The Hong Kong Mandatory Provident Fund (MPF) system will soon launch post-retirement investment products, which will allow pension-aged savers to choose solutions that will help them maintain their quality of life.

The Mandatory Provident Fund Schemes Authority (MPFA) established the Investment Solutions Lab to facilitate the funds industry’s development of retirement solutions, which will cater to the investment needs of scheme members in the accumulation and decumulation phases of their pension assets, a MPFA spokesman said in an email reply to AsianInvestor.

After issuing a set of principles in April to lay down a high-level framework to assist potential providers, the first-ever post-retirement solutions are expected to be launched soon, the regulator said. However, it said it is not in a position to disclose any details of the solutions, which will be set up by the MPF providers.

Elaine Hwang

The post-retirement solutions currently available in the city include annuity products offered by the Hong Kong Mortgage Corporation (HKMC) since July 2018. The HKMA’s Exchange Fund has been designated as the recipient and investment manager of the annuity premiums.

Annuity products have very standardised features. Retirees are allowed to invest some of the pension savings in a lump sum and receive periodic guaranteed payments to offset their longevity risks. But for one thing, they are not allowed to leave some money for their spouse or their other personal needs, Elaine Hwang, a Hong Kong-based director of retirement at consultancy Willis Towers Watson, told AsianInvestor.

However, the post-retirement solutions under the MPF system can be more flexible. The MPF providers could design and launch products that appeal to their target clients, she said.

These solutions should be easy to understand by the general public, and the expected products should be suitable for funding and withdrawing by a pension-aged saver. Theoretically speaking, if MPF providers’ products meet these broad principles, the approval process should be quite efficient, Janet Li, wealth business leader for Asia and Partner at Mercer, told AsianInvestor. Li is also the chairwoman of the Hong Kong Retirement Schemes Association.

Janet Li

The total assets of the MPF system exceeded HK$1 trillion ($129 billion) for the first time in July, after decreasing to HK$868 billion in March amid the market meltdown, MPFA chairman David Wong said over the weekend.

LOWERING FEES

Hong Kong does not have any publicly-managed universal retirement protection scheme, underscoring the importance of the MPF system in the city. Nevertheless, the system is seen to have some lingering problems after it was launched 20 years ago.

One is its high management fee. The MPFA argues that the average fund expense ratio (FER) of MPF funds has dropped from 2.06% in July 2007 (the launch of the FER) to 1.45% at present, down by 30%. Moreover, the eMPF platform, a streamlined and automated digital scheme administration platform, will be launched in phases starting from 2023. The operational costs for scheme administration will be significantly reduced, through which there will be more room to reduce fees, MPFA said.

Hwang of WTW said that the level is still deemed as not ideal when compared to most other developed economies, which won’t exceed 1%, but agrees that the FER should be reduced when the eMPF platform is up and running, and the asset pool in the whole system increases further.

In addition, the MPFA has also been making ongoing efforts to improve MPF product choices, including expanding the asset allocation and markets for Real Estate Investment Trusts (REITs), MPFA chairman Wong said in June.

The restriction of no more than 10% of the assets of MPF funds being invested in REITs listed on an approved stock exchange in Hong Kong, the UK, the USA or Australia has been removed. REITs listed on an approved stock exchange in Canada, France, Japan, Singapore or the Netherlands have been added as permissible investments, restricted to a maximum of 10% of the assets of MPF funds being invested in such REITs, he said.

However, one top challenge in the MPF system remains, Li said. The replacement rate, defined as a pensioner’s income as a percentage of earnings before retirement, is still low in Hong Kong. It stood at about 40%, while the average level at Organisation for Economic Cooperation and Development (OECD) members is about 60%. Authorities are encouraged to review the contribution cap or come up with ways to increase contributions to cope with the pension challenge, she said.