Managing the changing landscape of retirement savings 20Nov12 · 2015-07-17 · 4 Managing the...

Managing thechanging landscape of retirement savingsReport on a study ofadministrative costs in the Hong Kong Mandatory Provident Fund system

November 2012

2Managing the changing landscape of retirement savings

Executive Summary 04

Background 08

Study purpose and methodology 12

Findings of the study 14

Cost drivers and strategic responses 24

Summary of indicative cost savings 28

Contents

4 Managing the changing landscape of retirement savings

Executive Summary

Ernst & Young was engaged by the Mandatory Provident Fund Schemes Authority (MPFA) to perform a cost study of the trustee and scheme administration costs of the MPF system. We conducted this study via analysis of the overall Hong Kong MPF industry structure and stakeholders as well as analysis at the individual trustee administration process level. The fi ndings were compared with information from selected international pension systems.

The objectives of the study were:

1. To identify the more costly areas of administration, and the reasons for such costs

2. To review lessons learned from comparable international pension systems and

3. To make recommendations on how to achieve simplicity, economies of scale, and cost reductions.

Fee and cost analysis

The introduction of the fund expense ratio (FER) by the MPFA in 2004 was an important landmark in providing a single indicator disclosed for all MPF funds, aggregating fees and other expenses charged to MPF funds and underlying investments. Our analysis allowed us to break down the FER ratio as follows (fi gure 1) based on the published weighted average FER of 1.74% (the weighted average of the FERs of MPF constituent funds for fi nancial periods from 1 July 2010 to 30 June 2011).

The three major components of the FER are as follows:

1. The investment management fee represents charges for managing MPF funds, based on fees disclosed in scheme documents.

2. The administration cost is the focus of this report and represents the total expenditure incurred by trustees in performing MPF administration functions, including charges from outsourced third party administrator and other service providers. Data collected from trustees and administrators indicates the administration cost is a weighted average of 0.75% of the assets under management (AUM), breakdown shown in fi gure 2.

The Mandatory Provident Fund (MPF) system continues to evolve in response to the developing needs of its members and their long-term retirement goals. In the 11 years of the system’s existence, Hong Kong has experienced many changes that have had an impact on the retirement savings system. Despite the fact that MPF is relatively young, it is already more advanced in some areas than the more mature models in some other countries (see fi gure 3). It is an opportune time to review what the MPF system has achieved, revisit fundamental objectives, identify opportunities for potential improvement and agree upon decisive actions to improve outcomes for members.

Figure 1: Indicative breakdown of fund expense ratio (FER)

Fund Expense Ratio

1.74%

Investment Management

0.59%

Administration0.75%

0.40%

Sponsor Charge, Trustee Profi t,

Member Rebates, & Others


3. The remaining balance includes (i) trustee profi t (our estimate is based on their most recent annual fi nancial statements that the weighted average profi t of trustees which relates to MPF, by adjusting for the possible profi t from ORSO schemes, is between 0.09% - 0.15%), (ii) member rebates and (iii) sponsor fees related to their product support (sponsor fees include items such as disseminating MPF marketing materials and product development activities), and any other costs excluding scheme administration and fund management.

It should be noted that trustees must delegate the investment management function to investment managers, and may delegate the administration function to other parties. There may be a profi t element within the fee being charged for such delegated functions.

The FER breakdown components are indicative fi gures which are derived from professional estimations based on publicly available trustee fi nancial statements, cost data from trustees (not all trustees provided full cost data), and trustee’s qualitative explanation of costs.

Data collected from trustees and administrators indicates that the weighted average administration cost, based on AUM, across the system is 0.75% of AUM, i.e. costs of HKD 2.7 billion, based on the 2011 Hong Kong MPF AUM of HKD 356 billion.

We further analyzed these costs using a structural framework based on Ernst & Young’s pension administration value chain model, which defi nes six components in the value chain (refer to fi gure 6 (p.11) for details). The most costly components within the value chain were member support (representing costs of 0.19% of AUM, HKD 0.7 billion) and contribution handling (0.14% of AUM, HKD 0.5 billion). The full breakdown of the costs across the value chain is shown in Figure 2.

Our analysis then sought to identify the key reasons, or drivers, for these costs with a view to making recommendations that would lead to future cost reductions.

Administration cost drivers

In reviewing industry, process and international data, we identifi ed a number of factors related to system features and maturity, governance structure, and industry practices that explain why Hong Kong’s MPF system has the highest fees and administration costs as a percentage of AUM when compared to other selected international pension systems (Australia, Chile, Mexico and the USA). Hong Kong’s MPF system has:

1. A higher percentage of manual and paper–based administration processing, meaning that each additional transaction adds costs

2. A larger percentage of small employers and self–employed persons, increasing the volume of the employer transactions for administrators

3. A more fl exible, full service system offering wider member services, increasing process complexity and workload for administrators

4. Smaller scale of assets under management, which limits the benefi ts of economies of scale

5. Lower industry co–operation to resolve industry–wide issues collectively and effectively, limiting the ability to spread infrastructure costs across the system

6. Insuffi cient pricing competition, reducing the pressure for providers to contain and minimise costs in order to maintain profi t margins

It is expected that over time the number of MPF members will increase, and this combined with the introduction of the ECA program, which offers employees a choice of providers, will increase transaction volumes in the MPF system. If the system continues with no process and infrastructure changes, this means there will be more MPF accounts per member that will require servicing, additional transfers between administrators and as a result more manual and paper-based transactions and costs. In the context of these cost drivers, our analysis suggests that it is likely that costs will escalate in future if no action is taken.

General Administration

0.26%HKD 0.9 billion

Pension Administration

Value Chain

Cost as a % of AUM:

Marketing



Member and Scheme Administration (including Member Support (0.19%), Contribution Handling (0.14%),

Benefi ts Payments (0.11%), and Reporting (0.02%))

Total Administration Cost: 0.75% of AUM

Figure 2: MPF administration cost and expenses breakdown by value chain


Strategic responses to cost drivers

We were asked to develop strategic responses within the current framework of the MPF system, which is a privately operated, market driven, and mandatory occupational pension system. We have not considered reforms that would change these system features.

