Earlier this week the Hong Kong Mandatory Provident Fund Schemes Authority, or MPFA, released a report on the study of administrative costs involving the city's MPF system. Major findings like high administrative costs, inflexible administrative structure are all well known secrets, and although the report recommended some measures to reduce the costs, many of them may not be feasible or hard to implement.

First, the MPFA suggests imposing a cap on the administrative costs. By far this is the most radical suggestion on the issue. In a free market, if a particular investment fund charges high administrative fees but is not performing, investors can switch to other fund providers. In other words, market forces can help to make fund providers more responsible in determining administrative fee levels.

The proposal to impose a cap on administrative fees should be considered carefully, although many welcome such an idea. We have to be careful because this will have an adverse impact on Hong Kong's long established free market philosophy. In addition, there are many technical details that need to be resolved before the introduction of such a cap fee, which can be the subject of a lot of controversies. For example, if the cap is set too high, then it will be ineffective, and if it is too low, it would become unrealistic. So, a price control type of fee structure is not easy to implement in Hong Kong's free market system.

Second, there is a suggestion to introduce some low fee funds, a very appealing proposal at first glance. However, like all other suggestions, there is always a catch, and this time it is about price and quality. Fund providers can provide funds with low fees easily, but if the fund is of an inferior quality, at the end of the day, it is the investors who suffer. If investors are smart enough to identify these low quality funds, then they will not select them. Hence, introducing the low fee funds is not exactly what the MPFA would like to see.

Third, the MPFA also suggests introducing some simple funds so as to lower the administrative fees. According to market data, 19 provident fund providers provide more than 500 funds for members to choose. This raises a question of whether there are too many funds in the market so that the economies of scale cannot be obtained. So, if more simple funds can be introduced with lower administrative fees, the question here is what does 'simple' refer to and this could be the subject of a debate. Simple funds theoretically can lower the costs, however, there is no guarantee that they can lead to better performance, which is the key issue for investors. Here the question of quality is still yet to be addressed.

Fourth, there is a suggestion to introduce a public trustee to cut costs, and this implies that the government should have greater involvement and commitment in the provident fund industry. This will lead to greater people's expectation on lowering future fund administrative fees, as well as raising the return levels. An extreme outcome may be to advocate for a government guarantee type of provident fund scheme. Clearly this will be an issue that needs careful examination.

The suggestions made by the MPFA no doubt address some of the problems faced by the scheme right now. However, it is not sensible to believe that all problems can be resolved in one simple report. Much more work needs to be done.

The author is dean, School of Business,Hang Seng Management College. The views expressed here are entirely his own.