LegCo Subcommittee on MPF System
Information Note
Administrative Fees of the MPF System

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Purpose
Assessment of Annual Fees
Methodology of Assessment

Trustee Fees
Investment Fees
Compensation Fund Levy
Total Cost Impact
Analysis of Fee Assessment

• Requirements on Trustees
Economy of scale
Fees for MPFA
List of Major Duties of Approved Trustees under the MPF System

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Purpose

This paper sets out our preliminary assessment of the administrative fees of the MPF System.

Assessment of Annual Fees

2. We have estimated the annual fees to be borne by scheme members on the basis of the methodology set out in paragraphs 3 to 9. Our preliminary assessment is that the annual fees to be borne by a scheme member will be in the range of 1.6% to 2.4% of his assets.

Methodology of Assessment

3. In assessing the annual fees for MPF schemes, we have closely examined the existing fee structures of ORSO schemes. Except for the additional administrative and regulatory requirements of the MPF System, the operation of the MPF and ORSO Systems will be very similar. As such, the existing ORSO fee structures form a useful basis for our assessment of the MPF annual fees.

4. The methodology of the fee assessment is :

1. the ORSO fees of 1.5% - 2% (i.e. 0.5% - 1% administrative fees and 1% investment charges) form the basis of the assessment;
2. we add on costs for additional administrative and regulatory requirements not existing under the ORSO System;
3. we deduct costs in areas where requirements are streamlined under the MPF System in a way simpler than the ORSO System; and
4. we take into account the benefits of economy of scale resulted from the much larger membership under MPF.

5. We envisage that the MPF annual fees will consist of :

1. trustee fees;
2. investment fees; and
3. Compensation Fund levy.

Assessment of these three fee items are set out in paragraphs 6 to 9 below.

Trustee Fees

6. The trustee fees will cover the administrative expenses incurred by trustees as a result of MPF requirements. A list of the major duties of approved trustees under the MPF System is set out at .Annex A.

7. In assessing the quantum of MPF trustee fees, reference has been made to the existing operational requirements under ORSO as follows :

1. Similar requirements in the MPF and ORSO Systems : In terms of custodianship, record keeping, preparing annual reports, issuing annual benefit statements and withdrawal of benefits (items (a) to (e) of Annex A), the associated costs in both the MPF and ORSO Systems will be comparable.
2. Additional requirements under MPF System : In terms of such requirements as scheme enrolment, rectifying calculations of contributions and reporting default contributions, handling portability cases, providing enquiry facilities and internal control reporting (items (f) to (k) of Annex A), trustees may incur additional costs as a result of the new or more stringent requirements under the MPF System. However, part of these additional costs will be offset by the savings resulted from the streamlined MPF requirements (e.g. scheme registration and auditing requirements explained in paragraph 14 below) and the economy of scale derived from the large MPF membership (see explanation in paragraphs 17-18 below). Our crude estimate is that the costs incurred by trustees as a result of the additional MPF requirements will be about 6% to 8 % higher than that in ORSO. Translating this into fees and taking into account cost amortization, it represents an increase of about 0.06% of scheme assets during the initial years, reducing to no difference from ORSO when the MPF System becomes mature.
3. Professional indemnity (PI) insurance : The PI insurance is a unique requirement under MPF which does not exist in ORSO and unlikely to be able to benefit from the economy of scale. We estimate the cost of obtaining PI coverage to be 0.05% to 0.15% of scheme assets.
4. Fees payable to the MPFA : This includes fees payable by trustees to the MPFA for covering the operating expenses of the Authority. This will eventually be borne by scheme members through the annual fees. Having offset the annual ORSO scheme fees payable to the Registrar of ORSO, we estimate that, as the MPF System matures, only a very small additional fee (i.e. 0.05% to 0.2% on the assets of the MPF System) will be needed to support the MPFA.

Investment Fees

8. Investment fees cover the fees charged by fund managers to manage a portfolio of fund assets. As such, we envisage that the investment fees under the MPF schemes and ORSO schemes would be charged on a similar basis. At present, annual investment fees of ORSO schemes vary widely, ranging from 0.25 to 1% of a scheme member’s assets. However, an investment fee of about 1% is most commonly charged. Although we believe that competition and economy of scale in the future MPF market will drive the investment charges down to less than 1%, we take a conservative approach in this fee assessment exercise and assume that the investment fees of MPF schemes to be charged at 1%.

Compensation Fund Levy

9. Compensation Fund levy is unique to the MPF System and we propose to impose an annual levy at a rate of 0.03% of scheme assets.

Total Cost Impact

10. On the basis of the above assessment, we set out below a comparison of the total administrative and investment fees of ORSO and MPF schemes:

11. As seen from the above calculation, the total additional costs incurred as a result of the MPF requirements will only be minimal, which will be around 0.13% to 0.44% :

Analysis of Fee Assessment

12. The estimate in paragraph 10 shows that the additional annual costs to be borne by a scheme member in maintaining an MPF scheme will only be slightly higher than an ORSO scheme. This is due to :

1. streamlined administrative and regulatory requirements on scheme trustees;
2. economy of scale; and
3. low level of fees payable to the MPFA.

Requirements on Trustees

13. In designing the MPF System, every effort has been made to make the System as simple and cost effective as possible. In fact, there are areas where :

1. the requirements under MPF are simpler than those of ORSO (see paragraph 14 below); and
2. where the administrative procedures and regulatory requirements are streamlined to minimize the additional burden on MPF approved trustees (see paragraphs 15 and 16 below).

