In December Hong Kong “celebrates” the Mandatory Provident Fund’s 10-year anniversary. Rather than providing an opportunity to look back on the achievements of this compulsory retirement savings system, it seems to have invoked an outpouring of criticism. There have been calls to amend it, adjust it, and in some cases to scrap it. Others have suggested rolling it into a more comprehensive and government funded pension system.
At the end of November the MPF Authority’s chairwoman, Anna Wu, said the MPF scheme had not been seen as providing adequate protection for retirement or as universal. She criticised the scheme’s service providers for not lowering fees since its inception at a fast enough pace. Others have joined the chorus of complaints concerning high fees, inadequate coverage and insufficient member investment choice.
In September the government postponed plans to introduce greater choice for the scheme’s members, citing mainly its concerns for the adequate preparation and training of the industry’s 20,000-plus registered intermediaries licensed to sell MPF products and services. These original plans to provide greater member choice were expected to be implemented by April 2011. So far no date for the postponement has been announced.
Casual observers of these developments and the criticism being voiced could be understandably confused since the MPF has achieved many of its original objectives. The system has amassed a total savings pool of approaching $45bn since its introduction and compliance levels are well into the 90 per cent range. There have been no major scandals and individuals have weathered a number of significant investment challenges.
Some 2.45m people participate in the scheme, which is entirely managed by the private sector. Industry forecasts suggest total scheme assets will triple over the next 10 years.
According to MPFA data, the average annualised return on contributions to the MPF system since inception has been 5.1 per cent (to September 30) after fees.
However, the very attributes that have made the system such a success relative to the original set of objectives, are restricting its progress.
At the outset the biggest challenge was how to ensure all workers enrolled and contributed regularly. Hence the decision was taken to organise the mandatory scheme at the employer level. As the defined contribution scheme has grown, the limitations of a system organised at the employer level have been exposed.
First there has been the proliferation of similar funds developed exclusively by each service provider for each of their schemes respectively. This has led to almost 350 funds now being available in the market. Second, although there are many companies offering trustee and administration services, there has been insufficient competitive pressure for these providers to lower their fees and allow scheme members to benefit from economies of scale as scheme assets have grown.
The message on fees and choice from the government has been mixed. On one hand the MPFA has called for lower fees, believing changes to the scheme allowing members to direct their own contributions to any service provider will increase competition and put greater pressure on the industry to reduce charges.
At the same time it has become increasingly difficult for fund managers to introduce new funds. A recent industry consultation has suggested fund rationalisation should be encouraged. With a number of administrators competing in the market, any initiative to encourage lower fees will probably reduce competition within these services, or at least restrict development of future service enhancements. This is not consistent with a general call for service providers to increase the provision of member education and quality of advice being given to members, particularly at the point of sale.
It is hoped that choice will be expanded so members can have a better sense of ownership and be more involved with their MPF decision-making, as previously planned. Concerns that this will increase rather than reduce the number of products already on offer is likely to weigh heavy on the decision to liberalise, as there are concerns that members will not understand the choices being offered. The postponement of member choice may become an indefinite delay.
As Hong Kong reflects on the past 10 years of the system, if nothing else it can certainly be claimed with confidence that the MPF has raised the public debate on retirement provision.
Mark Konyn is chief executive of RCM Asia Pacific