Understanding the New MPF Default Investment Strategy

The Mandatory Provident Fund (MPF) Default Investment Strategy (DIS) is a statutory investment arrangement that applies automatically to MPF contributions when a scheme member has not given investment instructions. Introduced under the Mandatory Provident Fund Schemes (Amendment) Ordinance 2016 and fully implemented by 1 April 2017, the DIS now governs the default investment of MPF assets for an estimated 4.5 million scheme members who have not made an active investment choice.

For employers, understanding the DIS matters because it affects your statutory duties under the Mandatory Provident Fund Schemes Ordinance (Cap. 485) — specifically, your obligation to inform employees about the DIS and to ensure that default arrangements operate correctly within your chosen MPF scheme.

What Exactly Is the Default Investment Strategy?

The DIS is a standardised, fee-capped investment approach that applies automatically to MPF contributions when a member does not provide investment instructions. It is not a new MPF scheme — it is a default arrangement embedded within every registered MPF scheme in Hong Kong.

Under the DIS, contributions are invested according to a two-fund structure:

• Core Accumulation Fund (CAF) — for members aged 49 or below
• Age 65 Plus Fund (A65F) — for members aged 50 or above

The strategy automatically shifts assets from growth-oriented investments (equities) to more conservative investments (bonds and cash) as the member ages. This de-risking mechanism is designed to reduce exposure to market volatility as retirement approaches.

The Mandatory Provident Fund Schemes Authority (MPFA) describes the DIS as follows:

"The DIS is a ready-made investment arrangement that automatically invests members' contributions and accrued benefits according to a prescribed investment approach. It is designed to provide a standardised, low-cost default investment option for scheme members who do not wish to make their own investment choices."

How Does the DIS Differ From Previous Default Arrangements?

Before the DIS, each MPF scheme had its own default fund arrangement, which varied significantly between providers. Some schemes defaulted members into conservative funds, others into balanced funds, and fees varied widely across the industry.

The DIS introduced three key changes that remain relevant today:

1. Standardised investment approach — All DIS funds across all MPF schemes must follow the same prescribed investment strategy, regardless of which provider operates the scheme.

2. Statutory fee cap — The DIS imposes a maximum fee level of 0.75% per annum for management fees, plus an additional 0.20% for recurrent out-of-pocket expenses. This cap is set out in the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A).

3. Automatic de-risking — The glide path from CAF to A65F is prescribed by law, not left to individual fund managers' discretion.

For employers, the practical implication is that you must ensure your chosen MPF scheme includes the DIS as a default option and that your payroll and HR processes correctly identify which employees fall under the DIS.

What Are the Employer's Statutory Obligations Regarding the DIS?

Under section 7A of the Mandatory Provident Fund Schemes Ordinance (Cap. 485), every employer must provide each eligible employee with a written notice explaining the DIS. This obligation applies at the time of enrolment and whenever there is a material change to the DIS arrangements.

The MPFA's guidance on employer duties states:

"Employers are required to provide their employees with information about the DIS, including the investment approach, fee levels, and the circumstances under which the DIS will apply. This information must be provided in a form that is clear and understandable to the employee."

In practical terms, your obligations include:

• Enrolment notices — When a new employee joins and is enrolled in an MPF scheme, you must provide them with the DIS information leaflet and explain that the DIS will apply if they do not make an investment choice.
• Annual communication — The MPFA requires that members who are in the DIS receive an annual communication explaining the strategy and reminding them of their right to make an active investment choice.
• Payroll accuracy — Your payroll system must correctly calculate MPF contributions and ensure that contributions are directed to the correct funds within the scheme.

Failure to comply with these notice requirements can result in penalties under the MPF legislation. The MPFA can impose fines for non-compliance, and in serious cases, the matter may be referred to the Mandatory Provident Fund Schemes Appeal Board.

How Does the DIS Affect Your MPF Scheme Selection?

When selecting an MPF scheme for your business, the DIS should be a factor in your decision-making process. All registered MPF schemes in Hong Kong must include the DIS as a default option, but the quality of implementation can vary between providers.

