Revolutionising MPF System -The Centralized Platform

Cheng Yan-cheeChief Corporate Affairs Officer and Executive Director

Mandatory Provident Fund Schemes Authority27 May 2019

World Bank’s Multi-pillar Retirement Protection Framework

2

The World Bank (WB)

1994 – Recommended a three-pillar approach

2005 – Expanded into a five-pillar framework

3

Protect the Aged

0. Non-contributory, publicly financed &managed system

3.Voluntary savings

1.Mandatory, contributory & publicly managed system

2.Mandatory, privately managed, fully funded contribution system

4. Informal support, other formal social programmes & other individual assets

4

MPF in Line with the Global Trend

1 2 3 4 5 68

10 1113

1820 21

2325

2830

32 33

0

5

10

15

20

25

30

35

19

81

19

92

19

93

19

94

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

08

20

10

20

11

20

17

No. of Second Pillar Systems in the World

Chile Australia

Hong Kong

Sources: International Monetary Fund, International Labour Organisation, International Organisation of Pension Supervisors, Maldives Pension Administration Office, Mesa-Lago, National Pensions Regulatory Authority, OECD, Scherman, Superintendence of Pensions, World Bank.

WB’s Outcome-based Assessment (OBA) Framework for Private Pension Systems

5

WB’s OBA Framework for Private Pensions

To evaluate the performance of a private pension system (2nd Pillar)

5 key outcomes

Coverage

Sustainability

Security

Efficiency

Adequacy

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For further details, please refer to Price W, Ashcroft J, Hafeman M. (2016). Outcome Based Assessment for Private Pensions: A Handbook. World Bank, Washington, DC.

Performance of MPF System against OBA Framework

7

WB’s OBA Framework (2016) Performance of MPF System

Coverage

Sustainability

Security

Adequacy

Efficiency

Performance of MPF System against OBA Framework

8

Outcome 1 : Coverage

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Enrolment Rates of MPF System

99% 100% 100%100% 100% 100%

68% 69% 71%

0%

20%

40%

60%

80%

100%

as at 30.9.2016 as at 30.9.2017 as at 30.4.2019

Enrolment Rates of MPF Schemes

Employers Employees Self-employed persons (SEPs)

MPF System has very high enrolment rate

10

Coverage of Private Pension Schemes in Different Jurisdictions

95%91%

85%* 84% 84% 81%74% 70% 67%

61% 60%

0%

20%

40%

60%

80%

100%

Cove

rage

(a

s a

% o

f E

mp

loye

d / W

ork

ing

Po

pu

lation

)

* Employed population covered under MPF schemes, ORSO schemes and other statutory pension or provident fund schemes

Coverage of Private Pension Schemes

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Mandatory

Auto-enrolment/collective agreement

Outcome 2 : Sustainability

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MPF System: Sustainable by Nature

• Universal coverage for employed population (except for exempt persons)

Mandatory

• Independent from Government’s revenue / public financial resources

PrivatelyManaged

• Dedicated assets to meet future pension benefits payable to members

Fully Funded

• Contributions are defined and made by employers and employees (a total of 10% of salary, subject to minimum and maximum relevant income)

DefinedContribution

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Pension Sustainability Index – Asia

Hong Kong: highly sustainable

Source: Allianz Global Investors. (2016). Pension Sustainability Index 2016 (International Pension Paper 1/2016).

0 1 2 3 4 5 6 7

Thailand

China

India

Japan

Taiwan

Indonesia

South Korea

Singapore

Philippines

Malaysia

Hong Kong, China

Scale from 1 – 10. A jurisdiction with an overall score of 1 represents the

greatest need for reform and 10 represents the least need for reform.

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Outcome 3 : Security

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Safeguarding Interests of Scheme Members

Sound Legal & Financial System

Hong Kong’s sound legal framework and financial system serve as the backbone of MPF System

“Strong and stable financial markets” (WEF, 2017)

Global Competitive Index 2017-18Ranking of Hong Kong (out of 137 economies)• Institutions 9• Macroeconomic Environment 6• Financial Market Development 5

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Safeguarding Interests of Scheme Members(Con’t)

Robust Supervision & Regulation of MPF

Trust arrangement: keep MPF scheme assets separate from those of employers/ MPF trustees/ other service providers

Stringent approval & registration criteria

On-going monitoring of MPFtrustees by the MPFA

Professional indemnity insurance to be taken out by MPF trustees

Compensation Fund

Four-tier Protection under the MPF System

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Outcome 4 : Adequacy

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Causes for Inadequacy

Contributions: ER 5% + EE 5%

Capped by : max relevant income (RI) level ($30,000)

