As Hong Kong comes closer to implementing the new Mandatory Provident Funds Schemes (Amendment) Ordinance, heralding the era of member choice, we asked Philip Tso, Head of Investment, Hong Kong for Towers Watson, for his thoughts on how this new regime will play out.

We know from the experience of Australian superannuation savers that a move to member choice can cause real upset in the market, in which providers and the adviser support structures come under a lot of pressure, not least from the media and consumer groups. Is this likely to happen in Hong Kong? 

Philip Tso comments: “In theory, member choice of providers is good to promote public awareness of MPF, but if, and only if, support, assistance and education are offered to MPF members. Over the last 9 years, MPF members, generally, have been passive in managing their retirement investments.  This view is supported by the fact that attendance at education forums has been low. 

“This suggests that members’ financial literacy in retirement investing is relatively poor. They tend to apply personal investment concepts to retirement investment, which could lead to frequent trading and, as a result, a “buy high and sell low” outcome. The most important factor is that their investment horizon remains unchanged - more than 15 years.

“Thinking about the change from a wider context, members could make investment decisions incorrectly on the provider choice:  (1) they could buy brand, (2) they could be mis-sold by various types of promotion, (3) they could be too focused on past performance, (4) they could go for the cheapest providers, or (5) they could just follow the crowd.  Therefore, members do need assistance should they wish to exercise their freedom of choice.”

Under the new regime, while the administrative burden will fall on employers, Tso believes MPF scheme members should pay more attention in managing their account balances: “It is an effort which requires both parties (with the assistance from trustees and  the regulator) to make the system more effective.  We believe members should fully understand their needs. Different providers offer different types of products (multi-manager vs single managers; a range of specialist funds, target date retirement funds etc).  Members should first assess the type of products which suit them. For example, if they don’t have time or the confidence to monitor their own account, they could consider target date retirement funds.

“In addition, it is clear that members have different preferences and needs.  Having a generic education programme may not be as effective as segmenting the membership profiles.” It is clear that the majority of scheme members have only an elementary grasp of investment principles. Tso comments: “For the general DC market in Hong Kong, the current primary focus on investments is simply equities and bonds.  It is known (by the professionals) that products with equities and bonds are heavily reliant on the equity risk premium and result in only one single return driver. Having gone through the 2008 financial crisis, many members have been adversely affected despite the 2009 rebound.  Diversification in DB is not new, however, we have not yet seen sound diversification within many DC products.  A truly diversified product with different return drivers, such as skill and illiquidity premia, could deliver more stable long term investment returns, with better investment efficiency, than equity or bond products.”