Many of the cost drivers can be managed. We developed fi ve strategic responses which we believe would improve simplicity, scale and drive cost reductions. We suggest the MPFA to consider:

1. Industry-wide initiatives to deliver end-to-end online and electronic payments and data processing, to reduce costs and streamline processing

2. Introduce measures to facilitate account consolidation, to reduce costs associated with member support activities for personal accounts (formerly known as preserved accounts), while transitioning to full member choice to promote competition

3. Facilitate industry consolidation of MPF schemes, investment funds, trustees and administration platforms

4. Clarify MPF system objectives (e.g. low cost vs full service) to guide future reform, which may lead to the consideration of more fundamental changes to the MPF system

5. Improve governance and transparency to facilitate ongoing cost reduction, promote competition and increase public confi dence in the system

The fi rst three of these strategic responses are intended to directly reduce processing costs, whilst the remaining two relate to longer term structural considerations which we believe will guide more fundamental reform (or confi rm the current system direction), and facilitate ongoing cost reduction in administration activities. In the body of the report we outline more detailed initiatives to give effect to these fi ve strategic responses.

Estimate of potential cost savings

The fi nal section of this report outlines a high level estimate of the potential cost savings that could result from the fi ve strategic responses. We have estimated the total potential savings to be 0.35% of AUM per annum (HKD 1.2 billion per annum), if all initiatives are implemented and benefi ts are fully realized. This estimate does not take into account the signifi cant effort and capital investment that may be required to implement these initiatives. It is also important to recognise that the full benefi ts will not be realized without signifi cant behavioural change from all stakeholders in the MPF system.

The MPF is a legislated mandatory pension system operated by the private sector, and as such needs to balance the important goals of ensuring protection of member interests while still providing adequate incentives for providers to reinvest in infrastructure and member service innovation. As an essential next step, we propose that the MPFA conduct a detailed feasibility and cost/benefi t study of the recommended initiatives.

We hope the fi ndings from our study will shed light on issues of interest to sponsors, trustees, employers and other stakeholders. Embracing change will create opportunities for the MPF system to innovate and invest in infrastructure, products and capabilities, while generating additional returns for its members.


BackgroundThe MPF system plays a role in Hong Kong’s policy framework for old-age protection. Retirement savings schemes are commonly described in terms of the three-pillar classifi cation set out in the World Bank’s 1994 report “Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth” (Pillar 1 – Social safety net; Pillar 2 – Mandatory contribution scheme; Pillar 3 – Voluntary savings and insurance). In this context, the Hong Kong MPF system, launched in December 2000, is a Pillar 2 scheme, which is defi ned as:

“ A mandatory occupational pension system which operates on a defi ned contribution basis, whereby members and their employers make contributions into a scheme, which invests those contributions until the member’s retirement. On retirement, the accumulated contributions and investment earnings are made available to the employee. Management of schemes is carried out by the private sector.”



MPF stages of development

Figure 3 shows fi ve horizons of pension system maturity which Ernst & Young has developed based on its global experience working with pension funds and pension systems.

Figure 3: Pension system maturity horizon

Horizon 1

Strategic focus

Secondary focus

Key challenges

Infrastructure setupand penetration of employers and members

Enhance productchoice and systemequity

Enable provider choice and focus on fees

Focus on ef iencyfor all stakeholdersand introducecustomer experience

System re nements & incentives tocontribute more

Equity acrossmembers

Delivering valuethrough goodreturns

Member and employerdisengagement

Outcometransparency

Integration ofretirement and ageing

Balancing of upfrontplanning and setupversus immediateneeds

Short term returnsversus long termgrowth

Choice for some members versus system simplicity for the majority of members

Economies of scaleversus economies of scope

Accumulation versusasset consumptionfocus while retainingsystem focus

Horizon 2

Horizon 3

Horizon 4

Horizon 5

Hong KongMexico

Australia

ChileUnited

Kingdom

UnitedStatesSingapore

10 Years 20 Years 40 Years30 YearsCommon maturity time frame

The MPF system currently sits on horizon 2 of the pension system maturity curve, as a system still under development and expected to mature over 40 years. This is the appropriate timeframe required to enable members and employers to make suffi cient contributions to achieve the desired level of income replacement. Despite the fact that the MPF is a relatively young system compared with benchmark countries, the MPF is already more advanced in some areas than the more mature systems, and there are a number of opportunities to accelerate the MPF in moving up the maturity curve.

As it progresses towards horizon 3, the MPF system will enable provider choice for members. The fi rst step is the introduction of the Employee Choice Arrangement (ECA) initiative in November 2012.

MPF system participants

There are 19 approved MPF trustees in Hong Kong, of whom 15 are trustees operating MPF schemes while the other 4 trustees do not operate any MPF schemes. The majority of these 15 trustees delegate some or all administrative functions to various service providers, who receive a service fee in return (fi gure 4). Members pay trustees a total fee, either as a single amount or as separate fees for investment management and other management services. Trustees also apply different forms of charging mechanisms.

Figure 4: Stakeholders in the MFP system

MPFA

Investment Manager

Administrator

Custodian

Custodian of Trust Assets

Schemes Administration

Investment Asset Management

Regulate Activities

Trustee

Marketing & Other Operations Support

MPF Product Sponsor

MPF Intermediaries

Marketing & Distribution of MPF Products

Select Scheme, Enrolment & Contributions

Fees, Information &

Statutory Compliance & Reporting

Member Advice & Support

Enrolment & Contributions

Sell MPF Schemes & Services

Sell MPF Products & Advise on MPF Funds

Regulates Contributions

Employer

Member



MPF administration process & value chain model

Because of the nature and frequency of interaction with the MPF providers that members experience they may not realise the breadth and complexity of administration processes required to support an MPF scheme. We have outlined below a typical MPF administration process (fi gure 5), following the member activities over the life of their employment and hence their MPF membership.

