Since the implementation of the Mandatory Provident Fund (MPF) System in December 2000, we have seen both the regulator and MPF scheme providers continually make various improvements to better investor experience. Most recently, the Mandatory Provident Fund Authority (MPFA) is planning to introduce an MPF Default Investment Strategy (DIS) by the end of 2016. The DIS is a standardized, fee-controlled investment option that gradually reduces the portfolio’s risk as a scheme member ages. It is designed for those who have not specified a fund choice, but it can also be actively chosen by scheme members. We are supportive of this initiative, and you can read more about our thoughts here. Some other positive developments include the launch of the Employee Choice Arrangement program in 2012 and the option to withdraw MPF benefits by instalments instead of in a lump-sum from February 2016.
Recently, a number of MPF scheme providers have also made some constructive changes, particularly in scheme consolidations. For example, in March 2016, AIA merged the MPFs from its Basic Value Choice and Simple Value Choice schemes with those with the same names and investment objectives in its existing Prime Value Choice scheme. As a result, AIA now has only one scheme to offer. Similarly, HSBC plans to consolidate its SuperTrust scheme into its existing SuperTrust Plus scheme and its SimpleChoice scheme into its existing ValueChoice scheme on 1 July 2016. Hang Seng proposes to implement the same changes as HSBC on the same date. Unless otherwise indicated, transferred scheme members’ existing accrued benefits will be allocated to the newly consolidated schemes according to their pre-existing arrangements. Moreover, there will be no change in investment mandate, and the merger costs will be borne by the scheme provider. For more details, members should contact their respective scheme providers.
We think these changes are a step forward in further benefiting MPF participants in terms of enhancing fund choices and reducing fees. For instance, the former scheme members of AIA Simple Value Choice now have an additional 17 funds to choose from. The newly consolidated AIA Prime Value Choice scheme encompasses a greater variety of asset classes, with offerings in Asian, European, and Japanese equities. Moreover, the transferred scheme members now have access to even more internationally recognized subadvisors, including Fidelity and Allianz Global Investors. After HSBC’s and Hang Seng’s proposed SuperTrust and SuperTrust Plus scheme consolidations, the transferred members will have nine additional funds available to them. This includes a popular Hong Kong and Chinese equity fund and a global bond fund, which is the only bond fund available on their fund menu. All MPFs in HSBC’s and Hang Seng’s schemes are currently internally managed, but we believe scheme members can be better served by an open architecture platform that offers best-in-class investment options. In addition, the consolidation of funds with the same names and investment objectives will allow for greater scope for economies of scale. Prior to the scheme mergers, such funds were treated as separate vehicles, incurring their own operating costs and at times charging different management fees. By combining these funds, such costs will be spread over a larger asset base and can benefit scheme members in the form of lower fund expense ratios. In fact, former scheme members of AIA Basic Value Choice choose from the same fund menu as before, but now at a lower management fee of 1.75% for certain funds. Meanwhile, there will be no immediate change in the management fees for the funds merged from HSBC SimpleChoice into HSBC ValueChoice, nor those merged from SuperTrust into SuperTrust Plus. That said, HSBC and Hang Seng are one of the largest MPF scheme providers in Hong Kong, and we expect them to pass on some of their cost savings to scheme members.
According to the MPFA, Hong Kong’s MPF industry had about HKD 590 billion of assets under management as of the end of November 2015, divided among about 38 MPF schemes that contained a total of about 462 approved funds. This asset pool is small compared with a similar but more mature system like Australia’s Superannuation, which had AUD 2,046 billion, or around HKD 11,963 billion at the end of 2015. The retail segment, which is the largest and most relatable to Hong Kong’s MPF system, managed AUD 541 billion, or around HKD 3,169 billion with 148 funds (or schemes, per common Hong Kong usage). While we believe in fostering product innovation and diversity, the current MPF system is relatively young and small. Hence, the immediate focus should be on delivering strong post-fee returns for investors. We are happy to see that scheme providers are enhancing efficiency by consolidating overlapping MPFs to achieve economies of scale, with the aim of reducing fund expense ratios. Furthermore, there is scope to liquidate the small and uncompetitive MPFs.
The MPF system has undoubtedly come a long way since it was first launched. That said, we believe there is room for further improvement, particularly in the disclosure aspect. In addition to performance and fees, we think the investment team’s abilities and investment process are also important when trying to determine a fund’s investment merits. We look forward to further enhancements to the industry that will help investors better achieve their retirement goals.
