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