Hong Kong Pension System Charges Premiums for Cheap Index Funds

(Bloomberg) -- Hong Kong’s pension system has left savers paying fees for stock-index funds that are a multiple of those investors can get in the open market, contributing to a crisis of poor retirement preparation for millions of workers.

Take the biggest fund run by HSBC Holdings Plc that tracks the Hang Seng Index. With HK$35.5 billion ($4.5 billion) in assets, it’s the largest in Hong Kong’s Mandatory Provident Fund system. Savers pay an annual fee of 0.80%, compared with the 0.09% cost of an exchange-traded fund that tracks the same index. And HSBC’s offering is one of the lowest-cost available.

The extra amounts go to pay for everything from the marketing of the fund and the administrative paperwork to the compensation of the fund managers and any profits logged by the providers. Compounded over time, the fees leave performance well below those of the underlying indexes.

“It’s a drip, drip, drip effect,” said David Webb, a former Hong Kong Exchanges & Clearing Ltd. board member who advocates overhauling the city’s retirement program to let savers have self-managed brokerage accounts. “There would be a bit more outrage if people realized how much of the returns on their savings have vanished in expenses.”

The HSBC fund lagged behind the Hang Seng Index by some 25 percentage points over the past decade, a gap that Charlene Hui, a spokeswoman for HSBC, said was due to the fees for managing the MPF fund. The Tracker Fund of Hong Kong, the city’s most heavily traded ETF, underperfomed the index by about 8 percentage points.

“One cannot directly compare the fees of retail tracking funds with MPF tracking funds,” Hui said in an email. She also said the fees for the funds the bank offers through the pension program have been lowered on seven occasions over time.

One challenge with Hong Kong’s system, which covers about 4 million workers and involves compulsory payments by employees and their employers, is mandatory contributions are set relatively low -- at HK$36,000 a year for most people. That’s left the funds with smaller pots across which to spread administrative costs. Obligatory contributions in Singapore’s system are more than four times higher, a government-chartered review said in February.

‘Not Enough’

High fees are also one reason individuals have largely avoided putting in more than they’re required, according to the review by the Hong Kong Financial Services Development Council. The study concluded that MPF assets are “not enough for Hong Kong people’s retirements.”

Lower fees certainly would help.

A worker who made the mandatory contribution every month into the HSBC fund since it launched in 2000 would have about HK$1.3 million net of fees, according to calculations by Bloomberg. That’s about HK$184,000 less than an investor in the Tracker Fund of Hong Kong, before transaction costs.

The average pension product marketed as a Hang Seng Index tracker in the MPF system -- there are more than a dozen -- has an expense ratio of 0.89%, according to data from the MPF Authority. That’s lower than the 1.52% charged by the average fund in the system, which spans actively managed equity funds as well as bond, money market and balanced funds -- all of them dedicated offerings for the MPF that aren’t open to investment for other purposes. Average expenses for all the funds have fallen by half a percentage point since 2007, according to the authority.

Three of the Biggest Index Trackers

• The fund offered by Manulife Financial Corp. is “priced competitively among the MPF universe,” said Jacqueline Kam, a spokeswoman for the company in Hong Hong.
• BCT, or Bank Consortium Trust -- a pension provider set up by a number of local banks -- has proactively reduced fees “from time to time,” spokeswoman Stella Wong said. “MPF products are required to meet substantially more regulatory requirements.”
• The MPF Authority said in a statement that it “understands the concern of the public over the cost of MPF and has never turned a blind eye to the issue.” It said it has no statutory power to regulate fees.

What the MPF Authority did do in April was launch an online platform aiming to let savers easily compare costs. And it is digitizing systems to cut expenses. There are up to 100,000 paper-based transactions a day, a Legislative Council document showed last December.

Fees have been an issue in other countries’ retirement-savings programs as well. In the U.S., excessive index fund fees in retirement plans have been the subject of lawsuits in recent years, and a number of companies have reached settlements over accusations of unreasonable costs and poor fund selections. In Australia, too, retirement accounts known as superannuation funds have been the subject of lawsuits over fees, and a government-commissioned review in January concluded there were structural flaws.

Cost Layer

In Hong Kong, complying with administrative work required by the MPF authority “adds an additional layer of cost and complexity with no clear benefit” compared with a system like the U.S. 401(k), said Tariq Dennison, co-founder of GFM Asset Management, which provides retirement advisory services to high-net worth individuals in the city.

Still, the MPF system has its benefits for people without financial expertise -- including a lack of entry or exit fees, or the costs associated with setting up a brokerage account, said Francis Chung, executive chairman of MPF Ratings, which consults with employers on retirement obligations and analyzes fund performance. Financial investments in Hong Kong are relatively expensive, and the MPF can be a better deal than other products such as life insurance, he said.

What could help drive savers to advocate for lower fees is greater transparency. Chris Tse, a former chairman of the Institute of Financial Planners of Hong Kong, said the MPF Authority could do more to strengthen disclosure.

MPF account holders “do not have any knowledge about the relative performance of index tracking constituent funds without knowing the tracking errors or difference against the index benchmark,” Tse said.

--With assistance from Yusuke Takeshita.

To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen

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