Luncheon Hong Kong Retirement Schemes Association 14 May 2015 MPF 15 years and beyond David Wong Chairman Mandatory Provident Fund Schemes Authority Yvonne, Peter, ladies and gentlemen, Good afternoon. I would first like to thank the Hong Kong Retirement Schemes Association ( HKRSA ) for inviting me to this luncheon. Peter is a long-time friend of mine, and I am very happy to deliver my first talk as MPFA Chairman to the HKRSA, which, like the MPFA, is a champion of retirement protection schemes in Hong Kong. 2. It is my honour to serve the MPFA as the MPF System prepares to celebrate its 15 th anniversary this December. Though the System is still at the development stage, 14 years of hard work on the part of my MPFA colleagues and the MPF industry have put the System on a sound and solid footing. 3. As some of you are well aware, I strongly believe that the MPF is and should continue to be a key pillar of Hong Kong s retirement protection system. Hong Kong needs a mandatory retirement savings scheme. For the past few weeks, I have been using the seat belt rule as an analogy. True, not everybody likes it. Also true, you will put only yourself at risk if you don t buckle up. But you still have to
put it on. It s for your own good, which in the end, is also good for society at large. One-quarter of MPF assets are investment returns 4. As at the end of March 2015, total assets under the MPF System amounted to almost $600 billion. Of this, about a quarter, or $150 billion, was investment returns. 5. The System s annualized rate of return since its inception is 4.3%, way above the 1.8% annual inflation rate over the same period. I must emphasize that 4.3% is the net return, after fees and charges. 6. While some may find 4.3% too low, we must not lose sight of the MPF s position as a retirement savings fund and compare its returns to what we can earn from the stock market or even the property market. 7. Under the MPF System, scheme members are free to choose their own MPF funds. How much they save depends to a great extent on their fund choices. The figure of 4.3% represents the overall return of the System. Not all scheme members had the same rate of return. Some might have done better and some not. 8. Currently, the average scheme member has about $140,000 in savings. No, it s not a lot. But for quite a few, it may be all they have for retirement, and for some, they might not have saved anything otherwise. 9. We should not undervalue the MPF System. 10. I indeed find it heartening to know that more and more scheme members and employers recognize the value of the System and are making extra contributions. The amount of voluntary contributions has jumped from $700 million in the fourth quarter of 2005 to $3.7 billion in the first quarter of 2015, representing a fourfold increase and now accounting for 22% of overall MPF contributions. For us, this is a 2
clear indicator of at least some quarters having growing confidence in the System. 11. We are open to ideas as to how to increase the appeal of the MPF as an option for voluntary savings. Offering tax incentives for voluntary contributions, for example, warrants serious discussion from all parties concerned. Fee levels reduced by 23% 12. Of course, the MPF System has its critics. In fact, there are plenty of them and the fees charged by funds are often the target of the most vehement attacks. 13. The MPFA has been pushing for fees to come down for years. We have been urging trustees to introduce low-fee funds and to consolidate less efficient schemes and funds. We introduced the Employee Choice Arrangement ( ECA ) in 2012 and have been improving fee information disclosure, including launching a low-fee fund list, to drive competition. We have been finding ways to simplify and automate scheme administrative procedures to reduce operating costs. 14. All of these have helped lower the average Fund Expense Ratio ( FER ) of MPF funds from 2.1% in 2007 to the latest 1.62%, a reduction of 23%. 15. At present, almost 40% of all funds are low-fee ones, charging a management fee of 1% or lower, or an FER of 1.3% or lower. With ECA in place, employees are free to move their MPF to any of these low-fee MPF funds. 16. But the MPFA believes the FER can and should go down further. Plans are afoot to attain this. Default investment strategy to be launched by the end of 2016 17. I have been asked by a number of reporters what my goals are for the next two years. I am wary of the danger of too many high-sounding promises, with too few actions to match them. 3
18. Therefore, for the next two years, I have set for myself two priorities. First and foremost, I would like to see the default investment strategy ( DIS ) launched by the end of 2016. 19. As you might have read in the media, the DIS will have its management fees capped at 0.75% through legislation. Its investment approach will also be designed in a way that best manages the long-term risks associated with investing retirement savings. 20. The introduction of the DIS represents a new policy direction for the MPF System in several ways. First, it will simplify what is a difficult investment decision process for many scheme members. Second, the fee cap will directly benefit those scheme members whose MPF investments are in the DIS. Third, the impact of the fee cap may be felt across all MPF funds and create an opportunity for some cost-efficient service providers to enter the MPF market. Fourth, the performance of funds used in the DIS will be benchmarked against an agreed portfolio to increase transparency and consistency across schemes. 21. We are now working closely with the MPF industry on the details, such as the fund structure, disclosure requirements and fee calculation. We are also working with the Government on drafting a bill on the DIS, which we plan to table in the Legislative Council later this year. MPFA to explore empf 22. Another important task is to reduce the complexity of the System. Simplicity and automation are much needed. 23. We will soon appoint a consultant to explore options, including their feasibility as well as the costs and benefits, for the development of what we now tentatively call empf, which seeks to streamline, standardize and automate scheme administration as far as possible. 4
24. We have a few basic ideas with empf. First, it would allow the centralized collection of MPF contributions through an e-channel. Second, it would involve setting up a central register for automatic calculation of the amount of contributions and for automatic submission of contribution information to trustees. Third, it would have a one-stop e-channel for members to access all relevant information about their accounts. 25. As the MPF System has been in place for almost 15 years with each trustee having its own platform for handling scheme administration matters, standardizing them, streamlining the procedures and automating the processes are monumental tasks. 26. If empf is implemented, it will bring significant and fundamental changes to the administration of the MPF System, helping to increase its operational efficiency and further lower administration costs. Even more importantly, it will allow scheme members to manage their MPF more conveniently and access the latest information about their accounts at any time. 27. But we do not underestimate the challenges involved, and we are aware that the success of empf will, in the end, depend on how many scheme members and employers will be willing to go paperless. To make this work, we call on the MPF industry, to which many of you belong, to work together to encourage and educate the millions of scheme members and employers to use electronic services, and to facilitate the use of such services. 28. The study is expected to be completed in the fourth quarter of this year, and I hope a blueprint will be mapped out within 2016. Building a stronger MPF System 29. Pension systems around the world are a matter of great public interest. Few tasks are more important for a society than ensuring its members in old age are 5
well taken care of. 30. Hong Kong has adopted the multi-pillar retirement-protection model recommended by the World Bank, and the MPF is one of the key pillars of this framework. 31. With assets of $600 billion, four million scheme members, and nearly 100% employer participation, Hong Kong can take some pride in having a system that is already producing significant retirement savings. 32. The System has progressed from infancy to adolescence, but there is still a long way to go to improve the MPF System. 33. We are committed to enhancing the MPF System to meet the evolving needs of society. While it is true that many people are not yet ready for a higher contribution rate, I hope that in the long run, when the System has become better regarded and more trusted, the MPF contribution rate can go higher so that scheme members will save more. We can then even contemplate the idea of allowing scheme members to use their MPF benefits to buy homes, which can be both a physical shelter and a source of equity for retirees. 34. The MPF System has worked well so far. The challenge is to build on its considerable strengths to develop a system that Hong Kong people value. 35. To make this pillar bigger and stronger, I again count on the support of the retirement scheme industry to work together with us for the benefit of MPF members. 36. Thank you very much. 6