Challenges And Regulatory Change In Hong Kong’S MPF Market

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Burning platform:

Hong Kong’s compulsory pension fund, the Mandatory Provident Fund (MPF), will see significant disruption over the next few years as the Hong Kong Government and the regulator, the Mandatory Provident Fund Authority (MPFA) look to change the structure of the industry. These changes will have an impact on all market participants, including Trustees, Sponsors, Asset Managers and Members

Expansion:

Since its inception in 2000, the MPF has grown rapidly with Assets Under Management (AUM) now above HKD 800 billion and covering all regular employees and self-employed persons. However, there has been increasing disquiet in recent years over some aspects of the MPF system. In particular, there is a growing perception that fees charged by Trustees, who manage the administration of MPF, and Asset Managers, who make investments on behalf of MPF members, are too high. As such, the Government and the MPFA have responded by making changes intended to reduce fees.

One proposed change will have a substantial impact on the industry; the Government and the MPFA have agreed to centralize MPF administration and form an “Administration Master” (AM) and intend to implement this in the next five years.

This has serious implications for companies involved in the MPF system, particularly for Trustees, who will have to adjust their business and operating models and are likely to see fees reduce significantly. In addition, Trustees are likely to have to adjust their IT platforms and infrastructure to interact with the new AM system.

Asset Managers must also consider how they will be affected; customer experience and brand will become increasingly important as the AM will provide more choice to MPF members on where their money is invested and by which Asset Manager.

Although the implementation date is likely to be at least five years away, all businesses operating in the MPF sector must start their scenario planning now and determine the specific strategies they will need implement once the roadmap to establishing the AM is published.

Doing nothing is not an option:

Whilst there is significant uncertainty about the future of the MPF sector in Hong Kong, and neither the end-state nor the implementation timeline has been set by the Government or the MPFA, the proposed changes will have a significant impact on the entire market.

Solution:

Despite the impending disruption to the market, firms operating in the MPF industry must take four immediate steps to help them prepare:

Maintain awareness:

Stay on top of evolving regulatory guidance. The Hong Kong Government has committed to implementing the AM, but many of the finer details have yet to be worked out. For example, it is not yet clear what the ownership structure of the AM, or the customer data that is held within it will be. The picture is gradually becoming clearer though. In April, for instance, the MPFA communicated the initial conceptual design of the AM via a detailed system specification document.

Understand current revenue and profit drivers:

Most firms that operate in the MPF market are not pure-plays; they are part of broader financial services groups including banks and life-insurers. As such it may not be clear to them how much impact there will be on their overall revenue and profits from the AM-related changes. It is important for these firms to map the connections between other parts of the organization and their MPF business to assess the impact on their current operating models, organization structures and technology platforms.

Set clear strategic objectives:

Market participants must determine how the changes will impact their business model, revenues and cash flows and set clear objectives & priorities for post-AM implementation world: all market players should decide on what their priorities will be after the AM is implemented. These will need to be guided by the regulatory framework and adjusted accordingly. Some questions to answer could include:

  • Should we be a digital MPF leader? If so, what do we need to do now to prepare for it? If not, what will the impact be on our existing business?
  • What do we want our digital MPF Customer Experience to look like?
  • Is growing AUM / market share our goal or should we focus on profitability?

Operating Model development:

Begin developing potential Target Operating Models (based on potential scenarios) and the delivery roadmaps that will be required for the firm to achieve its strategic objectives. To do this, a flexible approach must be adopted that includes planning for future technology, people and process needs. At the next level of detail, the firm must specify the workstreams, activities and resources that will deliver the required outcomes. These need to be flexible so that appropriate changes can be made as further regulatory information is communicated or when priorities change.

How Typhoon can help:

Typhoon has helped companies in the MPF sector to work through regulatory uncertainty and plan their strategic responses and detailed approach. We have worked collaboratively with Trustees and Asset Management clients to set their overall direction and developed flexible target operating models that prepare them for the AM and beyond.

Typhoon consultants also have prior experience working with pension regulators in Hong Kong and regionally and understand the landscape and how it is likely to progress. We have applied this knowledge to our clients to inform their objectives, strategy and plan.

The take away:

Although the MPF market has current and upcoming challenges, companies can prepare themselves for the inevitable disruption through careful planning with a thorough understanding of the impending regulatory change, a flexible strategy for the shifting environment and by deciding on their priorities.