Figure 5: MPF administration process

Whilst the activities that occur over the life of a member’s MPF account appear relatively straightforward when viewed from the member’s perspective, in order to fully support an MPF scheme and fulfi ll their related obligations trustees and administrators require a range of activities and expenses as outlined in fi gure 6:

Figure 6: MPF administration value chain model

Joining MPF Scheme Managing MPF Account Withdrawing Benefi ts

• Employer enrolls employee in a MPF Scheme

• Employee specifi es fund choice

• Trustee handles the enrollment

• Trustee handles payment to employee upon termination (e.g. retirement)

• Trustee handles transfer of benefi ts according to employee instruction (e.g. change of employer)

• Trustee handles benefi ts offset according to employer request

• Trustee handles the contributions made by employer and employee and provides regular statements to employee

• Employee proactively checks his/her MPF account

• Trustee handles fund switches according to employee instructions

• Trustee handles employer’s and employee’s enquiries

Value ChainMarketing & Product

Management

Member Support

Contribution handling

Benefi t Payment

General Administration & Compliance

Reporting

Value Chain Processes

Develop, Distribute Marketing & Enrolment

Materials

Reporting Enrolment Information to the

MPFA

Out of Pocket Expenses (e.g. sub

custodian fee, postage & printing fees, etc)

Regulatory Compliance &

Investment Monitoring

Others (System Support &

Maintenance)

Contribution Collection

Transfer of Benefi tsMPF Enrolment

Maintain Marketing Materials & Offering

Documents

Assist in Recovery of Outstanding Contributions

Prepare Scheme Accounts, FInancial/

Statutory Reporting, & Documents for Audit

Payment of Benefi ts upon cessation of

membershipFund Administration

Handling Unclaimed Benefi ts

Regular Reporting to Members (e.g. member benefi ts statement and

fund fact sheet)

Manage Member Register

Commission Handling & Payment

Allocation of Contributions for

InvestmentHandling Member/Employer Enquiries

Product DevelopmentEstablish &

Maintain Voluntary Contributions

Regular Communications with

Members

Fund Switching

Handling Complaints


The purpose of this study is to analyze the costs of administering MPF schemes, excluding investment fees. We collected fi nancial and non-fi nancial data related to fees, costs and administration activities, conducted a benchmarking comparison and considered relevant experience from international pension systems. Our objective was to identify areas of signifi cant opportunity for industry stakeholders to work together to achieve further simplicity, economies of scale and cost reductions.

Study purpose and methodology



MPF data collection

The study team collected MPF scheme administration data on a voluntary basis from the 15 MPF trustees who operate MPF schemes via a series of individual interviews, workshops and questionnaires. The fi nancial and non-fi nancial information collected included data on administration costs, operational information such as volumes of transactions, automation levels and process challenges, as well as other information provided by the trustees.

Benchmarking countries selection

No two pension systems are alike, due to different stages of maturity, market forces, market environment, taxation systems, regulatory structures and focus, among other factors. Accordingly our comparison was restricted to those reference system areas that demonstrated the most relevance for the cost analysis.

The reference systems selected were Australia, Chile, Mexico and the US, as these systems have aspects that are relatively comparable to Hong Kong’s MPF system. These are defi ned contribution, occupational pension systems operated by the private sector, with suffi cient AUM and maturity to enable the drawing of useful insights relevant to the MPF system.

We did not perform a detailed analysis of the UK pension market, as it has had a variety of different pension systems over the past 30 years. However we did consider some aspects of the recently launched UK NEST system to consider relevant learnings for Hong Kong. This is a defi ned contribution (DC) system, and although currently the size of this system is relatively small it is expected to eventually become one of the world’s largest systems. Importantly, the system is designed as an automated, low cost and low service system and therefore is relevant for this study.

Many commentators refer to Singapore as a benchmark for the Hong Kong MPF system. In relation to administration costs Singapore is not a valid comparison, because Singapore’s CPF

system is administered centrally by the government, and includes social security features such as a guaranteed return, the ability to draw down to fund housing and the pay for medical costs in certain circumstances.

Similarly, whilst there are a number of other international markets which prima facie have low management fees, they are also not comparable (for example, most plans in Asian countries are either defi ned benefi t, e.g. Taiwan and South Korea, or run by the government, e.g. Malaysia and Thailand).

Benchmarking TableCountry selection criteria(based on OECD Report — Collective pension fund comparison criteria) √ = Fit Criteria

Australia Chile Mexico United States

Scheme Nature: Defi ned ContributionThere are two main types of plan: Defi ned Benefi t (DB) plans and Defi ned Contribution (DC) plans. Plans with similar natures are selected for benchmarking analysis. Administration differs signifi cantly as DC plans deal with individual accounts while DB plans provide guarantees and handled at a collective level. MPF schemes are DC plans and we therefore excluded all DB plans.

√ √ √ √

Operational Model: Private Trustee Managed Pension PlansThe MPF system is highly service oriented and provides a wide range of investment options to members, offering a level of service and fl exibility comparable to a retail system. The MPF system ‘outsources’ the management of the plans to private/commercial trustees. We therefore excluded all plans that are not run by private trustees, i.e. set up by the government or the employer.

√ √ √ √

Nature of Membership : Open Plan MembershipThe nature of the membership will affect how the Trustees operate their plans. MPF schemes are open plans with regular new joiners and we therefore excluded all closed plans in the benchmarking selection.

√ √ √ √

Size of Plan Assets: Large Asset SizeIn order to help us to understand the benefi t of economies of scale in this Study, we selected countries with comparable types of pension plans with signifi cant size of assets.

√ √ √ √

Maturity: Experienced SystemThe maturity of the system is an important aspect in studying administration cost effi ciency. The MPF system is a young system having only been established for 11 years. Therefore, mature systems are selected for comparison to help identify areas for future cost effi ciency improvement.

√ √ √ √

The table below describes the factors considered in our country selection criteria:


The fi ndings of our analysis are summarized in three categories: industry level fi ndings, fi ndings on administration processes, and fi ndings representing reference system learnings.

Findings of the study



Industry level fi ndingsThis section summarizes our fi ndings on the MPF system setup and scale, governance structure, fee structure, industry practices, and cost implications.

Finding #1: The MPF system scale is small, which limits benefi ts of economies of scale in operations.

The provision of pension administration services involves fi xed operational investments in property, IT, and general administration support. These costs are fi xed regardless of system asset size. Several studies have concluded that as AUM increases, there are reductions in operational costs as a percentage of assets. 1

Figure 7: AUM size of reference systems (HKD)2

United States$21,326bn Hong Kong

$356bn

Mexico$962bn

Chile$1,096bn Australia

$10,426bn

The MPF system scale in terms of AUM is small relative to the selected reference countries, limiting the benefi ts of economies of scale in operations.

Finding #2: Trustees managing signifi cant scheme assets enjoy greater benefi ts of economies of scale in operations compared to smaller trustees.

While there are a total of 15 trustees operating MPF schemes, the fi ve largest manage approximately 80% of employers and 77% of AUM in the MPF system.

