2. Regarding some members proposal to undertake an overseas study tour on foreign pension systems, the Chairman referred members to the information on Chile tabled at the meeting. Members deliberated on the feasibility of conducting an overseas visit in the latter half of April or May 1997. The Deputy Chairman was of the view that the Subcommittee should undertake a study tour so as to gain first-hand insight into overseas systems.

3. In reply to the Chairman, the Director of MPF Office (D/MPFO) confirmed that two Government officers had visited Chile in 1995 and the MPFO had also acquired some publications/literature on overseas retirement systems. A study into overseas practices was in fact included in the Administrations brief for the consultants.

4. After discussion and in consideration of the time constraint, members decided not to proceed with the overseas visit. Instead, they agreed to the Chairmans suggestion that the Research & Library Services Division of the LegCo Secretariat be requested to conduct researches into the subject.

(Post-meeting note: Pursuant to the Chairmans advice, a request for research was made on 18 March 1997.)

IIMeeting with the Administration

Sanctions of trustees

(LegCo Paper No. CB(1)1064/96-97(01))

Monitoring of trustees

5. Responding to the Chairmans view that the MPF Schemes Authority (MPFSA) should assume a proactive approach in monitoring the performance of trustees by conducting surprise inspections to detect irregularities and deter malpractices, the Assistant Director, Regulatory Standards (AD/RS) advised that where the MPFSA was not acting in response to complaints, the consent of the trustee was required for such inspections. Nevertheless, the MPFSA would arrange with trustees to conduct regular field inspections and request access to information relating to their performance to ensure that they complied with legal requirements and MPF guidelines. The information would include administration details of a scheme such as records of contributions, transfer and withdrawal of benefits, provision of enquiry facilities, security of scheme assets such as custodial arrangements, provision of performance guarantees and professional indemnity insurance, as well as investment aspects of a scheme such as transaction records. There were similar monitoring arrangements in overseas pension systems, as well as in the regulation of financial and banking institutions in Hong Kong. AD/RS did not envisage any major problem for the MPFSA in conducting regular inspections on trustees.

6. On the Chairmans concern about the costs for enforcement, the Director of MPF Office (D/MPFO) confirmed that the costs incurred by the MPFSA in its inspection and investigation work would be met by the Authority which would receive a set-up fund of $5 billion from the Government and derive its income from the approval of MPF trustees and registration of schemes in future.

7. In reply to Mr CHAN Wing-chans enquiry about the "whistle-blowing" duty on scheme auditors and other service providers, AD/RS explained that they were required to report to the MPFSA immediately any incident detected in their normal course of work which would adversely affect the financial position of a scheme. For instance, in performing the annual audit of a MPF scheme, the auditor would randomly select a few days transactions in the scheme year for examination and verification purposes. The policing role of service providers would have to be clearly stipulated in their appointment contracts with the scheme trustee. Failure to discharge their required duties would amount to professional negligence on the part of the service providers.

Removal, suspension or revocation of approval of trustees

8. In response to members enquiries about the sanctions of removal, suspension and revocation on trustees, AD/RS clarified that the application of different sanctions would depend on the seriousness of the breach of MPF requirements or regulations. While "removal" implied that the trustees authority to act with respect to a particular scheme or schemes were denied, "suspension" would have the effect of suspending the approval of the trustee for a specified period of time. "Revocation" was the total denial of a trustees ability to act for any MPF scheme. The MPFSA would only consider revoking the approval of a trustee as a last resort. Prior to applying sanctions, the MPFSA could give the trustee an opportunity to take corrective action if the Authority was satisfied that non-compliance on the part of the trustee had been inadvertent or had not caused material asset loss.

9. As regards Mr SIN Chung-kais concern that the proposed prior notice of one-month for applying sanction was too long, AD/RS advised that depending on the seriousness of the default, the MPFSA would decide whether a shorter notice period should be given.

