Starting from 1 April 2017, every Mandatory Provident Fund (MPF) scheme is required to offer the Default Investment Strategy (DIS) as a result of the MPF Schemes (Amendment) Ordinance 2016. The DIS is designed to address issues both of high administrative fees for MPF funds and also the fact that many individual scheme members have not made investment choices for their MPF funds. This article gives a general overview of the DIS and its implications.
What is the DIS?
The DIS is a standardised and globally diversified investment strategy that is intended to reduce investment risk according to the scheme members’ age. It is also fee-controlled, with management fees capped at 0.75 per cent and out-of-pocket expenses capped at 0.2 per cent of the net asset value of the funds per year. The fee cap is roughly half of the average fee level charged to MPF funds before the commencement of the DIS. The MPF Schemes Authority has stated that the fee cap will be regularly reviewed for further downward adjustment in the future.
The DIS consists of two funds designed to balance long-term risks and returns, namely the Core Accumulation Fund (CAF) and the Age 65 Plus Fund (A65PF). The CAF is intended to adopt a more aggressive investment strategy, while the A65PF is said to adopt a more conservative investment strategy, holding higher risk assets (mainly global equities) and lower risk assets (mainly global bonds) in the ratio of 6:4 and 2:8, respectively.
Contributions made by scheme members under the age of 50 who have not made a clear choice will be fully invested into the CAF. Once the scheme member reaches the age of 50, the trustee will automatically move a proportion of the scheme member’s assets in the CAF to A65PF every year. This de-risking process will continue until the scheme member reaches the age of 64, when all assets will be held in the A65PF.
Does the DIS affect me?
For new scheme members joining the MPF after the commencement of the DIS, their MPF contributions will be automatically invested through the DIS if they do not make an alternative investment choice. The scheme member can also actively choose to join the DIS, or invest in the CAF or A65PF individually. However, automatic de-risking will not apply where the scheme member chooses to invest in the CAF or A65PF individually.
For existing scheme members who have MPF accounts set up before the commencement of the DIS (Pre-existing Account), those who have already given investment instructions or are 60 or older before 1 April 2017 will not be affected by the implementation of the DIS.
Those under 60 with accounts fully invested in the default arrangement that existed before the implementation of the DIS (Pre-existing Default Fund) and who have never given investment instructions will be sent a DIS Re-investment Notice by the trustee within the first six months of the DIS being implemented.
If the scheme member does not respond within 42 days of notification, their existing accrued benefits and new contributions will be invested through the DIS after a further 14 days. Scheme members should refer to the DIS Re-investment Notice for details of the arrangement.
There are special circumstances where the scheme member will have their accrued benefits invested in the same manner as before the implementation of the DIS, but where future investments made after the implementation of the DIS may be invested in the DIS, unless otherwise instructed.
For instance: where part of the accrued benefits is invested in the Pre-existing Default Fund and where the accrued benefits in the Pre-Existing Account as at 31 March 2017 are transferred from another account within the scheme (e.g. in the case of a change of employment).
What should I do?
The implementation of the DIS may affect scheme members’ MPF investments or accrued benefits. Scheme members should take this opportunity to review their MPF accounts and make sure they understand the impact of the DIS on their investment.
This is especially so for those who invested in the Pre-existing Default Fund before the implementation of the DIS, as the DIS comprising two mixed-asset funds may alter the risk profile compared to the Pre-existing Default Fund.
In particular, those who receive the DIS Re-investment Notice should pay special attention to the contents and make appropriate arrangements.
More details can be found at http://www.mpfa.org.hk
This article appeared in the Classified Post print edition as New ordinance could mean changes to your MPF.