Figure 8: Distribution of employers and employees across the MPF industry

74%

26%

80%

20%

(41,928)

(172,124) (2,296,455)

(824,087)

Employers Employees

Top 5 Trustees Other Trustees

Figure 9: MPF asset distribution among 15 trustees

100%

50%

77%(HKD 274bn)

(HKD 338bn) (HKD 365bn)

95% 100%

0%

Top 5 Trustees Top 10 Trustees

Smaller administrators experience higher costs as a percentage of AUM as they lack economies of scale. Despite the relatively small overall MPF system scale, the concentration of AUM enables larger trustees to benefi t from economies of scale in operations, in comparison with small trustees who are marginally profi table. Some have made strategic decisions to outsource operations to third party administrators to benefi t from their scale of operations.

1. Investment Company Institute (2011); Oxera (2006)

2. Reference systems: Australia – Superannuation; Chile – Administradoras de Fondos de Pensiones (AFPS); Mexico – Administradora de Fondos de Ahorro para el Retiro (FORES); US – 401(K) plan.


Finding #3: Inability of employees to select their MPF provider for current contributions lessens price competition and therefore potentially reduces pressure on providers to reduce their costs.

Members do not currently choose the MPF scheme into which their current contributions are paid. The employer selects the MPF trustee for its employees, based on a number of criteria but not solely based on the cost to members or on what employees value. The inability of individual members to select their preferred MPF scheme potentially results in lower ongoing fee (and hence cost) pressure on MPF providers. The introduction of ECA in November 2012 is a signifi cant change to the MPF system and is intended to give members more control over their MPF investments. However, this only allows transfers of existing account balances rather than allowing current contributions to be redirected to the preferred scheme.

As ECA and future reforms introduce additional member choice, it is also important that members are able to make well informed choices when selecting their preferred scheme. The introduction by the MPFA of the fund expense ratio (FER) in 2004 was an important landmark in providing a single indicator disclosed by all schemes, aggregating fees and other expenses charged to members.

The FER allows members to make an overall comparison among schemes, however the current lack of consistency in fee-charging structures prevents a clear comparison of the breakdown of MPF fees among schemes. This makes it impossible for members to understand how much they are being charged for the different services they receive, and to therefore decide whether this represents good value for money. We believe this reduces public confi dence in the system overall, and will make it more diffi cult for members in future to make well informed choices on relative value for money for services between different schemes.

Finding #4: Trustees have no power over MPF product sponsors - limiting pressure to reduce costs.

The MPF product sponsors are the owners of the MPF products and major stakeholders in the MPF system. They play an important role in the set up of an MPF scheme, designing the product and setting fees. In the current MPF market, the majority of the trustees are part of the same corporate group as the sponsors, and sponsors are usually the parent company. In other cases, the trustees are third parties independently engaged by the sponsors to fulfi ll the MPF obligations. The trustees generally have limited power or infl uence over the sponsor in relation to fee setting, limiting their ability to exert pressure on the sponsor to reduce fees.

In addition, unlike the trustees which are the regulatee of the MPFA, sponsor activities in relation to the MPF are not subject to regulation. The MPFA’s ability to exercise oversight on fee setting is also limited even though the MPFA has taken the fee factor into account in approving products.

Finding #5: Trustees currently try to individually resolve administrative operational issues that are common across the industry. Better industry co–operation would allow such infrastructure costs to be spread across the industry and hence benefi t members.

The administration issues and challenges identifi ed in our study are common to all trustees and no individual trustee has identifi ed a complete solution. Currently Hong Kong has very few system-wide infrastructure or process initiatives that would reduce costs for trustees and ultimately all members. This is in contrast to international pension systems where such infrastructure is more common (please refer to fi nding #14 and #15 for the details). As the MPF system is a mandatory occupational pension, industry wide solutions, led by the industry, would provide the benefi ts of centralization while retaining a market led philosophy. Leadership and engagement from the larger trustees in particular to develop and support such industry wide initiatives would help build momentum, provided this can be achieved in a manner that is not anti-competitive.

Finding #6: The MPF is a fl exible system that offers a wide range of member services, resulting in higher administration costs.

The MPF system operates on a model oriented to member service. Members enjoy a wide range of investment options, and can maintain multiple MPF accounts across the system as they change employers. Furthermore, members are serviced comprehensively directly by trustees (not by their employer, who in some other occupational systems has a broader role). This fl exibility in member investment choices and broad customer service incurs extra administration costs.

Finding #7: The high percentage of self–employed individuals and small employers increases transaction costs and presents challenges to the industry’s ability to move away from manual and paper–based processing.

Small employers (1-10 employees) and self-employed persons (SEPs) represent over 90% of the total employer population. Electronic and straight-through processing is more diffi cult and less economically attractive for administrators to implement for this group. While a monthly contribution payment from a large employer includes hundreds of members, each contribution for a small employer or SEP has far fewer members but requires similar levels of processing.

Figure 10: MPF employer composition (including SEPs)

55.3%

26.1%

11.4%(54,560)

(6,219)

(264,397)

(124,969)

(27,821) 5.8%1.3%0.1% (483)

Self employed persons4—10 employees51—500 employees

1—3 employees11—50 employees0ver 500 employees

As part of the system design and Hong Kong’s social policy small to medium-sized employers and SEPs are included within the MPF occupational pension system. This inevitably increases transaction volumes and costs compared to reference systems such as the US’ 401(k) plan, Chile’s APFS, and Mexico’s FORES which have not mandated the inclusion of SEPs or all SMEs.



The three major components of the FER are as follows:

1. The investment management fee represents charges for managing MPF funds, based on fees disclosed in scheme documents.

2. The administration cost is the focus of this report and represents the total expenditure incurred by trustees in performing MPF administration functions, including charges from outsourced third party administrator and other service providers. Data collected from trustees and administrators indicates the administration cost is a weighted average of 0.75% of the asset under management (AUM), breakdown shown in fi gure 2.

3. The remaining balance includes (i) trustee profi t (our estimate is based on their most recent annual fi nancial statements that the weighted average profi t of trustees which relates to MPF,

by adjusting for the possible profi t from ORSO schemes, is between 0.09% - 0.15%), (ii) member rebates and (iii) sponsor fees related to their product support (sponsor fees include such as disseminating MPF marketing materials and product development activities), and any other costs excluding scheme administration and fund management.

It should be noted that trustees must delegate the investment management function to investment managers, and may delegate the administration function to other parties. There may be a profi t element within the fee being charged for such delegated functions.

The FER breakdown components are indicative fi gures which are derived from professional estimations based on publicly available trustee fi nancial statements, cost data from trustees (not all trustees provided full cost data), and trustee’s qualitative explanation of costs.

