Hon KP Chan on Motion on Comprehensive Reform of MPF Scheme (Synopsis):
• Although the development of the Mandatory Provident Fund (MPF) scheme has been positive in general, there are still many public comments and criticisms. Comprehensive review and reform are necessary. At the debate on extensive review of MPF at this Council in last session, I said that MPF was suitable for Hong Kong for retirement protection. Its problems arise from poor timing of launch and structural inadequacy.
• There are many levels and parties of involvement in MPF schemes, including employer, employees, service providers and the Government. Any change to the base plan would demand careful considerations and extensive consultations. One of my Amendments today calls for feasibility studies and impact analyses of various proposals submitted to the Government during the review.
• The common and core request in both the original Motion and Amendments is fee reduction. High MPF fees are legacy. Administrative costs were high at launch because of substantial capital investments of trustees. MPF administration is far more complex than ordinary investment funds. Trustees have put in hundreds of millions of dollars to develop sophisticated actuarial programmes and managerial systems to process contributions and handle investments. Their estimated payback periods range from five to ten years.
• Overseas experiences show that administrative costs would come down when funds under management exceed the critical mass. Hong Kong is also walking down the same lane. In July 2011, MPF cost rate was 1.83 percent on average, down 13 percent from three years ago. In October 2011, the rate fell to 1.78 percent. It is expected to fall further under market force when the Government allows more competitions such as MPF full portability.
• Nowadays, about 10 percent of MPF approved funds are charging a fee rate of less than 1 percent. Their majorities are conservative funds and fee rates are around 0.39 percent. Yet, they are unattractive because of low return. MPF members favour high return funds like equities instead. As these funds are managed by professionals, high returns are accompanied by high fees. That said, fee rates of equity funds are falling along with market trend as well.
• The insurance industry supports many proposals in today’s Motion. We look forward to early launch of full portability. We support early and partial withdrawal under exceptional circumstances. We support phased withdrawals after retirement. We support tax deduction up to $12,000 for voluntary contributions. We support review of the provision that allows employers offsetting statutory liabilities of severance pay and long service award against MPF contributions. We support more regulations on intermediaries and more enforcement and penalty against delinquency in contributions.
• On the other hand, many proposals are disturbing, like zero fee savings products, centralized administration, low management fees and inflation protected funds. Savings products do not serve the purpose of MPF in pursuing real asset growth at times of negative real interest rate. Inflation protected funds operated by the Government would simply mean public subsidy. In fact, trustees might launch similar funds themselves but the fee level would hardly be comparable to conservative funds if returns are assured.
• There are calls for statutory regulations on types and levels of fees. Those who are not in favour say that they are against principles of market economy and reduce competition. In turn, they would deter funds from seeking higher returns, resulting in low fees and low returns. Moreover, fixed fee is inequitable because it is indiscriminative of contributions. The insurance industry does not object to disclosing details of fees charged in annual reports. That said, the public might not necessarily benefit from disclosure of fees charged individually to the member because it would mean higher operating costs.
• My two Amendments urge the MPF Authority to promote free market competitions and to simplify management and administration with a view to cutting down fees payable. Apart from fee reduction, which is universal, we should pay more attention to inadequacy of MPF in meeting retirement expenses. Comparing to similar schemes elsewhere, Hong Kong is perhaps the latest starter and our contribution rate is perhaps the lowest. We should try to improve both applicable salary range and contribution rate so that MPF would truly meet retirement needs.