ETFs Poised for Growth in Hong Kong Pension Funds

The launch of Hong Kong’s digital retirement platform, eMPF, is set to pave the way for greater adoption of lower-cost passive investment solutions, with Exchange Traded Funds (ETFs) expected to play a prominent role. Industry experts suggest that the platform’s rollout offers a significant opportunity for asset managers to introduce cost-effective products tailored for the local pension market.

eMPF and the Shift Towards Lower Fees

In June 2024, Hong Kong introduced eMPF, a digital version of its Mandatory Provident Fund (MPF) retirement scheme, aiming to reduce high administrative costs and enhance investment returns. The platform will integrate all 24 of Hong Kong’s retirement saving schemes by the end of 2025. Analysts predict that this shift will cut average fees by over 50% within the next decade, saving between HK$30bn and HK$40bn.

Opportunities for Asset Managers

According to Marie-Anne Kong, PwC’s asset and wealth management industry leader, eMPF’s launch has attracted fund managers keen to offer new MPF pension products. The digital platform simplifies the process by removing the need for asset managers to act as scheme sponsors, thereby lowering barriers to entry.

Increased Competition and Product Innovation

The eMPF introduces “full portability,” allowing individuals to transfer accrued benefits from employer contributions to their preferred scheme. Francis Chung, chair of MPF Ratings, highlighted that this could spur competition among fund providers to develop products better suited to member needs. Lower fees and broader fund choices could encourage the rise of ETFs as a favored investment option.

Challenges and Market Dynamics

Despite the potential, Hong Kong’s investment culture still leans towards actively managed funds with higher fees. Researchers found that the MPF system underperformed net of fees compared to self-managed portfolios, citing a lack of low-cost index funds, including ETFs. Additionally, the city’s reliance on intermediaries, who do not earn commissions on ETFs, has slowed passive investment adoption.

Future Outlook

The MPFA now requires new MPF constituent funds to consider index-tracking options during approval, pushing for greater ETF inclusion. As of September 2024, around HK$220bn, or over 16% of the total MPF net asset value, was invested in index-tracking collective investment schemes. Industry experts believe this trend will continue, especially as schemes increasingly use ETFs to enhance ESG integration and risk management.

Conclusion

The arrival of eMPF signals a transformative shift in Hong Kong’s pension landscape, potentially positioning ETFs as a cornerstone of future retirement investments. While challenges remain, the platform promises to foster innovation, reduce costs, and offer investors broader, more accessible options in the years ahead.

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