Summary of industry level fi ndings

The following table summarizes the industry level fi ndings, cost implications, and identifi ed cost drivers for the MPF system:

# Industry level fi ndings Cost implications Identifi ed cost driver

1 The scale of the MPF system in terms of accumulated AUM is small compared to international country benchmarks

Limited economies of scale in administration operations

Small scale of the MPF system and administration2 Large trustees enjoy benefi ts of economies of scale in

operations compared to smaller trusteesSmall trustees’ administration is more costly

3 Inability of employees to select their MPF provider for current contributions lessens price competition

Reduces trustees’ incentive to compete on fees and reduce their costs

Insuffi cient pricing competition to minimize costs

4 Trustees have no power over MPF product sponsors and therefore have limited infl uence over MPF products or fees charged. The sponsor, who has infl uence over fee charges, does not have an offi cial role under the MPF Ordinance, and is not regulated by the MPFA

Trustees have limited infl uence over fees levied by sponsors

5 Trustees face similar administration issues, but there is minimal industry cooperation on improvement initiatives

Costs are incurred as issues are addressed separately

Lower industry co-operation to resolve industry-wide issues

6 The MPF system is highly fl exible, allowing multiple member accounts, offering a wide range of investment options with few restrictions, and providing full member service across multiple channels

Increased administration costs from high service and account proliferation

A highly fl exible, full–service MPF system

7 Mandatory participation in the MPF system for small employers and SEPs presents challenges in implementing process automation

Trustees continue paper and manual processing with small employers and SEPs, which is costly to the system

High percentage of small employers and SEPs

Administration process fi ndingsOur analysis allowed us to breakdown the FER ratio as follows (fi gure 11) based on the published weighted average FER of 1.74% (the weighted average of the FERs of MPF constituent funds for fi nancial periods ending on 1 July 2010 to 30 June 2011).

Figure 11: Indicative breakdown of fund expense ratio (FER)

Fund Expense Ratio

1.74%

Investment Management

0.59%

Administration0.75%

0.40%

Sponsor Charge, Trustee Profi t,

Member Rebates, & Others


Our fi ndings at the administration process level are:

Finding #8: A high volume of paper or cheque–based transactions increases costs.

Our analysis indicates that over 30 million transactions are processed in the MPF system each year. Over 65% of these are paper based and/or executed via cheque, and therefore require some level of manual intervention which incurs extra administration costs. As noted in Finding #7, the nature of the Hong Kong market means it is challenging to expand the extent to which online processing is used.

Finding #9: Ineffi cient administration processes add complexity and system costs.

Nearly 60% of total administration costs (0.44% out of 0.75% of AUM, HKD 1.6 billion) were identifi ed in member support, contribution processing, and benefi t payments. Many of these processes were designed to protect members and embed infrastructure during the introduction of the MPF system. These processes could potentially be eliminated or streamlined now the MPF system is more mature. Members could still be effectively protected in a mature system via streamlining processes such as member enrolment (e.g. employer could auto-enrol the new employee, and the member enrolment process could be eliminated), employer certifi cates (certifi cate could be checked online and the process of issuing employer certifi cates could be eliminated), contribution reconciliation and recovery activities (could be streamlined by allowing limited tolerance for differences and escalation processes), benefi ts transfer (could be streamlined by introducing electronic settlement of payments between trustees), and offsetting benefi t payments (could refi ne by reviewing public policy). Administration costs could be reduced if legislative or regulatory amendments allowed or encouraged administrators to eliminate or streamline these processes.

Finding #10: Member account proliferation adds to costs.

Some elements of administration costs, particularly for member support, are proportional to the number of accounts in the system. Although an account may be preserved, the member may still be active, requiring fund statements and other communications. Over four million personal accounts are in the system or, on average, there are three accounts per member. Costs could be reduced by facilitating or mandating account consolidation.

Finding #11: A minimum level of general administration and compliance costs is incurred by trustees/administrators and schemes/funds.

Nearly 35% of total administration costs (0.26% out of 0.75% of AUM, HKD 0.9 billion) are general administration and compliance costs for trustees and fund operations. This cost can be further broken down into four sub-cost components: out of pocket expense (0.14% out of 0.75%), fund administration (0.09% out of 0.75%), regulation compliance and investment monitoring (0.03% out of 0.75%), and system and support maintenance costs (0.01% out of 0.75%). The Out of Pocket expenses include costs incurred by the trustee to fulfi ll regulatory and oversight obligations that are not included in the management fee but indirectly charged to the member, such as the expense of legal, audit, and other professional fees, insurance indemnity premiums, sub custodian fee and the MPF compensation fund levy. Given its pension market size, Hong Kong has a relatively high number of trustees and investment options available to members. These general costs could be reduced by consolidating and simplifying the number of administration platforms and scheme/fund pools.

General Administration


Pension Administration

Value Chain

Cost as a % of AUM:

Marketing



Member and Scheme Administration (including Member Support (0.19%), Contribution Handling (0.14%),

Benefi ts Payments (0.11%), and Reporting (0.02%))

Total Administration Cost: 0.75% of AUM

Figure 12: MPF administration cost and expenses breakdown by value chain

Data collected from trustees and administrators indicate that the weighted average administration cost, based on AUM, across the system is 0.75% of AUM, i.e. costs of HKD 2.7 billion, based on the 2011 Hong Kong MPF AUM of HKD 356 billion.

We further analyzed these costs using a structural framework based on Ernst & Young’s pension administration value chain model, which defi nes six components in the value chain (refer to fi gure 6 for the details). The most costly components within the value chain were member support (representing costs of 0.19% of AUM, HKD 0.7 billion) and contribution handling (0.14% of AUM, HKD 0.5 billion). The full breakdown of the costs across the value chain is shown in Figure 12.


Summary of administration process fi ndings

The table below summarizes the administration process level fi ndings, their cost implications and the identifi ed cost drivers for the MPF system:

# Administration process fi ndings Cost implications Identifi ed cost driver

8 65% of the 30 million administration transactions processed in the system are paper based or executed via cheques

The current high level of manual processing in the system involves high administration costs

High levels of manual and paper based processing

9 Ineffi cient processes add complexity to administration Current legacy/ineffi cient processes in the system limit economies of scales and increase the need for manual processing

High levels of manual and paper-based processing

10 System does not restrict the number of accounts per member. Member account proliferation burdens member account maintenance and support processes

Current high number of member accounts in system increases maintenance costs

A highly fl exible, full–service MPF system

11 Trustees/administrators and scheme/funds incur a minimum level of general administration and compliance costs

Current large number of trustees/administration platforms and schemes/funds in the system limit economies of scale

Small scale of the MPF system and administration

Reference system learningsOur international benchmarking comparison of total fee and administration cost as a percentage of AUM (fi gure 13) indicates Hong Kong is the highest of the reference systems, which can be explained by maturity, scale, design and structural differences. The lowest cost systems have signifi cant scale advantages, provide limited or no fl exibility for members or exclude self-employed individuals and SMEs. In order to allow comparison in absolute terms at a member level, and refl ect the impact of fi xed fees and multiple accounts on fees for members, fi gure 14 compares administration costs per account and member. Hong Kong still has higher absolute costs, expressed as either cost per account or cost per member than the benchmarking countries with the exception of Australia.

