Exorbitant provident fund fee chargers should be shamed

HK Opinion
H03 China Daily Hong Kong Edition Victor Fung Keung
2012-10-27

Exorbitant provident fund fee chargers should be shamed

A survey by Hong Kong’s Consumer Council found that the average fee charged by a Mandatory Pension Fund (MPF) provider equates to nearly 2 percent of the assets under its management. The fees three fund houses have charged, at 4.62 percent, 3.88 percent and 3.86 percent respectively, are the highest. These high fee chargers should be named and shamed.

The council said the fee charged in Hong Kong is higher than those charged by fund companies in several other countries.If Hong Kong citizens purchase (invest in) mutual funds, the charges range from 0.1 percent to 0.5 percent. That makes the high charges for MPF a blatant rip off, which remains an enigma. Nevertheless, the mystery isn’t hard to solve. The cause of high fees is written on the walls. There is a structural problem in the fee-charging regime, which the government’s Mandatory Pension Fund Authority should consider tackling.

The MPF is a compulsory pension scheme established 12 years ago. The MPF’s value now totals HK$400 billion. The law requires all employees in the city to pay in 5 percent of their salaries per month, which will be matched by their employers. The contributions will be managed by an MPF provider which might be a bank or a fund company.

The structural flaw is that employers would invariably solicit benefits from the MPF providers they appointed, in kind, including providing free financial services and worse, kickbacks. Employers could care less about the high fees charged by the fund providers, since the fees are paid by the employees. The high fees wouldn’t hurt the employers a tiny bit.

The government on Nov 1 will introduce a new scheme called MPF Employee Choice Arrangement, which will allow employees to shift to new fund managers if they are not happy with the ones chosen by their employers. But this half-hearted scheme applies only to the additional contributions to pension funds made by an employee. The bulk of their pension money (the 5 percent pay-in by an employee and his employer, totalling 10 percent of his monthly income), as required by law, still stays with the fund houses picked by their employers.

Some unscrupulous MPF providers, on top of demanding high management fees, also charge other fees, including annual fees and fees for the fund companies’ annual bonus for their own employees.

The only way to reduce management and other fees charged by MPF providers, and hence increase competition, is to empower employees to shift at their discretion their employer-contributed funds to another fund manager, if they become disenchanted with existing ones. Economic efficiency will work only when the financial ties between an employer and an MPF provider selected by the employer are severed.

The irony, and bad news for many Hong Kong salary-men, is that the high fees charged by an MPF provider have absolutely no relation to the fund’s performance. In 2011, an MPF stock fund that charged its clients 4.62 percent fees suffered a loss of 15.53 percent. Another provider that invests in European stocks suffered a loss of 14 percent, even though it charged fund owners (employees) 3.88 percent in fees.

Some experts suggest capping the fees charged by MPF providers. This is hardly a good solution. The way to enhance competition and lower fees charged is to take away employers’ right to appoint fund managers. It is only natural that employers would appoint fund managers that offer them the highest “reciprocal benefits”, or commonly known as “kickbacks, in kind”. Another consideration can be linking the fees to the fund managers’ annual performance.

Hong Kong’s economic freedom should be upheld. Any policy that stifles competition should become anachronistic and abandoned. Enough is enough. The government should take employers’ power to appoint MPF providers away and hand it over to employees to make their own choices.

The author is coordinator of the B.S.Sc in financial journalism program at Hong Kong Baptist University.