Hong Kong's MPF debate: will portability reduce fees?


Stewart Aldcroft


Retirement, Fees

In the last few years, there has been a clamoring among certain sections of the media, and with a few of Hong Kong’s overtly political lawmakers, for the Mandatory Provident Fund Schemes Authority (MPFA) to force providers to reduce their fees. For many in the industry, this has been recognised as an ill-disguised attempt to gain self-publicity for the politicians, and to hammer down revenues of MPF providers – usually banks, insurance companies or fund management companies – on the part of the media.

The most popular concept raised – to reduce MPF fees – has been the introduction of portability. In effect, this means the introduction of a facility to allow employees to move their MPF from one provider to another, regardless of the intentions of the employer which had selected the original provider in the first place.

For those with experience of the pensions market in other locations, we are well aware that it is dominated by “advisers” and “consultants” offering guidance to their clients on how to set up, invest and manage their retirement schemes. In these places, very often the schemes have hundreds or many thousands of employees. In Hong Kong, the usual employer has much smaller numbers, which is why the MPF was considered a suitable design, in other words to suit the lower-average size companies which exist here.

And getting this advice is important when looking to change MPF provider. So who pays the adviser? Probably not the MPF product provider – the fees are too low to do so. Would the employer pay? Most unlikely, why would they want to have the extra administration of handling multiple MPFs for different employees? And the employee is equally unlikely; after all, what’s the point of trying to reduce fees by a few points if it costs so much in the first place?

But this avoids the crucial issue of fees on MPF. How could MPF funds reduce fees?

  1. Competition – not just from the point of view that switching funds among providers is good. What about new entrants to the market? Since the MPF was started, there have been none, mainly because the cost of entry is too high relative to the benefits of participation.
  2. Scale fund fees to reduce when exceeding pre-determined size levels – as the size of MPF funds continues to grow, some of the individual funds exceed HK$10 billion (US$1.3 billion), this is a good break-point at which to introduce a lower scale to the excess. Further break points on the scale can be added.
  3. Use Exchange Traded Funds (ETFs) – although the MPFA has allowed limited use of ETFs by the funds, this is still not a widespread policy. Indeed, where they are used, in some instances it has been very inefficient. This is because US-listed ETFs incur a tax liability on dividend income that reduces the eventual returns to the investor.
  4. Use Additional Voluntary Contributions (AVCs) to enhance the accumulated fund – generally, AVCs to MPF are among the most efficient investments anyone can make in Hong Kong. Apart from them being no load, the average fee on MPF funds is lower than on equivalent mutual funds. But so few do this, and the government doesn’t give tax benefits as those in other locations do.

The argument that fees on MPF are too high is flawed in many ways. On the one hand, it is certainly true that fees have some scope to be lowered. On the other hand, they are not too high either.

A simple comparison between MPF and mutual funds demonstrates this. What should be far more important, is to ensure the fund selected for your MPF is capable of achieving consistent returns. Ideally well-above the market average.

In recent years the MPF has become something of a political football, being kicked from one side of the pitch to the other, and often without a referee! This serves no purpose other than to confuse those for whom the MPF is designed to benefit – the employees.