As the soon-to-be-implemented Mandatory Provident Fund (MPF) "portability" scheme comes into being, it is worth taking stock of how this programme will impact on key stakeholders in the market. For employee contributors, portability will be beneficial in having a certain degree of control over fees, fund choices and service providers.
MPF portability will give employees the chance to transfer their part of the MPF contributions and returns to a service provider of their choice once a year. Employees can expect the Mandatory Provident Fund Schemes Authority (MPFA) to implement this in the first half of 2011.
Now that the "window for transfer" is open, service providers are devising ways to attract employee contributors to switching, and one of them is by lowering fees.
Since the launch of the MPF scheme in December 2000, many service providers have lowered their fees to suit market needs as competition increases. The launch of "portability" will trigger a new price war, and fees can be cut still further. It means more of the contributors' money will go directly into their retirement funds. Also, service providers will try to attract more clients by introducing a wider variety of funds, and enhancing services. The MPFA said that in April 2010, 377 MPF investment funds were registered in Hong Kong, including multi-asset and pure equity funds.
The number of funds available is expected to increase continuously, and contributors can expect to see some unique funds introduced, such as exchange-traded funds (ETFs).
No doubt MPF members will be the biggest beneficiaries of the portability scheme. Yet they do need to spend time and effort on their selections to achieve their target returns. In view of the increasing choice of MPF products, employee contributors can simply follow the steps below to choose the right funds.
First, members should list their investment objectives based on retirement needs, risk appetite and any other personal considerations.
There are many self-assessment surveys on the market that help investors determine their risk appetite according to their age and financial status. Employee contributors can use this information to determine their allocation into equity, multi-asset and/or fixed income products.
After that, members should shop around and study carefully the information about selected funds, such as background, fund type, track record and management fees. Investors should keep in mind that even though two different funds may have similar characteristics, their performances can vary depending on market volatility and investment style.
A fund manager with a greater risk appetite may achieve a higher return during an up market, but is also exposed to greater volatility; a more conservative fund manager may gain reasonable performance during an up market, but the fund is likely to be more resistant to market shocks.
Therefore, employee contributors can pick funds to match their investment goals, and select a fund manager they see as more likely to achieve their investment aim.
Lastly, members should also do a comparison on customer service, online platform and fee details for different service providers before making a final decision.
Another key feature about portability is that it gives employee contributors the ability to switch service providers once each year. The importance of reviewing one's investment portfolio periodically cannot be stressed enough. The new scheme will allow employee contributors more flexibility in adjusting their funds, and even their service provider, to ensure they are on track in reaching investment goals.
Regulators are ironing out the details to try to make the switching process as simple and clear-cut as possible. Yet there are a few areas that employee contributors should take note of when considering moving their part of the MPF portfolio to another service provider. Members should check with their current service provider on how long it would take to switch out, as this may involve "out-of-market risk". The longer the process takes, the higher the chance for the employee contributor to miss out on gains during an up market.
There are no penalties or extra fees for switching service providers, but members should confirm with the current provider to ensure no such charges exist for their accounts. Also, employee contributors who are in a guaranteed fund with the current provider should verify whether they would lose the guaranteed terms if they switch out.
Certainly, members want as much of their contribution as possible to go directly into their MPF portfolio, so they should take note of the fees charged by providers and determine if the costs are acceptable.
Key fees in an MPF fund are the trustee and administrator fee, plus a investment management fee, as well as other fund-operating expenses including a price publishing fee, fund audit and legal fees and compensation fund levy. While most MPF funds do not carry performance fees, members should double check with the provider.
When employees get more engaged and feel that they have more control over their MPF savings, we are likely to see increased voluntary savings in the MPF system.
Ultimately, the MPF portability scheme will benefit employee contributors by giving them even more choices and flexibility as they plan their retirement savings strategy.
Lieven Debruyne is chief executive of Schroders Hong Kong
SCMP 22nd August 2010