The government is considering sweeping changes to the city's compulsory retirement fund, including stringent limits on fees levied by financial services companies and introduction of not-for-profit operators to manage simple accounts.

The pledge came as members of the Legislative Council added their voices to the call for curbs on high management fees for MPF (Mandatory Provident Fund) accounts which result in little return for investors.

Democratic Alliance for the Betterment and Progress of Hong Kong Starry Lee Wai-king called on the government to set up a timetable for lower fees in the near-term.

Permanent Secretary for Financial Services and the Treasury Au King-chi told lawmakers on Monday that the administration expects to have measures in place within the current legislative year to rein in MPF fees.

"Even though the expenses of the scheme fell by almost 20 percent, the rate is still quite high compared to overseas. Our fees are still quite high," she said, adding there is room for reduction of MPF fees among some fundamental changes to the system currently in the planning stage.

Managing Director of the MPF Scheme's Authority Diana Chan said Hong Kong people needed to weigh whether they want more flexibility coming at greater cost, or whether the scheme's manifold plans and accounts could be consolidated to facilitate greater cost savings. She added, basic, low-fee default fund arrangements as well as a not-for-profit provider will be set up.

The government will write to people with more than three accounts at mid-year, to promote the consolidation of MPF accounts.

Chan said the proposals were at a conceptual stage and public consultation was needed before moving forward.

She added full portability of accounts would be available within two years.

Irritations over rising MPF fees eroding benefits from the low paying accounts have been simmering for some time, moving the government to commission an independent study last year.

An independent cost study by Ernst & Young found that high administrative fees and costs resulted from a lack of automation, lack of electronic filings and an absence of economies of scale. Based on the average fee rate of 1.74 percent, 0.75 percent went to administrative costs, 0.59 percent for investment management fees and 0.40 percent for trustee profit and product support services by sponsors.

A high number of small employers and self-employed filings also added to manual processing burdens, while a wide variety of investment options, including multiple accounts, resulted in higher handling costs for increased flexibility.

Small-scale MPF scheme providers also had higher administrative costs, because they were unable to benefit from economies of scale.

Insufficient price competition among providers was cited as another reason.

The independent study released late last year also advocated a cap on fees, various types of low-fee funds and a basic, low-fee default arrangement for scheme members who did not make an active fund choice.

The Consumer Council found there were substantial variations in fees among MPF funds, even for the same fund type.

Mixed assets funds fees ranged from 0.44 percent to 4.62 percent while equity funds fees ranged from 0.51 percent to 2.96 percent.

The 12-year-old privately managed fully-funded contribution scheme covers 85 percent of the city's working population through 19 trustees and 41 registered schemes providing 464 funds in the market.

As of the end of September, 2012, there was a total contribution of HK$339.4 billion, amounting to a total net asset value of HK$412.5 billion.

tim@chinadailyhk.com

(HK Edition 01/08/2013 page1)