LegCo Paper No. CB(1)1763/96-97
(These minutes have been seen
by the Administration)
Ref : CB1/HS/1/96/1

Subcommittee on Mandatory Provident Fund System

Minutes of Meeting held on Tuesday, 22 April 1997, at 2:30 p.m. in Conference Room A of the Legislative Council Building

Members present:

    Hon CHAN Wing-chan (Acting Chairman)
    Hon CHAN Yuen-han
    Hon James TIEN Pei-chun, OBE, JP
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai

Members absent:

    Hon Ronald ARCULLI, OBE, JP (Chairman)
    Dr Hon LAW Cheung-kwok (Deputy Chairman)
    Dr Hon HUANG Chen-ya, MBE
    Hon Christine LOH King-wai
    Hon LEE Cheuk-yan
    Hon Paul CHENG Ming-fun
    Hon LAW Chi-kwong
    Hon MOK Ying-fan

Public officers attending:

    Mrs Pamela TAN
    Director
    Mandatory Provident Fund Office

    Mr Raymond TAM
    Assistant Director
    Regulatory Standards

Clerk in attendance :

    Miss Polly YEUNG
    Chief Assistant Secretary (1)3

Staff in attendance :

    Mr Jonathan DAW
    Consultant (Legal Service)

    Ms Connie SZETO
    Senior Assistant Secretary (1)5

As both the Chairman and Deputy Chairman were absent, members agreed that Mr CHAN Wing-chan would chair the meeting

I.Confirmation of minutes of meetings and matters arising

2. The minutes of the meetings held on 31 January, 13 February and 2 April 1997 were confirmed without amendment.

II.Meeting with the Administration

Report on outstanding issues - approval of trustees

(LegCo Paper No. CB(1)1328/96-97(01))

"Fit and proper" criteria of trustee

3. On Mr SIN Chung-kai’s concern about the objective assessment on the "fit and proper" criteria of the trustees, the Assistant Director, Regulatory Standards (AD/RS) said that in vetting the particulars provided by the directors of applicant trustee companies or individual trustees, the MPF Scheme Authority (MPFSA) would collect information on the companies or individual trustees for the purpose of verification and conducting investigations, if necessary. Concerning paragraph (6) under Part III of Form A1 enclosed at Annex A of the information paper, AD/RS explained that the main purpose of this paragraph was to remind individual trustees of their obligations under the principal Ordinance and to ensure that they had certain knowledge on the MPF rules and regulations. On the other hand, the requirement for at least one individual trustee of an employer sponsored scheme to be an independent trustee who had suitable knowledge and experience would compliment the individual trustee and ensure proper management of the scheme.

4. On the Consultant (Legal Service)’s enquiry about sanctions for entering or declaring false information by applicant trustees, AD/RS said that the types of sanction would depend to a significant extent on whether the misrepresentation was intentional or inadvertent. The Administration would consider the appropriateness of including a provision in the Form A1 about the offence and penalty of such misrepresentation. MPFO

5. Regarding Mr James TIEN’s enquiry about consultation with the retirement fund industry on the proposed "fit and proper" criteria of MPF trustees, AD/RS confirmed that consultation had been carried out at the Specialist Panel, as a result of which some amendments had been introduced to the Form.

Survey on trustees

6. Miss CHAN Yuen-han questioned the appropriateness of the proposed minimum paid-up capital of HK$30 million for an MPF approved trustee since none of the 28 respondent trustee companies in the survey had met the proposed requirement. In response, AD/RS said that the proposed capital requirement was set with reference to overseas practices and in consultation with the trustee industry. The proposed level was comparable to those under the retirement fund systems of Canada and Australia. Given that the majority of the existing trustee companies were subsidiaries of substantial financial institutions with capital and net assets exceeding $150 million and that the total annual contributions into the future MPF system was estimated to be about $20 billion, the Administration did not envisage any problem for prospective service providers in meeting the proposed capital requirement.

Information on ORSO schemes

7. Noting that trustees and investment managers of half of the 29 pooled retirement funds in the ORSO market belonged to the same corporate group, Miss CHAN Yuen-han expressed concerns about the independence of service providers and the possibility of monopoly by large service providers in the future MPF market. In response, AD/RS advised that there would be stringent rules, which conformed with international standards, to ensure separation and independence in the functions between scheme trustees and investment managers belonging to the same corporate group. On the concern about monopoly, AD/RS said that it was a common market practice for a large financial institution to engage in multiple business activities and the Administration had not observed any monopoly in the present retirement funds market.

