mpf system moving into the 15th anniversary2015/05/20 · 2011 2021 2031 2041 7% 9% 11% 13% 19% 26%...

MPF System Moving into

the 15th Anniversary –

Challenges and Opportunities

Mr Cheng Yan Chee

Chief Corporate Affairs Officer

Mandatory Provident Fund Schemes Authority

Outline

Achievements of the MPF System

1

2

3

Role of the MPF System in Retirement Protection

Challenges

4 Initiatives to Improve the MPF System

5 Opportunities – Reforms and Way Forward

Role of the MPF

System in

Retirement Protection

World Bank

Old Age Protection Framework

4

Five Pillars Framework (2005)

0. Non-contributory, publicly financed and

managed

1. Mandatory, contributory and publicly

managed

4. Informal support (e.g. family support)

Other formal social programmes

(e.g. health care and housing) Other individual assets (e.g. home ownership)

3. Voluntary savings (e.g. personal savings and insurance)

Three Pillars Framework (1994)

2. Employment based, mandatory and

privately managed

1. Publicly financed and managed

3. Voluntary savings

(e.g. personal savings and insurance)

2. Employment based, mandatory and

privately managed


World Bank

Old Age Protection Framework

5

More about the second pillar MPF System

HK is one of the pioneers applying the World Bank framework

Mandatory – statutorily required (people without a saving habit

also save for retirement)

Privately managed – HK’s well-established and sound financial

infrastructure has a key role to play

Fully funded – Financially sustainable (as compared to

pay-as-you-go systems)


Achievements of the

MPF System

Challenges of an

Ageing Population

7

0%

10%

20%

30%

1981 1991 2001 2011 2021 2031 2041

7%

9%

11%

13%

19%

26%

30%

Percentage of the Population Aged 65

and Above

Sources: Census and Statistics Department 2012


8

The Employed Population

(As at 31 Mar 2015)

With

Retirement

Protection Without

Retirement

Protection

Before Implementation

of MPF Scheme

2

3

1

3

Joined MPF schemes

73% Joined other

retirement schemes

(E.g. civil servants, ORSO)

13%

Not required to join

any local retirement

schemes (E.g. domestic helpers)

12%

Not yet joined any

MPF schemes

3%


9

Net Asset Value

Growth of MPF Contributions and Accrued Benefits

595

444

100

200

300

400

500

600

700

HK$

bill

ion

Accrued Benefits

Total Net Contributions Received


10

Contributions Received


5,959

651

30

12,215

1,918 1,547

0

2000

4000

6000

8000

10000

12000

14000

Mandatory Voluntary Special Voluntary

Contribution Contribution Contribution （HK$ million）

89.7%

78%

9.8%

12.2%

0.5%

9.8%

4th quarter

2005 4th quarter

2014

4th quarter

2005 4th quarter

2014

4th quarter

2005 4th quarter

2014

194% 5,057%

105%

11

Investment Return

-4.9%

-10.7%

22.0%

4.7%

12.3% 12.4%

4.5%

-25.9%

30.1%

8.7%

-5.6%

6.4%

4.2%6.4%

00/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15

Annualized Internal Rate of Return (IRR)

Annualized Internal

Rate of Return

+ 4.3 %

( Net of Fees)

Since Inception of

the MPF System

CPI over the

same period

+ 1.8 %

( As at 31 Mar 2015 )


Challenges

13

Adequacy

(1) Low contribution rate

Employers and employees each only contribute 5% of

employees’ relevant income

Contribution capped at $1,500

Employees earning <$7,100 need not contribute

Challenges

14

Adequacy

(2) Short contribution/accumulation period

MPF System only in place for 14+ years (still at development

stage)

Retirement systems normally take 30 - 40 years to mature

Challenges

15

Adequacy

Horizon 1

Horizon 2

Horizon 3

Horizon 4

Horizon 5

10 Years 20 Years 30 Years 40 Years

Hong Kong

Mexico

Australia

Chile

United

Kingdom

Singapore

United

States

The MPF System was

launched in December 2000

Challenges

(2) Short contribution/accumulation period (cont’d)

Pension System Maturity Horizon

16

Adequacy

(3) MPF, by design, is insufficient for retirement

Only as one of the pillars as recommended by World Bank

Complementary to other pillars

All pillars must work together to provide sufficient retirement

protection

(4) MPF not intended to cover people not with

employment

e.g. housewives are not covered

Challenges

17

Fees

MPF fees are frequently regarded as too high

A deeper look about the fee structure

3 major components of FER were identified

Fund Expense Ratio

1.74%*

Investment Management

0.59%

Administration 0.75%

0.40%

-----

---------------------------------------

Sponsor Charge, Trustee Profit, Member Rebates

& Others

* The weighted average of the FERs of MPF constituent funds for financial periods ending on 1 July 2010 to 30 June 2011

