Hong Kong's Mandatory Provident Fund (MPF) managers are under growing pressure to cut the fees on retirement saving schemes, which last year recorded the highest net return in eight years as equity markets soared.

The fund expense ratio (FER) for the 469 constituent funds under the MPF schemes is 1.56% on average and the aim is to bring that below 1% in the coming years, Alice Law, chief operating officer and executive director at the Mandatory Provident Fund Schemes Authority (MPFA), said.

She declined to provide a specific timetable for achieving this goal but said she anticipated some consolidation in the industry on the way there.

“Funds which are not making money or are too small are merged or terminated. We require those underperforming funds to close down or change fund managers,” Law told AsianInvestor on the sidelines of a press conference held on February 8.

The authority launched a scheme in 2014 to require the 14 MPF trustees to maintain good governance. As part of the scheme, the board members have to report to the MPFA how they can bring down the fees on a regular basis, she said.

MPFs have often been criticised for their high administrative fees. Countering these concerns, MPFA chairman David Wong said the pension scheme allowed average people to invest in a wide array of assets with small amounts of money.

Nevertheless, at Thursday's press briefing to report on MPF’s investment performance last year, he admitted that there was room for the MPFs to improve their fees. 

Of the current total of 469 MPF funds, 45% are mixed-asset funds and 33% are equity funds. The rest of the six fund types include bond funds, conservative funds, guaranteed funds, and money market funds. 

275 of these funds have a FER of less than 1.3% and are categorised as low-fee funds.

However, the FER for guaranteed funds can be as high as 3.75%, according to the last “Fees and Expenses of MPF Funds: An Overview of the Fund Expense Ratio and Its Trends” report released by the MPFA in 2016.

At the other end of the spectrum, Default Investment Strategy (DIS) funds have a FER of 0.9%. DIS funds are designed for those who are not investment savvy and, following their inception in April last year, had attracted inflows of some HK$20 billion by November-end, but that still accounts for just 2.5% of total MPF assets (HK$843.5 billion), said an executive at the press briefing.

According to the MPF information website, DIS is a highly standardised investment strategy subject to fee controls. It is the default scheme for members if they do not choose their own MPF investments when enrolled into an MPF scheme.

It will likely take time for more scheme members to warm to DIS funds while they first see how these funds perform and also get to understand how they work, Sally Wong, chief executive of the Hong Kong Investment Funds Association (HKIFA), told AsianInvestor.

STRONG RETURN

The MPF system posted a net return of 22.3% in 2017, the highest since 2010 and the second highest since the scheme was launched in 2000.

The annualised rate of return after fees in the 17 years was 4.8%, during which time the average inflation rate was 1.8%.

“Equities account for 69% of MPF assets and owing to the upturn in global stock markets in 2017, the MPF system had a strong performance last year,” Wong of MPFA said.

Fund type

Net return in 2017 (%)

Net annualised return since 2000 (%)

Average FER (as of June 2016; %)

Equity fund

34.4

5.5

1.58

Mixed asset fund

22.3

4.6

1.72

Bond fund

4.8

2.7

1.38

Guarantee fund

3.0

1.2

2.08

Money market fund

2.5

0.6

1.17

Conservative fund

0.1

0.7

0.69

Source: MPFA
 

LITTLE INNOVATION

Besides the fee levels, the MPF scheme has also been criticised for its lack of innovation.

These hasn’t been much innovation but that is partly because the pension fund managers do not have a paid-for-performance mindset for MPF investments, Jayne Bok, head of investments for Asia at Willis Towers Watson, told AsianInvestor. Other Asian countries also have this problem, she added.

“Oftentimes when I’m working with sovereign and public funds [in Asia] I find that they are more driven by playing it safe, not getting into trouble because there is no bonus. So there is no reward if even they do well,” she said.

Criticism around lack of innovation is echoed by Lau Ka Shi, chief executive of BCT Group.

The regulatory environment surrounding MPFs is stifling innovation and makes it difficult to have new types of funds on top of existing MPF products without having to provide a whole range of justifications to the MPFA, she said.

The MPFA is cautious about approving funds perceived to have higher risks, such as emerging market funds, Lau said. Sector funds like healthcare funds are also deemed to have higher concentration risks and it does not welcome funds with new themes that have relatively higher management fees as well, she added.

In response to AsianInvestor's question about how the MPFA was going to encourage innovation, Law stressed that MPFs are meant for people’s retirement and should not be compared to funds in the private market. She also said pointed to DIS funds as proof of the existing potential for innovation in the pension scheme.

MPF providers have to offer DIS and the product is the first of its kind internationally, she said.