Key considerations when evaluating MPF schemes:

• Fee transparency — While the DIS fee cap is statutory, some providers may charge lower fees. Compare the actual fee levels across schemes.
• Fund performance — The DIS funds are passively managed and track prescribed benchmarks, but performance can still vary slightly between providers due to tracking error and operational efficiency.
• Administrative support — Consider the quality of the provider's employer portal, payroll integration, and staff training materials.

The MPFA publishes a quarterly comparison of MPF schemes, including DIS fund fees and performance data, on its website. This information is publicly available and can help you make an informed choice.

What Happens When an Employee Makes an Active Investment Choice?

The DIS only applies when a member has not given investment instructions. If an employee actively chooses their own fund allocation, the DIS ceases to apply to those contributions.

However, there are important nuances:

• Partial instructions — If a member gives instructions for only part of their contributions, the DIS applies to the remainder.
• Change of instructions — Members can switch out of the DIS at any time, subject to the scheme's rules on transfer frequency.
• Preserved benefits — When an employee leaves your company, their accrued benefits remain in the MPF scheme. If they were in the DIS, the de-risking mechanism continues to operate automatically.

For employers, this means you should maintain clear records of which employees have made active investment choices and which are in the DIS. This information is typically available through your MPF provider's employer portal.

How Does the DIS Interact With Employee Transfers and Terminations?

When an employee changes jobs, their MPF benefits can be transferred to the new employer's scheme or retained in the existing scheme as preserved benefits. The DIS continues to apply to preserved benefits if the member does not make an active choice.

For employers, the key administrative point is that you must provide accurate information about the DIS when an employee leaves your company. The MPFA requires that employers provide a "Notice of Cessation of Employment" and relevant DIS information to departing employees.

The MPFA's employer guide states:

"When an employee ceases employment, the employer must provide the employee with a notice of cessation of employment and inform them of their options regarding their MPF benefits, including the option to transfer their benefits to another scheme or to retain them in the existing scheme."

What Are the Common Compliance Pitfalls for Employers?

Based on MPFA enforcement actions and industry practice, the most common compliance issues relating to the DIS include:

1. Failure to provide DIS information at enrolment — This is the most frequently cited breach. Employers must provide the DIS leaflet and obtain acknowledgement from the employee.

2. Incorrect contribution allocation — Payroll errors that direct contributions to the wrong fund can result in the DIS not applying as intended.

3. Inadequate record-keeping — Employers must maintain records of employee investment choices and DIS notifications for at least seven years under the MPF legislation.

4. Outdated scheme documentation — If you change MPF providers, you must ensure the new scheme's DIS documentation is properly distributed to employees.

What Should Employers Do Now?

The DIS has been in operation since 2017, but it remains a critical compliance area for employers. The MPFA conducts regular inspections and can impose penalties for breaches of the notice and disclosure requirements.

Practical steps to ensure compliance:

• Review your enrolment procedures — Confirm that every new employee receives the DIS information leaflet and signs an acknowledgement.
• Audit your payroll processes — Verify that MPF contributions are being directed to the correct funds and that the DIS applies when no investment choice has been made.
• Check your MPF provider's reporting — Ensure you receive regular reports showing which employees are in the DIS and which have made active choices.
• Update your employee handbook — Include a clear explanation of the DIS and how it applies to employees who do not make an investment choice.

The Bottom Line

The DIS is a statutory default that affects every MPF scheme member in Hong Kong who has not made an active investment choice. For employers, the key takeaway is that compliance with the DIS notice and disclosure requirements is a legal obligation under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), not merely a good practice.

By ensuring your enrolment procedures, payroll systems, and record-keeping are aligned with the DIS requirements, you can avoid penalties and provide your employees with the information they need to make informed decisions about their retirement savings.

If you are setting up a new company in Hong Kong and need to select an MPF scheme, or if you are reviewing your existing arrangements, take the time to compare schemes based on fee levels, administrative support, and the quality of their DIS implementation. The MPFA's website provides comprehensive comparison tools that can help you make an evidence-based decision.

Practical Takeaway: Review your MPF enrolment procedures today to confirm that every employee receives the statutory DIS information leaflet and that your payroll system correctly applies the DIS when no investment choice has been made. For businesses navigating company formation and MPF scheme selection, our HSIC Code Finder can help you identify the correct business classification for your company registration.