What is MPF?

The Mandatory Provident Fund in Hong Kong is a mandatory savings scheme for the people in Hong Kong to build up their retirement savings. With the rapid ageing population in Hong Kong, by 2034 it’s estimated that over 65 year olds will account for more than a quarter of the population. The government stepped in by introducing the MPFSO in August 1995, the ordinance of the MPF.

With compulsory savings on 5% of the employee’s relevant income levels (up to HK$30,000 per month) it means employees will be able to save part of their salary (up to $1,500 per month) and the employer will match that contribution, totalling to HK$18,000 per year. There are exceptions and minimum levels, which you can read here however, the current contribution levels can be argued to be less than effective in a bustling, expensive city such as Hong Kong and we urge the government to increase relevant income level contributions to take into account the impact of high rising costs in Hong Kong.

Your contributions may seem small, however making sure you are on top of the small pension pots you may have built up can go a long way when it comes to your retirement. As the old says goes:

“If you look after the pennies, the pounds will look after themselves.”

(Or maybe cents and dollars in our case.)

 

What is the Default Investment Strategy?

As of the end of September 2024, the Default Investment Strategy (DIS) accounted for more than 30% of all accounts under the MPF. You could be one of these, as the DIS is a choice employees can make if they choose not to make a fund choice or choose specifically (because the exhaustive fund list is too complicated to understand).

It was introduced as a ‘standardized, fee-controlled investment approach across all MPF schemes’ and able to de-risk come to retirement age. Made up of two funds, the Core Accumulation Fund (CAF) and the Age 65 Plus Fund (A65F), the weighting automatically changes once the scheme members reach the age of 50 to 64. We would argue that age related risk control is an anachronism and is typical of the lack of understanding of the overall MPF and the government body that controls it.

The MPFSO introduced a fee-controlled investment approach for the DIS, which means management fees are not more than 0.75% and the out-of-pocket expenses not more than 0.2%. Something which should be implemented in all funds, at a lower percentage.

One could argue there are better options out there but if you don’t know or understand, relying on people to make a decision which could result in their retirement lifestyle decision being made can be daunting. Follow your long-term financial goals, and stick to a passive approach. Though this will prove difficult too because the fund options are restricted and the MPF authority hasn’t understood the concept of global index trackers, they listen far too much to the vested interests of the providers and their profits, rather than taking a fiduciary position. Though it is possible in some instances to simply buy a global fund and take a passive approach.

 

Guaranteed Funds – There is no such thing as guaranteed.

There are many other funds to choose from but one which many people get confused about is ‘guaranteed’ funds. Since September 2024, the average fund annualised a net return of 1.1% since the inception of the MPF system. Inflation annualised 1.8% during the same time period. A risk averse, unaware employee could choose this option and achieve a real net loss of -0.7%, perhaps the fund is guaranteeing a loss? We do not think this is a suitable option for most people.

Why is it such a low net return? This could be answered by the average Fund Expense Ratio (FER) of all ‘guaranteed’ funds registered under the MPFSO, averaging 1.81% costs to the administrators. This is the same story with the averages in money market funds.

Bond funds, on the other hand, only averaged a +0.1% annualised net return over inflation since inception. A good well diversified bond fund can play a significant part the overall allocation.

 

Reasons why you could be seeing red.

Of course, investment takes time, and you should not expect the market to always go up in a straight line. There will be period of downturns as well as upturns however, in today’s society and accessibility to the media of ‘noise’ in the market, it is hard not to expect a positive return when reading the media and comparing your portfolio to this noise.

One probable reason could be your fund choice, as stated above, many different funds come with different net returns and FER. Understand the highest and lowest FER costs of funds can range from 3.37% to 0.30% since the inception of the MPF system. With inflation annualising 1.8% in the same period, making sure you receive a positive real return for your investments may lie in your investment decision when choosing which MPF funds to invest in.

According to official statistics, less than 40% of MPF funds were classified as “low-fee funds with fee of 1 per cent or below or Fund Expense Ratio of 1.3 per cent or below” as of the end of October 2015. That means you could be paying more than 1% in fund fees, wouldn’t you prefer to make the wiser, more knowledgeable investment choice?

Over a long period of time, compounding your returns overtime might add up to a significant amount of money.

Another reason could be due to the build-up of multiple MPF accounts in different schemes. As the FER range substantially, a scheme may charge 2.10% for an equity fund whereas another scheme may charge 0.61%. By comparing fund expense ratios between schemes on the My MPF Choice website, you will be able to see the cheapest, most diversified options available to you on your platform. Don’t be swayed by the returns you see! They can vary throughout your lifetime and by sticking with a global fund choice, it will set you steady towards reaching your retirement goals.

Many people do not know what they are investing in, and often, choose the default investment strategy. This has returned better numbers than other asset types, due to the low-fee cap, but is it the right strategy for you? Have a look online to see what you are investing in and contact one of our advisors to learn how you could align your MPF with your retirement goals.

Diversification is also key to reaching your financial goals. The information given to us employees is very minimal, with only geographical breakdowns available to the public. By using this information, you can make sure you are globally diversified within your MPF accounts. Take the equity funds as an example. The most globally diversified equity fund available is the ‘global equity fund.’ This consists of a global cap weighted fund which spreads your risk across geographic regions. Don’t get mixed up with choosing many different funds as ‘diversification.’ By choosing different equity funds and weighting them according to your preference, you could inadvertently geographically weight yourself towards a certain region which ought to be viewed as a ‘punt.’

 

The MPF serves as a crucial mechanism for retirement savings in Hong Kong, especially in light of the impending demographic challenges posed by an ageing population. It is essential for you to actively engage with their MPF choices, understanding the implications of fund fees and performance on their long-term savings. By making informed decisions and prioritising diversification, you can better navigate the complexities of the MPF system, ultimately enhancing your chance to reach your retirement goals.

On a lighter note, it is really encouraging to see the end (Its coming) of the nefariously enacted ‘’offset’’ scheme, anyone who has suffered this disgraceful legal deduction of their pension funds will understand.

 

Click below to read part 2 on ‘How do I withdraw from my MPF’.