MPF Part 3: The Bloated Regulator
11 February 2007
Perhaps the most ridiculous thing about the Mandatory Provident Fund Schemes Authority (MPFA) is the endowment of HK$5bn (US$641m) it was given by Government when it was set up. This is just a regulator, and yet it has more net assets than most listed companies. As shown in the MPFA financial statements, in the year to Mar-06, it had operating expenses of $203m, and net assets of $5,378m. Virtually all of those net assets comprise investments and cash, with just $12m in fixed assets. Even if the returns on that portfolio do no more than keep up with inflation, it would still be enough to operate for the next 26 years without any fee income.
About a quarter of the money is in listed equities. Managing the stash is a task in itself - there is a non-executive Finance Committee which meets twice a year and oversees an internal management team and three external fund managers. Investment expenses alone were $15.2m last year, and that probably excludes the internal asset management staff.
Last year, the MPFA's fee income was just HK$8.9m, only enough to cover 4% of its expenses. This means in effect that the Government, through the MPFA, is subsidising the MPF industry to the tune of $194m per year and rising. Section 22B of the MPF Ordinance actually requires trustees (there are currently 19) to pay the MPFA an annual registration fee to cover its expenses, but the MPFA has been waiving this fee by setting it at zero ever since the MPFA was established. Enough is enough. The annual registration fee should be charged as the law intended. At current levels, the fees would be equivalent to about 0.1% of the $202bn funds under management. If that sounds like a lot, then blame the inefficiencies of the MPF scheme. In the MPFA accounts, there's no divisional breakdown of how they spend $203m, but we would guess that a lot of it goes to the Enforcement Division in handling complaints from employees about non-payment or non-enrolment in MPF (10,285 complaints last year), investigating and prosecuting offenders. The MPFA also had to handle 161,428 enquiries last year, 97% by phone.
When the MPFA was founded in 1998, the funds in the schemes were zero, and it may have been difficult to get the industry to pay for it. The Government probably wanted to minimise the potential for the Legislative Council to disrupt the MPFA's funding, so rather than grant an annual subsidy, it granted an up-front endowment. That was a big mistake on two counts. First, $5bn was grossly excessive, because the MPFA only needed enough money to survive its early years until the industry was established enough to pay the annual registration fee. Second, the money should have been lent to the MPFA instead, so that the industry could pay it back over time, following the principle of user-pays.
If the Government chooses not to abolish the MPF, then obviously we still need the MPFA to regulate it, but it should return $5bn of surplus capital to the Government and stop waiving the annual fees which should cover its costs. The remaining $378m would be more than enough reserves to handle fluctuations in fee income.
By comparison ,the Securities and Futures Commission, a much larger regulator which had expenses in the year to Mar-06 of $497m, had reserves at 31-Mar-06 of $1.21bn, up from $0.86bn a year earlier, as a result of a huge surplus from levies on the bull market. The Government has cut the SFC's levy rate by 20% this year. Still, the SFC's swollen balance sheet was only a quarter of the size of the MPFA's.
Compensation Fund
We should also mention that apart from the $5bn stuffed into the MPFA at inception, another $600m of public money was put into a compensation fund, in case any of the MPF providers defraud their customers, and their insurers fail to cover the loss. Supplemented by a annual levy of 0.03% on the each fund in the MPF, amounting to $49m last year, this fund has grown to $932m without a claim. As the compensation fund has now exceeded its original target level of $900m, the levy for that can end, unless they plan to use the surplus to repay the $600m to the Government.
There's a case for scrapping the compensation fund anyway, because like the HKMA's Deposit Protection Scheme or the SFC's Investor Compensation Fund, it creates a moral hazard - consumers then care less, or are careless, about the honesty of their financial intermediaries or the quality of the fidelity insurance. Through the levies on their assets, those who do take care are subsidising those who don't. Unfortunately, in the case of the MPF, this argument is undermined by the fact that the trustees and fund providers are generally chosen by the employers, not the employees to whom the assets belong. Until that changes, the compensation fund will have to stay.
© Webb-site.com, 2007
Organisations in this story
Sign up for our free newsletter
Recommend Webb-site to a friend
Copyright & disclaimer, Privacy policy