Darren McShane, the chief regulation and policy officer of Hong Kong's pension regulator, the Mandatory Provident Fund Schemes Authority (MPFA), will leave Hong Kong at the end of March 2017.

His move comes as the last major policy initiative of his watch, the Default Investment Strategy (DIS) for MPF scheme members, is being rolled out.

McShane is moving back to Australia, primarily because his children are about to enter high school. "It’s now or never, in that sense," he told AsianInvestor. He also felt it was the right time professionally, with the DIS work completed and coming into force in April 2017.

The DIS is a 'core' investment option for MPF savers, consisting of two mixed asset funds: the Core Accumulation Fund and the Age 65 Plus Fund. It is seen as a solution to the problem of too much choice in fund selection, as well as providing a low fee product to assist members in creating a meaningful retirement nest-egg.

The issue of value for MPF members has been a major consideration for the regulator in recent years, and McShane drove the recommendations on fee caps contained in the controversial paper issued in March 2015 that caused much consternation among fund managers. The paper recommended a maximum management fee of 0.75%, which the fund groups said was unworkable. Ultimately the 0.75% cap has been included in the legislation, along with a separate cap of 0.2% on some types of expenses.

Of that campaign to lower fees and provide a core default fund, McShane said, "Attacking the fee issue has been a long term project. The world was simpler and easier when no one realised they were paying fees, but this changed when we dramatically improved disclosure back in 2004. Only then was there are a basis for a debate. At times it’s been a debate that is not entirely rational or informed, but without the disclosure measures, none of that could have happened."

Legislation success

McShane came to Hong Kong in 2002 specifically for the role of supervising regulation and disclosure on the investment side of MPF. Over time his role expanded to general policy. He said the process of change has been constant but there have been some important milestones.

"Some people suggest the system needs reviewing, but the fact is the system has been under constant review. Almost every part of it has been changed. We’ve had 20 legislative actions in that 15 year period, which is just a phenomenal amount of legislation."

He is proud of the measures protecting members’ rights, which "people tend to forget about because they work very well. But they didn’t work so well back in the early 2000s in terms of how you get the money out of employers and how you protect members’ contributions".

McShane is also justly proud of the coverage rates for MPF, which he said is "one of the great achievements of the system. In terms of enrolment rates, for employers it’s 99% and 100% of employees, so everyone who is supposed to be enrolled is enrolled".

For the self-employed it is only 70% but McShane said "that’s a different dynamic".

MPF is seen in some circles as having failed to resolve the issue of retirement security for members. In AsianInvestor's 15th anniversary edition last year, local pensions guru Stuart Leckie wrote that until Hong Kong has a monthly pension system financed by much higher contributions, retirement security will remain inadequate for Hong Kong’s rapidly ageing population.

This is a part of the puzzle that MPFA can’t solve, said McShane. "The adequacy issue (the need to raise contribution levels) is really one of government policy and how this fits with the social welfare system. I am hopeful they are building a framework to deal with these issues."

Churning challenge

Constraining the fund industry's enthusiasm for launching new funds has also been a challenge, he said. "People want choice, so you have to deal with people’s expectations, but from a pure system design and efficiency perspective, it’s not a good thing. You end up with smaller pots where the frictional costs are higher, fixed costs are higher and you end up with a degree of confusion and transactional activity that is quite unnecessary."

This is where the DIS may help. McShane believes this option addresses the concerns of members about value. "That might have a big impact on behaviour, and ultimately might be the route through which we can be a bit more relaxed about the industry offering niche products to members who do want more complicated investment strategies."

McShane says the question of dissatisfaction with MPF feeds into a broader question of public discontent in Hong Kong.

“It is frustrating that the debate and reporting here is always negative. No one mentions the fact that 90% of Hong Kong workers are covered by some retirement system, whereas it used to be 30% before we started. There are tremendous success stories and overall, compared to international counterparts, it’s a solid and efficient system.

"There’s been no investment crisis. Our regulatory system works well. The adequacy issue is difficult but there is $650 billion there to fund people’s retirement that wouldn’t have been there otherwise, and $150 billion of that is investment earnings. But that’s not a good story in the way the daily media works in Hong Kong."

McShane and his family will be living on the Gold Coast in Australia. He has no plans to take up a new role but said he "may look for opportunities as they exist. There’s a large financial services market in Australia, so we’ll see".

The MPFA is planning to recruit a direct replacement and is currently vetting candidates.

In the meantime, from now until the end of January 2017, all 9.1 million Hong Kong MPF account holders will receive a DIS Pre-implementation Notice from their trustees, which introduces the DIS and explains how it may affect their MPF benefits and accounts.