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?
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
Question 3.2Who supervises the MPF industry?
MPF IndustrySupervised by the MPFA (Mandatory
Provident Fund Schemes Authority)Supervises the MPF Trustees and MPF
ProvidersOversees MPF products and MPF
intermediaries (agents)Also oversees ORSO schemesIssued “best code of practice”
Source: http://www.mpfa.org.hk/eindex.asp
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
• Question 3.4• relevant income• how are contributions calculated?• MPF “salary cap”?
Relevant income
Pensionable income + taxable benefits in kind - allowable business expenses.
(before deduction of personal allowances).
Taxable profits – capital allowances/losses from previous years.
How are contributions calculatedFor both employee and employer:- 5% of employee’s relevant income is contributed
Salary cap- currently $20,000* per month
Monthly relevant income
<$6500 $6500≤__≤$20000 >$20000
Mandatory contribution rate
not required(only voluntary)
5% of relevant income 5% of $20000
Source:Hong Kong Fact Sheet: Mandatory Provident Fund Fact Sheet http://www.gov.hk/en/about/abouthk/factsheets/docs/mpf.pdfHong Kong MPF Schemes Authorityhttp://www.mpfa.org.hk/eindex.asp Finance glossaryhttp://www.finance-glossary.com/define/net-relevant-earnings/1006
Q3.5 MPF TRUSTEE & MPF SERVICE PROVIDER
Sylvia Sung and Radhika Mathur
MPF Trustee and Service Provider
MPF TRUSTEE MPF SERVICE PROVIDER
Trustees are in-charge of the security
Example - HSBC Provident Fund Trustee (HK) Limited
Service Providers are the officials that offer the clients the products and schemes
Example - Schroders
TRUSTEES REGISTERED WITH MPFA
19 trustees are registered with MPFA
Some of them include HSBC Institutional Trust Services (Asia) Limited, Principal Trust Company (Asia) Limited etc.
LIST OF SOURCESTrustees with MPFA-http://www.mpfa.org.hk/english/reg_use/reg_use_amt/reg_use_amt.asp
Schroders MPF Schemehttp://www.schroders.com.hk/retire/en/mpf-scheme.html
Q3.6:WHAT IS AN MPF INTERMEDIARY? HOW MANY ARE THERE, WHAT DO THEY DO, AND WHO REGULATES THEM?
MPF Intermediary
MPF Intermediary is someone who: In a position as an officer/agent/employee Passed an MPF Intermediaries examination recognized by the
MPFA
As of January 31st 2012: 29,555 registered MPF Intermediaries Corporate: 482 Individual: 29,073
Permitted to advise on insurance policies: 20,679 Permitted to advise on securities: 5,144 Permitted to advise on both securities and insurance
policies: 2,350 Permitted to sell MPF schemes without rendering specific
investment advice: 900
MPF Intermediary
A person or company that engaged in: selling MPF schemes advising clients on constituent funds or underlying
approved pooled investment funds of MPF schemes a representative or a corporation that issued with MPF
certificates upon registration with the MPFA supervised by one or more of the following regimes:
SFC regime/IA regime/MA regime
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
Q3.8:WHAT IS AN MPF SCHEME ANDIS THERE MORE THAN ONE KIND?
Mandatory Provident Fund(MPF)
Aging problem (28 % above 65 in 2039)
Birth rate dropped significantly Compulsory saving scheme Contribute monthly to the scheme
according to their salaries Aims to ensure the provision of
retirement protection
The types of the Scheme
Master Trust Schemes:-pool together contributions from various employers and their relevant employees, and self-employed persons
Employer-sponsored Schemes:-limited to relevant employees of a single employer and its associated companies.
Industry Schemes:-specially established for employees of the catering and construction industries
Referencehttp://www.mpfa.org.hk/eindex.asp
Q3.9:What is an MPF constituent fund
1. An investment fund
2. Part of a MPF scheme
3. Comprised of different Fund Classes
4. Each Fund Class is treated as a separate investment fund on the platform
Types of constituentFund Characteristics
Mixed Assets FundThe fund or a class of units of the fund invests no less than 70% of its assets in bonds and equities, with a specified maximum level of exposure to equity.
Bond FundThe fund or a class of units of the fund has no less than 70% of assets invested in bonds.
Equity FundThe fund or a class of units of the fund has no less than 70% of assets invested in equities.
Guaranteed FundA guaranteed amount of return of capital of the fund or a class of units of the fund will be paid to holders in future according to the features of the guarantee.
