Hong Kong's deposit rates have been increasing recently following increases in interest rates around the world. Banks are attracting cash by offering higher interest rates on time deposits, and the one-year Hong Kong Dollar fixed-term interest rate has now reached more than 4%.
Given this background, the "Prescribed Savings Rate" under the MPF and the returns available from MPF Conservative Funds have also increased.
What is the Prescribed Savings Rate?
The Prescribed Savings Rate (PSR) is used as a benchmark to decide whether MPF trustees can collect fees on their Conservative Fund. Each month, the PSRs for the previous month are announced in newspapers, as well as on the Mandatory Provident Fund Authority’s (MPFA) website.
Under the regulations, no fees can be deducted from a Provider’s Conservative Fund in any month unless it achieves a net return for that month greater than the return calculated based on the PSR. However, within any 12-month period, if the return in any month exceeds the PSR, the MPF trustee can recoup any uncollected fees, but only to the extent of the excess returns achieved.
This arrangement encourages MPF Conservative Fund managers to actively look for suitable investment opportunities in the market, so that the investment return on their funds is higher than the PSR.
The PSR has been on an upward trend since September 2022
The calculation method to determine the PSR is based on the simple average of the interest rates offered by the three note-issuing banks in Hong Kong on a Hong Kong dollar savings account with deposit amount of HKD 120,000. In the prior “zero-interest rate”, the PSR remained at 0.001%. From September 2022 onwards, the PSR has started to increase, and the latest announced PSR is 0.625% for Jan 2023.
Conservative Funds cannot fully invest in longer-term instruments
Conservative Funds must adhere to certain investment requirements.
First, Conservative Funds can only invest in Hong Kong-dollar short-term bank deposits and short-term bonds, with an average maturity of not more than 90 days. Further, since Conservative Funds are mostly viewed as short-term parking funds, fund managers need to ensure there is sufficient liquidity to fulfill redemption demands.
These requirements prevent Conservative Funds from investing heavily in longer-term time deposits or bonds, so comparing overall fund performance with returns available on one-year time deposits is not appropriate.
The effects of timing can prevent returns from matching the market
Conservative Funds are required to wait for their current holdings to mature before they can invest in new time deposits or bonds, which may offer higher interest rates. This lag effect can affect fund performance. In addition, interest rate increases may adversely affect other investments within the fund.
Whilst the effect of rising interest rates may not be fully reflected in Conservative Fund returns, the returns will still follow in the direction of the rise in interest rates and the PSR, so they can be considered a suitable fund choice in the current economic cycle.
