LCQ20: MPF fund management fees
Wednesday, June 13, 2007
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):
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
(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
(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
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
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;
* 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.