The Mandatory Provident Fund Schemes (Amendment) Bill 2015 has been introduced to the Legislative Council, following earlier consultations conducted by the Mandatory Provident Fund Schemes Authority (MPFA), with a view to improving the arrangements for Mandatory Provident Fund (MPF) members who have not made a choice of investment funds (default scheme members).
The Bill proposes to mandate each MPF trustee to provide a highly standardised and fee-controlled Default Investment Strategy (DIS) in each MPF scheme.
In substance, the DIS contemplates two constituent funds (DIS constituent funds) to be set up under each MPF scheme:
- Core Accumulation Fund - a mixed asset constituent fund which targets to invest 60% of the net asset value in higher risk investments (i.e. predominantly in global equities) and 40% in lower risk investments (i.e. predominantly in global bonds), whereas actual exposure to higher risk investments may vary between 55% and 65% of the net asset value; and
- Age 65 Plus Fund - a mixed asset constituent fund which targets to invest 20% of the net asset value in higher risk investments and 80% in lower risk investments, whereas actual exposure to higher risk investments may vary between 15% and 25% of the net asset value.
The accrued benefits of a default scheme member who is between the age of 18 to 49 will be invested in the Core Accumulation Fund only. From the age of 50 onwards, his accrued benefits in the Core Accumulation Fund will be gradually switched to and completely invested in the Age 65 Plus Fund by the time he reaches 65.
A statutory fee control mechanism will be introduced, mandating that a DIS constituent fund must not charge total “fees” higher than the prescribed maximum level, at an annual rate of 0.75% of the net asset value of the relevant DIS constituent fund. Such fees are inclusive of fees paid to the trustee, administrator, investment manager, custodian and their delegates and the sponsor and promoter of the MPF scheme and the same types of fees chargeable to underlying funds in which the DIS constituent funds invest.
During the transitional arrangements, existing default scheme members will be given a 42-day opt-out period. If no reply has been received from them by the expiry of such period, their accrued benefits will be transferred to and invested into the DIS within 14 days after the opt-out period.
In terms of timing, the aim is for the DIS to be launched before the end of 2016 and it is expected that the DIS arrangements will be fully implemented by the end of third quarter of 2017.
From a practical perspective, trustees and sponsors of MPF schemes should start planning for the DIS by structuring the DIS constituent funds to be established and considering the necessary amendments to the governing rules to provide for the DIS. At the approved pooled investment fund (APIF) level, new sub-funds may be established for investment by DIS constituent funds. These APIFs may invest directly into global equities and bonds or invest in other APIFs or in index tracking collective investment schemes to obtain exposure to global equities and bonds.