Lower risk investments and reduced management fees for Hong Kong pensions

Author: Liana Cafolla | Date: 18 Nov 2015

Hong Kong’s Mandatory Provident Fund set for reform

Hong Kong's Mandatory Provident Fund (MPF) is set to offer lower-risk investments to pension contributors who are nearing retirement age and sharply reduce the management fees paid by employees for default investments.
 
Under the Mandatory Provident Fund Schemes (Amendment) Ordinance 2015, MPF trustees will be obliged to offer a “highly standardised and fee-controlled default investment strategy (DIS)” for each MPF scheme.
 
The DIS arrangement “will adopt globally diversified and age-based de-risking investment principles, with assets invested in local and overseas markets. Trustees will be required to gradually reduce a scheme member’s exposure to relatively higher-risk investments as he approaches the age of retirement,” said the Financial Services and Treasury Bureau.
 
The government also plans to impose a cap on management fees of 0.75 per cent annually of the net asset value of the DIS constituent fund, or core fund, which is less than half the current average of 1.6 per cent, the lowest level in the fund’s history – down from a high of 2.1 per cent in 2007.
 
"The proposed fee cap is only a starting point,” said secretary for financial services and treasury bureau Chan Ka-keung. “We expect that the fee cap will have a benchmarking effect, leading to lower fees or consolidation of other MPF constituent funds, thus strengthening the MPF system as one of the important pillars of the retirement protection system for the working population.”
 
The reforms, which should be in place by the end of 2016, aim to respond to public concerns over high management fees and the difficulties reported by some contributors in choosing investments. About 600,000 contributors do not currently specify how they wish their contributions to be invested. The accrued benefits of new and existing MPF members who have not selected particular investment choices will be invested in the core fund. The city’s 38 MPF trustees must also allow all other members of its schemes to opt for the DIS.
 
Once the scheme is in place, trustees will have six months to notify all relevant contributors. If contributors have not replied with instructions within 42 days, their contribution will automatically be moved into the core fund within 14 days.
 
The MPF scheme was launched in December 2000 to cover about 2.5 million of Hong Kong’s employees and self-employed people aged between 18 and 64. Exemptions include those who are covered under other schemes, domestic employees ,and short-stay overseas or retired people working in Hong Kong. As of 31 July 2015, MPF assets totalled HK$605 billion.
 
The bill will be introduced into the Legislative Council for a first reading on November 25.