Requirements that are simpler than those of ORSO

14. There are a number of areas where the MPF requirements are even simpler than those of ORSO, for example :

1. Scheme registration : Under ORSO, separate registration is required for each participating employer unit in a pooled agreement. Under the MPF System, we propose to register schemes at the master trust level without the need to register the individual employer units;
2. Self-certification : ORSO scheme registration requires certification by external solicitors and auditors. This is not required for MPF scheme registration; and
3. Accounting and auditing requirements : In ORSO pooling agreements, preparation of annual accounts and auditing are required for each participating employer unit. Under MPF, auditing requirement is only mandated at the master trust level for master trust schemes.

All the above will reduce the volume of administrative work and the costs for trustees significantly.

Streamlined requirements

15. Due to its mandatory nature, we recognise that, in some areas, the proposed MPF System have more stringent administrative requirements than the ORSO System. However, such additional requirements are already kept to a minimum in order to minimize the costs to trustees and the MPFA, for example :

1. Contributions : Trustees will not be required to verify the calculation of the relevant income of each employee which may fluctuate each month. Instead, we rely on the employers to calculate and employees to cross check;
2. Default contributions : The mechanism of reporting default contributions to the MPFA by trustees and imposing fines on the default employers by the MPFA is designed in a way that will be activated automatically so as to reduce unnecessary correspondence and communication between the parties involved; and
3. Portability : Record transfers among trustees in a portability case is reduced to only the prescribed portability application form which will contain the most essential information of the scheme member.

It will be difficult to further streamline the administrative requirements in order to reduce the costs meaningfully.

16. Being a mandatory system, the regulatory requirements in the MPF System will unavoidably be more extensive as compared to ORSO. The most important regulatory requirements imposed on MPF trustees which will incur additional costs are the arrangement of PI insurance and reporting and disclosure requirements to the MPFA and to scheme members. However, the regulatory requirements are already minimized without sacrificing the protection of scheme assets. We do not suggest further simplification of the requirements because :

1. the proposed requirement regarding PI insurance represents a fine balance between costs and security of assets;
2. the disclosure requirements can potentially be costly. However, transparency of the System is most important to enable a scheme member to understand the financial position of his MPF account and the overall scheme. We also believe that economy of scale under the MPF System will help to drive down the additional costs incurred; and
3. the cost implication of the reporting requirements to the MPFA will not be unreasonably high provided that the frequency and amount of information required are reasonable and be communicated through advanced information system.

Economy of scale

17. As at 31 December 1996, out of a total of 14,923 ORSO schemes, 14,281 (i.e. 96%) are operating under the pooled arrangement which is similar to the master trust arrangement in the future MPF market. This covers a membership size of about 465,000. Amongst these schemes, 6,380 schemes (i.e. 43%) have less than 10 employees. In such a pooled arrangement environment, the service providers can still provide ORSO products suitable for small units at an affordable fee level.

18. The MPF System will be participated by more than two million members of the workforce who are not yet covered by ORSO at present. As most of them are employed in relatively small establishments, we expect that a majority of them will be participating in the master trust schemes under the MPF System. The client base of the MPF master trust schemes will therefore be much larger than that of the existing ORSO pooled arrangement. Hence, whilst service providers may incur additional costs as a result of MPF requirements, such additional costs will be offset to a large extent by the benefits of economy of scale resulting from the larger membership size of the MPF master trust schemes.

Fees for MPFA

19. It is our intention that the future MPFA will be self-financing in the long-run, with government capital injection of $5 billion. We intend to charge the trustee annual fees as a percentage of scheme assets which will be used towards the operating expenses for the Authority. We envisage that the fees will be translated into scheme expenses and will be borne by scheme members eventually.

20. It is important to keep the operating expenses of the MPFA low so that it will not become a heavy burden to scheme members. We recognize that the regulatory role of the MPFA in the MPF System will be more important than that in ORSO due to the mandatory nature of the System. However, we have designed the MPF System in such a way that the structure of the MPFA will remain slim :

1. Role of MPFA : The role of MPFA will remain supervisory, while the responsibility of operating MPF schemes should rest with service providers. At the early stage of implementation of the System, enforcement efforts of the MPFA will be more intensive and considerable resources will also required in launching large scale education programmes. As the MPF System matures, the operation of the MPFA will be streamlined; the MPFA’s coordination and communication with service providers will improve significantly; employers and employees will understand the operation of the System better. These factors will help improve the efficiency and effectiveness of MPFA’s supervisory function. The operating costs of MPFA can therefore be maintained at a reasonable level.
2. Streamlined administrative procedures : Procedures regarding scheme registration, recovery of default contributions and reporting requirements by trustees will be streamlined to minimize the workload of the MPFA. Advanced information systems will be used to facilitate communication between trustees and the MPFA.

21. We have conducted a very preliminary estimate of the recurrent expenses of the future MPFA, which will approximately be HK$ 300 million - $350 million annually (at 1996 price). However, during the early years of the operation of the MPF System where the asset size of the System is still meager, a small percentage fee will not be adequate to recover all the operating expenses of the MPFA, including initial setting up costs of the Authority. It would not be in the interest of scheme members to set the fee at a rate for cost recovery of all the expenses at this stage. For this reason, we intend to make use of the Government injected capital of HK$5 billion (subject to approval by Finance Committee of LegCo) to subsidize the initial set up and the operating costs of the MPFA until the MPF System matures.

Mandatory Provident Fund Office
Financial Services Branch
8 April 1997

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Annex A

List of Major Duties of Approved Trustees under the MPF System

1. Arranging for custodianship of scheme assets
2. Maintaining MPF records
3. Annual reports and other reporting requirements
4. Issuing annual benefit statements
5. Processing benefit withdrawal
6. Scheme registration and enrolment
7. Rectifying calculation of contributions
8. Reporting default contributions
9. Handling portability cases
10. Providing enquiry facilities
11. Internal controls reporting requirements
12. Annual auditing requirements

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