Figure 13: Comparison of total fees and administration costs as a % of AUM (in order of administration cost — highest to lowest)

0.0%

0.5%

1.0%

1.5%

2.0%

Hong Kong Australia Mexico Chile United States

1.74%

0.75%

1.21%

0.42%

1.32%

0.39%

0.60%

0.27%

0.83%

0.10%

Administration costs Other fee components

The fee and cost comparison is against mature systems which have more established administration operations.

Figure 14: Comparison of administration costs per account and member

Administration costs in HKD

Cost per account Cost per member

Hong Kong 400 1,000

Australia 1,500 3,800

Mexico 80 80

Chile 300 325

United States – 350

The cost per account is not available for the US.

The cost comparison does not take into account the differences in cost of living of the reference systems.

Exchange rate: HKD 1 = AUD 0.1247; MXN 1.6689; CLP 62.2731; USD 0.1282


We have analysed the reference systems to identify those features which enable them to achieve lower fees and costs:

Finding #12: Large system scale enables low–cost administration (Australia, US).

The chart suggests an inverse correlation between scale and administration costs; Australia (administration cost of 0.42% as indicated in fi gure 13) has 30 times the AUM of Hong Kong and the US (administration cost of 0.10%) has 60 times the AUM. Lower costs and fees are expected to result from economies of scale in administration operations, and a large scale system allows fi xed costs to be spread across a greater asset base, lowering the cost as a percentage of AUM.

Finding #13: Having a limited number of service providers in the system, so that all are large, enables low–cost administration (Mexico, Chile, and US).

In Mexico, Chile, and the US, pension administration is operated by a limited number of large pension service providers. The scale per provider maximizes the economies of scale, which can be fully or partially passed on to members through lower fees. By contrast, the Hong Kong system, which operates on free market principles, has 12 administration platforms and 15 trustees providing MPF services. We observe that only a few of the providers in Hong Kong come close to achieving the scale benefi ts enjoyed by many of their overseas peers.

Finding #14: Centralization of administration platform enables low–cost administration (Australia, Mexico, and UK’s NEST).

Although privately operated, the reference systems have centralized either some or all of the administration functions, include member enrolment, contribution processing, benefi ts transfer and payments. In addition to benefi ting from economies of scale in operations, such centralized platforms also facilitate and enforce standardization of pension data and processing. This allows straight-through processing, increases industry transparency, and promotes competition in fees and services.

Finding #15: Online solutions and electronic payments enable low–cost administration (Australia, Chile, and UK’s NEST).

Using online solutions for member enrolment and contribution, and implementing electronic payments enable administration processing in these reference systems at a lower cost than manual processing (lower process error rates). In addition, an online platform reduces costs by enabling straight-through processing, and standardization of data and processes.

Finding #16: Account consolidation policies and rules enable lower cost administration (Australia, Mexico, Chile, and UK’s NEST).

The reference systems adopt various approaches to minimize account proliferation, including automated account consolidation (e.g. Australia), or only allowing members to have one account in the system (e.g. Mexico, Chile and UK’s NEST). Implementing such measures reduces account maintenance costs, and provides members with a consolidated view of their pension portfolios to facilitate management of their savings.

Finding #17: Best practice governance with legislated trustee responsibility to act in the best interest of members; regulators monitor the pension value chain, balancing commercial and member interests (Australia, US).

Following the OECD best practice guidelines for pension funds, many mature pension systems explicitly legislate that the trustee acts as a member advocate. Trustees have a legal responsibility to protect member interests across product, distribution, investment management, and administration value chain. This responsibility means that any commercial arrangement within a group or with external providers has to withstand a “best interest” and “market” test. This provides built-in incentives to drive initiatives for cost and fee reductions, and service improvements.

The governance role of the trustee creates a built-in tension and protection mechanism within the privately-managed administration system, while the pension regulator supervises the proper implementation, evolution and compliance of the trustees and scheme administrators.


Summary of reference system learnings

The table below summarizes reference system learnings and cost implications:

# Reference system learnings Cost implications

12 Large accumulated contribution scale in the reference systems drives fees down through benefi ts from economies of scale in operations

A large scale system allows fi xed costs to be spread across a wider asset base, resulting in lower costs as a percentage of AUM

13 Having a limited number of large service providers in the reference systems drives fees down through benefi ts from economies of scale in operations

Benefi ts from economies of scale can be passed on to members in the form of lower fees

14 Centralization of administration platforms enables low cost administration through benefi ts from economies of scale in operations, standardization of data and processes that improve industry transparency, and thereby facilitate industry competition

Benefi t gains from economies of scale can be passed on to members in the form of lower fees

Industry standardization and transparency which result from the centralization of administration further promote price competition to drive down fees

15 Online solutions and electronic payments enable lower administration cost compared with manual processing, and reduce process errors. Online platforms also enable straight–through processing, and standardization of data and processes, which again improves industry transparency and fee/service competition

Online processing is less costly in comparison with manual processing

Industry standardization and transparency which result from the online solutions and electronic payments further promote price competition to drive down fees

16 Account consolidation policies and rules in the reference systems limit the number of member accounts. This helps reduce account maintenance cost, and provides members with a consolidated view of their pension portfolio to facilitate investment planning

Lower account maintenance cost per member as compared to Hong Kong, as members do not have so many accounts on average

17 Trustees have authority or are required to act in the best interest of members and balance this with commercial aspects; and the regulator has more power over the pension administration value chain. These features give trustees incentives and authority to press for cost and fee reductions and other service improvements

Trustees can drive initiatives for cost and fee reductions, as well as service improvements, while considering commercial implications


Cost drivers and strategic responses



After evaluating the industry, process and international reference system fi ndings we have summarized these into six key cost drivers within the MPF system; the fi rst four are most directly related to administration costs, while the remaining two are related to structural and governance considerations. Based on these cost drivers, we have developed fi ve strategic responses to help provide overall direction for the industry in improving the effi ciency of administration processes, encouraging industry scale and reducing operating costs.