10. Responding to Miss CHAN Yuen-hans enquiry on rescinding sanctions, AD/RS said that the MPFSA could rescind a sanction on an approved trustee at any time subject to satisfactory rectification of irregularities or defaults. Regarding Miss CHANs suggestion of blacklisting non-complying trustees, AD/RS remarked that it would be inappropriate to do so as circumstances of non-compliance might be associated with the "fit and proper" criteria of the trust company directors rather than the operation of the trustee company. Moreover, other effective sanctions including prosecution, financial penalties and public censure were also available to the MPFSA. It was envisaged that in order to remain competitive, trustee companies would strive to maintain an impeccable reputation in the industry.

11. On the Deputy Chairmans concern about protection of members interests in the event of sanctioning the trustee, AD/RS confirmed that under such circumstances, the MPFSA would appoint a replacement approved trustee to take over the scheme pursuant to section 33(4) of the principal Ordinance. The Authority would consider the suitability of the replacement trustee recommended by the original trustee in order to facilitate the orderly transfer of scheme management. Moreover, notwithstanding suspension or removal, the duties imposed on an approved trustee under the principal Ordinance, the regulations and rules would not lapse.

Replacement of trustees

(LegCo Paper No. CB(1)1064/96-97(02))

Winding up of schemes

12. In order to protect the integrity of assets and the interests of scheme members when a scheme became so problematic that no replacement trustee was willing to take over it, some members urged the Administration to provide more active assistance such as by putting the scheme under receivership and appointing the Official Receiver as the liquidator. They asked the Administration to consider similar arrangements for liquidation of companies provided under the Companies Ordinance.

13. Responding to members concerns, D/MPFO and AD/RS made the following points :

(a) the MPFSA would make every endeavor to save a problematic scheme by appointing a replacement trustee to rectify the problems and make proper arrangements to avoid further losses in scheme assets. Only under extreme circumstances that the scheme had very serious problems and where a replacement trustee could not be found would the Authority apply to the court for a winding-up order; and

(b) if there was evidence to show that there might be losses in MPF accrued benefits caused by misfeasance or illegal conduct of the trustee, the MPFSA would set up an investigation team to carry out a full investigation. Depending on the outcome of the investigation, the Authority would consider taking appropriate actions such as sanctioning the trustee or initiation of winding up.

Protection of members accrued benefits

MPFO

14. Some members were still concerned about the effectiveness of the proposed safeguarding mechanism to protect members accrued benefits and the means to enhance self-policing by scheme members. At the Chairmans request, the Administration agreed to provide a paper setting out the various safeguarding measures underpinning the MPF system and how they would operate to protect the interest of the parties concerned. As regards the self-policing role of scheme members, D/MPFO confirmed that sufficient information and assistance would be available to scheme members. These would include monthly pay slips showing the details of contributions made, annual benefits statements, annual reports and audited accounts provided by the trustee, as well as enquiry and complaint channels.

15. Addressing the Deputy Chairmans concern about the need to monitor MPF schemes with consistently low investment returns, AD/RS remarked that in monitoring the investments of MPF schemes, the MPFSA and scheme auditors would ensure compliance of the trustee and other service providers with prescribed MPF investment guidelines and the relevant Statement of Investment Policy and Objectives. As regards the Deputy Chairmans concern about possible malpractices resulting from the trustee and investment manager belonging to the same parent company, AD/RS said that it would be stipulated in the subsidiary legislation that concerned parties involved in any financial transaction must deal with each other at arms length and all transactions must be fair and conducted at market prices. In this connection, the Chairman said that while monitoring of administrative fees was possible by comparing the fees charged by different schemes, it would be difficult to compare investment returns of schemes as they were subject to different investment strategies and portfolios. Mr SIN Chung-kai also remarked that the scheme trustee had the duty to supervise the investment manager and monitor the latters performance.

16. The meeting ended at 4:00 p.m.

Legislative Council Secretariat

21 May 1997

Last Updated on {{PUBLISH AUTO[[DATE("d mmm, yyyy")]]}}

Subcommittee on Mandatory Provident Fund System

Minutes of Meeting held on Monday, 17 March 1997, at 2:30 p.m. in Conference Room A of the Legislative Council Building

I.Confirmation of minutes of meeting and matters arising