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Understanding MPF retirement income funds

Retirement
MPF

By Elaine Hwang | June 29, 2022

Recently, a number of MPF providers have added a retirement income fund to their investment fund range.

A retirement income fund helps members create "passive income" after retirement. It also acts to preserve the purchasing power of the member’s assets and counter the effects of inflation. For members with a lower risk tolerance and those near, or already at retirement, this type of fund can be quite attractive.

Satisfying both "investment" and "income" needs

When members are close to retirement, they face a choice as to whether to withdraw their MPF benefits in cash, or to continue to keep their MPF assets invested for use sometime in the future. Most retiring members lose their primary income after retirement, so they tend to withdraw their MPF benefits, but at the cost of losing the opportunity to increase asset value and counter the effects of inflation.

In view of this, the launch of retirement income funds can help members continue to invest their assets in the MPF system and earn income after retirement.

Retirement income funds are mixed asset funds

In general, retirement income funds are mixed asset funds that invest in both stocks and bonds. MPF fund managers have a high degree of freedom in deciding the asset allocation depending on market conditions, but will usually tend towards investment strategies with lower volatility.

The bond portion of the fund can provide stability and interest income to the fund. Also, as the funds invest in higher-yielding bonds such as longer-term bonds, corporate bonds and even emerging market bonds, etc., there are opportunities to generate returns above inflation.

In terms of investment risk, retirement income funds are similar to other mixed asset funds with the same corresponding asset mix.

Post-retirement dividends can be withdrawn at any time

Some retirement income funds have a dividend distribution arrangement similar to stocks. They have a record date, an ex-dividend date, and a distribution date. In such cases, dividends will be paid in respect of units held by a member before the record date. The distribution of dividends will cause a unit price adjustment on the ex-dividend date. The distribution date is the date on which the dividend is paid to the member.

Before reaching age 65, dividends are usually reinvested in the retirement income fund so as to compound investment growth. After age 65, dividends are instead reinvested in less risky and more stable assets.

Some trustees allow members the option of (1) setting up a standing instruction to withdraw a specific amount on a monthly/quarterly basis as an alternative source of income whilst continuing to invest, or (2) one-time partial/full withdrawal. Benefits which are not withdrawn will continue to be invested in the MPF system.

Retirement income funds are not guaranteed products

Under normal market conditions, the funds pay monthly dividends as planned, but the funds do not provide any guarantees on investment returns or dividend payout ratios. If the investment return is below expectations, the fund may reduce its payout level.

In general, retirement income funds are not principal and/or interest-guaranteed products. The price of the fund can go up or down. Even if the fund has a dividend target (e.g. higher than the inflation rate by a certain percentage), there may be adjustments to the actual dividend payout depending on market conditions.

More options for retirement investing

The management of retirement income funds is more complicated than traditional funds, but this does not prevent MPF providers from launching these new products and extending new investment options for members. To reduce the burden on retired members, some providers automatically reduce fund fees for members after the age of 65.

Since retirement income funds have only recently been launched, past record and available data is limited. Whether these funds can achieve their long-term investment objectives is yet to be seen. Members may start paying attention to the funds’ operation and performance, as these funds maybe a reliable choice in the future.

This article in English and Chinese is available for download.

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Head of Retirement, Hong Kong & Macau

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