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FINA Case StudyFinancial Planning for Retirement

Questions 3.1-3.14

Question 1: What is the Mandatory Provident Fund, when was it launched, and what pension schemes were in place before the launch of the

MPF?

Presented by Leslie Tong

Mandatory Provident Fund (MPF)Compulsory retirement scheme in Hong KongAll employers in Hong Kong have to joinImplemented on 1st December 2000Both employers and employees contribute to the fundIf your monthly salary is above $6500, the current

contribution rate is 5% of salary, with a cap of $1000.Employer will choose a MPF provider.Employee can choose a fund offered by the MPF

provider.Employee will receive the benefits upon retirement.

Mandatory Provident Fund (MPF)(continued)

Before the implementation of MPF: Only some (not all) companies offer retirement

benefits to their employeesDifferent employers have different retirement

schemes.It is governed under ORSO. (Occupational

Retirement Schemes Ordinance)

Source: Hong Kong Fact Sheet: MPF Sheethttp://www.gov.hk/en/about/abouthk/factsheets/

docs/mpf.pfd

Q3.2: Who Supervises the MPF Industry?

Mandatory Provident Fund Schemes

AuthorityRole

• The MPFA was established in September 1998 under the Mandatory Provident Fund Schemes Ordinance (MPFSO) to regulate and supervise the operations of provident fund schemes.

Mission• The mission of the Mandatory Provident Fund Schemes

Authority (MPFA) is to ensure the provision of retirement protection for Hong Kong's workforce through an effective and efficient system of prudential regulation and supervision of privately managed provident fund schemes.

MPFSO

Responsible for ensuring compliance

with the MPFSO

Register provident

fund schemes as registered

schemes

Approve qualified

persons to be approved trustees

Regulate the affairs and activities of approved trustees

Make rules or

guidelines for the

payment of mandatory

contributions

Consider and propose

reforms to the law relating to provident fund

schemes

Promote and encourage the development

of the retirement

scheme industry in Hong Kong

Exercise such other

functions as are conferred or imposed on

the MPFA

Question 3.3What section(s) of the working population

is/are required to contribute to MPF?

Who needs to contribute to MPF?All employees aged between 18 to 64Self employed workers also includedBegin contribution after 60 days of employmentPeople that are exempted are:

Self-employed hawkersHousehold employees (domestic helpers)Employees already covered under ORSOExpatriate workers working in HK for less than one yearExpatriate workers already covered under overseas

schemes.

Source: www.gov.hk/en/about/abouthk/factsheets/docs/mpf.pdf

Q3.4:What does ‘relevant income’ mean?

"Relevant income" refers to all payments in monetary terms given to employees, including wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance (including housing allowance or otherhousing benefit), but excluding severance payments and long service payments.

How are contributions calculated?

Increase in the Minimum Level of Relevant Income for MPF Contributions to HK$6,500. The minimum level of relevant income in respect of Mandatory Provident Fund (MPF) contributions has been increased to HK$6,500, effective 1November 2011, from the original level of HK$5,000.For the contribution periods starting on or after the effective date, employees with a monthly relevant income of less than HK$6,500 are not required to contribute, but their employers must make the employer’s contribution. Self-employed persons with a relevant income of less than HK$6,500 per month or HK$78,000 per year do not have to make contributions.

Contribution tables after the increase in the minimum level of relevantincome(1) Regular employees

Monthly paid regular employees and their respective employersMonthly relevant incomeHK$Mandatory contribution amount HK$ Employer’s contribution Employee’s contributionLess than 6,500 Relevant income x 5% Not required6,500 - 20,000 Relevant income x 5% Relevant income x 5%More than 20,000 1,000 1,000

What is the MPF ‘salary cap’• MPF salary cap: Maximum income level employees

need to pay• HK$20,000• Employees earning up to HK$20,000 pay 5 percent of

their salary to the fund• Employees earning more than HK$20,000 pay the

same maximum amount.Source:http://www.mpfa.org.hk/english/abt_mpfs/abt_mpfs_fms/abt_mpfs_fms_con/abt_mpfs_fms_con.html

http://www.mpfa.org.hk/english/super/super_si/super_si_mie/files/Study_Notes_Eng.pdfhttp://mpf.hk/post/2011/11/24/MPF-contributions-cap-next-year-to-improve.aspxhttp://www.thestandard.com.hk/news_detail.asp?pp_cat=11&art_id=35508&sid=11611812&con_type=1&d_str=20070106

Q3.5 What is the difference between an MPF trustee and an MPF service provider?

MPF Service Provider and Trustee

MPF service provider• consists of administrator, investment manager, custodian, and other person appointed or engaged by the approved trustee

• Investment manager

• provide services for the purposes of the scheme.

•legally obliged to make all trust-related decisions with the beneficiary‘s interests in mind, and may be liable for damages in the event of not doing so.

MPF Trustee•Government approved provider

•An individual or organization which holds and invests assets for the benefit of employees.

How many MPF trustees are registered with the MPFA?

MPF Trustee

The MPFA vets all trustees to ensure that they meet the detailed requirements to be a trustee, e.g. capital adequacy, independent directors, relevant

experience etc.

A trustee who has met all of these criteria and been approved by the MPFA will be an approved trustee and can act as a trustee for a master trust, an employer sponsored scheme or an industry scheme.

19 Approved MPF Trustees

Q3.6 What’s an MPF Intermediary?

There are two types of MPF intermediary:

(i) “Corporate intermediary” ;

(ii) “Individual intermediary”

it means a person who is engaged in:

(i) selling MPF schemes; or

(ii) advising clients on constituent funds or underlying approved pooled investment funds of MPF schemes.

