MPF market tipped for shake-out as cost pressures bite

Managers and service providers in Hong Kong's pensions market are struggling to cut costs as new rules on fees weigh down on them, industry players say. Up to a third of MPF providers face closure or consolidation.
MPF market tipped for shake-out as cost pressures bite

Up to a third of Hong Kong’s MPF providers could close or merge with rivals as a result of narrowing margins and government pressure to reduce fees, say industry players.

Recent government proposals to introduce a new low-cost fund for the compulsory employee pension scheme have caused concern amongst Hong Kong's asset managers and servicing firms, with the market set to become ever-more passive.

And it comes amid reports that Standard Chartered has put its Hong Kong pensions business up for sale.

In March, the Hong Kong government and the Mandatory Provident Fund Schemes Authority (MPFA) introduced new rules requiring a reduction in fees and the introduction of a new low-cost “core” fund. Local and smaller fund providers are expected to be worst hit by rules imposing a fee cap of 0.75%.

Enrique Gonzalez, head of product for Asia at Milestone, an operations software provider specialising in the funds industry, said internal reform was the only way forward.

For asset managers, Gonzalez says a lot of the inefficiencies are in operations, which is where companies can make savings: “They can’t charge any less for the investment capability. The custodians and administrators have been squeezed to rock-bottom already. The only way you get to make savings of 10bps, which is what you need, is to streamline your own internal processes.”

In Hong Kong, the big global asset managers, who have experienced this kind of fee pressure in other regions, will find it a bit easier to deal with, and they have the buying power, said Phil Cook, Milestone’s Hong Kong-based business development director.

The local and smaller players are less likely to survive the squeeze “because they have neither the clout or the buying power to negotiate downwards,” he added.

“What’s likely to happen is that the 15 or 16 MPF providers will be whittled down to 9 or 10, through closures and consolidation.”

Last year, the Axa Group pulled out of the MPF market and its funds were merged into the MPF range of Principal's pension arm, in a $335 million deal. Yesterday, Reuters reported that Standard Chartered is putting its HK$20 billion ($2.6 billion) Hong Kong pensions business up for sale for $350 million.

Cook said: “I expect smaller firms who only have three or four MPF funds will be the first out the door, because it’s just not viable for them.”

A product manager at one of the global fund management groups in Hong Kong calculated it costs them 60 to 62 bps to cover custodian and administrative costs on their MPF funds. With only 75bps on the product, everyone is being squeezed on cost.

In the UK, where new rules for defined contribution pensions imposed a 75bps cap on administration costs, the challenge for asset managers was similarly harsh. And lowering the fees for one set of products naturally led to questions of why the managers couldn’t do the same for their regular retail funds.

Another industry insider talking to AsianInvestor said that when the core option comes into play with the cap on fees, “we will see the market become increasingly passive, with index products and smart-beta type funds".

If experience from the UK is any guide, that prediction is likely to be accurate. There, almost 80% of investors in the new private pensions scheme are in the default fund. In Hong Kong, the figure is currently 15% but market experts say that could rise as high as 50% under the new arrangements.

New portability rules will allow MPF scheme members to move not just their own contributions, but those of their employer, to a new provider. “Certain people,” said the industry expert, “will decide this is not a business they want to be in.”

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