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Following is a question by the Hon Mandy Tam and a reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (June 13):
Question:
It is reported that some Mandatory Provident Fund (MPF) trustees charge MPF fund management fees up to 2% to 3% a year, thus substantially reducing the accrued benefits receivable by employees upon retirement. In this connection, will the Government inform this Council:
(a) whether it will consider amending the relevant legislation to enable employees to choose MPF trustees on their own, so as to lower MPF fund management fees by means of market forces; if it will, of the details and timetable of such amendments; if not, the reasons for that;
(b) given that the annual management fees of quite a number of investment funds in foreign countries are only within the range of 0.4% to 0.6%, whether it has explored which of the experience of foreign countries may be drawn on by Hong Kong to lower MPF fund management fees; and
(c) whether it will regulate the levels of fund management fees charged by MPF trustees?
Reply:
Madam President,
(a) The Mandatory Provident Fund Schemes Authority (MPFA) is actively considering a practicable option to allow employees to choose trustees of Mandatory Provident Fund (MPF) with a view to increasing market competition and driving down the fees of MPF funds. The Government is supportive of any measures proposed by the MPFA which could effectively improve the operation of the MPF System so as to provide better retirement protection for the employees.
As MPF contributions are made by both employers and employees, we must fully consult the employers and employees and consider their views before introducing any major changes. In considering ways to allow employees to choose the MPF trustees, the MPFA has to ensure that the relevant arrangements are supported by both employers and employees. The issues that need to be considered include the possible proliferation of accounts, transfers and increased administrative work that may be brought about by the changes, which might lead to increased operating costs. Moreover, as the existing system allows employers to offset the severance payments and long service payments by their contributions, employers would expect that they could participate in choosing the MPF trustees. The MPFA must analyse in detail the implications of the proposal on both employers and employees and strike a balance in assessing its costs and benefits.
The preliminary proposal being considered by the MPFA is to allow employees to choose MPF schemes regarding the accrued benefits derived from their own contributions. The MPFA is now consulting the professional bodies in the industry on the implementation of the proposal and the arrangements. If practicable, this would result in around 60% of MPF benefits being portable between trustees.
The MPFA plans to consult other relevant stakeholders on the proposal later this year and put forward recommendations to the Government within this year.
(b) The MPFA has carried out research into the fees and charges of retirement savings systems in other jurisdictions. The findings show that the design and operation of the systems vary considerably across jurisdictions. The fee structures and mechanism as well as the calculation and reporting of fees are also widely different. Therefore, the MPFA considers that it is very difficult for Hong Kong to make a meaningful comparison with foreign countries.
Moreover, owing to differences in services provided and types of fees, it is not possible to directly compare the MPF scheme with investment funds in general.
The MPFA is of the view that the most valid international comparison is probably to consider the Australian retail superannuation system because of its structural similarities with the MPF system. According to information obtained by the MPFA, fees as percentage of assets under the system is around 1.53% (excluding contribution fees) (Note), while the average fund expense ratio of MPF funds in Hong Kong is 2.06%. However, it should be noted that since the Australian retail superannuation system was established in 1992 with a total asset value of more than US$40 billion, it outperforms our MPF system both in terms of its maturity and asset size of funds.
In the light of experience of other jurisdictions, the MPFA will conduct follow-up studies on a number of issues to help ensure that fees and charges are set at a reasonable level. These issues include:
* discussion with stakeholders, including trustees, about how the operation of the system can be refined with the objective of reducing operating costs and fees and charges;
* helping MPF funds to achieve greater economies of scale by facilitating mergers and restructures of funds;
* considering how the MPF system can be expanded to achieve greater economies of scale, for example, by facilitating more voluntary contributions from members into the system;
* considering whether product costs can be reduced, for example, by making greater use of simplified and lower cost investment products;
* considering ways for greater portability of benefits to increase market competition without increasing the operating costs of the schemes (please refer to part (a) of the reply for the proposal);
* considering whether disclosure of fees and charges can be further improved; and
* enhancing education and helping scheme members to gain a full understanding of the importance of fees and charges.
(c) The existing MPF System mainly relies on market forces to set the type and level of fees.
The MPFA is committed to improving the transparency of fees so as to help bring market forces into full play. Following the issue of the Code on Disclosure for MPF Investment Funds in 2004, the MPFA is developing a web-based comparative platform to help scheme members compare fees and charges across funds and schemes. The first phase of this platform, which will provide scheme members with information about the highest/average/lowest expenses by fund types, will be available in July this year. The second, a more sophistically designed phase, will show detailed information about fees and charges for each individual fund. The launching time of the second phase will depend on the progress of the relevant legislative work. A Bill incorporating the relevant proposed amendments will be introduced into the Legislative Council later this month.
Note: There is a 0.27% to 1.51% contribution-based fee on top of an asset-based management fee. The relevant data are based on the information provided to the Australian Securities and Investments Commission by trustees between October 1, 2005 and June 30, 2006.
Ends/Wednesday, June 13, 2007
Issued at HKT 13:00
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