The digital revolution is coming for H.K.’s retirement system
Regulator MPFA’s call for a more radical approach to streamlining retirement savings and investments must be heeded.
Senior regulators at the Hong Kong Mandatory Provident Funds Authority (MPFA), which supervises HK$858 billion ($110 billion) in retirement savings, are calling for a radical redesign of the system based on cutting-edge fintech.
In December 2018, MPFA chairman David Wong wrote a blog piece on the regulator’s website highlighted the decision to implement a central platform to unify the current hodgepodge of processes among 12 administrators. The government set up a working group to push for the centralized platform, called eMPF, in 2017.
Now the MPFA is following up with a “request for information” that it issued on its website last week, calling for ambitious ideas to be submitted by May 3.
Behind this bland announcement is a call for a radical, even revolutionary, overhaul. A centralized platform, or C.P., cuts at the heart of the inertia plaguing the system.
Because so much of the MPF system is based in legislation, the regulator is unable to do much. Instead it wants to submit a proposal to the city’s Legislative Council in 2021, based on a tender to a winning plan to be issued by March next year. The new centralized platform would begin to roll out in 2022.
Achieving that, in a meaningful way, will not be straightforward. There are two reasons why this change has been slow in coming. First, pensions are the “third rail” in Hong Kong politics, a difficult subject that no single government department has responsibility for, or wants. Second, it has become a den of vested interests, a trough at which trustees and administrators feed.
Fees have gone up
Fees in the system are high because of its design, which necessitates a lot of paperwork. But it’s MPFA staffers who are responsible for reconciling errors in collecting payments and chasing deadbeat employers; the administrators are mostly just paper processors. Indeed there are 200 people at the MPFA tasked with such soul-destroying minutia.
Yet it is the admins and trustees who capture the majority of fees paid into the system. And those fees have gone up.
In 2012, the total fees, expressed as a fund expense ratio, were 1.74% on a base of about HK$430 billion assets. That meant members (the 4.3 million people with an account) paid around HK$7.5 billion (about US$1 billion) in fees that year.
As of January 2019, the FER has come down to 1.52% but on an asset base of HK$858 billion, which means in 2018 those same members paid HK$13 billion (US$1.7 billion) in fees for the same service. The lion’s share is paid to trustees and administrators, with a sizeable chunk also going to fund managers.
There are 14 trustees and 12 fund administrators for MPF schemes, including Bank Consortium Trust (a bespoke group for MPF), AIA, BoCI-Prudential, HSBC, Manulife, Principal, and Sun Life.
In an era when, in the U.S., Fidelity and J.P. Morgan Asset Management are offering ETFs at ultra-low or zero management fees, the status quo for the MPF is clearly failing Hongkongers.
Stuck in the past
There’s more to it than just fees, though. The system was supposedly designed to have free-market competition among fund managers. Its greatest flaw was to also farm out the operations end. The 12 administrators operate their own systems, which don’t communicate with one another. This, plus requirements baked into the original legislation of 1995, make the system a nightmare of paperwork and obsolete requirements (such as mandating that employers submit their monthly contributions by check).
This rigidity has hobbled the ability of MPFA to play a more meaningful role in people’s financial lives. Members end up with new accounts every time they change jobs (or add a gig, if they’re part time). The ineffective MPFA website and heavy paperwork means people rarely bother to consolidate their accounts.
Full portability is impossible until silos are razed
The same goes for getting people to make voluntary contributions. The MPF has over 450 funds among 30 providers, but the siloed, cumbersome nature of the system means it has failed to develop into a competitive marketplace.
So while operations consume most fees, the fund managers themselves have had no incentive to lower their fees, either. And full portability of schemes for members is impossible until these silos are razed.
Time for something radical
It is a sad oddity that MPF, which touches more Hongkongers than any other financial institution, is almost universally viewed as an irrelevant nuisance. This has always been the case: launched in 2000, it was immediately attacked by politicians and business groups in the wake of the Asian financial crisis and the 2003 SARS epidemic, and the then-Chief Executive, Tung Chee-hwa, considered axing the entire thing. MPF survived only because repealing the legislation was too much trouble.
Yet the assets amassed there are now substantial. And the one great achievement of MPF is that, simply, it’s still here. The assets are legally bound to individual members, ringfenced from political meddling, corruption or theft.
MPFA has woken to the need for radical change
MPFA executives have woken to the need for a radical change, not a band-aide. Yet it has taken them two years since the original assignment from the government to come around to seeking out-of-the-box fintech solutions. And this latest “request for information” leaves fintechs and their allies only about a month to gather responses.
DigFin can only speculate as to what sort of tussle over eMPF has been taking place behind closed doors. The government mandate has not changed, however. What seems to have changed is the willingness, or even urgency, to seek ideas beyond those service providers already involved with the system (EY has served as consultant to MPFA for a number of years).
What to do
This is to be welcomed. Here is what needs to be done.
MPFA wants to eliminate the 12 administrators and replace them with a centralized system. These admins are also arms of the 14 trustees, whose role as fiduciaries will continue.
Doing this will require building two large systems. First is a means of routing instructions, collections and benefits. Second is a database.
One reason why MPFA statistics are often late and incomplete is that the MPFA does not have data on its 4.3 members: the 12 administrators do, in their particular systems. The government seems determined now to assert control over user data.
If successful, this could have fundamental, long-term repercussions. If every MPF member has a unique identity in the system, that could be used as the foundation for connecting them to other government and financial services. Today, banking, insurance and investments are blurred, and digital technology is further tearing through the borders. MPF and its assets remain in not-so-splendid isolation.
This opportunity will of course have to be balanced with protecting that data and ensuring privacy. The creation of a centralized platform will bring the risk of a “single point of failure”, i.e. a hacker’s honey pot.
Solutions, not least decentralized computing, exist to address this problem. Collaborative technologies can also help automate processes among trustees, fund managers, employers, and the new C.P.
And while the status quo seems secure, it is also opaque, and technology can introduce transparency – the bedrock of fairness and price discovery.
Furthermore, open API is being phased into the banking sector; the principles should apply to MPF accounts, too – for consolidating funds, for portability, and for connecting MPF to other retirement-related industries (housing, healthcare, leisure).
Imminent 5G advances in mobile communications suggest new ways to integrate MPF-related activities into everyday life.
Robo-advice seems ideal for providing goal-oriented portfolio construction for the majority of people who are confused by the system with its hundreds of choices.
The hardest part may be finding a solution that incorporates the administrators. They may resist or sabotage efforts to pry their grip off their captive fee-paying subjects. But they also have two decades of operational experience in MPF. They are necessary partners.
To win their cooperation will require a vision of a greater-pie retirement system that, thanks to digital technology, is no longer relegated to the fringes of Hong Kong finance and society – but repositioned at its heart.