Cost drivers

Compared to the international systems, Hong Kong’s MPF system has:

1. A higher percentage of manual and paper-based administration processing, meaning that each additional transaction across the system adds signifi cant additional costsThe high volume of transactions involving manual and paper-based administration, the existence of potential unnecessary processes, multiple accounts per member, and the relatively large number of trustees/administrators and schemes/funds, all contribute to high levels of manual and paper-based administration processing, which increase operational costs

2. A larger percentage of small employers and self-employed persons, increasing the volume of the employer transactions for administratorsThe high proportion of SEPs and small employers in the system increases the volume of transactions and makes it challenging for the administrators to encourage a move away from manual/paper-based processing

3. A more fl exible, full service system offering wider member services, increasing process complexity and workload for administratorsThe MPF system is highly fl exible, allowing multiple member accounts, offering a wide range of investment options with few restrictions, and providing full member service across multiple channels. Such a high level of fl exibility and member services inherently increases administration costs

4. Smaller scale of assets under management, limiting the benefi ts of economies of scale The total pension AUM size in Hong Kong is small compared to the reference systems. However, the MPF industry has 15 trustees, with approximate 80% of AUM (HKD 285 billion) held under fi ve trustees. The rest of the AUM is managed by the remaining 10 trustees, with limited asset scale per trustee. The small scale of the MPF system and the small scale operations of the majority of trustees, mean that while some trustees enjoy economies of scale, the majority do not and will struggle to achieve suffi cient scale

5. Lower industry co-operation to resolve industry-wide issues collectively and effectively, limiting the ability to spread infrastructure costs across the system All trustees/ administrators across the industry are dealing with similar cost and administration challenges. However, rather than promoting industry consistency and solutions, they are responding to these challenges individually. The lack of industry consistency on improvement initiatives duplicates implementation efforts and limits benefi ts from economies of scale, and education of employers and members of their role in the system, to reduce costs

6. Insuffi cient pricing competition, reducing the pressure to contain and minimize costs in order to maintain profi t marginsInconsistency in description, and diffi culty in comparing, administration fee charges by different service providers, a lack of trustee’s and regulator’s authority over the sponsors who set the fees, a lack of clarity of whether trustee’s obligation to act in the best interest of members covers the fees aspect, and a lack of incentives for employers to select the lowest cost service provider are factors contributing to a relatively low level of price competition in the MPF system


1. Consider industry-wide initiatives to deliver end-to-end online and electronic payments and data processing to reduce costs and streamline processingRecommended initiatives

• �Introduce industry-wide processes, service quality, data standards, and employers’ obligations on member data quality to streamline processes, help reduce associated costs, and facilitate identifi cation and allocation of monies electronically

• �Transition employers to online solutions (data management, reporting, payment transfers, etc.), members to e-communications to reduce paper-based transaction costs and inquiries, and trustees to fully electronic trustee-to-trustee interactions (online transactions and electronic payment)

• �Reassess the need for and potentially eliminate or streamline processes such as member enrolment forms, employer certifi cates, and benefi ts offset activity. This may require revising or clarifying legislation and regulation if these are actual or perceived barriers

Expected benefi ts from these initiatives

• �Industry wide data and service quality standards are important pre-requisites to expanding and encouraging electronic and online processing

• �Moving to online and electronic payment and data processing in a manner that addresses the needs of small employers and SEPs would reduce costs and simplify processes, while enhancing administration service time and quality

• �When the MPF system commenced these processes were considered important to protect members’ interests and ensure the smooth operation of the system. These may no longer be necessary given the system’s current maturity and therefore costs could be reduced

2. Introduce measures to facilitate account consolidation, to reduce costs associated with member support activities on personal accounts, while transitioning to full member choice to promote competitionRecommended initiatives

• �Defi ne the “ideal” number of accounts per member in the current system and run mandatory account consolidation with an opt-out mechanism for members who do not wish to consolidate - working towards transition to full member control over trustees/funds selection

• Assess the feasibility of a centralized clearing house for contribution payments, to promote standardized processing and facilitate future initiatives such as full member choice


• � Reducing the number of member accounts would cut the extra costs for servicing multiple accounts per member, and help improve members’ awareness and control of their MPF investments. Long term, full member choice would allow members to consolidate their accounts with their preferred trustee, which would promote competition and economies of scale in administrators and help build public confi dence in the MPF system to encourage more voluntary contributions. (Note: full member choice refers to employees selecting a scheme and directing their employers to contribute to that scheme)

Strategic responses, initiatives and expected benefi ts

Our fi ve strategic responses and related initiatives are intended to help the industry to reduce costs in a sustainable manner, promote market competition, and improve understanding and public confi dence in the MPF system. This study is focused on administration costs. The intention is not to recommend fundamental changes to the system; and accordingly, the initiatives are designed to be evolutionary within the current system framework. These initiatives will however require engagement and behavioural change from key (and in some cases all) industry stakeholders in order to succeed. Feasibility studies and cost benefi t analyses should be performed to assess whether those initiatives should be implemented. Consideration should also be given as to whether these initiatives would confl ict with other Government policy objectives.


4. Clarify MPF system objectives (e.g. low cost vs full service) to guide future reform, which may lead to the consideration of more fundamental changes to the MPF systemRecommended initiatives

• Clarify MPF vision and objectives and the future direction of the system, to allow the development of more innovative initiatives to reduce costs, to determine what are considered to be adequate contribution levels, and to evaluate the need to review investment options and encourage voluntary contributions. In particular, objective consideration is recommended on whether the system should continue to evolve as a fl exible, full service system (at a higher cost), or wholly or partly as a more basic schemes/funds, simple system (at a lower cost)


• � The benefi t of this exercise would be to allow an explicit assessment and debate regarding the trade-off between services and costs, with the potential for allowing concentration on a low-cost option if that is desired

5. Improve scheme governance and transparency to embed ongoing cost reduction disciplines, promote competition and increase public confi dence in the systemRecommended initiatives

• Strengthen scheme governance by clarifying the sponsor’s and trustee’s roles, to establish a member advocate function, and explicitly require trustees to act in the best interest of members

• Review and standardize fee disclosure components to refl ect the governance model and improve transparency and comparability of fees

• �Review trustee reporting requirements to facilitate future policy reviews relating to cost and the benefi ts of other initiatives


