More details are needed, but changes to cost structure should reduce high management fees
PUBLISHED : Monday, 05 October, 2015, 11:41pm
UPDATED : Monday, 05 October, 2015, 11:42pm
A quarter of the 2.5 million employees covered by the MPF schemes do not tell providers how to invest their money. Photo: Nora Tam
The cost structure of the Mandatory Provident Fund will be significantly altered next year as the government pushes ahead with its plan to require all scheme providers to have a "core fund" option.
A government source told White Collar the MPF core fund reform was a step closer. The draft of the bill is ready to be submitted to the Legislative Council in November.
This is regarded as the most important reform in the 15-year history of the MPF, as it shows the government taking a more active role in regulating industry management fees. As we all know, the most common complaint is high annual management fees, now at an average of about 1.6 per cent.
The good news is that these core funds will have their annual management fees capped at 0.75 per cent, bringing them into line with the annual charges for similar schemes in the United States. If passed, the proposal will require all 19 MPF providers from next year to introduce at least one core fund investment choice.
While this might sound like a minor tweak, core funds are likely to have a profound effect on the pension industry.
It may come as a surprise that may people take a lackadaisical approach to their MPF investments. The Mandatory Provident Fund Schemes Authority data shows that a quarter of the 2.5 million employees covered by the MPF schemes do not tell providers how to invest their money. These contributions tally HK$57 billion and represent about 10 per cent of all MPF assets.
When employees do not choose how to invest their MPF funds, fund selection by default goes to MPF providers. In many cases, this means choosing options that entail higher management fees or more complicated investment options.
Under the new system, scheme providers will have to route unspecified MPF contributions into core funds. Many other employees will also choose the low-cost core funds as their preferred investment allocation. It is likely that the overall MPF fee structure will come down as scheme providers reassess their management fee structures to compete with the core funds.
Now we need to pay attention to the details. The government has said the core funds will also adopt a simple investment strategy, with a mix of bonds and equities while the risk level would change with age. But the details have not been made clear and we need more information on this in the upcoming Legco debate.
http://m.scmp.com/business/mutual-funds/article/1864390/proposed-core-funds-could-be-catalyst-mpf-fee-reform
