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

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

Q3.4 LABU Presentation

What does ‘relevant income’ mean, how are contributions calculated, and what is

the MPF ‘salary cap’?

Relevant income

• refers to all payments in monetary terms given to employees

• wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance

• including housing allowance or other housing benefit, but excluding severance payments and long service payments.

Calculation of MPF Contribution

• Calculate individual employee's relevant income and the amount of MPF contribution for each contribution period

• Deduct the contribution from the employee's income

• Pay the employer's contribution from employer’s own funds for the employee's benefit

• Employees can choose to contribute more than they are expected to the fund

Contribution Holiday and Periods

• Period of time employer does not contribute to the pension fund

• Employers' contributions count from the first day of employment

• Employee not required to make contributions for first 30 days of employment and first payroll cycle immediately following the 30-day contribution holiday

MPF Salary Cap

• 20,000 per month in Hong Kong• People want to raise it to 33,000

Q3.5:What is the difference between an MPF trustee and an

MPF service provider?Trustee

Appointed by other companies

duties to comply with standards and guidelines

Service Providerinvestment managers, custodians and scheme administrators

SERVICE PROVIDERS

TRUSTEES

What is the difference between an MPF trustee and an MPF service

provider?Trustee

administer, manage, and maintain all MPF schemesService Provider

trustee delegates part of their functions to

other service providersTRUSTEES

SERVICE PROVIDERS

How many MPF trustees are registered with the MPFA?

As of 25 Feb 2012, there are 19 MPF trustees registered with the MPFA.

Source: http://www.mpfa.org.hk/english/reg_use/reg_use_amt/reg_use_amt.asp

Q3.6:MPF IntermediaryVirina Vaswani, Vicky

What is an "MPF intermediary"?

"Mandatory Provident Fund"

an individual, a firm, partnership, corporation and its directors

Two Types of MPFs:

1. "Corporate intermediary"

2. "Individual intermediary"

What do they do?• sell MPF schemes

• advise clients

MPFA regulates them with a decentralized and coordinated approach

Hong Kong has a rapidly aging population and most of our workforce do not have any form of retirement

protection. Recognizing the need to provide for the long term financial security of our workforce, the

Hong Kong SAR Government has implemented the Mandatory Provident Fund system in year 2000.

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 and is there more than one kind?

By Angel Lok & Axl Wong

What is an MPF scheme? MPF = Mandatory Provident Fund

Implementation of MPF system – 1 Dec, 2000

Compulsory saving scheme for retirement of HK members of the workforce aged between 18 – 65

Divides the workforce into regular employee, casual employee, and self-employed persons

Monthly contribution of employee and employer - 5% of “relevant income”(self-employed: monthly or yearly basis)

Can make extra, voluntary contributions

Contributions are entrusted to privately managed

trustees approved by the MPFA eg. Principal HK

Types of MPF schemes

Master Trust Schemes - most common

- open to relevant employees of participating employers, self-employed persons, etc.

Employer-sponsored Schemes

- open to relevant employees of a single employer and its associated companies

Industry Schemes

- employees of the catering and construction industries

- no need to change schemes if you change job

Sourceshttp://english.people.com.cn/english/200012/0

1/eng20001201_56697.html

http://www.mpfa.org.hk/english/abt_mpfs/abt_mpfs_bgd/abt_mpfs_bgd.html

http://en.wikipedia.org/wiki/Mandatory_Provident_Fund_(Hong_Kong)

Q3.9: MPF constituent funds

What is an MPF constituent fund and what different types of constituent funds are available for employees to choose from?

Mandatory Provident Fund is a compulsory saving scheme (pension fund) for the retirement of residents in HK.

Introduced on 1 December 2000

Cover all employees aged over 18 and under 65 with exemptions

Mandatory contributions of 5% of earnings each by employee and by employer

Earnings subject to a current minimum limit of HK$5,000 p.m. and a current maximum limit of HK$20,000 p.m., and excludes housing allowances/benefits

Mandatory contributions are immediately 100% vested with employees, portable on change of employment, preserved until retirement

Full benefits paid on retirement, death, disability, permanent departure from Hong Kong

Minimum of 30% of investments must be held in HKD denominated assets

TypesInvestment Objective Investment

InstrumentRisk Level

MPF Conservative Fund To earn a rate of return similar to the Hong Kong Dollar savings rate

