Mandatory Provident Fund assets continue to grow amid unpopularity

Fund expense ratios in Hong Kong's compulsory retirement scheme lack clarity

November 29, 2013 9:45 IST | India Infoline News Service
Assets in Hong Kong's Mandatory Provident Fund (MPF) have more than doubled (up by 117%) since 2008. The fund now accounts for about 63.5% of Hong Kong's retirement investable assets. In contrast, ORSO (Occupational Retirement Schemes Ordinance) assets have stayed flat, and now make up 36.5% of investable assets, compared to 55.3% in 2008.

Despite its asset growth, the MPF remains hugely unpopular in the city, driven by a toxic combination of high fees and low returns. Average fees now are about 1.7%, higher than comparable schemes in Australia (1.21%). Measures to reduce fees have been mooted in Hong Kong, such as implementing fee caps or introducing default funds.

Fees, as well as returns, are certainly an important consideration for MPF members. However, Cerulli's assessment of rankings of MPF funds in terms of lowest and highest fund expense ratios (FERs) do not reveal any distinct pattern in the investment preferences of members. There also looks to be a fee and return mismatch.

For instance, the returns of most of the 10 funds with the highest FERs (between 2.81% and 4.32%) could not compare with the returns of most of the 10 funds with the lowest FERs (between 0.41% and 0.85%, not including ETFs). Further, the MPF funds with the best returns in the first nine months of 2013 had FERs ranging from 1.7% to 2.7%-at or above the average FER.

The data for returns and FERs of MPF funds do not provide too much clarity on why members choose certain funds instead of others. "Perhaps a problem arises because employers allocate contributions to funds without much consultation with employees, and these tend to end up as 'default funds' for employees," says Ken Yap, head of Asia-Pacific research at Cerulli.

One possible solution would be to increase employees' autonomy in selecting funds. "The Employee Choice Arrangement is expected to help in this regard, but in terms of progress, it is still treading water," Yap adds.

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