8. In reply to Miss CHAN’s enquiry about the situation in Singapore, AD/RS informed that there was no evidence of monopoly in the market. Scheme members of the Central Provident Fund system were given great flexibility in the investment of their funds. Out of the total contributions equivalent to 40% of wages, up to 30% could be put into approved investment vehicles according to members’ own choice while the remaining 10% must be managed by the Government mainly invested in debt securities issued by the Government.

Capital preservation products

(LegCo Paper No. CB(1)1328/96-97(02))

9. Miss CHAN Yuen-han queried the effectiveness of the proposed Capital Preservation Product (CPP) to protect the contributions of low-income earners. Pointing out that investment of the Product would be very conservative and service providers were only required not to charge administrative fees exceeding investment returns, Miss CHAN doubted whether the Product could yield reasonable returns for retirement purposes. She urged the Administration to consider requiring a guaranteed return which could match inflation.

10. Responding to Miss CHAN, D/MPFO and AD/RS elaborated on the rationale of the CPP as follows:

  1. the objective of the proposed CPP was to protect scheme members’ contributions from erosion by administrative fees or poor investment returns;

  2. the proposed stringent investment rules on the Product were intended to reduce investment risks and the likelihood of negative investment returns so that the objective of capital preservation would be achieved;

  3. the operation of the proposed Product was similar to that of money market cash management funds. The investment return from these funds was comparable to wholesale rates for 3-month bank deposits while fees were only 0.25%. Therefore, it was envisaged that the net return of CPP would be more competitive than bank deposit rate for savings account; and

  4. guaranteed funds currently available in the market were different from the proposed Product. The former usually provided a better return but they required members to stay in the scheme for a certain period period before they could get the guaranteed return and withdraw from the funds. However, there would not be a qualifying period of participation for the proposed CPP.

11. As regards Miss CHAN’s proposal of requiring the CPP to provide a guaranteed investment return which could at least match inflation, AD/RS explained that although investment instruments were able to achieve returns above inflation over the long term, no investment portfolios could hedge against short term inflation risks. Given the volatility in the local investment market, coupled with high imported inflation rate, it was impossible for service providers to provide a CPP that would guarantee a return not lower than the rate of inflation. Moreover, under the MPF environment where scheme members could switch their accrued benefits between different investment choices or transfer their accrued benefits from one scheme to another, it would be difficult to secure a guarantee against inflation without a long-term commitment to a specific fund. The best alternative the Administration could achieve after discussion with the industry was to provide a CPP to protect members’ contributions by minimizing investment risks, monitoring the fees charged by service providers, and enhancing of market competition and transparency in investment operations.

12. Responding to Mr NGAN Kam-chuen’s enquiry about the feasibility of providing a guaranteed investment return if scheme members agreed to stay with an investment option or a scheme for a specific period of time, D/MPFO said that the proposal was not feasible as apart from practical difficulties, no employees could guarantee continuous contributions to a specific scheme since they might change employers or cease employment at any time.

13. Mr James TIEN concurred that it would not be possible to guarantee an investment return matching inflation. However, he opined that as administration and investment for the proposed CPP would be relatively simple, in order to relieve the burden of fees on low-income earners, the Administration should consider imposing an affordable fixed fee on the Product.

14. In reply to Mr TIEN’s proposal, D/MPFO stressed that regulating fees would amount to undue interference into the free market which would undermine the effectiveness of open competition among service providers for better quality of service. AD/RS added that prescribing fixed administration fees would disadvantage low-income earners as service providers would be prompted to select those employees with high and stable income as their customers. Such a problem had been found in the Chilean retirement fund system.

15. Responding to Mr SIN Chung-kai’s enquiry about the justification and cost-effectiveness of requiring all MPF schemes to provide a CPP instead of setting up a residual provident fund scheme for low-income earners, AD/RS explained that it would be inequitable and administratively cumbersome to confine membership of the CPP to low-income earners. The proposal was to require all MPF schemes, including master trust schemes and employer sponsored schemes, to offer the Product as an investment option for members. He said that the arrangement would provide greater flexibility and convenience as scheme members could switch between different investment options under the same scheme to cater for their different needs. As regards cost-effectiveness of the proposal, AD/RS said that low-income earners would be able to benefit from cross subsidies from other scheme members and from the economy of scale under master trust schemes.

16. As scheme members could switch between CPP and other investment products, Mr James TIEN cautioned that members might have to bear high administrative fees. AD/RS noted his concern and said that the MPFSA would require proper disclosure of the fee level of future MPF products.

17. The meeting ended at 4:30 p.m.

Legislative Council Secretariat

4 June 1997

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