Challenges

18

Fees

MPF fees should not be compared to retail investment funds

Administration of MPF is much more complex

Regular collection of contributions

Following up default contributions

Ongoing management (e.g. regular reports to members /

processing transfers and fund switching applications)

Payout of benefits in accordance with statutory requirements

Challenges

19

Fees

Lower fees in scheme members’ interests

MPFA has over the years brought fees down

Enhancing fee disclosure

Implementing Employee Choice Arrangement (ECA) to

facilitate better working of market force

Streamlining and simplifying administrative processes

Urging trustees to further automate administration

Urging trustees to offer low fee funds

Working with trustees to merge less efficient schemes and

funds

Challenges

Fees

Average Fund Expense Ratio (FER)

07 Dec

12 Dec

11 Dec

10 Dec

09 Dec

08 Dec

15 Mar

13 Dec

14 Dec

2.10%

2.01%

1.94%

1.84%

1.77%

1.75%

1.70%

1.65% 1.62%

1.60%

1.65%

1.70%

1.75%

1.80%

1.85%

1.90%

1.95%

2.00%

2.05%

2.10%

2.15%

20 Challenges

21

Fees

The speed and rate of fee reduction not fast and deep enough

As MPF assets grow, there will be further room for fee reduction

Reduction of fees will translate into higher retirement benefits for

scheme members

Challenges

22

Administrative Complexity

MPF is privately managed

Different trustees with individual administrative systems

Entails a lot of administrative work

Most employers are SMEs and they are mainly paper based

Some employers do not use computers

Some employees may not be computer literate

Challenges

23

High Equity Exposure

67% of MPF assets invested in equities (among the highest

worldwide)

Investment returns highly volatile

dropped by 25% in 2008 / 09

rose by 30% in 2009 / 10

Investment allocation is a result of scheme members’ own

choices

Challenges

24

Mindset

Scheme members ignore MPF information/their accounts

Difficult for our investment education to reach them and to

change their behaviour in a short span of time

Significant rise in the number of personal accounts

Over-emphasis on short-term performance

Some scheme members try to time the market

Media like to compare short-term MPF performance (e.g. on a

monthly basis)

Challenges

25

Too Many Products

38 MPF schemes

> 450 funds

Difficult for scheme members to choose

Scheme members can choose any scheme / fund after

Employee Choice Arrangement

Challenges

Initiatives to Improve

the MPF System

27

Relevant Income Level

Relevant Income

level

Max. RI level

• Both employers and employees make

contributions capped at 5% of the max. RI level

(i.e. $1,500)

$

$30,000

Min. RI level

• Employees not required to make contributions

if RI is less than min. RI level

• Employers still required to make 5% contributions

for employees

$7,100

Ensure contributions keep up with income growth

Initiatives to Improve the MPF System

28

Past Adjustments

1 Dec 2000

Effective date

$4,000

Min. RI

$20,000

Max. RI

1 Feb 2003 $5,000 $20,000

1 Nov 2011 $6,500 $20,000

1 Jun 2014 $7,100 $30,000

1 Jun 2012 $6,500 $25,000

1 Nov 2013 $7,100 $25,000


29

Compliance

Ensure employers make contributions

Set up a centralized enquiry line (2007) for employees to check if

employers have made contributions

Amended law to plug loopholes

Housing allowance included as relevant income for MPF

contributions since 2008


30

Compliance

Ensure employers make contributions

Set up the Non-Compliant Employer and Officer Records (2011)

Enhance the deterrent effect on non-compliance

The public can view and search for information on employers and

officers with MPF non-compliance records resulting from legal

proceedings initiated by MPFA

Enhanced enforcement provisions (2012)

Making failure of employers to pay MPF a continuous offence

Making employers’ failure to pay tribunal or court awards a

criminal offence


31

Employee Choice

Arrangement

Expand investment choice and autonomy for employees

Employee Choice Arrangement (ECA) took effect in Nov 2012

Allow employees to transfer their part of contribution to a

trustee of their own choice once each calendar year


32

Mis-selling

Prevent mis-selling

Put in place a statutory regulatory regime for MPF intermediaries

(2012)

