Hong Kong has postponed the introduction of a long-awaited change to its pension plan that would have allowed employees more investment choice and was expected to foster lower fees. The delay is due to concerns over who will regulate the salespeople who will sell funds to the 2.3m employees that invest in the Mandatory Provident Fund scheme.
“With more than 2m employees becoming the direct sales targets of MPF intermediaries, the MPFA expects a growing number of companies and individuals joining the field and selling MPF schemes,” the Mandatory Provident Fund Authority said in a statement.
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The delay came as a surprise to many in the asset management industry as they had spent months preparing for the change, which was expected to go into effect in April 2011. The government said a public consultation would be held by early next year so new legislation could be tabled in late 2011, meaning the change is unlikely to happen before 2012.
“The government came out with the idea a few years ago, and since then the industry had done a lot of systems work to get ready for it,” says Stuart Leckie, the founding chairman of the Hong Kong Retirement Savings Association and chairman of Stirling Finance.
“For the government to suddenly announce the delay without any market consultation, as far as I know, caused a lot of surprise and irritation.”
Employees enrolled in MPF contribute 5 per cent of their salary, capped at HK$1,000 ($129) a month. These contributions are matched by their employer. Until now the employer has chosen which fund provider to use, while the employee chooses which individual fund to invest in.
The change would have enabled employees to choose which MPF provider would manage their share of the contributions, while the employer would continue choosing the manager for their share. Employees would have been allowed to switch provider once a year without additional charges.
Since the MPF was introduced 10 years ago its system of allowing bosses to select the trustee has been criticised for limiting competition and allowing fund trustees to charge excessive fees. Critics say provider selection relies more on previously established banking relationships between provider and employer than the quality and pricing of service to the employees.
MPF fund providers are regulated by a variety of authorities. Banks are regulated by the Hong Kong Monetary Authority, fund houses are under watch by the Securities and Futures Commission and the insurance industry is in the midst of creating its own regulator called the Insurance Authority. While the MPFA runs the actual retirement scheme it does not control the 27,000 salespeople registered in its system.
At the moment about 70 per cent of sales are through insurance agents, with some 20 per cent handled by banks.
“All these discussions need to come together in legislation that will set out the guidelines, roles and responsibilities of each various regulator,” says David Fried, global head of insurance at HSBC, the largest MPF provider. “There will be shared oversight and there needs to be some clarity on how that will work.”
The delay in introducing member choice is seen to benefit service providers as they enjoy the competition-free environment for longer, although providers say they welcome the change and were prepared for it.
“There was no broad based consultation, but the MPFA has had discussions with the trustees to let them know of their concerns,” says Mr Fried. “We support what they are looking to do.”
MPFA says the average fund expense ratio, an indicator of the level of fees, has dropped from 2.1 per cent in January 2008 to 1.89 per cent now.
“I believe this will bring pressure and competition to the pricing of the funds,” says Mr Fried. “But the most important part of members’ choice is to try to bring about an effort where individuals take responsibility for their retirement savings.”
Mr Fried says 27 per cent of those in the system make an active fund choice, with the rest going straight into the Central Provident Fund, showing a lack of appetite amongst investors to manage their retirement planning.
“In the past decade HSBC has always had more than a 30 per cent market share and in that time only 25 per cent of all our members have done any switching,” says Mr Fried. “And that 25 per cent has only done 2.5 switches over the past 10 years.”
Mr Leckie says when Australia began offering similar choice to employees about 10 per cent changed providers in the first year, with the ongoing rate of switching falling to about 5 per cent.
Mr Fried says MPF contributions fall well short of what Hong Kong employees need to save for retirement, echoing a common criticism of the scheme.
Retirement schemes around the globe are facing the same problem, with few employees saving the 15 per cent of their annual salaries that financial advisers say is needed to maintain their lifestyle in retirement.
By Cameron Dueck
Published: November 28 2010 08:10 | Last updated: November 28 2010 08:10