An automated mechanism to determine the levels of contribution to Hong Kong's public pension scheme would solve certain issues, including political ones, argues a senior industry executive.

The city’s Mandatory Provident Fund Schemes Authority (MPFA) is consulting on adopting a system whereby the level of income employees must hit before they have to make contributions would be automatically adjusted every two years. The adjustments would be made in relation to a set of benchmarks that tracks the average Hong Kong income.

The mechanism would also automatically adjust the maximum level of income before it is capped from further contribution by employees and employers.

“It is sensible for the MPFA to have a consultation to introduce an automatic mechanism, so it doesn’t need additional approval [from the legislature] for adjusting the minimum and maximum level,” said Lau Ka-Shi, CEO of Bank Consortium Trust, a local MPF product provider.

Debate in Hong Kong’s legislature about the MPF has often been fractious, with the most common criticisms being about high fees and low returns.

The average fund expense ratio was 1.65% in 2014, compared to 2.09% in 2007. The average MPF return was 1.5% last year, according to data provider Lipper.

Asset managers stress that members should look at returns on a long-term horizon, and argue that the onus should be on fund administrators to reduce costs, rather than on fund providers.

Meanwhile, an automatic system would help make adjustments more efficient, said Lau, as employers would need to shift both the ceiling and floor on contributions only once, as opposed to twice as under the current system.

But wouldn't an automatic system reduce the flexibility over the setting of levels? Lau didn't see this an issue, arguing that it will always be difficult to agree on this, as arguments can constantly be made as to what is a ‘right’ or ‘wrong’ level.

“You can’t come to a compromise,” she said. There is never going to be a right level, and having that decision in [the Hong Kong Legislative Council's] hands ... is just asking for no movement. Any time you go through Legco, you go through [a series of] debates, which is killing a lot of time.

“If you give [people] flexibility, you allow the employee to argue for greater contributions, but also for the employer to have an equal chance to lobby against it.”

An automatic system that adjusts itself to economic realities would therefore be welcome, she added, helping contributions to keep up with employees’ purchasing power.

However, Lau recognised the difficulties such a system could pose for small and medium-sized enterprises, for which the operating environment in Hong Kong is becoming more challenging, and whose ability to contribute to employees’ pension pots is declining. 

Meanwhile, she confirmed that discussions are under way with the MPFA and the Hong Kong Retirement Schemes Association on the creation of 'core' funds, an issue highlighted in a consultation paper that closed last September.

Core funds have been seen as a way to help reduce the average cost of funds, but one sticking point is the question of how to communicate the concept to the public.

“The MPFA need to determine the strategy as they mentioned in the consultation paper,” said Lau. “It’s easy to say, 'well, we want the strategy to come out with a consistent outcome', but what does that mean, how do you achieve that? How complicated would it have to be? If it’s complicated, you defeat the purpose of it, so it’s a balancing act.”

Eleanor Wan, CEO of Hong Kong-based fund house BEA Union Investment, said labelling a fund as 'core' could confuse members of the public into thinking that the fund is a necessity rather than a choice.

She echoed suggestions raised by Elvin Yu, head of institutional business for Greater China and Southeast Asia at Allianz Global Investors, who says the term ‘default’ fund should be used instead.

Interested parties seeking to comment on the consultation can do so here by March 5 latest.