People earning less than min RI level not contributing

System in place only 18 years

Max / min RI levels lag behind income level

19

20

Initiatives to Enhance Adequacy of MPF System

Review of min/max relevant income (RI) levels

RI levels are reviewed regularly and adjusted when necessary to keep up with income changes of the workforce in HK

MPFA is required by law to review the minimum & maximum RI levels at least once every 4 years according to the statutory adjustment mechanism, and submit the review findings to Government for consideration. A review was conducted and the review results were submitted to Government in 2018

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Tax Deductible Voluntary Contributions (TVC)

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The Financial Secretary announced tax concession for MPF voluntary contributions and deferred annuities to encourage more contributions for retirement on a voluntary basis

Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions) (Amendment) Bill 2018 was gazetted on 29 Mar 2019

Tax deduction will be effective from the assessment year 2019/20

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How to benefit from tax concessions?

• Contributions that are made to the TVC accounts are eligible for tax deduction

• Tax deduction cap is $60,000 per year (aggregate limit for MPF TVC and qualifying deferred annuity policies premiums)

Who can make TVC?• Holders of contribution accounts or personal accounts of MPF schemes;

or members of MPF Exempted ORSO Schemes are eligible to make TVC

How to make TVC?• Open a TVC account in an MPF scheme that offers TVC and make

contributions directly to the account

Transfer of MPF Benefits

• All balance in a TVC account can be transferred to another TVC account of the same member of an MPF scheme at any time

Withdrawal of MPF Benefits

• TVC can only be withdrawn upon scheme member’s reaching age 65 (or on other statutory grounds)

TVC

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Three major features of TVC

Convenient

Eligible persons can open a TVC account in anyMPF scheme which offers TVC of their own choiceand make contributions directly with trustees

MPF trustees will provide contribution summariesto facilitate filing of tax returns

Flexible

No fixed frequency or fixed amount ofcontributions

Simple

TVC account holders can transfer all balance toanother TVC account of an MPF scheme at any time

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Points to Note

• Only applies to salaries tax and personal assessment

• Any contributions exceeding this limit will not be tax deductible and cannot be withdrawn

• TVC can only be paid into TVC account, but not contribution or personal account

Improve Scheme Members’ Financial Literacy

The more scheme members know about retirement savings the better

Committed to providing retirement investment education to the public through various channels

Revamped MPF Investment Education Thematic Website, providing financial planning tips to scheme members of different age groups

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Outcome 5 : Efficiency

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Drop in MPF Fee Level

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Fee Level of MPF System

2.10%

1.52%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Dec 2007 Feb 2019Mar 2019

Recent Initiatives to Enhance Efficiency of MPF System

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(I) Transparency

30

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Fund Performance Platform Fee Comparative Platform

Low Fee Fund List DIS Fund List

One-stop MPF Fund Platform

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Breakdown of Management Fees

Admin / Trustee / Custodian Fee

Investment Management Fee

Sponsor Fee

Fund Management Fees

MPF Fund

Platform

Scheme Members

Service Providers

Trustees

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Improve Transparency to Create a Win-win Solution

Enhancing Transparency of Information to Scheme Members

Working Group has been formed with MPF trustees to take forward a number of initiatives on further enhancing transparency of information to scheme members

Working Group met in late April to pursue the following initiatives

development of a standardized online dashboard for members to view their key account information

improving the readability of annual benefit statements

simplifying current disclosure regime at point of enrolment

Plan to roll out these initiatives by phases from Q1 2020

Count on the support from trustees to roll out these initiatives and enhance scheme members’ engagement

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(II) Default Investment Strategy (DIS)

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Default Investment Strategy (DIS)

Key Features

Ready made strategy balancing

long-term risks and returns

Fee caps

(0.95%)

Globally diversified investment

36

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Massive promotion initiatives before and after the launch of DIS: DIS pre-implementation

Notice / DIS Re-investment Notice

TV and radio advertisements

Video series “DIS Kitchen” on social media

Infographic video Hundreds of public

talks Roving exhibitions Thematic website Dedicated leaflets

Promotion of DIS

DIS

Launched in April 2017

Since the passage of the DIS legislation in 2016, the management fees of over 130 constituent funds have been reduced

Percentage of accounts investing in DIS constituent funds has increased from 10.3% to 17.6%

Percentage of MPF assets invested in DIS constituent funds has increased from 2.3% to 3.5%

Review of fee cap to be conducted before April 2020

38(as of Dec 2018)

Revolutionising MPF System to Enhance Efficiency

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Centralized Platform

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Background

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Mandatory participation (except for exempt persons)

Privately managed (investments not government managed)

Decentralized administration

Trustees/schemes chosen by employers*; funds chosen by employees

*Under the Employee Choice Arrangement, employees have the right to transfer part of their accrued benefits to a scheme of their choice.

