Hong Kong Mandatory Pension Fund: survival of the fittest

Hong Kong’s Mandatory Provident Fund (MPF) system hit the HK$1 trillion (US$129 billion) mark in total assets at end of the third quarter of 2020 after operating for 20 years. This is equivalent to 35% of Hong Kong’s 2019 gross domestic product, and ranks the MPF among the 30 largest public pension systems in the world, according to data from pension consultant Willis Towers Watson.

As a pillar two system based on the World Bank’s multi-pillar retirement protection framework, the MPF is a system of privately-managed, fully-funded, employer-led schemes covering the employed population aged between 18 and 65 in Hong Kong. It currently has 4.3 million members, or almost the entire working population.

But among the largest global asset servicing providers, only HSBC is currently participating as a trustee and administrator in the MPF system. Most of the other global players do not put much focus on MPF business opportunities. If they are involved, they are typically only providing basic custody services to the constituent funds.

The MPF system’s multi-layered infrastructure has come under criticism from the onset. Instead of establishing a centralised administrative platform like Singapore’s Central Provident Fund, the government decided on a decentralised infrastructure built around a layer of privately managed MPF trustees who are responsible for operating the schemes.

There are currently three types of schemes, including 24 master trust schemes that are open to employees of any participating employers and self-employed persons. Two other industry schemes are for workers in the wholesale, retail, and import and export trades, catering and construction industries, many of whom are casual employees. One employer-sponsored scheme has been set up specifically for the employees of that employer and its associated companies. There are in total 409 approved constituent funds of various types under these schemes.

An MPF trustee appoints an administrator to handle the daily administrative work, a custodian to safekeep and service the scheme assets, and an investment manager to manage the investments of those assets.

Complex and costly

This complex infrastructure creates a huge amount of running costs. To operate efficiently, a trustee would need to pour in millions of dollars to develop an administrative platform purpose-built to meet the MPF’s specific requirements, and also to operate a call centre to service hundreds of thousands of members on an on-going basis. It can easily take as long as seven years for the business to break even on the upfront investment.

In addition, the retail nature of the business, with a large number of members and accounts to handle, along with a huge amount of manual, labour-intensive transaction processing involved, all add up to running costs that result in higher fees which are ultimately borne by MPF members.

The combined administration fees, trustee fees and custodian fees account for almost half of the MPF’s high average fund expense ratio of 1.44%, according to data from the Mandatory Provident Fund Schemes Authority (MPFA).

There is also a high barrier to entry for service providers. To build a meaningful market share, a trustee needs to have a broad clientele base of small and medium companies and a large sales team to go after more than 340,000 employers in Hong Kong and over 140,000 individuals who are self-employed. This means only service providers belonging to a banking group with a large retail branch network, or an insurance parent group with a big force of sales agents, could possibly have a reasonable chance to succeed.

When the MPF was launched in December 2000, there were 21 trustees who were keen to take a shot at the business. All but one were subsidiaries of a retail bank or an insurance company. The exception was Bank Consortium Trust, which was created for the MPF business by ten medium-sized banks banding together to set up a shared platform.

Fast forward to 2020, and the number of trustees has dwindled to 14. Those who were not able to build sustainable scale have bowed out and sold their businesses.

HSBC/Hang Seng currently tops the league table with 25.58% market share by assets under management, followed by Manulife with 24.6%, according to data as of end-June from Willis Towers Watson (**refer to footnote). Five others have market shares between 5%-10% and the rest have less than 5%.

Electronic MPF

There are now 12 MPF administration systems. All are directly owned by, or affiliated with, an MPF trustee. Sun Life’s administrator, BestServe, currently provides outsourcing services to two third-party trustees.

All these platforms have their own formats, rules and procedures. This lack of standardisation results in costs that cannot be shared across industry players. It also means that MPF members who maintain accounts with different providers are unable to view and manage their aggregate benefits on a single platform.

Calls over the years for an overhaul of the system has pushed the MPFA and the Hong Kong government to launch a multi-million-dollar project to provide a centralised digital platform aimed at facilitating the standardisation and automation of MPF scheme administration processes.

The electronic or eMPF platform, scheduled to be launched in 2023, will be operated by a newly-created wholly-owned subsidiary of the MPFA. It is expected to enhance the operational efficiency of MPF schemes and achieve cost savings, thereby providing more room for reduction in the administration fees. Furthermore, it is expected to help provide a level playing field by facilitating full portability of member benefits among MPF schemes, thereby encouraging competition.

The eMPF is indeed good news for MPF members and industry players who have long been frustrated with the current inefficient infrastructure.

The MPFA emphasises that the eMPF is much more than an information technology project. It is a digital transformation that will re-define the MPF ecosystem, providing a brand new user-centric experience using digital technologies and applications and integrated into the Hong Kong government’s broader “Smart City” initiatives. The message is that the eMPF will make the MPF business more commercially viable and create unlimited possibilities.

Changing landscape

But will this new digital platform and the MPF’s swelling asset pool attract more asset servicing providers to enter the business?

Although it will address the issue of administrative complexity for industry players, the barrier to entry – the highly retail nature of the business requiring a large sales team to chase after hundreds of thousands of companies and the self-employed – still remains. The world’s largest global asset servicing providers are typically in the wholesale business. It’s difficult to see them go out of their core competency to enter into this retail space.

Furthermore, it will be a colossal task for any new player to break in without costly acquisitions. The battle for business over the past two decades has already drawn a formidable competitive landscape. Two giants, HSBC Group and Manulife, have captured about half the market, leaving the rest to fight for shares ranging from 0.06% to 9.6%.

This landscape is bound to change further with the implementation of the eMPF. The bigger players who have the business scale will be much better positioned to prepare for the next digitisation phase and explore new possibilities on the open platform. The smaller ones may find it even more difficult to grow or hold on to their market shares.

Price wars can be expected, like when the MPF was first launched. Another round of consolidation will likely happen and slash the number of players further. Only the fittest will remain in the business.

At the end of the day though, if the eMPF does lead to fee reductions and higher levels of service through competition, all MPF members will benefit.

*This article was published in Asia Asset Management's December 2020 Magazine titled "Survival of the Fittest."

** Manulife is now the largest MPF provider after its deal in November to undertake sponsor tasks of the scheme for Allianz Global Investors.