The Mandatory Provident Fund Schemes Authority (MPFA) has just released a consultation paper on the draft code on disclosure for MPF investment funds, and invites industry players to submit written comments by March 15.
Unlike previous dialogues between industry and regulator, relations now between MPF service providers and the MPFA are pretty good, and the proposal should come as no surprise to the banks, insurance companies, fund managers and administrators servicing the Mandatory Provident Fund business. While industry players are confident of a reasonable outcome, they have nonetheless voiced some scepticism about what better disclosure will accomplish. Moreover, the views of employer and employee groups remain unknown.
"The objective is clearer, easier to understand information to members; to ensure simplified language and consistent fee information; and to provide tools to help members understand this information," says Darren McShane, executive director at the MPFA. The first tool includes making sure the offering documents stipulate fees to members, to the fund and the underlying funds; illustration of ongoing costs and the effect of fees on a standard-sized investment with certain assumptions about return and timing. In other words, people should know the cost of each HK$1,000 after one, three or five years for each fund, inclusive of all charges. "It does the hard math work that is difficult for individuals to do," McShane says.
The second tool is to provide the total expense ratio (TER), the percentage cost of operating a fund. All schemes will provide basic minimum performance data over the same time frame, using the same language about risk. Although providers may use any benchmark they like, the MPFA wants principles to ensure they are consistent and comparable across funds, and to ensure members understand how to use them.
All service providers give lip service to the idea of disclosure. Those with low costs are genuinely keen to see it. Others grumble that there is no real demand for this among members, and that members are unlikely to know how to use the information correctly.
"Members shouldn't make investment decisions solely based on fees," warns Naomi Denning, head of regional investment consulting at Watson Wyatt.
Others note that as long as employers select MPF providers, this information is not meaningful - members should choose a fund based on their risk profile. There is a risk that when presented with TERs, some members will switch assets to the lowest-cost funds - which are going to be capital preservation funds, rarely the best performers.
As a Mercer Investment Consulting report notes, today 17% of all MPF assets are invested in CPFs while short-term interest rates are nearly zero, with another 19% of assets in money market and guaranteed investment options. "While CPF participants are suffering negligible investment returns, they are enjoying greatly discounted fees," Mercer says. "The losers are all of the other MPF participants paying full fees for the other MPF investment products. This situation is grossly inequitable and unfair." The consultancy calls for a renewed attempt to educate investors about long-term investing, but by emphasizing low-cost products, the MPFA risks turning members' attention in the wrong direction.
"The MPFA is under pressure to drive low-cost pension provision and create a climate that drives costs down," says Douglas Naismith, managing director at Fidelity Investments. "But the embedded costs are high, and won't come down without scale."
Adds HSBC Insurance CEO CF Choy: "We propose disclosing information required to help members understand their investment, but in too much detail. Otherwise it will be a costly waste of time which will show up again in fees." Providers are concerned about too much record keeping, printing, storage and postage. "It's good to have fee scales that are consistent across providers," he adds, "but the fee alone doesn't describe the service you get for that fee scale."
The upcoming February/March edition of AsianInvestor magazine takes a deeper look at competition and marketshare in the MPF industry. For subscription enquiries, contact Randhir Prakash on (852) 2122 5228 or Naveet Singh on (852) 2122 5224.