Insurance Related Legislation - Code on Disclosure for MPF Investment Funds

1. Insurance Related Legislation - Code on Disclosure for MPF Investment Funds Amy So Vice President, Employee Benefits Administration & Services 12 October 2004

2. Objectives of the Code • Provide members with clear and easy-to-understand information • Simplified language • Improved consistency of presentation & language • Tools that assist understanding of MPF information (e.g. Fee Table, On-going Cost Illustration, Fund Expense Ratio) • Provide guidance to trustees & other service providers • Good Disclosure Principles

3. Information to be Disclosed • Information that enabled members to make informed investment decision • General content to be determined by trustees considering the MPF (General) Regulation, SFC Code on MPF Products, and Good Disclosure Principles • Focus of the Code -- to provide clear and comprehensible information regarding fees & charges, in standardized format & terminology • Fund Expense Ratio (FER) • Fee Table • On-going Cost Illustration (OCI) • Fund Fact Sheet • Capital Preservation Fund (CPF) Illustrative example New New New New

4. History of Code Formulation • Discussion with industry started in late 2002 • 5 Papers regarding Fund Expense Ratio, Performance Presentation Standards, Point of Sale Disclosure, Member Benefit Statement, & Fund Facts Sheets • Consultation paper issued for comments by members of public and industry from February 2 to March 15, 2004 • Code finalized & published on 30 June 2004

5. Good Disclosure Principles • Information should facilitate decision making • Information should be timely • Disclosure should promote comparability • Disclosure should be consistent • Disclosure should be clear and concise

6. What the Code requires Trustees to do • Distribute offering documents (“ODs”) • Include Fee Table in OD, with CPF Illustrative example & On-going Cost Illustration (“OCI”) • Signpost OCI & Fee Table in OD • Prepare and distribute Fund Fact Sheetstwice a year • Include Fund Expense Ratio (“FER”) in annual returns, fund fact sheets and OCI New New New New

7. Offering Document (OD) • Sections 31(2)(c) and 54 of Regulation • Provide OD to all prospective or current scheme members through a delegate; or through employer • Not adequate just to hold copies for reference or available on request

8. Fund Expense Ratio (FER) • Fund Expense Ratio (FER) • Measure total level of expenses of a fund • Apply to constituent funds and APIFs • Include FER in (E1.4) • Fund Fact Sheet • On-going Cost Illustrations (OCI) • Annual return of a registered scheme & Approved Pooled Investment Fund (APIF)

9. Fund Expense Ratio (FER) • Expense amounts Include • Management fees • Guarantee charge paid to guarantor • Registration fees & compensation fund levy • Insurance costs, legal & professional fees • Printing & distribution costs • Banking charges & interest on borrowings • Amortized expenses • Deferred expenses from previous period in relation to CPF Exclude • Capital account movements • Asset Appreciation / depreciation • Fund income • Non-fund fees paid directly by employers & scheme members • Guarantee charge deducted & reserved within the fund • Foreign exchange gains/loss of the fund • Deferred expenses to subsequent period in relation to CPF

10. Fund Expense Ratio (FER) • FER first calculated for financial period commencing 31 December 2004 (G2.7) • Auditors to ‘check’ calculation (E4.2) • Trustees to retain calculation and source data for inspection by Authority • Authority will review accounting practices for any inconsistency in application

11. Fee Table Purpose (C2.3) : • One point presentation for all classes of participants • Consistent • Standardized terms • “At a glance” understanding Complement to the existing SFC requirement (C2.4)

12. Fee Table Content (C2.6) • All fees & charges • What for • Amount currently charged • Payable from whom

13. Fee Table

14. Fee Table Five Sections of Fees (C2.7) • Joining fee & Annual fee • Fees & Charges payable arising from transactions in individual member’s account (e.g. Contribution Charge, Offer Spread, Bid Spread, Withdrawal Charge) • Annual fund operating charges & expenses in relation to constituent funds of the scheme (e.g. Management Fees, Guarantee Charge, Other Expenses) • Fees & charges payable out of underlying funds • Other fees & charges for providing additional services

15. Fee Table • Fee information in documents other than OD (e.g. guidebooks, brochures, booklets) (C1.9) • Consistent with OD • Presented in same format as set out in Fee Table

16. Fee Table • Include Fee Table in OD by 31 December 2005 (G2.1) • Submit draft to Authority for approval-in-principle by 15 September 2004 • Provide Fee Table to prospective employers and scheme members one month after Authority approval as supplement information.

17. On-going Cost Illustration (OCI) Purpose (C2.8) • Understanding the effect of fees / charges in the Fee Table. • Comparison of dollar costs among similar constituent fund of different schemes • Illustrate in dollars incurred in investing into the funds across defined time horizons • Using an example of total fees & charges on $1,000 contribution with 5% gross return each year. • Not applicable to capital preservation funds, guaranteed funds or new funds (established for less than 1 year) (C2.10)

18. On-going Cost Illustration (OCI) • Use latest Fund Expense Ratio (FER) • Show all classes of fund • Use current contribution charge, offer spread to arrive the net contribution invested • Use of current level of bid spread and withdrawal charge to arrive the respective cost • Non-recurring expenses (set-up costs, system changes etc) should be adjusted

19. On-going Cost Illustration (OCI)

20. On-going Cost Illustration (OCI) • Prepare first edition OCI when Fund Expense Ratio (FER) first calculated • Prepare within 6 months after each financial year-end • File first issue of OCI with supporting calculations with Authority for information (G2.3) • May form part of (MPFA approval needed) or as an accompaniment (signpost only) to a scheme’s OD (C2.9) • Update annually • OCI calculation verified by approved trustees (C2.16) • Document verification procedures in compliance manuals

21. Fund Fact Sheets (FFS) • Minimum content (D2.3) • Fund size • Launch Date • Investment Objectives • Portfolio Allocation • Top 10 Portfolio Holdings • Performance Over Time Periods • Performance vs Benchmark • Latest Fund Expense Ratio (FER) • Appropriate Fund Risk Indicators • Fund Descriptor • Commentary

22. Fund Fact Sheet (FFS) • Meet requirements in Chapter 8.6 and Appendix D of SFC Code on MPF Products (D3.5) • No prior approval by Authority required unless included in offering document • Authority may review and comment on fund fact sheets

23. Fund Fact Sheets (FFS) • Frequency (D3) • 2 fund fact sheets each financial year • Timing • One at financial year-end • Distribution: mail with annual benefit statement 3 months after financial year-end • Signpost distribution of other fund fact sheet: when / how • One at date six months after • Distribution: mail, employers, email, internet, fax, call centre • Provided within 2 months of reporting date • Provided with first annual benefit statement issued after 28 Feb 2005

24. Capital Preservation Fund (CPF) Illustrative Example • May form part of (MPFA approval needed) or as an accompaniment (signpost only) to a scheme’s OD (C2.15) • Verified by approved trustees • Document verification procedures in compliance manuals

25. Annual Benefit Statement • Section 56 of Regulation requires trustees to provide annual benefit statements • Ensure each member is provided annually with historical record of member’s account at a point in time • Align with good disclosure principles • To be further developed

26. Questions & Answers Session

27. Thank You!