Employee Choice Arrangement (ECA) is more than a technical change to Hong Kong’s Mandatory Provident Fund system. It is an opportunity to turn MPF into a vibrant, meaningful industry, akin to the superannuation funds business in Australia.
To make that happen, however, requires a turnaround in MPF’s reputation. That begins with ensuring choices are made wisely.
Philip Tso, director of investment for Hong Kong at Towers Watson, says MPF needs to be promoted in a more positive light. Thanks to rising longevity, Hong Kongers will on average face 20-30 years of retirement life. Today there is no adequate means of ensuring they can pay for it, other than making people work well into their 70s.
Tso says there is evidence that some people are starting to realise this. He notes that over the past 12 months people made HK$1.5 billion of voluntary contributions to MPF accounts, an increase from the previous 12 months.
He suggests ECA will raise awareness of MPF and its pros and cons. It will make members more sensitive to fees, especially as they start to compare providers – which could prove a rude awakening to HR departments, if the company’s own trustee turns out to be not so attractive.
Tso suggests administration fees could be changed from a percentage of assets to a flat fee per member, as the MPF business gains scale.
Perhaps the biggest challenge will be how individuals select trustees and funds. There is a risk that people will want to use MPF to chase hot themes or to time markets – a game that MPF is not suited for, even with ECA. The legislative efforts to prevent mis-selling will go some way.
However, people still need to understand something about investing, retirement safety, asset allocation, and the terrible losses to inflation that already occur in low-risk/low-return MPF funds.
More sales activity around ECA is one opportunity to have more discussions among employees and providers, but it can only do so much. There are going to be a lot of people who are not well equipped for this discussion.
For example, Jardine Matheson’s vast workforce of 60,000 includes many people in businesses such as construction and catering. These workers are financially illiterate (and maybe unable to read), and often work shifts that make it hard to organise sessions with service providers or HR teams, says Nancy Chan, general manager of group HR services.
She says education material must accommodate such people, “especially when fund performance hasn’t been so good”.
Tso adds that service offerings by providers need to be flexible, because not everyone has access to the internet; the level of tech savviness will vary between, say, bank employees and bus drivers.
Jardine Matheson is developing a pilot programme to provide financial planning to its employees, including MPF and defined-benefit members.
Ken Lau, head of institutional business at BestServe, an MPF administrator, says there are ways to judge service. On the surface, every provider says their service is top-notch, and they all offer websites, call centres and written material.
“But do they have SMS alerts?” asks Lau. “How easy is it to navigate their website? What information do they offer about fund performance over different periods of time? Do they provide any suggestions about rebalancing?”
Tso says track record alone or fees alone are not good indicators. Instead, choice should be about a package of performance, fees, reputation and service. The desire for many people to have a guaranteed fund should be countered by offering more target-date funds or passive funds.
MPFA’s Darren McShane says the best way to think about performance is not to look at returns, as most people do, because such data says nothing about future performance and few funds are always successful. Rather members or employers should compare fees and risk indicators, to get a sense of long-term prospects.
“MPF is more than just a compliance obligation to companies,” says KT Lai, formerly group HR head at CLP Holdings. “It’s complicated. We need to understand all aspects of scheme, including risk and return, not just fees.”
Our final article in this series will address the bigger question of whether choice arrangements can help MPF become more than just a compliance obligation, but also a vibrant industry and a meaningful part of Hong Kong society.