Country update - Hong Kong
The wagons are hitched up, the wheels greased, the brand new prospecting tools loaded and the hired hands briefed on roughly where to start digging. Yes, the MPF (Mandatory Provident Fund) gold rush is about to begin!
Since 1 February 2000, product providers have been allowed by the MPF Schemes Authority to start signing up employers for MPF schemes. They have worked very hard to get to this stage. Even before the wagons were to have left the start line, they had to select and appoint trustees, administrators and fund managers, design the particular range of investment options, develop a comprehensive administration system, train their sales/distribution staff in what is a relatively complex subject and get approvals from the regulators.
The shape of the initial MPF market is set by the 21 trustee companies and 44 master trust products submitted for approval. The stakes are high. The MPF contributions in the first year are predicted to be between HK$10 billion and HK$15 billion. Assets will grow very rapidly over time and may well exceed HK$300 billion within 10 years.
The MPF is a very long-term savings vehicle. The ultimate amounts generated over time may amount to many millions. To avoid any doubt, employees should note, however, that translating the projected amounts back into current terms generates a more realistic benchmark, typically in the hundreds of thousands of dollars.
How then can employees make sure that the product they are buying will bring the good fortune they are looking for? The MPF is ultimately just a special kind of defined contribution retirement plan. The best approach to selecting and operating such a plan may be summarised as follows.
Setting the goals
The first step is to establish the goals being sought from the MPF. Employers may see the ultimate purpose as just complying with the legislation with minimum disruption. But they need to stop to think about the full implications of introducing the MPF, and they need to consider what their employees' preferences may be. It is after all their retirement security at stake and half of it is financed by their own contributions. Employees are likely to want the best possible return on their money after fees as well as an appropriate range of investment choices and easy to understand communications. They may also seek reassurance that their money will be in the safest of hands.
Employers would certainly be looking for a provider which will survive in the new competitive environment. Top class servicing which eases their administration headaches is also likely to be on top of the agenda. Taking on a MPF master trust which provides a free payroll system may be a good bonus to have.
With the goals set, employers must then identify the criteria for selecting the MPF master trust product that best suits their needs.
Investment fund choices
Unlike the Occupational Retirement Schemes Ordinance (ORSO) counterpart where the employer can select the range of investment funds to be offered to the employees, this freedom does not apply under the MPF environment. All the investment funds available in any individual MPF master trust have to be open to all members; there is no picking and choosing. This is why some providers are offering more than one master trust, one with a handful of around five investment choices, perhaps aimed at the less sophisticated clients, and the others with significantly more options.
So, in selecting the master trust product, one of the key considerations is the number of investment funds on offer, whether they adequately capture the range of risk return preferences of the employees or whether the fund managers involved have the experience and resources to deliver.
Employees may be quite diverse in their knowledge of investment matters. Some may be very sophisticated, others may know very little. Given the choices they will have in the MPF environment, investment education will therefore be very important. It will be important to ensure your MPF master trust provider takes this responsibility seriously and has the resources to support the education process.
Selecting a scheme
It is important that the employer, as the buyer of MPF services, weighs up its own criteria against what the MPF master trust provider is offering. If service quality and administration is seen as a key factor, then dig deeper. Find out, how are they going to carry out the administration? What are the experience of their staff? How effective have they been at administering retirement schemes in the past? How good are their systems? What are the added services that will make your life easier?
The choices are there for each employer to explore and there is time enough to avoid committing to the first MPF salesman who makes contact. With a little thought, it is possible for employers to enhance their chances of choosing a wagon which does not lose one of its wheels in the rush to compete in this new market!
(From an article originally published by Watson Wyatt in South China Morning Post)
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