• �We expect over time that this would lead to increased competition, further fee and cost improvements, and build public confi dence in the system

3. Facilitate industry consolidation of MPF schemes, investment funds, trustees and administration platformsRecommended initiatives

• Review concerns with trustees to identify and address barriers to consolidation of MPF schemes and investment funds

• � Consider options and the costs and benefi ts of administering MPF schemes under a consolidated trustee or administrator platform. This does not necessarily involve consolidation across the entire value chain, but potentially only certain components (e.g. only contributions or transfers)


• � Smaller schemes have limited economies of scale and are marginally profi table. Current regulations allow the closure or consolidation of scheme/funds. However, this is not an easy process. Smaller trustees also have limited economies of scale. Facilitating industry consolidation would allow those trustees or administrators who desire to exit the industry to do so in a commercially acceptable manner, increase economies of scale for the remaining administrators, and reduce costs


Summary of indicative cost savings



The table below summarizes indicative cost savings that may be derived from implementing all initiatives supporting the strategic responses, and the rationale for estimating the cost savings. These savings do not take into consideration the required investment costs associated with implementation.

Cost savings measures Cost savings (% of AUM)

Savings rationale

1. Industry wide initiatives to transition to end-to-end online and electronic payments processing to reduce costs and streamline processing

0.20% • �For member support value chain, potential saving of 0.02% by replacing paper with online communication and 0.03% by facilitating online enrolment

• The use of an online solution or clearing house for the collection of contributions could reduce costs by 0.10%

• For the transfer of benefi ts, electronic payments between trustees could save 0.02% while standardisation of data could reduce costs by 0.03%

2. Manage account proliferation while transitioning to full member choice to promote competition and increased contributions

0.10% If all personal accounts are eliminated, the number of accounts would reduce by 55% and member support costs (communications and enquiries) would also fall signifi cantly as a consequence. If the fall in costs is proportional, the potential saving is 0.10% of AUM

3. Facilitate industry consolidation of MPF schemes, investment funds, trustees and administration platforms

0.05% Consolidation of MPF schemes and investment funds would help trustees to save costs in managing various funds, by 0.05%, in particular by reducing compliance and out of pocket expenses

4. Clarify MPF system objectives to guide future reforms

– Clear articulation of the system goals is expected to provide industry stakeholders with greater certainty around the government’s and public’s expectations and encourage reform initiatives

5. Improve scheme governance and transparency to promote competition and restore public confi dence in the system

– We expect over time that this would lead to increased competition and further cost and fee improvements. More importantly it will support the sustainability of other cost improvements. Finally it should build public confi dence in the system

6. FER reduction due to natural growth of AUM from 2012–2018

0.25% Should the Hong Kong system continue to grow at its historic rate, it is expected to reach assets under management of HK$525bn by 2018. If costs increase at a rate of 3-4% per annum, this naturally could reduce FER as a percentage of AUM by 25 basis points

(Note: the savings rationale for strategic response #3 includes the proposition for a systematic change to one member one account, as the current system allows one member to maintain many accounts)


Figure 15: Hypothetical administration cost savings

Online/ElectronicConsolidatedAccounts Industry

Consolidation

0.20%

0.10%0.05%

2010/11 Administration Cost

0.75% Potential Administration Cost

0.40%

Figure 15 summarises the potential indicative cost reductions, by reference to the industry level weighted average administration cost of 0.75%, an estimated cost fi gure calculated based on trustee provided data. The indicative cost savings fi gure of 0.35% of AUM (i.e. over HKD 1.2 billion per annum)3 represents an estimated best case outcome if all recommended initiatives are implemented and potential benefi ts are fully realized. In order for this to occur, the stakeholders must achieve:

1. Full co–operation from industry

2. Successful changes in law and regulation

3. Changes in employer and employee behaviour

In addition, if voluntary contributions can be encouraged through building public understanding and confi dence in the MPF system, further scale and administration cost improvements are possible.

Before proceeding to implementation, a feasibility study with cost and benefi t analysis is required to assess each initiative to ensure that providers are able to:

• Make necessary reinvestments and innovation in their MPF infrastructure, products and capabilities

• Gain a reasonable return on capital for their investments

• Achieve additional benefi ts for MPF members

Private sector providers may be reluctant to make further investment in the system without achieving a reasonable return on that capital investment.

3. The total potential savings available from delivering the strategic responses are estimated to be 0.35% of AUM. Applying this percentage to HKD 365 billion (Hong Kong MPF AUM in 2011) yields an estimate for potential savings of HKD 1.2 billion per annum.

32 Managing the changing landscape of retirement savings32 Managing the changing landscape of retirement savings

Hong Kong should feel proud of what the MPF system has achieved in the relatively short period that it has been in existence. It has demonstrated strong commitment to implementing a functioning occupational retirement system in a dynamic, complex employment market. However, even mature pension systems seek continuous improvement, so embracing change will create opportunities for the MPF system to innovate and invest in infrastructure, products and capabilities, while generating additional returns for its members. We believe the industry and stakeholders should be prepared to consider a range of initiatives in their quest to deliver a system which Hong Kong can continue to be proud of in the future.

Conclusion


Legal Disclaimer This Study provides general information which is current as at the time of production. The information contained in this Study does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profi ts) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk.

This Study has not been performed in accordance with generally accepted auditing, review, or other assurance standards in Hong Kong and accordingly does not express any form of assurance. This Study will not constitute any legal opinion or advice. We did not conduct a Study to detect fraud or illegal acts.

The observation and comments contained in this document have been compiled or arrived at based upon information obtained from the industry and from data that is publicly available. This information and the data is believed to be reliable and provided in good faith. We are not responsible for the completeness or accuracy of any such information or for confi rming any of it.

The observations and comments on the Reference Systems have been derived from samples taken from each individual country. The actual conclusion of this review on fees and performance will not be a wholly accurate refl ection of the pension system in each of the respective benchmark countries.

The observation and comments contained in this document are based on information obtained and some are considered “forward-looking statements”. They are based on our best efforts at the time this research is compiled. Actual future results, however, may prove to be different from expectations. Furthermore, these views are not intended to predict or guarantee the future trend or performance of the MPF system or of pension systems in any reference countries.

Contact Kieren CummingsPartnerFinancial Services

+852 2846 [email protected]

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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© 2012 Ernst & Young Advisory Services Ltd.All Rights Reserved.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither the Ernst & Young Advisory Services Ltd nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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