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Funds in the Mandatory Provident Fund (MPF) System with a higher Fund Expense Ratio (FER) are not associated with better investment performance, according to a study conducted by the Mandatory Provident Fund Schemes Authority (MPFA).
 
The MPFA today published a report titled Fees and Expenses of MPF Funds: An Overview of the Fund Expense Ratio and Its Trends, which reviewed the changes of the FER of MPF funds and analysed its relationship with various factors, including the investment performance, size, age and management style of funds.
 
Speaking at a press conference on the report today, MPFA Non-executive Director Mr Philip Tsai said, “Some MPF scheme members may think that it’s worth paying more if a fund can deliver a better return. But we urge them to consider this carefully, as our study shows no relationship between the FER and investment performance.”
 
Mr Tsai explained that the FER was developed as a tool to help members compare the total fees, charges and expenses of MPF funds across schemes. The report shows the FER reduction trend to be persistent and material. The average FER of MPF funds dropped 24% from 2.06% in July 2007 to a record low of 1.56% in October 2016. There is also a downward trend for the FER of all fund types.
 
He said fees are generally known in advance, but a fund’s investment performance is not. “Generally, when two funds have similar investment objectives, the one that charges lower fees would likely have a better return.”
 
“While the MPFA will continue its efforts to drive fees down, we would like to highlight that 70% (about $450 billion) of MPF assets (namely the benefits in personal accounts and those from employee contributions in contribution accounts) are portable. And of the 400-plus funds in the market, 40% (169) are Low-fee Funds, many of which are equity or mixed-assets funds, so scheme members who are concerned about fee levels have plenty of choices. We urge members to proactively manage their MPF accounts, and consider fund fees and the FER when making investment decisions.”
 
Mr Tsai cautioned against comparing MPF fund fees with the fees of retail funds.
 
“The operation of MPF funds involves specific scheme administration work that retail funds do not need to do. On top of ongoing fees based on the assets under management, most retail funds also have subscription or redemption charges related to the amount invested, but MPF funds do not.”
 
He also said it is extremely difficult to make any meaningful comparison between the FER and the fee levels of overseas pension schemes, given the differences in system design, maturity and asset size.
 
But private pension schemes around the world face the same challenge of how to drive fees down, and international experts have pointed out that there is inertia among scheme members when managing their pension accounts.
 
Mr Tsai said the introduction of the Default Investment Strategy (DIS), which is a ready-made investment solution expected to be launched in April 2017¹, will help address public concern about the high fees of MPF funds, as the two funds under the DIS will have their management fees and the recurrent out-of-pocket expenses capped at 0.75% and 0.2% of the fund’s net asset value, respectively.
 
He said, “We hope the fee caps will have a benchmarking effect, enhancing competition among MPF funds and bringing about further MPF fee reductions. The MPFA will also continue to explore ways to push fees down to benefit scheme members.” 


Mandatory Provident Fund Schemes Authority Non-executive Director Philip Tsai (second from left), Chief Regulation & Policy Officer and Executive Director Darren McShane (second from right), Chief Corporate Affairs Officer and Executive Director Cheng Yan-chee (first from left) and Senior Manager of the Research and Statistics Section Edwin Lee (first from right) highlighted the key findings of the report on the Fund Expense Ratio at a press conference today.


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23 November 2016