How many are there?as at November in 2011, there were about

30,000 registered MPF individual intermediaries in the market

around 12.5% were permitted to provide recommendation on securities and insurance policy.

What do they do?

1 •approach the client

2 •understanding the client

3 •selling/advising on MPF schemes without rendering specific investment advice

4 •after sale service

Who regulates them?

The MPFA acts as the lead regulator and coordinator

The MPFA relies on the three financial regulators in Hong Kong: the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority

Referenceswww.mpfa.org.hk

http://www.convoyfinancial.com/en_US/about-convoy/corporate-news/20111214

Question 7What is the Employee Choice Arrangement and

why has it been proposed?

Employee Choice ArrangementAllows employees to choose the MPF provider as well

as the different types of MPF funds.Aims at lowering the admin fees charged by MPF

providers. When there is more competition among MPF providers,

it creates pressure and forces the MPF providers to lower the fees.

Originally scheduled to come into effect in April 2011Government has postponed it and it is now expected to

come into effect in the second half of 2012

From: MPF Choice Put Back to July 2012. http://topics.scmp.com/news/hk-news-watch/article/MPF-choice-put-back-to-July-2012

Presented by:Sau YeeWoody

3.8 What is an MPF scheme and

is there more than one kind?

MPF(Mandatory Provident Fund ) scheme suitable retirement protection system

a mandatory, privately managed, fully funded contribution scheme

Compulsory saving scheme

Launched in December 2000

Types of MPF Schemes

Master Trust Schemes

Employer-sponsored Schemes

Industry Schemes

Q3.9:MPF constituent fund

Forms part of a MPF scheme

Different fund classes

Different types of constituents funds

Mixed Assets Fund Bond Fund Equity Fund Guaranteed Fund Money Market Fund-MPF Conservative

Fund Others

Question 3.10How has the MPF performed over the past

year, over the past five years, and/or since it was launched?

MPF Past PerformanceTotal net asset value of all MPF schemes: HK$365.4billion

(as at December 2010) The average annual rate of return since inception (2000) is

5.4% (net of admin fees)Compared to the annualized composite CPI percentage for

the same period: 0.7%

MPF Past PerformanceThe average annual rate of return for different types of funds:

- Equity Fund consistently outperformed other funds.- Money Market Funds performed the poorest.Source: http://www.info.gov.hk/gia/general/201106/22/P201106220300.htm

Types of funds Rate of return in 2011

Rate of return since inception

(2000)

Mixed Asset Fund

8.7% 4.9%

Equity Fund 10.2% 5.7%

MPF Conservative Fund

0.0% 1.2%

Guaranteed Fund 2.2% 1.6%

Bond Fund 3.9% 3.9%

Money Market Fund

-0.4% 0.8%

By Zephyr Chan and Yoyo Cheng

Q3.11 What do the terms Fund Expense Ratio (FER) and Fund Risk Indicator (FRI) mean and how is each one calculated?

Fund Expense Ratio (FER)A standard measure which indicates the

total amount of fees and expenses charged to a fund

Expressed as a percentage of the fund's net asset value

May include management fees, safe custody and bank charges, legal and other professional fees, auditors' remuneration, compensation fund levy to the MPFA, guarantee charges and other expenses.

Fund Risk Indicator(FRI)Describes the risk of one’s MPF fundMeasures that have been adopted is called

standard deviationIs calculated over a three-year periodShows the volatility of price as a

percentage around the average price over the measurement period

Q12.

• When and by whom can accrued benefits be withdrawn from a member’s MPF?

When?

• retirement at age of 65• early retirement at the age 60• permanent departure from Hong Kong

Source: http://www.mpfa.org.hk/english/abt_mpfs/abt_mpfs_fms/abt_mpfs_fms_bp/abt_mpfs_fms_bp.html

By whom?• total incapacity (certificate of a person's unfitness for a particular

kind of job with doctor note) • death (note that the MPF will be regarded as part of the member's

estate and can be claimed by the personal representative of estate)• small balance account of less than $5,000, no contributions made to

a scheme for 12 months, and declared not to become employed or self-employed within the foreseeable future

Source: http://www.mpfa.org.hk/english/abt_mpfs/abt_mpfs_fms/abt_mpfs_fms_bp/abt_mpfs_fms_bp.html

QUESTION 3.13:THE MPFA MAKES FOUR SUGGESTIONS THAT PEOPLE SHOULD CONSIDER WHEN IDENTIFYING THEIR RETIREMENT INVESTMENT GOALS.WHAT ARE THEY?

Presented by

Leafynn Tan

Leo Lam

REMEMBER TO:

Set clear investment goals Assess your own risk tolerance level Estimate your investment horizon Adjust your investment portfolio at different

life stages

ADDITIONAL INFORMATION:

Achievable goals, tailored to your needs MPF is a long term investment Past performance of a fund is not a guide to its future performance

Source: http://www.mpfa.org.hk/english/mpf_edu/mpf_edu_laymi/mpf_edu_laymi_uyn/mpf_edu_laymi_uyn.html

Q3.14 What should employees consider when choosing MPF funds?

Hayes ChuCaren Lam

http://www.mpfa.org.hk/tc_chi/mpf_edu/mpf_edu_laymi/mpf_edu_laymi.html

Clear investment objectives

Estimated expenditure required per year after retirementClothing, food, housing, medical costs etc.Inflation cost

Assessment of risk Assessed according to your age, character, personal and family member’s financial status etc

If exposed to higher riskmore aggressive investment portfolioreturn may be higher faster to achieve your investment objectives.

Investment period

Longer the investment period ability to take risks are relatively higher, vice versa

Other factorsReview the portfolio at your different stages of life help improving your investment efficiency.

Fund’s investrment objectives, tools and assets.

Fund’s market risk