MPF suffering the risks of DC
MPF, like other savings systems, has been hit badly by market falls. At the end of September 2008 MPF assets were HK$224 billion (US$29 billion), back to the level in the second quarter of 2007 despite over US$3 billion of contributions going into the system annually.
MPF allows members to choose how their funds are invested. Some 23% are invested in the safer end of the market, money market funds and guaranteed funds, around 1% in bond funds but the rest are invested in lifestyle mixed asset (49%) and specialist equity funds (27%).
For those in balanced funds - around 70% in equities where the median fund fell 37.1% in the twelve months to October 2008, MPF has been a salutary experience. For those in Hong Kong funds where the fall was 56.5% they will have lost their last three years contributions, all this for a system just eight years old.
MPF started with a two year bear market, but where the effect of dollar cost averaging helped in those early years as markets recovered, this latest fall will reduce some of the anticipated balances by over 20% even with another 20 years in the system.
For those who are to retire soon and who listened to the arguments about owning equities up to and beyond retirement, the impact will be greater. MPF pays a lump sum on retirement at 65, or at 60 if the retiree no longer works.
Beyond the market
Market moves have been obscuring some interesting structural changes, the most important of which is the importance of preserved accounts. These accounts are established when an employee leaves his employment and has MPF savings that he cannot access until retirement.
In MPF’s early days these were modest sums and a number of providers saw them as unprofitable and did not mind if they left for another provider. Some MPF members would have two or more preserved accounts with different providers, not bothering to amalgamate them or move them to their current MPF provider where they worked.
Hong Kong though is known for high employee turnover, anything between 15% and 25% annually, so as these accounts multiplied their collective importance grew. There is little official data on these accounts but many providers say that over half their assets are now in preserved accounts. Longer term there will be much more in preserved accounts than in the so called active accounts based around current employment.
MPF providers have realised the importance of these preserved accounts and are now are now competing fiercely where once some of them did not care. As an employee leaves, there are often financial incentives to stay with that provider. Some of the more aggressive providers are going after preserved accounts and until recently had been showing just how quickly their assets could grow.
And more mobile accounts through employee choice
MPF is getting ever mobile as 2009 should see legislation paving the way for employees to move their own accumulated contributions into a provider of their choosing rather than their employer’s the current situation. This will make around two thirds of MPF potentially mobile.
Product changes and fees
MPF had been making interesting progress with many providers adding to their range of fund choices. Fidelity recently introduced a version of their target date funds in both theirs and an MPF rival’s product, Bank Consortium. Bank Consortium was formed by a group of smaller local banks and is now the fifth largest provider. These target date funds have maturities at five year intervals between 2020 and 2045 and are equity heavy until close to those dates.
This is in contrast to HSBC’s early 2008 introduction of Simple Choice, a default balance of equities and bonds based on age where the investor defaults into bonds at a much earlier age.
Fees have also been in the news with a swathe of fee reductions in late 2007 and early 2008 as some MPF providers responded to pressures to reduce fees. Since then fee reductions have been noticeably absent, as declining asset values have again put the industry under revenue pressure.
The government’s injection, only slow progress
A one-off injection of by the government into the MPF system was proposed in Hong Kong’s 2008’s spring budget, when the government was running a big surplus. The HK$6,000 (US$775) injection is for every employee with an MPF account or in Hong Kong’s original occupational who was earning less than HK$10,000 a month, around the median wage.
This has caused some administrative problems particularly with multiple MPF accounts and Hong Kong’s traditionally high employee turnover which at around 20% a year is leaving a trail of hard to find beneficiaries. The MPFA have been collecting data from the nineteen MPF providers and two employee schemes, making sure that there are no duplicate or undeserving payments. The qualifying date was 29th February 2008 and accounts are expected to be credited by March 2009. There have been calls for it to be abandoned, reflecting changing government finances but so far word is that it will go ahead.
Despite the government’s largesse, MPF is still regarded with some suspicion in Hong Kong. The halving of some members’ balances will only add to concern.
MPF is regarded as only one source of retirement income, or as it structured with its lump sum payment a retirement asset. Employers see it as a business tax, whilst other critics see it as a benefit to the big providers whose big market shares - the top five providers have a 73% market share - might seem very profitable.
The providers point to the lower balances and their asset related fees; at the same time the enquiry rates have risen, so more effort is being spent on just retaining business.
Like all saving systems, MPF could do with a return to better financial market conditions in 2009.