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Following is a question by the Hon Tommy Cheung and a written reply by the Secretary for Security (in the absence of Secretary for Financial Services and the Treasury), Mr Ambrose S K Lee, in the Legislative Council today (April 25):
Question:
In an article published in mid-February this year, a retired investment banker has commented that the investment returns stated in "A Five-year Investment Performance Review of the MPF System" released by the Mandatory Provident Fund Schemes Authority (MPFA) might have been overestimated, and the high fees charged by Mandatory Provident Fund (MPF) service providers have adversely affected the MPF investment performance. The article has aroused wide public concern. In this connection, will the Government inform this Council:
(a) whether it has assessed if MPFA has covered up the excessively high fees charged by MPF service providers and the relatively low rates of return in the above report; if assessment has been made, of the results; and why the report did not use the compound annualised rate of return which is considered by market participants to be a better indicator to reflect the truth, and did not include expenses, such as the transaction levy, in calculating and analysing the MPF investment returns;
(b) whether it will request MPFA to conduct a central MPF settlement exercise annually, and to make a detailed comparison of the rates of return, expenses and costs, transaction levy, risk levels and investment performance of the products offered by various MPF service providers, so as to enhance the transparency of MPF schemes; and
(c) given that the MPF Industry Schemes for employees in the catering and construction industries are currently run by only two operators, and the employees in those industries consider that there is a lack of competition, whether the authorities concerned have studied if the maintenance fees charged by such operators are on the high side; if they have, of the results of the study; if not, whether they will conduct the relevant review and consider introducing measures to ensure effective investment performance of such MPF schemes?
Reply:
Madam President,
(a) The objective of the Mandatory Provident Fund Schemes Authority (MPFA) in undertaking a five-year investment performance review is to provide some objective information to scheme members and other stakeholders to help them better understand about long-term investment risks and returns. The review report has provided clear explanation on the basis and methodology for using the internal rate of return (IRR) to calculate investment return, and that all returns are expressed net of expenses including any transaction costs. The review report has therefore clearly set out all necessary information to facilitate the public's understanding of its contents and findings. There is no over-estimation of returns.
The Mandatory Provident Fund (MPF) is a regular savings system, with scheme members contributing into and withdrawing from the system during the relevant period. Considering that the methodology of calculating MPF's investment return must fit its mode of operation, the MPFA has decided to adopt the IRR method after consulting Prof Kalok Chan (Note), Chair Professor of Department of Finance, the Hong Kong University of Science and Technology (HKUST). The IRR, commonly known as "dollar-weighted return", was computed on a monthly compound basis, taking into account the amount and timing of contributions into and withdrawals from the MPF system. The compounding effect has therefore been reflected in the system return figures in the report.
As regards the alternative method of compound annualised rate of return, MPFA considers that it cannot adequately reflect the return of all the contributions made into the MPF system. This is because the compound annualised rate of return can only show the compound return on those monies (HK$15.69 billion) that were already in the system on April 1, 2001. It would not provide any return information for the net contributions that were made in subsequent months, which account for about 88.5% of the total net contributions. On the other hand, the IRR method can provide return information that is relevant for each and every contribution made into the system over the five-year period.
The MPFA is committed to enhancing the provision of MPF-related information to the public. Since the issuance of the Code on Disclosure for MPF Investment Funds (the Code) in mid-2004, the MPFA has implemented a number of initiatives to improve the disclosure of information and to enhance the transparency of fees relating to MPF funds. These initiatives include:
* introducing a fee table to standardise the way that fees and charges are disclosed;
* prescribing the minimum content of the fund fact sheet to ensure pertinent information about the fund is disclosed; and
* introducing two useful tools, the Fund Expense Ratio and the Ongoing Cost Illustration, to help members and other stakeholders understand and compare fee levels.
With the implementation of these initiatives, MPF scheme members now have better access to information about the funds they invest in.
(b) Apart from the initiatives mentioned in (a), the MPFA is studying improvements to the annual benefit statements of MPF scheme member to further enhance transparency of fees and returns. The MPFA is also developing a comparative platform to provide a central place to facilitate comparison of fees and charges of different MPF funds. The Government plans to introduce the requisite legislative amendments for implementing the above two initiatives this year. We have consulted the LegCo Panel on Financial Affairs on the proposed amendments in April 2007. As regards information on return of MPF funds, it is readily available in the market-place, such as weekly reports in the press.
(c) Since the issuance of the Code in mid-2004, the MPFA has been monitoring closely the fees and charges of MPF funds, including those of industry schemes. The fund expense ratios of the funds of the two industry schemes are found to be generally in line with the market, except a few funds where the fund sizes are exceptionally small.
It should be noted that employers of the construction and catering industries are free to join master trust schemes instead of the industry schemes and in fact, many employers chose to do so. In this connection, MPFA does not consider that there is a lack of competition for the industry schemes.
Note: Prof Kalok Chan is also the Director of the Center for Fund Management of the HKUST.
Ends/Wednesday, April 25, 2007
Issued at HKT 13:05
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