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Hong Kong govt fights high MPF fees with core fund

The Hong Kong Government has proposed introducing a ‘core fund’ option for investors in the Mandatory Provident Fund, in a bid to combat high costs and help those less able to select funds.

The proposals form part of an industry consultation opened earlier today and would mean all investors in an MPF would be automatically invested in a standard, low fee default fund, unless they decide otherwise.

The reforms come against a backdrop of concerns about the MPF system, particularly in relation to the level of fees and charges, the complexity of decision-making for members, and whether returns generated by funds meet expectations as a retirement savings product.

In the consultation paper, the government proposes the core fund should adopt a ‘life cycle’ or ‘target date’ investment strategy, which automatically reduces investment risks as scheme members approach retirement age.

Furthermore, the authorities plan to keep the fees at 0.75% of fund assets or lower, and in the medium term are aiming to maintain the fund expense ratio at or below 1% with the use of passive investment strategies.

With fees pegged at these low levels, the authorities expect the core fund to emerge as a benchmark, enhancing competition among funds and ultimately driving down the overall MPF fee level.

Professor K C Chan, secretary for financial services and the treasury, said: “To address concerns over ‘high fees’ and ‘difficulty in making choices’, the government and the MPF Schemes Authority (MPFA) will implement reform measures and introduce legislation to provide scheme members as soon as possible with a low fee ‘core fund’ that is consistent with the philosophy of retirement protection.”

The three-month consultation is open for public comments until 30 September. Depending on the outcome of the consultation, the government and the Mandatory Provident Fund Schemes Authority aim to launch the ‘core fund’ in 2016.

Anna Wu, chairman of the MPFA said: “The MPFA is committed to refining the MPF system and we are prepared to take bold new measures to improve retirement protection for scheme members. Setting a fee target is something we have not done before, and the level proposed is an ambitious target.”

The average fund expense ratio for all MPF constituent funds has declined by 20% over the past six years from 2.1% in 2007 to 1.69% in May. Currently, only 13% of constituent funds have fund expense ratio that are below that proposed for the core fund at or below 1%.

The Mandatory Provident Fund system, implemented in December 2000, is a mandatory, privately-managed, defined contribution, employment-based and fully-funded pension system. It is an important part of the total savings pool for retirement needs in Hong Kong.

Under the MPF system, scheme members have the right to make their own investment choices by selecting funds. For those who do not select funds, the trustees of the respective schemes by default, invest the scheme members’ contributions in one or more of the funds as specified in scheme rules.

According to a member survey conducted by the MPFA in 2013, about  24% of members indicated that they had never made a fund choice.

The total number of constituent funds in MPF increased to 477 in May from 299 in 2000 when the scheme was launched.

In November 2013, a Cerulli research revealed the total assets of Mandatory Provident Fund have more than doubled since 2008.

Part of the Mark Allen Group.