MPF System: Key Features

42

Snapshot of Current MPF Scheme Administration

Default

Contributions- Report to MPFA

- Follow up defaulting

employers

- Collect and validate

surcharge

Enrolment

Form

Date Ref Name R/I Cont - ER Cont -EE

3/10/2017 E-001 Chan Tai Man $20,000 $1,000 $1,000

3/10/2017 E-002 Wong Tai $25,000 $1,250 $1,250

3/10/2017 E-003 Ding Ding $28,000 $1,400 $1,400

3/10/2017 E-004 David Sir $19,000 $950 $950

3/10/2017 E-005 John Sir $18,000 $900 $900

3/10/2017 E-006 Happy Wong $17,000 $850 $850

3/10/2017 E-007 Mathar Yuen $16,000 $800 $800

3/10/2017 E-008 Lee Ho $15,000 $750 $750

3/10/2017 E-009 Wong Tai $14,000 $700 $700

3/10/2017 E-010 Kwan Kung $13,000 $650 $650

Total $9,250 $9,250

Enrolment- Employers/ Scheme

Members

- Collect enrolment data

Contributions- Collect & process contribution data

- Validate calculations

- Follow up errors with employers

- Allocate contributions to member A/C

- Allocate units to member A/C

Investment- Allocate contributions by fund

choice of members

- Pass contribution funds to IM

for unit subscription

- Pass redemption/

subscription orders of fund

switching to IM

Information &

Communication- Update member/

employer particulars

- Send benefits statements

- Provide A/C & other MPF

information

Intra-scheme Fund

Switching- Verify instructions

- Calculate redemption

& subscription amount

- Update unit balances

- Issue confirmation

Inter-scheme Transfer- Transfer of MPF benefits

from a scheme to another

- Follow up with counter-

party trustee

- Redeem / subscribe fund

units

- Issue transfer statement /

confirmation

Benefit Payment - Member withdrawal/ Offsetting

claims

- Verify submission & supporting

document

- Verify entitlements

- Submit info to MPFA (PD cases)

- Fund redemption & make

payment

- Provide final benefit statement43

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About 4.3 million scheme members

Over 9.8 million accounts (4.1 million contribution accounts; 5.7 million personal accounts)

30 MPF schemes; 430 MPF funds

14 trustees (12 scheme administration platforms), multiple standards and processes

65% of the 30 million annual MPF transactions are paper-based (e.g. submitting physical enrolment forms, Remittance Statements and cheques to trustees etc.)

MPF System at a Glance

0

100

200

300

400

500

600

700

800

900

1,000

強積金權益 所收到的總凈供款額

HK

$ B

illi

on

MPF Accrued Benefits and Net Contributions (1.12.2000 – 31.1.2019)

MPF Assets

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Investment Returns(net of fees & charges)

$253 billion (28% of AUM)

Contributions(net of amount withdrawn)

$641 billion

$858 billion

Accrued Benefits Total Net Contributions Received

* Monthly average: HK $5,985 million

Annual MPF Contributions Received

46

Quarter Total contributions received (HK $ million) 2018 Total

Q1 2018 18,295

71,831Q2 2018 17,748

Q3 2018 17,684

Q4 2018 18,104

FER

1.74%

(2012)

Investment management

0.59%

Administration

0.75%

Others0.4%

*According to the “Report on a study of administrative costs in the Hong Kong MPFSystem” by Ernst & Young commissioned by the MPFA in 2012*Link to the report:http://www.mpfa.org.hk/eng/information_centre/publications/research_reports/files/MPF%20Consultancy%20Study%20Report(Eng).pdf

*Latest FER of MPF System: 1.52% (Feb 2019)

Components of Fund Expense Ratio (FER)

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(33%)

(43%)

(24%)

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MPF Scheme Administration -Current Status

*Source: Presentation of Government’s representative at the Legislative Council Panel on Financial Affairs on 18 Dec 2018

AIA

Bank Consortium Trust

Bank of Communication

Bank of East Asia

BOCI-Prudential

China Life

MassMutual

HSBC Institutional

Manulife Provident Fund

HSBC Provident Fund

Sun Life Pension

Sun Life Trustee

RBC Investor

Principal Trust Asia

In-house AdministrationOutsourced to Associated Co.Outsourced to 3rd party

AIA International Ltd. (HK Branch)

Bank Consortium Trust Co. Ltd.

Bank of Communications (Trustee) Ltd.

Bank of East Asia (Trustees) Ltd.

BOCI-Prudential Trustee Ltd.

