EMPLOYER ACTION CODE: ACT

The introduction of a new government-required Default Investment Strategy (DIS) within Mandatory Provident Funds (MPFs) as of April 1, 2017, has significant investment risk/strategy and fund cost implications for both employees and employers. In effect, the DIS imposes an investment decision on members who do not make an investment selection. Given the possibility of investment losses in the DIS funds, employers will want to be sure their employees understand and are well prepared for the change.

As background, employers in Hong Kong (with a few grandfathered exceptions) are required to provide an MPF defined contribution plan for their employees. The MPF is administered by private providers designated as approved MPF trustees. At a minimum, employers and employees are each required to contribute 5% of covered pay to the designated MPF.

KEY DETAILS

The DIS is a highly standardized, ready-made investment strategy designed to be a default investment option for MPF plan members who cannot or do not actively choose their own investment funds.

  • The DIS has a prescribed asset allocation, using the member’s age as the sole determining factor in reallocating assets over time.
    • For members below age 50, the DIS will be entirely invested in a Core Accumulation Fund consisting of 60% global equities and 40% global bonds.
    • For members age 65 and above, the DIS Age 65 Plus Fund consists of 20% global equities and 80% global bonds.
    • Between ages 50 and 65, the asset allocation is adjusted annually to smoothly reduce the equity allocation and increase the bond allocation.
  • Members can also actively choose to invest a portion of their MPF assets in the DIS or in its two component funds.
  • The DIS is subject to fee caps set by regulations, which are likely to result in lower fees than for most existing funds. For all MPF funds, fees are paid by the members.
    • DIS management fees (including trustee, administrator, custodian and investment management, among others) are capped at 0.75% of assets.
    • DIS out-of-pocket expenses for administration costs that may not be included in management fees (e.g., annual audit costs) are capped at 0.20% of assets.
  • For members who do not proactively select their investment funds within a prescribed period, their MPF account balances in any current default investment funds will automatically be transferred to the new DIS.

EMPLOYER IMPLICATIONS

Employers should proactively communicate with employees to ensure they understand the changes and the potential investment risks associated with the DIS. Pertinent actions include:

  • Schedule timely member briefing sessions and consider supplementary internal communication (e.g., via company intranet) to highlight details of the DIS to employees.
    • The introduction of the DIS is an opportune time for existing MPF members to revisit their investment options.
    • The DIS component funds may appear similar to existing fund options (e.g., a balanced fund with similar asset allocation), but in reality they could be very different (e.g., fee cap, investment approaches, managers used, active versus passive strategy, geographical compositions).
  • Ensure HR understands DIS details. As a first step, HR may wish to understand:
    • How the newly introduced funds under the DIS compare with existing mixed asset funds and target-date funds
    • How the existing default fund strategy compares with the DIS, especially if the existing default fund is a guaranteed fund
    • The detailed implementation process and the critical timeline in relation to MPF enrollment, investment selection and procedures
  • Work with the MPF provider to understand the overall fund distribution profile selected by employees, especially how many existing default fund members may potentially be affected by the introduction of the DIS.
  • Ensure that the updated MPF plan “welcome pack” with new enrollment forms is available for use after April 1.
  • As a follow-up step, employers may wish to review their existing retirement policies and make adjustments, as appropriate. For example, those employers still offering an Occupational Retirement Schemes Ordinance (ORSO) plan may wish to consider whether this is still appropriate and whether adding lower-fee, passively managed funds within their ORSO plans is an option.