Service providers for Hong Kong’s new Mandatory Provident Fund (MPF) programme must as of today raise capital reserves for MPF guaranteed funds, according to a letter that was sent yesterday (Monday) by the Officer of the Commissioner of Insurance. The rules also mean additional systems costs to model the new reserve requirements. This has caused a furore among insurance companies, which offer the majority of such funds. Many firms already face a horizon of up to 10 years before they expect to break even on MPF business. The new rules, which could raise costs dramatically, will add to pressures at some small- and mid-sized players to drop out of the MPF business.

The force behind the new rules is the Mandatory Provident Fund Schemes Association (MPFA), which has encouraged the Commissioner of Insurance and the Hong Kong Monetary Authority to execute the new rules. Raymond Tam, executive director at MPFA, says: “Investment guarantees need to be backed up by strong reserves, otherwise we could end up with a situation like Equitable Life in the UK.” Equitable closed its doors when it failed to meet annuity obligations.

Insurance industry executives say, however, the rules are overkill. They believe MPFA is covering its back in case a local insurer goes under and clients with MPF guarantees clamour for compensation. The industry has already served the existing private retirement schemes, so-called ORSO (Occupational Retirement Schemes Ordinance) plans, typically guaranteeing 5% roll-ups of contributions.

They also complain the new rules were foisted on them quickly, with the issue only being raised in November, well after service providers structured MPF products.

Roddy Anderson, chairman of the Life Insurance Council of the Hong Kong Federation of Insurers, says: “Anything that costs money is to be carefully considered. We’ve been trying to negotiate tweaks to the rules.” He says the reserve base is “stringent”.

MPFA made one important concession by asking HKMA to draw up similar rules for banks offering guaranteed funds, to preserve a level playing field among all MPF service providers. Tam says those rules will be issued in early February.

Tam also disputes the idea that these reserve requirements are new. He says MPFA raised the issue as early as 1996, and that service providers knew there would be some such requirement. He says it is urgent a minimum be required by insurers and banks now, before MPF assets grow to a large size and could potentially wipe out MPF players a la Equitable. Tam notes the insurance industry experienced tremendous losses globally in the two great emerging market crises of 1994 and 1997-98. “The insurance industry objects but they have experienced huge losses, which shows precisely the need for reserves.”

The new rules will also be retroactive: ORSO guaranteed funds must also be backed up by reserves phased in over the next three years.