On 24 June 2014, the Government and the Mandatory Provident Fund Schemes Authority (MPFA) launched a public consultation on the proposal to enhance the regulation of default arrangements in MPF schemes by introducing a "core fund" as the standardised low fee default fund on all MPF schemes.
Currently, MPF schemes have different default arrangements (with varying risk and investment outcomes) for members who do not choose their constituent funds (CFs). Under the proposals, such members would have their contributions invested into the core fund.
Key features of the proposed core fund include:
- It must be based on standardised default funds.
- The investment approach should be to balance long-term risks and returns in a manner appropriate for retirement savings.
- It should be good value, in particular, its fee must be kept at 0.75% of fund assets and in the medium term, the fund expense ratio (FER) should be kept at or under 1%.
- It is available to all MPF Scheme members to choose.
In order to reduce investment risk automatically as members approach retirement age, it is proposed that the investment approach for the core fund should be either a series of target date CFs (each targeting a different retirement year) or a combination of life cycle CFs (automatically set to adjust the proportion of the members' contributions over time to reduce risk). This strategy would be globally diversified in relation to geography and asset class with a principal focus on traditional equities and bonds. The MPFA is seeking to work with the industry on the technical details of this approach.
The MPFA is also seeking feedback on the proposal for the core fund fee to be kept at 0.75% of the assets and the FER at or under 1% over the medium term. It is also proposed that in order to keep costs low the core fund should use predominantly passive investment strategies and, where appropriate, different MPF schemes should invest in the same underlying approved pool investments funds, rather than just using those within their own group.
In term of implementation, members who have not previously made a choice of constituent fund would be notified in advance and given opportunity to make an investment choice, failing which, they will be invested into the new core fund.
The MPFA believes that the core fund (as the standardised default fund) will become a benchmark for MPF fees and performance. The three-month public consultation will end on 30 September 2014 with the Government and the MPFA aiming to launch the core fund by 2016.