Hong Kong's Mandatory Provident Fund (MPF), as it exists today, is a contradiction in terms: it’s sprawling, yet limited.
Today there are 467 constituent funds for the 32 schemes registered under the Mandatory Provident Fund Schemes Authority (MPFA). They fall under six fund types: equity, bond, mixed assets, guaranteed fund, money market fund, and conservative money market fund.
With this setup, similar funds under the same type proliferate, while product innovation is limited.
While many funds exist, the trustees that offer them typically provide extremely similar products in each of the six fund types, Janet Li, wealth business leader for Asia at Mercer and chairwoman of the Hong Kong Retirement Schemes Association, told AsianInvestor.
“There are a lot of products available but the products are very homogeneous. For example, [look at supermarket chains] Market Place, 3hreeSixty, Parknshop…on the surface it looks like there are a lot of things to choose from in each, but in fact when you enter them the products they sell are very similar,” Li said.
This setup serves mainly to confuse the average saver, who is not very investment savvy, argued Richard Jackson, president and founder of Global Aging Institute. He said the primary goal of a mandatory funded pension system like the MPF should be to maximise risk-adjusted returns for its participants, not offer masses of almost identical products.
“While a high degree of choice may be appropriate in a voluntary pension system, the MPF is in effect Hong Kong’s social insurance system and its purpose should not be to facilitate choice but to protect people against the consequences of bad choices,” Jackson said.
Other market participants believe the regulator should offer trustees more room to innovate.
“The current investment restrictions should be relaxed to allow MPF constituent funds to invest in a wider universe of asset classes and regions to enhance risk diversifications and encourage product innovation in the MPF regime,” Lau Ka-shi, managing director and chief executive of the BCT Group, told AsianInvestor.
One consequence of too many funds is not enough scale.
As of October 2018, about half of 432 funds on MPFA’s fund performance platform had less than $50 million in assets under management.
Heman Wong, former chief executive of the Hong Kong Pension Schemes Association, believes MPF funds generally deliver poor performance. In part this is because many are too small to ensure cost-effective investment management; he argues the smaller ones should be consolidated.
But the MPFA doesn’t appear interested in such measures. When asked about merging certain smaller funds and how to deal with funds that perform worst, MPFA executive director Cheng Yan-chee said in a press briefing in November that the schemes are privately managed, and so it should not play a role that is too proactive.
The agency declined to comment when AsianInvestor asked whether it has recommended a minimum fund size to ensure better economies of scale.
“MPF trustees have the statutory duty to act in the interest of scheme members. They should regularly review the fund range offered in the schemes under their trusteeship and take necessary actions, including termination or restructuring of funds, based on their review results,” an MPFA spokesman said in an email reply to AsianInvestor.
The schemes are expensive too, with an average fund expense ratio standing at 1.53%. That’s far higher than the US’s 401(k) plan; participants incurred an average expense ratio of 0.45% for equity mutual funds in 2017, according to the US-based Investment Company Institute.
“1.53 is still very high. Chile, which has a similar personal accounts system, has managed to lower the ratio to around 0.5%. That should be the goal for the MPF too,” Jackson said.
The MPFA has been criticised about the cost of MPFs for years. Its response has been lackadaisical at best.
In early February the agency finally offered some progress when it pledged to bring the ratio down to less than 1%. To that end it is now constructing a digital platform – the eMPF – to automate the administration of MPF schemes. The platform will be launched in 2022, but MPFA said it is too early to say what the impact of an eMPF will be on reducing the fund expense ratio.
The regulator was also unwilling to specify to AsianInvestor when it wants to achieve its less than 1% goal.
The agency’s reluctance to talk might in part be down to its function, believes Wong.
MPFA’s purpose is to execute enacted rules, but it should be given more power to pursue better performance and encourage fund rationalisation, he argued.
This story is adapted from a longer feature from the December 2018/January 2019 edition of AsianInvestor magazine.