Accorded better protection to scheme members against mis-

selling of MPF


33

Benefit Transfer

Enhance efficiency of benefit transfer

An electronic system (ePASS) was launched (2012) to facilitate

transmission of scheme members’ data for benefit transfer

An E-payment system was launched (2014) to automate

payments for benefit transfer


34

Withdrawal

Flexible withdrawal of MPF accrued benefits on retirement

Currently, scheme members can only withdraw their accrued

benefits in a lump sum at 65 or satisfying other early retirement

criteria

To give members more flexibility in withdrawing their accrued

benefits, the Mandatory Provident Fund Schemes (Amendment)

Bill 2014 was passed (allowing them an option to withdraw their

benefits in phases)

An additional ground (terminal illness) has been added for early

withdrawal

MPFA is working with the trustees to prepare for the

implementation


Opportunities -

Reforms and

Way Forward

36

MPF System

In operation for almost 15 years

MPFA is committed to enhancing the System and has been taking

forward various improvement measures

Issues of public concern:

Great variety of funds → difficult to make an investment choice

High fees

Opportunities - Reforms and Way Forward

37

Prescribe a Default Investment Strategy (DIS)

Consistent with the objective of retirement savings

Low Fee

Next step

MPF System


38

Default Investment Strategy

Two main features

“DIS” Automatically reduce investment risk as

members approach retirement age

Subject to fee controls


39

Why Enhance Regulation of

Default Arrangement?

Types of default funds

12 12

6

2 2 4

0

2

4

6

8

10

12

14

Mixed Assets Fund

MPF Conservative Fund

Guaranteed Fund Others Diversified into different

constituent funds

Based on members' age

(target date/life cycle strategy)

No

. of

sch

em

es


40

Highest and lowest monthly returns for default funds

(April 2009 - March 2014)

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Mixed Assets

Fund MPF Conservative

Fund

Guaranteed

Fund

Others

Diversified into

different

constituent

funds

Based on members’ age

(target date / life cycle

strategy)




41

2013 survey

Said they had never made a fund choice

24%

Scheme members who responded to the survey




42

International experience

OECD:

well-designed default funds are very important

Overseas systems:

impose different levels of regulation on default

arrangements





43

“DIS”

Provide a benchmark for fees and

performance of MPF funds

Roles

Increase market competition and reduce fees



44

A 3-month public consultation from July to September 2014

Public Consultation

Consultation Conclusions

266 written responses received

81.4% respondents supported the general direction of

the proposals



45

1. The DIS in each MPF scheme should be based on the same

investment approach.

2. The DIS will be applied to the following scheme members :

Those who do not indicate, or have not indicated, a

specific fund choice; and

Those who specifically choose to invest according to the

default investment strategy.

After the consultation, the Government and MPFA proposed the following

broad directions for the default investment strategy:



46

3. The DIS :

Will be designed to automatically reduce investment risks

as a member approaches the age of 65;

Will charge management fees of no more than 0.75% per

annum; and

Will invest in two or more funds.

4. The performance outcomes of the funds used for the DIS in

each scheme will be benchmarked against an agreed

portfolio so that members of the public can easily review and

compare the funds’ performance.

Opportunities Reforms and Way Forward


47

MPFA Management Board has endorsed taking the

proposals forward as quickly as possible

MPFA will continue to work with the industry on the details

including the fund structure, disclosure, benchmarking and

fee calculation

Government plans to submit the enabling legislative

amendments to LegCo by end of 2015

Subject to the legislative progress, DIS is expected to be

introduced by the end of 2016

Way Forward


48

Standardizing, Streamlining & Automating

(SSA) MPF Scheme Administration

Various measures taken to streamline MPF scheme

administration

Simplified certain statutory procedures and requirements

which MPF trustees have to comply with

Further reduced their operational and compliance costs,

thus increased their scope for fee reduction


49

Standardizing, Streamlining & Automating

(SSA) MPF Scheme Administration

To commission in May 2015 a consultancy study on possible

options for eMPF

to establish a one-stop electronic platform for members

to access all relevant information through a central

register

to allow the calculation and submission of data on MPF

contributions via a central register

to centralize collection of MPF contributions by electronic

means

Aim to complete the study in Q4 2015


Next step

50

Our Vision

The MPF System

With DIS

low fee

easy choice

With SSA

simple administration

user-friendly


51

Our Vision

“To build a retirement savings system

that is valued by Hong Kong people”


mpf system moving into the 15th anniversary2015/05/20 · 2011 2021 2031 2041 7% 9% 11% 13% 19% 26%...

Documents