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FINA Case Study Financial Planning for Retirement (Questions 3.1 – 3.14)

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Session T07

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FINA Case StudyFinancial Planning for Retirement

(Questions 3.1 – 3.14)

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Question 1: What is the Mandatory Provident Fund, when was it launched, and what pension schemes were in place before the launch of the

MPF?

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Mandatory Provident Fund (MPF)Compulsory retirement scheme in Hong KongAll employers in Hong Kong have to joinImplemented on 1st December 2000Both employers and employees contribute to the fundIf your monthly salary is above $6500, the current

contribution rate is 5% of salary, with a cap of $1000.Employer will choose a MPF provider.Employee can choose a fund offered by the MPF

provider.Employee will receive the benefits upon retirement.

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Mandatory Provident Fund (MPF)(continued)

Before the implementation of MPF: Only some (not all) companies offer retirement

benefits to their employeesDifferent employers have different retirement

schemes.It is governed under ORSO. (Occupational

Retirement Schemes Ordinance)

Source: Hong Kong Fact Sheet: MPF Sheethttp://www.gov.hk/en/about/abouthk/factsheets/

docs/mpf.pfd

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Q3.2:Who supervises the MPF industry?

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The Mandatory Provident Fund Schemes Authority (MPFA)

Ensure stakeholders’ compliance with the Mandatory Provident Fund Schemes

Approve and supervise approved trusteesApprove and supervise MPF funds/ investment

productsRegister MPF schemesRegister and supervise MPF intermediariesRegister and supervise ORSO schemes

Source: http://www.e-crest.com:8080/hkrsa/public_docs/2007/Handout/1103MPFAHYu.pdf

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Q3.3 What section(s) of the working population is/are required to contribute to the MPF?

• The Mandatory Provident Fund (MPF) scheme is a retirement protection scheme for the entire working population in Hong Kong

• All employees and self-employed persons of 18 years of age or over and below age 65

• Unless specifically exempt under the MPFSO, e.g. Domestic employees, Self-employed hawkers, People covered by provident fund schemes, such as civil servants and subsidized or grant school teachers

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Q3.4 What does relevant income mean?

It includes wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance, but excluding severance payments and long service payments.

Both you and your employer can opt to make extra, voluntary contributions in addition to your mandatory

How are contributions calculated?

What is the current MPF “salary cap”?

The current salary cap is HK$20000

It refers to all payments in monetary terms given to employees.

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Q3.5 What is the difference between an MPF trustee and an

MPF service provider? How many MPF trustees are registered with the MPFA?

Jenny and Kenneth

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Difference between Trustee and Service Provider

Approved MPF trustees are entrusted with overall responsibilities for the administration and

management of MPF schemes.

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While the MPF trustees may : - Delegate part of their functions toother Service Providers

And the Service Providers have to : - Comply with the provisions of the MPF

legislation - Discharge their responsibilities with due care - Exercise their fiduciary duties.

Difference between Trustee and Service Provider

Reference: http://www.mpfa.org.hk/english/super/super_st/super_st.html

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The 19 MPF Trustees registered with the MPFA

• Ageas Trustees (HK) Limited• American International Assurance Company (Trustee) Limited• AXA China Region Trustees Limited• AXA Financial Services Trustees Limited• Bank Consortium Trust Company Limited• Bank of Communications Trustee Limited• Bank of East Asia (Trustees) Limited• BOCI-Prudential Trustee Limited• China Life Trustees Limited• Cititrust Limited• HSBC Institutional Trust Services (Asia) Limited• HSBC Provident Fund Trustee (Hong Kong) Limited• ING Pension Trust Limited• Manulife Provident Funds Trust Company Limited• MassMutual Trustees Limited• Principal Trust Company (Asia) Limited• RBC Dexia Trust Services Hong Kong Limited• Royal Bank of Canada Trust Company (Asia) Limited• Sun Life Trustee Company Limited

Reference: http://www.mpfa.org.hk/english/reg_use/reg_use_amt/reg_use_amt.asp

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MPF INTERMEDIARY

Will Lee and Rowena Lai

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Q3.6 What is MPF intermediary? Selling MPF schemes Advising clients on constituent funds

or underlying approved pooled investment funds of MPF schemes

Register with the MPFA Be supervised by financial regulatory

regimes Pass the MPF Intermediaries

Examination

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Types of MPF intermediaries

Corporate intermediary - company that is responsible for

the supervision of the activities of MPF schemes

Individual intermediary - person who engages in selling

MPF schemes and advising on funds

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Who regulate them?

Subject to the supervision of at least one regulatory regime.

Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority are the financial regulators.

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Question 7What is the Employee Choice Arrangement and

why has it been proposed?

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Employee Choice ArrangementAllows employees to choose the MPF provider as well

as the different types of MPF funds.Aims at lowering the admin fees charged by MPF

providers. When there is more competition among MPF providers,

it creates pressure and forces the MPF providers to lower the fees.