Types of constituent
Fund Characteristics
Money Market Fund - MPF Conservative Fund
The fund, previously known as the capital preservation fund, is essentially a money market fund investing in Hong Kong dollar based assets such as short-term bank deposits and high quality debt securities. The expenses of the fund are deducted based on a mechanism specified in the regulation.
Money Market Fund - non MPF Conservative Fund
The fund invests no less than 70% of its assets in short-term deposits and debt securities.
Others Funds that do not fit within any of the description above
Source: http://www.mpfa.org.hk/
Q3.10:How has the Mandatory Provident Fund performed over the past year, past five years,
and/or historically since it was launched?
Raksha SawarthiaYeon Soo Kwak
10 years ago
5 years ago
1 year ago
As at 31 March 2001
As at 31 March 2006
As at 31 March 2010
As at 31 March 2011
Enrollment Rates
Employers 82% 77% 100% 100%
Employees 92% 95% 100% 98%
Self-employed persons
90% 99% 74% 78%
Number of approved trustees
19
Number of registered
scheme
38 41
Aggregate Net Asset
value of all schemes
$15.694 billion
$164.61 billion
$373.31 billion
$378.28 billion
Annualized Internal rate of return for
the MPF system since 1 Dec 2000
6.99% 4.80% 5.40%
Resources
http://www.mpfa.org.hk/english/quicklinks/quicklinks_pub/files/2_MPF_AR1011_E.pdf
http://www.mpfa.org.hk/english/quicklinks/quicklinks_pub/files/stat_1.pdf
LABU 2052 – Finance CaseQ3.11: what do the terms
- Fund Expense Ratio(FER), and
- Fund Risk Indicator(FRI)
mean and how is each one calculated?
Daria SoDaniel Wong
Fund Expense Ratio (FER)
Definition 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
Fees and expenses include all administrative fees and other expenses.
How is it calculated?
• the expenses are built into the fund’s overall return
• they are almost hidden and people don’t really consider the effect they have
• Lower FER Higher returns
Fund Risk Indicator (FRI)
Definition
•Shows the risk of a Mandatory Provident Fund (MPF)
•Higher FRI Higher riskMeasurement of FRI:
• Standard deviation over a three-year period
• Shows the volatility of fund price around the average price
Usefulness:
• Suggests a trade off between risk and investment return
• Comparison between various funds Relative risk
The EndThanks for your attention
1) Age of 65 (Generally)2) Special Case early retirement at the age 60 permanent departure from Hong
Kong total incapacity
Q3.12:When and by whom can accrued benefits
be withdrawn from a member’s MPF?
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
Johnathan LeeMaggie Ng
Q3.13:MPFA: Suggestions that people should
consider when identifying retirement investment
goals
4 suggestions
1. Set clear investment goals
how much you would need
2. Assess your own risk tolerance
age, personality, financial status
3. Estimate your investment horizon
longer investment horizon = higher risk tolerance level
4. Adjust your investment portfolio at different life stages
different life stages , many changes
Important factors you need to consider when review your portfolio
investment objectives, instruments &assets of the funds
proportion of different investment instruments
market risks of the funds
Sources:MPFA - Look After Your MPF Investment:
http://www.mpfa.org.hk/textonly/english/mpf_edu/mpf_edu_laymi/mpf_edu_laymi_uyn/mpf_edu_laymi_uyn.html
Thank you
Q3.14:What should employees consider when choosing MPF funds?
Presented by Alan and Becky
Employees should select fund(s) that best match their investment objectives.
Factors for employees to consider: Years to retirement Years you will be investing in MPF before your retirement the impact that inflation has on your retirement nest egg, and
compounding effect will have over the long term the longer you have until retirement, the more risk you can afford
to take your portfolio can focus more on growth oriented equity funds
closer to retirement, wish to preserve your retirement nest egg more conservative type fund (eg.bonds )
Life cycle need What are your priorities at various stages in life in relation to your
investment goals Especially relevant to your voluntary contributions
Retirement goal How much do you need to enjoy a comfortable retirement
Risk tolerance All investments have risks Consider the investment objective and scope of the fund and
how much the related price fluctuation is going to affect you Again, one can normally afford to invest in growth oriented funds
with a higher price volatility if one has a long term investment horizon
References
Hong Kong Investment Funds Association MPF FAQ
http://www.hkifa.org.hk/eng/educationalmt_mpf_faq.aspx
The End