China Life Insurance (Overseas) Co. Ltd. HK Branch

MassMutual Trustees Ltd.

HSBC Institutional Trust Services (Asia) Ltd.

Manulife (International) Ltd.

Hongkong and Shanghai Banking Corp. Ltd.

BestServe Financial Limited

Principal Trust Company (Asia) Ltd.

Most trustees operate MPF scheme administration services through its own administrator

A small number of trustees outsourced to SunLife’s administrator (BestServe)

14 Trustees 12 Scheme Administrators

Features of Centralized Platform (CP)

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Objectives of CP

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1. Improve accuracy, reliability and efficiency

2. Standardize, streamline & automate the MPF administration processes

3. Reduce overall costs of the MPF System

4. Improve user experience

5. Enable future MPF reforms initiatives

6. Greater transparency & member engagement

7. Centralization & consolidation

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MPF Scheme Administration -Current Stage vs Centralized Platform

*Source: Presentation of Government’s representative at the Legislative Council Panel on Financial Affairs on 18 Dec 2018

I. Current status

AIA

Bank Consortium Trust

Bank of Communication

Bank of East Asia

BOCI-Prudential

China Life

MassMutual

HSBC Institutional

Manulife Provident Fund

HSBC Provident Fund

Sun Life Pension

Sun Life Trustee

RBC Investor

Principal Trust Asia

In-house AdministrationOutsourced to Associated Co.Outsourced to 3rd party

AIA International Ltd. (HK Branch)

Bank Consortium Trust Co. Ltd.

Bank of Communications (Trustee) Ltd.

Bank of East Asia (Trustees) Ltd.

BOCI-Prudential Trustee Ltd.

China Life Insurance (Overseas) Co. Ltd. HK Branch

MassMutual Trustees Ltd.

HSBC Institutional Trust Services (Asia) Ltd.

Manulife (International) Ltd.

Hongkong and Shanghai Banking Corp. Ltd.

BestServe Financial Limited

Principal Trust Company (Asia) Ltd.

Most trustees operate MPF scheme administration services through its own administrator

A small number of trustees outsourced to SunLife’s administrator (BestServe)

14 Trustees 12 Scheme Administrators

II. eMPF

AIA

Bank Consortium Trust

Bank of Communication

Bank of East Asia

BOCI-Prudential

China Life

MassMutual

HSBC Institutional

Manulife Provident Fund

HSBC Provident Fund

Sun Life Pension

Sun Life Trustee

RBC Investor

Principal Trust Asia

Centralized Platform

14 Trustees

All trustees would use the CP to handle MPF scheme administration

Standardize and streamline administration process, enhance user experience and create cost reduction through synergy

Trustee Administrator/Centralized Platform

Trustee / Scheme B

Trustee / Scheme A

Trustee / Scheme N

…..

Trustees/ schemes continue to handle below as they are not covered by the Centralized Platform:• fund offering and

management• appointing investment

manager and custodian• Anti-money laundering• customer—relationship

management

52

Note: The MFS is a payment gateway for transmitting payment instructions.

Conceptual Model of CP

*Source: Presentation of Government’s representative at the Legislative Council Panel on Financial Affairs on 18 Dec 2018

Centralized Platform

Features of CP

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Centralized processing

Automated processing with common

standards

Central registration with unique MPF ID

An user interface connecting CP with

MPF trustees

Data & instructions can be channelled

to trustees

Envisaged effects of CP

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Higher operational efficiency and lower overhead costs for

trustees

Level the playing field for current and prospective fund

managers who wish to sponsor and launch cost-efficient

MPF schemes

Greater transparency of MPF, greater competition and

ultimately fee reduction

Positive customer experience, and more active

management of MPF accounts by members

Pave way for future reforms of MPF System

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Implementation of CP

Public tender for -

A. Infrastructure

B. Operation

To formulate strategies and measures on data management and governance

MPFA to set up a company to own and operate the CP, which is neither a trustee nor a regulatee of MPFA

Trustees continue to owe fiduciary duties to their scheme members

*Source: Presentation of Government’s representative at the Legislative Council Panel on Financial Affairs on 18 Dec 2018

56

Development Roadmap of CP

2019 Request for proposals, tendering exercise

2020 Tender award in Q1

System design and development from mid-2020

2021 Submission of legislative amendment proposal to Legislative Council

Expect a comprehensive overhaul of the law to streamline schemeadministration workflows and reduce regulatory burden, etc.

2022 Completion of CP

2022 to 2027-28

Phased implementation of CP

*Source: Presentation of Government’s representative at the Legislative Council Panel on Financial Affairs on 18 Dec 2018

“To build a retirement savings system that is valued by Hong Kong people”

Vision of MPFA

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Thank you

58