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Following is a question by the Hon Frederick Fung and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (June 13):
Question:
It has been reported that many trustees of the Mandatory Provident Fund (MPF) charge high fund management fees, resulting in the employees' accrued benefits being eroded by as much as 40% upon their retirement. In this connection, will the Government inform this Council:
(a) of the highest, lowest and average fund management fees charged by the trustees in each of the past five years;
(b) of the ratio of the employees' accrued benefits upon their retirement to the total amount of management fees throughout the contribution period as calculated according to the current average fund management fees; and
(c) whether it knows if the Mandatory Provident Fund Authority:
(i) has put in place measures to prevent trustees from charging excessive fund management fees; if it has, of these measures, and if it has assessed whether these measures are effective; if no such measures are in place, the reasons for that;
(ii) has studied in the past the levels of fund management fees charged by the trustees and compared them with the corresponding figures of foreign countries; if it has, of the results; if it has not, the reasons for that;
(iii) is aware of the existing criteria adopted by the trustees for determining the levels of management fees charged for MPF funds of different risk categories;
(iv) has assessed if the trustees' practice of charging the same percentage rate of management fees for MPF funds of different risk categories is fair; if it has; of the results; if it has not, the reasons for that; and
(v) has studied any proposals to lower the levels of fund management fees; if it has, of the contents of the proposals concerned, and whether such proposals include a study on greater involvement of employees in the decision-making process for the selection of the trustees; if so, of the details; if not, the reasons for that?
Reply:
Madam President,
(a) Trustees of MPF funds are required to disclose fee information according to different fee types under the Code on Disclosure for MPF Investment Funds. According to the Mandatory Provident Fund Schemes Authority (MPFA), in general, the disclosed fees have not changed materially over the past five years. However, it is very difficult to understand the totality of fees and charges by looking at the segregated information about different fee types such as fees for investment manager, trustee and administrator. Fund expenses are best reflected as a percentage of fund size, i.e. Fund Expense Ratio (FER). Based on the information submitted by trustees (up to June 8, 2007), the average FER of MPF funds calculated on an asset-weighted basis was 2.06% and the lowest and highest FERs were 0.41% and 4.19% respectively.
(b) As calculated according to the current average MPF fund expense ratio of around 2%, if an employee contributes for 40 years, his final benefits will be reduced by nearly 40% as compared to the theoretical position if no fee were charged. In other words, if the total contribution of the member and his employer is HK$960,000, his accrued benefits will increase to HK$1.85 million upon his retirement as compared to about HK$3 million on a no-fee basis. In that case, the ratio of the employees' accrued benefits to the total amount of management fees throughout the contribution period would be around 1.6 to 1.
(c)(i) As far as the fees for MPF funds are concerned, the existing legislation only provides for the limits on monthly fees chargeable to capital preservation funds and the limitation on fees for transfers between schemes or accounts. The 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.
Moreover, the MPFA from time to time reviews the operational arrangements of the existing system in consultation with the industry, and proposes legislative amendments to streamline the procedures and reduce the operating costs of MPF schemes. Educating scheme members about the importance of fees and charges in investment decisions is also part of MPFA's ongoing efforts.
We believe the above measures will help in the setting of MPF fees at a reasonable level in the long run.
(ii) The MPFA has recently carried out research into the fees and charges of MPF schemes. The findings show that given the complexity of the fee structures, the different practices of the industry and the limitation of data, it is rather difficult to come to any definite conclusion on the current level of fees and charges of MPF schemes based on benchmarks such as local retail funds, funds of occupational retirement schemes and other international pension funds.
As regards the fees and charges of other overseas retirement savings systems, the research findings of the MPFA 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.
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, the 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.
(iii) & (iv) MPF funds are commercial investment products, and the levels of fees and charges for such funds are commercial decisions by individual companies taking different factors into consideration. The MPFA's present focus is to enhance the transparency of fees charged for MPF funds, thereby bringing the market forces into full play in determining fee levels. Moreover, the MPFA is actively following up the other measures mentioned in part (v).
(v) Under the existing system, upon termination of employment, an employee may, by his own choice, open a preserved account in any MPF schemes operated by approved trustees and transfer the accrued benefits derived from his previous employments to that preserved account. At present, the MPF benefits portable between schemes also include contributions from self-employed persons and special voluntary contributions from employees, which together account for around 30% of the MPF benefits.
To promote market competition, the MPFA is actively considering a practicable option to expand employees' choices by allowing them to choose MPF trustees regarding the accrued benefits derived from their own contributions. As the proposal may lead to a proliferation of accounts, transfers and administrative work, hence increasing the operating costs of MPF funds, 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.
In the light of experience of other jurisdictions, the MPFA will also 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 the second paragraph of part (v) above 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.
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 15:45
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