Information Centre

“Governance” seems to have become a buzzword that has gained a lot of attention in recent years.  Financial regulators worldwide have increasingly focused on the governance of financial institutions since the 2008 global financial crisis.  In the context of pension funds, the International Organization of Pension Supervisors (IOPS) states in its Principles of Private Pension Supervision that the objectives of private pension supervision should include protecting the interests of pension fund members by promoting good governance of pension funds.

What is good governance and why does it matter for privately managed pension funds like the Mandatory Provident Fund (MPF) schemes?  Hong Kong has adopted the multi-pillar retirement protection model recommended by the World Bank; our MPF System forms the second pillar of the World Bank’s model.  Employees are mandated to join the MPF schemes chosen by their employers, and contributions made to the schemes are privately managed.  Ensuring that the working population will have a reasonable standard of living after retirement is a major challenge faced by many societies.  This is especially true for Hong Kong, where the life expectancy is among the highest in the world.  The MPF System therefore has a very important role to play.

The MPF System was founded on the cornerstone that trustees manage the investments and make sure that everything is in good order for scheme members, so that when it comes to their retirement, members can have a certain level of retirement protection based on their contributions accrued over their work life, which may span over 40 years.  Because of this, MPF trustees assume a fundamental role in protecting scheme members’ interests and delivering “value for money” outcomes for scheme members.  This is, in fact, the meaning of the fiduciary duty of MPF trustees.  It is incumbent upon the trustees to fulfill their fiduciary duty to protect and act in the interests of scheme members, and not in the trustees’ or their financial group’s own interests.

With the MPF assets under management reaching a record high since inception, amounting to HK$786 billion, which is equivalent to about 32% of Hong Kong’s total 2016 GDP as of 31 August 2017, and covering over 4 million scheme members, MPF trustees, though not “public trustees”, are indisputably “trustees of the public”.  Trustees of a mandatory system are expected to have a higher duty of care compared with those of retail products, where investors are free to choose their service providers and whether or not to invest.  MPF scheme members place their trust in and rely on the integrity and professional judgment of the MPF trustees to manage the schemes responsibly and safeguard their retirement savings.  Therefore, it is absolutely vital for trustees to act in the best interests of scheme members and to take all possible measures to ensure the delivery of appropriate member outcomes – high quality and value-for-money benefits and services, notwithstanding any potential conflicts that may arise from their own profit objectives.

Good governance is regarded as an important aspect of an efficient pension system, enhancing investment performance and providing increased protection of scheme members’ benefits.  It supports and guides the board members of MPF trustees when making decisions in relation to the management of MPF schemes, the oversight of service providers’ quality and fee levels, and the hiring and firing of senior staff of trustees.

International best practices identify appropriate governance structures, well-defined accountability, policies and procedures, and suitable processes for selecting and operating governing bodies as some of the key factors contributing to the good governance of pension funds.

Promoting a high standard of governance amongst all MPF trustees has always been a key regulatory objective of the Mandatory Provident Fund Schemes Authority (MPFA).  Over the past three years, the MPFA has embarked on a campaign of regulatory visits to the boards of directors of MPF trustees (Governance Visits) with the objective of promoting stronger governance and a healthy risk culture.  Areas of focus during the Governance Visits included:

• Delivering value for money for MPF scheme members – fund performance monitoring/management of MPF fund lifecycle, cost saving initiatives and administrative efficiencies;
• Trustee governance structure and policies;
• Risk management, internal controls and data quality assurance; and
• Enhancing service quality and the user experience.

During the Governance Visits, some good practices were observed, while certain areas for improvement were identified.  MPF trustees have taken measures to enhance the areas identified for improvement from the Governance Visits, including reviewing and revamping the board composition, governance structures and risk management frameworks, as well as streamlining/simplifying the scheme and investment structures.  In response, the trustees took positive action to enhance the operational efficiency and cost effectiveness of the System.

During the period from October 2014 to September 2017, the number of MPF schemes fell from 38 to 32.  The number of low feed funds (i.e. funds with a Fund Expense Ratio (FER) of 1.3% or below or a current management fee of 1% or lower) increased from 166 to 238 during the same period, and the average FER of MPF funds has continued to fall from 1.68% to a record low of 1.55%.

On 17 October this year, the MPFA hosted the first Workshop on Governance of MPF Trustees (see picture).  Its objectives were to raise the awareness of MPF trustees with respect to their role in making sure the MPF System works in the best interests of members and of the need to strengthen their governance framework and practices to achieve that end.  Over 100 representatives, including directors of the boards of MPF trustees, other local financial regulators and market experts attended the Workshop.  They discussed and shared their experience on various topics, including the latest developments on international and local governance frameworks, risk management, and the fiduciary obligations and public expectations of MPF trustees.

Going forward, the MPFA will maintain a supervisory dialogue with individual trustees on governance based on their business and governance plans.  To help board members of MPF trustees uphold good governance practices, the MPFA plans to issue a set of “High Level Principles on the Governance of Trustees” in 2018 for industry guidance.

While acknowledging that MPF trustees are commercial entities, they also have social responsibilities, as the MPF System is mandatory in nature, designed to help the working population save for their retirement.  As professionals entrusted with the management of MPF savings, the trustees have a responsibility to work for their scheme members’ greatest benefit.  To achieve this, MPF trustees should have the right people on the governing board and a healthy risk culture.  They should be member-centric, put in place a good communication system, both internally and with scheme members, and promote transparency of information. They must understand the needs of scheme members and offer them products and services that represent good value for money.

The governing board should always “put members’ interests first” when making both investment and operational decisions for the scheme, including the service providers they appoint, and the fees and charges for their services.  At the end of the day, the trustees and their governing boards are answerable to scheme members for the outcomes of their schemes.