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Following is a question by the Hon Paul Tse and a written reply by the Acting Secretary for Financial Services and the Treasury, Ms Julia Leung, in the Legislative Council today (October 31):
Question:
Recently, the Consumer Council (CC) published the performance of 341 fund schemes under the Mandatory Provident Fund (MPF) Schemes for the past five years. With a membership size of 2.35 million and accrued benefits accumulated so far standing at $384.3 billion, such fund schemes yielded an overall rate of return of only 2.7% per annum but their annual average charging rate was as high as 1.74%, which was substantially higher than the relevant charging rates of some countries (1.19% for the United Kingdom (UK) and 0.56% for Chile). A newspaper report entitled "MPF contributions have no prospect of recovery of losses" has pointed out that "half of the funds have 'incurred' losses on the part of wage earners", but there are numerous investment methods yielding much higher investment returns than MPF. A number of members of the public have also telephoned radio programmes, expressing their discontent with MPF and requesting the Government to completely abolish the MPF Schemes. Regarding the policies and measures for protecting the overall retirement fund contributions made by employees, will the Government inform this Council:
(a) whether, in view of the situation that nearly half of the fund schemes (46.6%) have incurred losses and the charging rates of fund schemes are higher than those of other countries, it will immediately review the actual effectiveness of the MPF Schemes and examine the feasibility of abolishing the MPF Schemes or replacing the MPF Schemes with other retirement protection schemes; whether the Government will set any deadlines and bottom lines (e.g. the charging rates of fund schemes have to be lowered to a level that is close to those of countries such as UK and Chile, etc. prior to a certain deadline, and the number of loss-incurring funds has to be capped at a certain percentage of the total number of funds) and listen to and assess the views of members of the public in order to objectively examine whether the MPF Schemes should be abolished completely; if it will, how and what bottom lines will be set by the Government and how the views of members of the public will be listened to and assessed; if not, of the reasons for that;
(b) given that quite a number of members of the public have pointed out to me that the effectiveness of the MPF Schemes has been far from satisfactory for a long time and that they have to pay high fund fees irrespective of whether or not they make profits which always result in gains on the part of the trustees, and as such, the MPF Schemes not only cannot offer effective protection for their retirement life but instead gradually undermine their ability to cope with it, which have led to widespread discontent against the MPF Schemes in society and growing public sentiments calling for the abolition of the MPF Schemes, whether the Government has conducted any studies or reviews on this situation; if it has, of the results of the reviews; if not, whether it will immediately conduct such reviews; what methods are in place to convince members of the public that the Government requiring them to make mandatory contributions to the MPF Schemes can effectively protect their retirement life;
(c) whether it has conducted any study on amending the Mandatory Provident Fund Schemes Ordinance (Cap. 485) to require that fees charged for fund schemes should be linked with investment performance, and that for fund schemes which have incurred investment losses, clients should be exempted from management fees or subsidised with management fees for the year after the loss-incurring year, so that part of the investment risks will be shared by fund trustees and competition will be promoted among them, and at last, only quality trustees will survive; and
(d) given that the Mandatory Provident Fund Schemes Authority (MPFA) incurs an expenditure of around $400 million each year but it has never implemented any effective policies resulting in fund schemes lowering the management fees charged to clients, nor has it conducted any one-stop assessments on the performance of funds, and it has only taken follow-up actions upon CC's announcement of its study results, whether the Government has assessed if MPFA is competent in discharging its duties and whether the annual expenditure of $400 million is used in a value-for-money manner and put to proper uses; also, whether the Audit Commission will conduct a value-for-money audit on MPFA?
Reply:
President,
(a), (b) and (c) The Mandatory Provident Fund (MPF) System in Hong Kong is consistent with the second pillar in the pension model advocated by the World Bank, i.e. "mandated, privately managed, fully-funded defined contribution scheme". Before implementation of the MPF System in 2000, only one-third of the workforce had retirement protection. At present, 85% of the working population are covered under MPF schemes and other retirement protection schemes which provide retirement protection to various degrees. As at June 30, 2012, the annualised internal rate of return of the MPF system, after deduction of fees, is about 2.7% per annum while the change in the annualised Composite Consumer Price Index over the same period is 1.2%.
Both the Government and the Mandatory Provident Fund Schemes Authority (MPFA) fully appreciate the strong public sentiment that MPF fees should be reduced, especially against the less than satisfactory return of MPF funds amidst the volatile global economy over the past few years. In fact, the Government and MPFA have been striving to enhance the MPF System and to reduce fees through measures to enhance the transparency of market operations and promote competition, including adopting a uniform approach for fee calculations, i.e. Fund Expense Ratio (FER), and making regular publication of the FER of each MPF fund which exerts pressure on the industry to reduce fees. Since 2008, the average FER has decreased by about 18% in overall terms.
The next stage will be the implementation of the Employee Choice Arrangement (ECA) on November 1, 2012, following which the size of MPF assets transferable by employees will increase from 40% of the total net asset values of all MPF schemes to over 60%, which is expected to add pressure on trustees to further reduce their fees. At present, MPFA has set up the Fee Comparative Platform and the Trustee Service Comparative Platform which are accessible via its website to facilitate scheme members' comparison of fees and trustee services. Both platforms include a hyperlink to the website of the Hong Kong Investment Funds Association where information on the investment performance of individual MPF funds is available for public reference. In tandem with the implementation of ECA, MPFA will make available a list of MPF funds with lower fees for public information via its website as from the end of this year. Furthermore, MPFA will enhance public education and remind scheme members to carefully take into account relevant factors in deciding whether or not to transfer their accrued benefits to another scheme or fund, including the fees of the relevant schemes, the risk tolerance of the scheme member concerned, the service levels of the trustees concerned, etc.
The overall FER will come down if more scheme members choose to transfer their accrued benefits to funds with lower fees under ECA. And there will be room for further fee reduction with the growing scale of the MPF System. We will continue to monitor the market situation closely, and enhance the regulatory arrangements as appropriate.
On the other hand, in parallel to the preparation for the implementation of ECA, MPFA has, at the request of the Government for a comprehensive review of the MPF System, formulated the scope of the overall review, which includes a study on the administrative cost of trustees. MPFA plans to submit a report to the Government by the end of this year, setting out the study results and recommendations on improvement measures. The comprehensive review also covers examination of various other proposals, including regulating the fee level by, say, imposing a cap on fees. At this stage, the Government will keep an open mind on any proposal that can lower MPF fees and will actively follow up on MPFA's report, when available.
As a retirement protection system, the MPF System has not yet reached a mature stage in terms of both the institutional arrangements and the overall level of accrued benefits. The Government and MPFA will continue to pursue various means to facilitate reduction in trustees' fees and to enhance the MPF System.
(d) MPFA is established under the Mandatory Provident Fund Schemes Ordinance to regulate the MPF System. The above paragraphs have set out its efforts on lowering the fees of MPF schemes by enhancing market transparency and promoting competition and the results achieved. The Ordinance has incorporated a number of safeguards as regards the corporate governance of MPFA, which include: the Management Board of MPFA which is responsible for making major policy decisions and monitoring the daily operation of MPFA, comprises a majority of non-executive directors appointed by the Chief Executive; the Management Board is required to submit annual report, corporate plan and budget to the Financial Secretary; and MPFA is required to appoint an auditor to audit its accounts, which, together with its annual reports, are to be released to the public. In addition, MPFA has set up an Audit Committee comprising non-executive directors to examine MPFA's annual financial statements, reports on internal control and internal audit programme. MPFA will continue to enhance the MPF System.
Ends/Wednesday, October 31, 2012
Issued at HKT 15:36
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