"No chance" of MPF self-directed accounts any time soon

The low level of contributions made to Hong Kong's Mandatory Provident Fund scheme limits what members can invest in, argues Darren McShane of the MPF Authority.
"No chance" of MPF self-directed accounts any time soon

A senior official at Hong Kong’s Mandatory Provident Fund Authority has dismissed the possibility of allowing scheme members access to direct investments such as equities and bonds via self-directed accounts in the near future.

Asked the question at the Global Retirement Savings Conference in Hong Kong last week, Darren McShane, executive director for regulation and policy at the MPF Authority, said: “No chance.”

After State Street Global Advisors received regulatory approval to allow MPF scheme providers access to its gold exchange-traded fund earlier this year, some market participants said the next logical step for Hong Kong’s defined contribution plan would be direct access to a variety of asset classes via a self-managed account. This is an option available from some pensions.

Since the MPF allows providers access to the SsgA's SPDR Gold Shares ETF, some argue that direct gold purchases – with banks acting as custodians – should be made possible, with direct investment into equities, bonds and high-interest savings accounts via a self-managed account not far off.

But McShane told attendees that this is not on the cards for the HK$455 billion ($58.7 billion) fund.

“We use funds for very good reasons,” McShane said, speaking at the conference. “They do provide efficiencies, [market] access and management that you don’t get through individual investment assets.”

The MPF monthly contribution is capped at HK$2,500 ($322), which significantly limits the equity universe an individual can buy, as equities are traded in varying blocks sizes. There are also brokerage fees to consider, which are not cheap, McShane adds.

“If you go to the market, given the lot sizes in Hong Kong, you’re going to be paying brokers of up to 8% per month,” he notes. “That makes our overall annual fee of 1.7% look pretty good.”

Direct investment into ETFs would also prove difficult as the average MPF contribution of around HK$1,500 per month, only allowing members to invest in 1/15 of an average ETF board lot. As contributors would only be able to purchase small lots, they would in turn incur higher fees charged with every monthly purchase, he adds.

On investing direct in ETFs: “You can’t do it. You'd have to save up the whole year and you still wouldn’t get one lot, so you have to pool it,” McShane tells AsianInvestor on the sidelines. “What is a pool structure? It’s called a fund.”

Then there are regulatory issues that go hand-in-hand with a self-directed scheme, such as withdrawal restrictions and currency hedge.

There are also necessary custodian arrangements that need to be set up as well as implementing the right technology, all of which comes at an expense.

Although there are self-managed pension funds available in markets such as Australia, McShane says that as the MPF's focus is on efficiency and trying to lower costs, “for the time being, we are stuck on the funds structure”.

He adds: “I can’t see that we can get there [on allowing self-directed accounts] soon. It’s not in the agenda at the moment. In the future it is possible, as is the sense that anything is possible.”

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