Employee Choice Arrangement (ECA) will become effective in Hong Kong as of November 1, and companies as well as service providers need to be prepared.
This represents the first major reform to Hong Kong’s Mandatory Provident Fund (MPF) system, a defined-contribution regime that covers 2.6 million people in the territory, with an industry size of HK$384 billion ($50 billion).
ECA is going to change people’s awareness and attitude towards MPF, and it may also presage greater changes down the road.
“We will consider full portability down the track,” says Anna Wu Hung-yuk, chairman of the Mandatory Provident Fund Schemes Authority and keynote speaker at AsianInvestor’s recent seminar on ECA, co-organised with the Hong Kong Retirement Schemes Association.
The event attracted 349 delegates from employers and service providers, straining the capacity of the banquet room at the Renaissance Harbour View hotel in Wan Chai, and suggesting that the community does indeed have a lot of questions about ECA.
Wu notes that ECA is an evolutionary step, not a radical one. It provides members with more freedom to choose their trustee and MPF scheme – but not total freedom. And employers’ responsibilities will not change, although they may find over time that they will also need to review their providers more thoroughly, and take MPF duties more seriously.
Employers will continue to select the MPF provider (or rarely, multiple providers) and the schemes that are offered to workers. Companies must also continue to ensure their employees are enrolled in MPF (unless they are otherwise admitted to MPF-exempt corporate pension plans), and that both employer and employee contributions are filed each month.
For employees, ECA is not, technically, the first taste of choice. Preserved accounts (which the MPFA now wants to call ‘personal accounts’) already exist, rump accounts when people change employers that can be placed with the provider of the individual’s choice; and there has always been allowance for voluntary contributions to MPF schemes.
ECA is a new right to transfer accrued assets to an MPF provider of choice. It does not allow workers to direct future contributions to other providers; they will continue to pay into the scheme already selected by the company.
So it is a limited freedom, but one that should begin to encourage Hong Kongers to take a more proactive stance towards how they manage their retirement money. It is also designed to introduce a new element of competition, and thereby lower fees charged by asset managers.
The MPFA is aware that ECA is far from perfect. But they and the legislators who approved it are working under constraints of history as well as political realities.
Full choice was deemed too difficult. It would create too great an administrative burden on companies, particularly small ones, which would at a stroke have to connect with 21 MPF trustees running 42 schemes.
As it is, ECA is going to increase the administration work; and as the fees are as much administrative as related to investment management, ECA may well raise costs rather than reduce them, as some company human-resource executives in the audience told AsianInvestor.
In fact, ECA almost didn’t get off the ground: it was slated to launch in 2010, when Hong Kong’s Legislative Council fretted that choice could lead to debacles such as those surrounding structured products, which led to horrendous losses in 2008.
There are also examples of other countries’ opening DC schemes to choice, with dubious results. For example, Chile embarked on a similar transition in the 1990s, but mis-selling was rampant, undermining member confidence in the country’s pension arrangements.
Legco amended its legislation regarding intermediaries to guard against mis-selling of MPF products. Now it will be illegal for, say, a bank teller or an insurance agent to promise rebates, kickbacks, coupons to supermarkets or free toasters in exchange for MPF business.
The MPFA also did not want to undermine other aspects of the system for the sake of ECA. For example, the legislation was careful not to discourage voluntary contributions, says Darren McShane, MPFA executive director.
At the end of the day, ECA was designed to minimise the burden on companies. “ECA should not affect company contributions,” McShane says. “It should be so painless that [employers] may not even know it’s happened.”
Other steps in ECA are meant to ensure the integrity of choice. Trustees cannot charge a fee for transfers, so incumbents can’t get in the way if a member wishes to shift assets out.
That also means the genuine admin costs of such transfers have had to be socialised into general administration fees to avoid artificial barriers to choice (but it risks those general admin fees going up). On the other hand, to protect providers from the costs of egregious transfers, these have been limited to one per year, per employee.
More fundamentally, ECA may lead to changes in how MPF is perceived by Hong Kongers. Today it is despised and neglected. Whether this reputation can be salvaged, and thereby turn MPF into a vibrant industry akin to Australia's superannuation funds business, will be addressed in our follow-up article.