Article

Default Investment Strategy – An MPF Milestone. What actions should employers take?

March 8, 2017
| Hong Kong

From April 1, 2017, all MPF Schemes will be required to offer a Default Investment Strategy (“DIS”). Introduction of the DIS represents another milestone in the evolution of the MPF system. However, it is not without its issues.

What is Default Investment Strategy?

The DIS is a highly standardised, ready-made investment strategy designed to be a default investment option for MPF scheme members who cannot or do not actively choose their own investment funds. Members can also actively choose to invest in the DIS, or the 2 component funds. The DIS strategy is also subject to a maximum fee cap set by regulation which is likely to be lower than most existing funds.

More information about the key features of DIS and the implementation schedule.

How does DIS affect members?

DIS is a key initiative designed to enhance the overall MPF system. However, members need to understand the DIS features to avoid potential pitfalls:

  1. DIS is a highly standardised strategy based on a prescribed asset allocation, using the member’s age as the sole determining factor in re-allocating assets over time. The introduction of DIS is an opportune time for existing MPF members to revisit their investment options.
  2. The DIS component funds may appear similar to some existing funds, e.g. a balanced fund with similar asset allocation, but in reality they could be very different (e.g. fee cap, investment approaches, managers used, active versus passive strategy, geographical compositions, etc.).
  3. It is important to note that if members who are currently invested in MPF default funds do not proactively select their investment funds within a prescribed period, their existing balances will automatically be switched to the new DIS. This could result in a significant change from their existing default investment strategy.

What actions should employers take?

Employers should understand the changes and should be prepared to answer questions from their employees. Pertinent actions include:

  1. Ensure HR understand the details of DIS. As a first step, HR may wish to understand the following:
    • How do the newly introduced funds under DIS compare with the existing mixed assets funds and target date funds?
    • How does the existing default fund strategy compare with DIS, especially if the existing default fund is a guaranteed fund?
    • What is the detailed implementation process and what is the critical timeline in relation to MPF enrolment, investment selection and procedures?
  2. Work with the MPF provider to understand the overall fund distribution profile selected by their employees, especially how many existing default fund members may potentially be affected by the introduction of DIS.
  3. Schedule timely member briefing sessions and consider supplementary internal communication (e.g. via Intranet) to highlight details of DIS to employees.
  4. Ensure that the updated MPF Scheme “welcome pack” with new enrolment forms is available to be used after April 1.
  5. As a follow-up step, employers may wish to review their existing retirement policy (ORSO / MPF) and make any adjustments, as appropriate. For example, employers may wish to consider whether using an ORSO scheme is still appropriate and whether adding lower fee passively managed funds in their ORSO scheme is an option.

Willis Towers Watson can help

As a leading provider of retirement consulting services, Willis Towers Watson can support you with the above action items and help shape your responses to ensure you are well-prepared for the imminent DIS changes.

For further information, please contact your local Willis Towers Watson consultant or Elaine Hwang.

Contact us

For further information, please contact your local Willis Towers Watson consultant or Elaine Hwang by email.

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