Originally scheduled to come into effect in April 2011Government has postponed it and it is now expected to

come into effect in the second half of 2012

From: MPF Choice Put Back to July 2012. http://topics.scmp.com/news/hk-news-watch/article/MPF-choice-put-back-to-July-2012

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Question 3.8What is an MPF scheme and is there more than

one kind?

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MPF SchemeThree main kinds of schemes:

Master trust schemesIndustry schemesEmployer sponsored schemes

MPF Schemes can also be called Registered schemesIn 2011, there were a total of 38 MPF schemesMost common and larger in scale: Master trust schemes

Pooling contributions from a large number of employers and employees economies of scale lower admin cost

Source:http://www.mpfa.org.hk/english/quicklinks/quicklinks_pub/quicklinks_pub_ar_12.html

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Q3.9:What is an MPF constituent fund?

A constituent fund invests in one or more approved pooled investment funds (“apif”) or invests directly. An apif can be a unit trust or an insurance policy

Employees have the right to choose MPF constituent funds.

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Main types of MPF constituent funds

Equity Fund

Balanced Fund

Bond Fund

Money Market Fund

Capital Preservation Fund

Guaranteed Fund

Primary investment objective

growth growth + some income

income + some growth

capital security

capital security

capital security

Geographical location

Single Country/Area Regional Global

Usually global

Single Country/Area Regional Global

Usually in only 1 single market

In HK only

HK/Regional/Global

Expected rate of return

High Low A pre-set minimum rate

Simplified from “MPF Investment: What every employee should know” by HKIFA,http://www.hkifa.org.hk/eng/download/fundinfo/mpf/HKIFA_Edu_E.pdf

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Q3.10:HOW HAS THE MPF

PERFORMED SINCE IT WAS

LAUNCHED?

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PERFORMANCE OF THE MPF SYSTEM AS A WHOLE From 1 December 2000 to 31 December

2010, Total amount contributed to the MPF

system: HK$277.52 billion

Total net contributions at 31 DEC: grown to HK$365.44 billion of accrued benefits

Investment returns had added HK$87.92 billion to the net contributions of members

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MPF System recorded an annualized return of 5.5% over the 10-year period after fees and charges

Yearly performance of the MPF system: fluctuated negative annualized return of -25.9% to a positive annualizedreturn of 30.1%.

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FINANACEQ3.11: What do the terms Fund Expense Ratio (FER) and Fund Risk Indicator (FRI) mean and how is each one calculated?

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Fund Expense Ratio (FER) Indicates how much money is paid for

services on investment

Components of operating expenses:1. Management fees2. Advertising and marketing expenses3. Accounting, auditing fees4. Transaction costs5. Transfer agent fees

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Fund Risk Indicator (FRI)Indicates the risk of your MPF

fundhttp://

cplatform.mpfa.org.hk/MPFA/english/cf_list.jsp

Is calculated as the annualized standard deviation based on monthly rates of return of the fund over a 3-year period

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referenceshttp://cplatform.mpfa.org.hk/MPF

A/english/index.jsp

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MPF schemeQuestion 12

By:

RebeccaArthit

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when and by whom can accrued benefits be withdrawn from a member's MPF?

When??

MPF System was introduced, Help as an income earner, save for your old age,

The benefits have to be preserved until you reach the retirement age of 65 stipulated in the MPFSO.

Whom??

Those who have to make the mandatory contributions All employees and self-employed of 18 years and above

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Exceptions??

circumstances under which accrued benefits may be paid before: early retirement at the age 60; or permanent departure from Hong Kong; or total incapacity; or death (note that the MPF will be regarded as part of the

member's estate and can be claimed by the personal representative of estate); or

small balance account of less than $5,000, no contributions made to a scheme for 12 months, and declared not to become employed or self-employed within the foreseeable future.

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Question 13The MPFA makes four suggestions that people

should consider when identifying their retirement investment goals. What are they?

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Advice on Setting retirement investment goals

1) Have a clear set of investment goals: Consider your income and expenses Don’t forget inflation

2) Assess your own risk tolerance level: If you are willing to take more risk, you can choose more

aggressive investment portfolio, vice versa.3) Estimate your investment horizon:

If you have a longer investment horizon, you can “afford” to take more risk.

4) Adjust your investment portfolio at different life stages: Keep reviewing and adjusting your portfolio as there will be

changes in your life.

From: Look After Your MPF Investment http://www.mpfa.org.hk/english/mpf_edu/mpf_edu_laymi/mpf_edu_laymi_uyn/mpf_edu_laymi_uyn.html

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Q3.14:What should employees consider when choosing MPF Funds?

-RISK- low risk steady growth vs high risk high growth- consider risk tolerance levels

- high risk tolerance levels: Equity Fund,Index fund- medium risk tolerance levels : Mixed Assests Fund- low risk tolerane levels : Money Market Fund, Guaranteed Fund, Bond Fund

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What should employees consider when choosing MPF Funds?

-Know the fund's featuresfund's launch date, its net asset value, type and asset allocation.-> reflect fund’s risk level

-Understand investment objectivese.g MPF Conservative Fund vs Equity fund-Take note of fees and charges

Fees and charges will affect a fund's long-term return