ETFs set to be high on the menu for Hong Kong pension funds

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Asset managers in Hong Kong could have a greater incentive to launch lower-cost passive solutions following the rollout of the digital platform for the local pensions sector, industry experts tell Ignites Asia.

The eMPF, a digital version of the territory’s Mandatory Provident Fund retirement scheme launched in June 2024 after years of development, with all of Hong Kong’s 24 retirement saving schemes scheduled to join the platform by the end of 2025.

The new platform looks to address long-standing criticisms of the territory’s retirement system by bringing down its notoriously high fees, which could help to improve investment returns.

Moving all schemes on to a single non-profit digital platform is expected to drive down average administrative fees for the HK$1.29tn ($166bn) MPF system by more than 50 per cent over 10 years, leading to estimated savings of between HK$30bn and HK$40bn.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Marie-Anne Kong, Hong Kong-based partner and asset and wealth management industry leader at PwC, said the rollout of the eMPF had led to a number of fund managers becoming interested in launching products for the Mandatory Provident Fund.

Scheme administrators might suffer a “loss of revenue” as the eMPF took over a service for which they had previously been remunerated. However, asset managers saw opportunities to offer new MPF pension products without the complexity of having to be the sponsor for a specific scheme, she noted.

The digital eMPF platform also aimed to allow “full portability” of MPFs, under which individuals would be able to transfer the accrued benefits from employer mandatory contributions to a scheme of their choice.

Francis Chung, chair of MPF Ratings, said this could lead to increased competition to offer pension products that better catered to member needs.

“Lower fees is a key consideration, fund choices too, so MPF scheme sponsors will need to be creative in balancing low fees and new product ideas,” said Chung.

“From that perspective it could open up the market for lower-cost instruments such as ETFs.”

In a study spanning the years from 2008 to 2024, researchers at Hong Kong university found that the MPF system had underperformed net of fees, “compared to what investors could achieve by opening a discount brokerage account and managing their own asset allocation”.

Aggregate and per capita fees had kept rising, due to fund expense ratios falling more slowly than the asset base had grown, they said.

One of the ongoing obstacles to improving MPF’s returns was the lack of low-cost index-tracking funds including ETFs, found the researchers.

“The first thing missing in the MPF system is low-cost index funds,” said the researchers, noting that higher-fee actively managed funds still dominated product offerings, while there were “surprisingly few” passive fund options such as ETFs.

Traditionally, launching passive index-tracking MPF products has not been attractive for fund managers or scheme providers.

“It’s not just about the MPF, but generally, passive is not yet as popular in Hong Kong when compared to in the west,” said PwC’s Kong.

Kong said that this was partly due to Hong Kong’s “heavy reliance” on intermediaries to sell funds, including in the MPF system, which had 38,530 individual intermediary agents as of December 2024.

Intermediaries did not earn fees for ETFs as these could be bought easily on the exchange, she noted.

New MPF constituent funds are now required to consider index-tracking investment options when applying for approval, with the MPFA now asking trustees to explain “why the index fund option is not used for obtaining the proposed investment exposure”, said the MPFA.

The MPF funds market has already begun to shift towards greater inclusion of exchange traded funds, with people familiar with the matter telling Ignites Asia that schemes were using these products to enhance their risk management and environmental, social and governance integration.

As of September 2024, the amount that constituent funds invested in index-tracking collective investment schemes reached around HK$220bn, accounting for over 16 per cent of the total net asset value of MPF, according to data from MPFA.

“MPFs have been increasingly using Hong Kong-listed ETFs as part of their asset allocation, and some have been using them to enhance ESG integration or meet their sustainable objectives,” said Jean-François Mesnard-Sense, head of exchange traded products at Hong Kong Exchanges and Clearing.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.