26 October 2016
After 15 years of implementation, the MPF scheme (left) has become increasingly unpopular because of its high administrative cost. In the case of political reform (right), 'pocket it first' means 'pocket it for life'. Photo: HKEJ
After 15 years of implementation, the MPF scheme (left) has become increasingly unpopular because of its high administrative cost. In the case of political reform (right), 'pocket it first' means 'pocket it for life'. Photo: HKEJ

What do MPF and the political reform package have in common?

The Mandatory Provident Fund in Hong Kong is notorious for its high administrative cost and low returns.

But for the average individual it might not be easy to tell exactly how high its administrative cost really is.

Recently, the Mandatory Provident Fund Schemes Authority said the MPF’s average fund expense ratio (FER) has come down from 2.2 percent in 2007 to 1.62 percent at present.

However, Tobias Brown, a prominent fund manager and a former Listing Committee member of the Hong Kong Stock Exchange, wrote a letter to the South China Morning Post on May 15 to refute the authority’s statement, saying that in the international market, the administrative cost of most pension funds similar to the MPF is just around 0.15 percent.

This indicates that MPF scheme providers in Hong Kong are charging 10 times higher than the international standard.

It is estimated that under the MPF scheme, after a member makes contributions for 20 years, as much as 30 percent of the earnings plus principal will go into the coffers of fund companies.

Compared to retirement savings plans in other countries, such as the 401(k) plan of the United States, one thing peculiar to the MPF scheme in Hong Kong is that employees don’t have the freedom to choose their fund administrators.

The Employee Choice Arrangement, which came into effect in 2012, does allow some degree of freedom to a certain extent, but public response has been lukewarm since there are lots of restrictions in practice.

When I was working in the US, my employer offered me four to five different choices of fund administrators, and each of them provided me with several investment portfolios to choose from according to their specialties, from low-risk currency market funds to high-risk information technology venture capital funds.

Some more popular funds, such as the S&P 500 Index Fund, are usually provided by more than one fund manager, and administrative costs are kept to a relatively low level as a result of competition.

However, in Hong Kong, it is the employer, not the employee, who chooses the MPF fund manager, who will then offer several funds for the employee to choose from.

Under such circumstances, one can expect the fund manager will always have the employer’s best interests at heart in order to win the contract, sometimes even at the expense of the employee’s interests. That can explain why the administrative costs of MPF funds remain high.

In order to drive down the administrative costs of MPF funds, the right to choose fund managers freely should be given to the employees rather than the employers, and competition should be introduced to the market.

Yet due to the fierce opposition of the vested interests, there seems to be a long way to go before employees can eventually choose their own fund managers freely.

In fact, it seems there is a lot in common between the existing MPF scheme and the “pocket it first” reform package proposed by the government.

For example, the “employer” first chooses the “fund manager”, who then offers several funds which appear different but are all charging an unreasonably high fee for the employee to choose from.

For the employee, no matter which fund he or she chooses, it is almost for sure that the fund manager will make a high profit and the employer can enjoy a lot of perks, and it is the employee who foots the bill.

To make matters worse, once the system has been firmly established, the “employer” and the “fund manager” will form an alliance to protect their common interest and even go to any lengths to prevent the “employee” from having the right to choose so that they can maximize their profits.

In this metaphor, one can imagine the “MPF scheme” as the “August 31st resolution”, the “employer” as the “nomination committee”, the “employee” as the “people of Hong Kong”, and the “fund’ as the “Chief Executive”.

After 15 years of implementation, the MPF scheme has grown more and more unpopular because of its high administrative cost.

One can expect that once we agree to “pocket it first”, the democratization process in Hong Kong is likely to grind to a halt and the genuine election will never become reality.

“Pocket it first” means “Pocket it for life”, and the painful lesson of the three million employees speaks volumes.

This article first appeared in the Hong Kong Economic Journal on May 21.

Translation by Alan Lee

[Chinese version 中文版]

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A former member of Frontline Tech Workers Concern Group

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