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Aon Retirement and Investment Blog

Changes to the Hong Kong MPF

Hong Kong Mandatory Provident Fund (MPF) members can expect to see a new investment option in their retirement plans before the end of 2016, following the recent release of a bill to standardize the default investment strategy across all MPF schemes.

On November 25, 2015, under the order of the Chief Executive of the Special Administrative Region of Hong Kong, the Mandatory Provident Fund Schemes (Amendment) Bill 2015 (the Bill) was introduced to the Legislative Council. In essence, the Bill proposes the introduction of a standardized, low cost life cycle or target date default fund to become the default investment strategy (DIS) across all MPF schemes.


Standardization would require each MPF trustee to introduce two new constituent funds in their MPF schemes:

  1. Age 65 Plus Fund – “a constituent fund investing in a globally diversified manner that targets to invest 20% of net assets in higher risk assets,” although allocation can vary from 15% to 25% of the net asset value of the funds
  2. Core Accumulation Fund – “a constituent fund investing in a globally diversified manner that targets to invest 60% of the net assets in higher risk assets,” although allocation can vary from 55% to 65% of the net asset value of the funds

Furthermore, the DIS will require MPF trustees to reduce members’ exposure to higher risk assets as they approach retirement. Allocation of accrued benefits among the two funds will vary according to members’ age.



The Bill left some questions unanswered, such as the mechanism for asset reallocation and the precise definition of higher risk assets. The Bill is now pending approval by the Legislative Council, and it is likely more refinements to the Bill are forthcoming. Dr. David Wong, the Chairman of the Mandatory Provident Funds Authority (MPFA), expects the Bill to come into effect by the end of 2016. The Bill follows the release of the MPFA’s consultation paper “Providing Better Investment Solutions for MPF Plan Members” in June 2014 and a round of public consultation from June to September 2014.

What is the MPF?
The MPF is a mandatory defined contribution scheme requiring contributions from both employees and their employers. Licensed providers in the private sector then invest these contributions until the employees’ retirement or beyond. Now in its 15th year of existence, the system has grown to over US$70 billion in assets as at the end of 2014, amounting to an average balance of US$29,000 per member. In comparison, the average 401(k) balance in the US was US$100,320 at the same point in time, according to Aon Hewitt’s 2015 Universe Benchmarks.

To use the terminology coined by the World Bank in its 1994 report “Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth”[1], MPF is a Pillar 2 scheme[2]. It carries double duty in Hong Kong as there is no state pension in the Special Administrative Region. Prior to the introduction of the MPF in December 2000, only 1/3rd of employees in Hong Kong were enrolled in an occupational retirement scheme.

Today, 85% of the working population in Hong Kong is enrolled in the MPF or other forms of occupational retirement plans.
 
What could follow?
As of November 2015, the average management fee of all MPF funds in the market is 1.6% pa of plan assets, more than twice the proposed fee cap of 0.75% pa for DIS funds.  The introduction of DIS will place downward pressure on fund management fees, and smaller MPF trustees in particular will see their profit margins reduced. In the long term, this change is expected to bring about improved competition and efficiency among MPF trustees, though in the short term would likely lead to further consolidation in the industry.

The top 5 MPF trustees have more than 90% market share and benefit from economies of scale that will be impossible for smaller players to achieve. 2015 saw Standard Chartered and AXA selling their MPF businesses to rivals, and it would not be surprising to see similar deals happening in 2016.  Employers are advised to keep an eye on industry movements to keep abreast of any developments that might affect benefits continuity.
 
Edwin Yan is the retirement practice lead in Aon Hewitt’s Hong Kong office.


[2] As defined by the World Bank, a pillar 2 plan is “typically an individual savings account (i.e. defined contribution plan) with a wide set of design options including active or passive investment management, choice parameters for selecting investments and investment managers, and options for the withdrawal phase.”


Content prepared for APAC subscribers, but available to interested subscribers of other regions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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