7 April 2017
The MPF Default Investment Strategy for Enhancement of the Hong Kong Mandatory Provident Fund System
In BDO April 2016 publication on updates of amendments to Mandatory Provident Fund (MPF) legislation (www.bdo.com.hk/en-gb/insights/publications/apercu), we highlighted the major initiatives to be implemented by the Mandatory Provident Fund Schemes Authority (MPFA) for enhancement of the MPF system. These include (i) the introduction of a Default Investment Strategy (DIS); and (ii) the introduction of an electronic platform for centralising members’ access to their MPF-related information, processing of transactions and payments.
The MPFA has announced that the Mandatory Provident Fund Schemes (Amendment) Ordinance 2016 was passed by the Legislative Council and effective from 1 April 2017. The Default Investment Strategy has been launched on the same day. According to the Amendment Ordinance, each MPF scheme has to offer the DIS to scheme members as an investment choice.
About the DIS
The DIS is designed in response to the criticisms of the MPF system among the 2.6 million Hong Kong employees, such as high fees and low returns, administrative inefficiency, etc. The DIS is a standardised, low cost investment choice designed for MPF scheme members who have difficulty in making investment decisions (eg lack of knowledge or lack of time). For scheme members who do not provide their investment choice to their trustees, their MPF benefits will default to be invested according to the DIS funds. Existing scheme members may also choose to switch their investments to the DIS funds at any time.
The DIS contains two constituent funds (CF): the Core Accumulation Fund (CAF) and the Age 65 Plus Fund (APF).
The CAF will hold around 60% assets in higher risk assets, such as global equities, and 40% in lower risk assets, such as global bonds. The APF will hold 20% in higher risk assets and 80% in lower risk assets (see Table 1).
Before age 50, all MPF contributions made by the scheme members will be invested into the CAF. However, starting from age 50 up to and including 64, accrued MPF benefits of scheme members in the CAF will automatically and gradually be switched to the APF. This switch will be based on a specified percentage to accomplish the objectives of progressive reduction of exposure to higher risk investments, thus achieving the purpose of de-risking (see Table 2).
Statutory management fee cap
The DIS also features a statutory management fee cap, as the amount of management fee charges to an MPF constituent fund (CF) has a significant impact on long-term investment outcomes. On this basis, the amount of management fee charges to the CFs in the DIS is capped at 0.75% of net asset value (including asset based fees paid for services of trustee, administrator, investment fund manager, etc but excludes out-of-pocket expenses). This fee cap is approximately half of the average fee level currently charged to existing MPF funds and is subject to regular reviews for downward adjustment in the future.
The strategy of DIS, after consideration of the needs of average MPF scheme members, is aimed at balancing the risks and returns in the long-term investment objective of retirement savings through the above two CFs. However, employees should be aware that although the investment strategy is highly standardised, the funds under different schemes adopt different investment approaches.
Thus a standardised investment strategy does not equate to standardised investment returns. Employees should keep an eye on the performance of their investment funds under their MPF schemes and may switch investment portfolios based on their investment choices in order to yield better returns. We believe that the MPFA will continue to launch reform measures to enhance the MPF system in future. It is therefore important for both employers and employees to keep abreast of the forthcoming changes in MPF requirements, as these will impact their margins and future retirement benefits respectively.