Alice Law, deputy chairwoman of Hong Kong’s Mandatory Provident Fund Schemes Authority (MPFA), is calling for fintech companies to form partnerships in order to win a mandate for a sweeping reconstruction of the government-sponsored pension system.
The task is daunting: the MPFA and the Hong Kong government are calling for a soup-to-nuts overhaul that puts the Mandatory Provident Funds system on a digital platform.
If successful, the result could form the center of a new, broad-based pensions industry that promotes far greater investments and supports a greater variety of investment products.
Recognizing the scope of both the work and the stakes, the government is backing its request for proposals with a huge pot, about $430 million (nearly HK$3.4 billion).
And that’s just for the design and initial deployment; the MPFA will go back to the government for more money to pay for ongoing services once the platform is launched.
A lot to fix
DigFin covered the challenge in detail earlier in the year (see here for the story). Whereas previously the MPFA sought tech-based solutions for separate aspects of its “e-MPF” project, now it is requiring pitches for the contract be all-inclusive.
Today the scheme is drowning in red tape, with 100,000 paper-based transactions every working day, according to MPFA statistics. This paperwork is due to the way the scheme was created in the 1990s (it launched on December 1, 2000). This processing is the biggest factor in the scheme’s fees, which remain persistently high even as assets under management have grown, now to HK$930 billion ($119 billion). The average MPF scheme fee is 1.5%, of which as much as 0.8% accrues to the administrators.
“We need a game changer to disrupt this,” said Law. “This is not just about going paperless. Paperless is what you see, but it’s the tip of the iceberg. We need to build the whole iceberg. What’s underneath is a much bigger challenge.”
Paperless is what you see, but it’s the tip of the icebergAlice Law, MPFA
Given the complexities of MPF, a system that is terra incognito to most of the tech industry, Law is urging fintech companies to find partners that can deliver a complete system design.
This is, however, where the real business challenge lies.
Partner with incumbents?
The MPF system is run by 14 trustees, of which are 12 scheme administrators; most of them also provide their own investment products to employers (click here for the list).
There are also third-party firms, such as Allianz Global Investors, Fidelity and Invesco, which offer investment products to MPF members, but via an administrator to handle fund accounting, reporting, payments, and recordkeeping; and trustees for custody of assets.
The two biggest sponsors (plan investment managers) are Manulife, with HK$206 billion ($26 billion) of assets and a 23% industry share, and HSBC, with HK$180 billion ($23 billion) and 20%, according to MPF Ratings, a consultancy. AIA, Sun Life and a joint venture between Bank of China and Prudential are other leading providers. These sponsors are also the biggest scheme administrators and trustees.
Law is calling for fintechs to partner with a trustee, because they have two decades’ worth of experience handling all the nuances of a complex system.
But it’s not clear whether the trustees will want to devote a lot of resources to redesign a system that delivers them billions of assets and tens or even hundreds of millions of dollars in fees.
Moreover, e-MPF will surely mean job losses at scheme administrators. Some people can be retooled to take on new types of work based on new types of products and services. But the MPF admin workforce has spent nearly 20 years conducting rote tasks, and industry department heads can be expected to put up a fight if cuts impact their budgets (and internal prestige).
How partnerships could play out
Law says therefore the MPFA wants proposals that essentially grow the pie. She says a successful proposal will need an investment bank or accounting component, to work out the numbers so that incumbent trustees continue to enjoy the same revenues, even if their fees fall.
There are probably four ways this could work (opines DigFin). First, fintechs and consultants partner with an HSBC or Manulife that decides it wants to ensure they end up writing the rules for e-MPF to secure their already large volumes.
Second, a non-trustee like a Fidelity or Invesco that has experience dealing directly with consumers, has ambitions to grow its direct-to-consumer business, sees the opportunity to transform MPFA from a backwater to the heart of a new, dynamic investments platform, and establish new leadership.
Third, find a mid-tier trustee that has no prospect of growth in the status quo, but thinks it has enough resource to take on the Big Two in a newer, digital world. This is difficult because MPF is a steady cash cow (because it’s mandatory), so even smaller players don’t feel the need to rock the boat. It would require a visionary executive with something to prove.
Fourth, and the exception to the above: the likes of a China Life, AMTD or Bank of Communications – the mainland-tied players at the bottom of the rankings that might see a revitalized MPF system as a springboard to (one day) servicing mainland China’s pensions industry.
Law has a few pointers for proposals.
First, the e-MPF system has to capture data that is marked to market every day. Money held by trustees is not static, as with a savings deposit.
Second, the design must provide standards for how data is classified and categorized, to bring some unity to what is now 12 distinct administrators’ ways to keep track of things. This fragmentation is a barrier to transferring data and instructions, which is why the current system is so dependent on paperwork, not to mention an army of regulators to chase down Mrs. Wong at her vegetable stand to make sure she’s compliant.
“We’re not just building a platform,” Law said, but reimagining the entire workflow. This means leveraging fintech so that e-MPF can both provide more convenient service AND reduce fees.
So, third, the outcome must provide tangible improvements that members will experience, in terms of U.X. and more efficient pricing – because it will be members who will initially bear the costs of providers integrating into the new platform.
“We’re not talking about just plugging in a virtual bank, or an API strategy, or biometric authentication,” Law said. “It’s all of the above and more.”
Fourth, the proposal has to survive the tectonic plates of changing market dynamics and legislation. The MPFA’s plan is to award the tender in the second half of 2020, with deployment slated for 2022. That’s a tight timeline. Moreover, based on the winning design, the MPFA and the government intend to push a necessary amendment to MPF’s founding ordinance through LegCo (Hong Kong’s legislature).
That’s a big uncertainty: although the government commands the majority of votes in LegCo, most of its work has been stalled by Hong Kong’s political disagreements – even before mass protests broke out in June this year. Moreover, MPF is an unpopular system, so a reform should be welcome by everyone but could make for a political target.
However, managing the legal aspects will be the government’s job. First it needs a design to propose.
That’s your job.