Hong Kong’s Mandatory Provident Fund is getting ready to change

Author: Liana Cafolla | Date: 9 Nov 2016

Classified Post HR Conference 2016: Much-criticised retirement scheme will become more user-friendly

Hong Kong’s Mandatory Provident Fund (MPF) is getting a makeover – and not before time, according to some.
 
The MPF scheme, which was set up to provide retirement incomes in the face of Hong Kong’s ageing population and longer life expectancy, has regularly come under fire since it came into force in December 2000.
 
The scheme’s unpopularity is well recognised by the Mandatory Provident Fund Schemes Authority (MPFA), which runs it.
 
“[The MPF] is the most hated, the most criticised employee benefit,” said Cheng Yan-chee, chief corporate affairs officer and executive director of the MPFA. He said the scheme is mainly criticised for three reasons: low returns and high fund management costs, being over-complicated, and being inadequate for meeting retirement needs. Starting next year, changes should help improve the scheme’s popularity.
 
From 1 April, a new Default Investment Strategy (DIS) will be offered. The DIS has three features: automatic de-risking, globally diversified, and fee-capped at 0.95 per cent. The DIS option will suit those who find selecting a fund onerous, or who don’t want to bother to choose a fund. A survey carried out three years ago found that almost one in four respondents hadn’t chosen a fund, with most simply choosing the same options as their colleagues.
 
The DIS will cater particularly to this group and offer investments based on the international practice of reducing risk for employees as they near retirement age. Every MPF scheme must provide a DIS, and if people don’t choose another option, their payments will automatically go into the DIS from 1 April. Employees can also actively choose the DIS option, and have 42 days to opt out and choose another fund.
 
Philip Tso, director of investments at Willis Towers Watson Hong Kong, said many employees will need help from HR to decide how to choose the best option for them. He thinks HR professionals need to encourage employees to actively manage their MPF. “Many don’t even open their MPF statements,” said Tso.
 
It is also important for HR to find out what employees want from the MPF so they can provide feedback to the MPFA and improve the system, he said.
 
MPFA’s Cheng pointed out that some of the criticism directed at the MPF was unfair. Aggregate annual returns in the 16 years since the scheme was launched have averaged 3.3 per cent, he said, versus an annual average inflation rate of 1.8 per cent over the same time. Fund management fees have fallen, from an average of 2.1 per cent in 2007 to 1.56 per cent today, and will continue to fall because of market competition and government action, he forecast.
 
The complexity of the scheme is closely linked to the variety of options available. Employees can choose to invest in any of 38 schemes offering a total of 462 funds. For many, the choice is too wide. Cheng said competition will see the number of funds fall to about 300 later this year and the number of schemes will drop to 32.
 
Finally, the MPF was designed only to provide basic retirement protection, noted Cheng, and it is only one of four pillars providing social protection in Hong Kong.