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

HKSAR Governme

nt

MPFA

MPF ORSO

Q3.2 Who supervise the MPF industry?

MISSION

O Established in September 1998

O Under Mandatory Provident Fund Schemes Ordinance

O To ensure the provision of retirement protection for

Hong Kong's workforce

Role

O to be responsible for ensuring compliance with the MPFSO;

O to register provident fund schemes as registered schemes;

O to approve qualified persons to be approved trustees of

registered schemes;

O to consider and propose reforms to the law relating to

occupational retirement schemes or provident fund schemes;

O to exercise such other functions as are conferred or imposed

on the MPFA by or under the MPFSO or any other Ordinance.

Q3.3 Which sections of the working population are required to contribute to

the MPF?• All employees and self-employed people aged 18 or above and below age 65 e.g, regular employees who are employed for a continuous period of not less than 60 days either full-time or part-time, casual employees who work in the catering or the construction industries, and are employed on a day-to-day basis or for a fixed period of less than 60 days, or those who earn an income from the production or trade of goods or services, in a capacity not as an employee (i.e. self-employed).• Residing and working in Hong Kong or, • Hong Kong resident employed from Hong Kong working overseas for a limited

period and engaging in business which is sufficiently connected to Hong Kong, and a person who is employed in Hong Kong but working outside Hong Kong temporarily.

• Source: http://www.gov.hk/en/about/abouthk/factsheets/docs/mpf.pdf http://www.mpfa.org.hk/eindex.asp

Who is not required to contribute to the MPF?

• Those who are covered by statutory pension or provident fund scheme

e.g. civil servants who receive pension, judicial officers and teachers in subsidized schools• Employees covered by occupational retirement scheme• People from overseas who get permission to work in HK• for less than 13 months / who are not members of retirement

scheme in HK• Those who work in European Union Office• Domestic Helpers• Self-employed hawkers

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

Q3.4:Basic Concepts

• Relevant income: all payments in monetary terms, but excluding severance payments and long service payments

• Calculation: 5% of relevant income, subject to the maximum of $20,000 and minimum of $6,500 per month

• MPF salary cap: Contribute up to $1000 for both employer and employee

Example

• Supposed you earn $12,000 monthly for your first job…

Your contribution = $12,000×5% = $600

• Supposed you earn $22,000 monthly after a salary increase…

Your contribution = $20000×5% = $1000

Reference:http://www.mpfa.org.hk/english/abt_mpfs/abt_mpfs_fms/abt_mpfs_fms_con/abt_mpfs_fms_con.html

Q3.5 MPF Trustee and MPF Service Provider

• Approved MPF trustees are responsible for the administration and management of MPF schemes.

• They have to comply with the provisions of the MPF legislation

• Monitor legislative changes and evaluate their effects on

the to administrate the fund

• Conduct valuations of fund assets

• Prepare accounts and to audit reports

• They may delegate part of their functions to other service providers.

Number of MPF trustee registered with the MPFA

• As at 25 Feb, there were 16 approved trustees.

• American International Assurance Company (Trustee) Limited

• AXA China Region Trustees Limited• Bank of East Asia (Trustee) Limited• ING Pension Trust Limited• http://www.mpfa.org.hk/english/reg_use/re

g_use_amt/reg_use_amt.asp

• ‘Q3.6 MPF Intermediaries are…

• people who are engaged in– Selling MPF schemes; or– provides advices to clients on constituent funds or

underlying approved pooled investment funds of MPF schemes

• excludes lawyers, professional accountants or actuaries

• 29,555 registered MPF intermediaries(31 Jan)

― 482 corporates

― 29,073 individuals

Retrieved from: http://www.mpfa.org.hk/english/quicklinks/quicklinks_sta/quicklinks_sta_sh.html

• Regulators

• Mandatory Provident Fund Schemes Authority (MPFA)

• Hong Kong Monetary Authority (HKMA)• Securities and Future Commission (SFC)• Insurance Authority (IA)

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

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%

Q3.11 Fund Expense Ratio (FER)-What ? How?

% of all expenses in an asset funde.g. Administrative, management, advertising (12b-1fee in US)EXCLUDE brokerage commissions, foreign exchange losses, taxesAnother Factor influencing FER: - size of the fund (small funds have higher FERs)FER (=1% per annum) means that each year 1 % of the fund’s total assets used to cover the expensesNOT necessary to show the Ratio for funds with less than 2 years

FER (%) = direct expense (%) + underlying fund costs (%) +/- any adjustments permitted or required by the Authority in any individual case

04/09/2023

Fund Risk Indicator (FRI)

Definition: An indicator of the risk of your MPF fund (The higher the FRI, the higher the risk).

Measurement: An annualized standard deviation based on the monthly rates of return of the fund over the past 3 years to the reporting date of the fund fact sheet.

Importance: A strong relationship between the level of risk and the likely returns over the longer term.

Reminder: The risk indicator is of most value when making comparisons between funds ---- relative risk.

24

Reference

http://cplatform.mpfa.org.hk/MPFA/english/glossary.jsp#ferhttp://www.mpfa.org.hk/english/leg_reg/leg_reg_cod/files/Disclosure_Code_4th.eng.pdfhttp://en.wikipedia.org/wiki/Expense_ratiohttp://www.mpfa.org.hk/english/leg_reg/leg_reg_sta/files/PPS_HKTA_HKIFA_April.2007__Clean.pdf

Q3.12 When and by whom can accrued benefits be withdrawn from a

member’s MPF?

By Steven Tsoi Wilson Pang

By employee himselfNormal retirement: At age 65Early retirement: At age 60Total incapacitySmall 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

By personal representative of the estateDeath (note that the MPF will be regarded as

part of the member's estate and can be claimed by the personal representative of estate)

Q3.13:The MPFA makes four suggestions that people should consider when identifying their

retirement investment goals. What are they?

1. Set clear investment goals

Work out how much you would need, including all cost of living ,medical expenses to live on annually after retirement. (consider inflation to prevent underestimation)

You can live for as long as 20 or 30 years in retirement, so take that into consideration when setting your goals.

2. Assess your own risk tolerance level

Factors e.g. age, personality, financial status of yourself and that of your family would all have to be considered when deciding how much risk you could tolerate with your MPF investment.

If you can take more risks, you can consider a more aggressive investment portfolio which may yield higher returns, thus allowing you to achieve your goals sooner.

3. Estimate your investment horizon

The longer your investment horizon (i.e. retirement is still a long way off), the higher your risk tolerance level will be, and as such, the more aggressive investment portfolio you can afford.

Conversely, if your investment horizon is relatively short, it will be more appropriate for you to choose an investment portfolio with lower risk, such as those that aim at preserving capital.

4. Adjust your investment portfolio at different life stages

Your MPF investment horizon could span tens of years during which you would experience different life stages and face many changes. Reviewing and adjusting your investment portfolio at appropriate times could facilitate the achievement of your investment goals.

Question 3.14What should employees consider when

choosing MPF fund?

When Choosing MPF FundsPersonal Profile

What is your financial situation?How long until you plan to retire?What are your investment goals?What is your risk tolerance level?

When Choosing MPF FundsFund Profile

What is the fund’s size and when was it launched?What are the funds’ investment objectives and

instruments?What is the fund’s portfolio allocation and top 10

holdings?How has the fund performed, in recent years and

since inception?What is the fund’s risk indicator?What is the fund’s fee expense ratio?Source: www.mpfa.org.hk/english/mpf_edu/mpf_edu_laymi_uyn.html