Short-term bank deposits and short-term bonds

Relatively low

Money Market Fund To earn a rate of return comparatively higher than that of bank deposits or short-term certificates of deposit

short-term interest bearing money market instruments such as short-term bank deposits, government bills or commercial papers

Relatively low

Guaranteed Fund To provide a guarantee on the capital invested, or to achieve a guaranteed rate of return

Bonds, stocks or short-term interest bearing money market instruments

Relatively low(but also depends on the guarantee conditions)

Bond Fund To earn stable income from interest and coupon rate and make profits from bond trading

Bonds Low to medium

Mixed Assets Fund To achieve capital appreciation over the medium-to-long term

Stocks and bonds Medium to high

Equity Fund To achieve capital appreciation and a return higher than inflation over the long term

Stocks Relatively high

Index Fund To earn a rate of return similar to that of the market index that the fund replicates

Stocks Medium to high

Q3.10 Labu presentation

How was the Mandatory Provident Fund performed over the past year, past five years, and/or historically since it was launched?

MPF performance: two ways of looking at performance

• Year on year, quarter on quarter, month on month – useful, with some recognition of risk, for assessing investment managers and products.

• Regular saver’s return, the cumulative result of investing a regular sum each month – relevant from an MPF member’s point of view.

Last year

• Sharpdaily Newspaper• Recorded –ve growth (-8.4%)• Was the worst performed since 2008 financial

tsunami • Each employee lost around $12,000 for this

investment• Very poor due to unstable international

circumstances

MPF performance - the results, a point to point view

• For Balanced Funds – median returns• 2001 - 13.3% poor• 2002 - 10.1% poor• 2003 +26.2% good• 2004 +12.9% good• 2005 + 8.8% fair• Cumulative +20.0%, Annualised +3.7%

Q3.11: Fund Expense Ratio (FER)The total percentage of fund assets used

for expensesExpenses include administrative,

management, advertising, etc.An expense ratio of 1% per annum means

that each year 1% of the fund's total assets will be used to cover expenses

FER =Sum of ExpensesTotal Fund Assets

Fund Risk Indicator (FRI)Indicates the risk of the MPF fund. Higher FRI = Higher the risk = Greater

volatility of returnProvided in the Fund Fact Sheet Help to choose the risk you like to take in

your MPF investmentNo universal standard for benchmarking the

level of risk based on the Fund Risk IndicatorMainly used for relative comparison.

CalculationCalculated as the annualized standard

deviation Based on monthly rates of return of the fund

over a 3-year periodCalculated to two decimal places

= The rate of return of the fund for each full month of the measurement period

= The average monthly rate of return of the fund over the measurement period

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

• Retirement age of 65 years• 60 years of age and permanently ceasing the

employment or self-employment• Permanently departing from Hong Kong• Total incapacity• Death• Meeting small balance provisions (less than

HK$5,000)

Who can get the MPF:• Employee• Guardian (death, mentally incapacitated)

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

Q3.13: 4 SUGGESTIONS ABOUT IDENTIFYING RETIREMENT INVESTMENT GOALSMADE BY THE MPFA

• Set clear investment goals Work out how much you would need include all cost of living ,medical expenses, cost

of inflation

• Assess your own risk tolerance level Factors (age, personality, financial status )of

yourself and your family Take more risks a more aggressive investment

portfolio (may yield higher returns)achieve goals sooner.

• ESTIMATE YOUR INVESTMENT HORIZON

•Adjust Your InvestmentPortfolio at different life stages

The Longer the horizon, the higher the risk tolerance level will be and more affordable for a more aggressive investment portfolio.

Reviewing and adjusting at the appropriate time facilitates the achievement of investment goal.

Aggressive

Growth

Balanced

Moderate

Conservative

http://www.axa.com.hk/html/AXA_PRO/eng/mpf_eb/mpf/mpf_risk_profiling_assessment.html

By Fiona & Jerry

Q3.14

WHAT SHOULD EMPLOYEES CONSIDER WHEN CHOOSING MPF?

Personal Circumstances

1. Years to retirement

How many years to go

Inflation

Affordable risk

2. Life cycle need

Priorities

Voluntary contributions

Personal Circumstances3. Retirement goal

OR

4. Risk tolerance

Always fluctuation

THANK YOU!

Reference: http://www.hkifa.org.hk/eng/educationalmt_mpf_faq.aspx#4