LegCo Subcommittee on MPF System
Information Note
Report on
Outstanding Scheme Operational Issues (Part II)

Purpose

Further to Part I of the Report on Outstanding Scheme Operational Issues on 10 April 1997, this paper presents other outstanding scheme operational issues raised at the Subcommittee meetings subsequent to 12 February 1997, together with the response and follow-up actions taken by the Administration.

Specific Issues Raised

Default Contributions (12.2.1997)

LegCo’s Comments

2. LegCo members have expressed concern that the MPF schemes or scheme members involved have to bear the costs of prosecuting defaulting employers. They suggest that scheme members should not be held responsible for such costs.

Administration’s Response and Action

3. Default contributions ("arrears"), as provided in the MPF Ordinance, will constitute a debt due and payable to the MPFA. The MPFA may take legal actions to recover such debts. The recovered arrears shall be returned to the scheme members via the trustees.

4. We agree to Members’ suggestion that all expenses in prosecuting defaulting employers should not fall on the schemes nor the scheme members. Such expenses would be absorbed by the MPFA, except when the court orders the defaulting party to bear any part of the expenses. Such expenses generally consist of several major items, including :

  1. Filing fees : These include various fees for filing documents in respect of a case to the courts;
  2. Legal fees : These include fees and expenses for engaging legal counsels in preparing and presenting a case;
  3. Enforcement fees : Fees for enforcing judgments, e.g. fees for obtaining the court bailiff; and
  4. Costs : If a case is defeated in the courts, the MPFA may have to bear the legal costs of the defendant (i.e. defaulting employer) as determined by the courts.

5. Items (a) and (c) are standard fees which are reasonably low and are prescribed in the relevant legislation. In a straightforward recovery action, we anticipate that such fees would be about $2,000 for the District Court and $2,800 for the High Court. Such expenses would be absorbed by the MPFA.

6. Item (b) shall either be the staff costs of the MPFA if the lawyers are from within the MPFA, or it may be absorbed by the Legal Department if government legal counsels are engaged.

7. We do not foresee that the potential costs under item (d) will be high. The MPFA will only file a suit to the courts where there is prima facie evidence for the default cases. As a result, we anticipate that the court proceedings should be fairly straightforward. Such costs will be absorbed by the MPFA.

Accounting and Reporting Requirements (10.3.1997)

LegCo’s Comments

8. Members have made the following comments:

  1. Timing for submission of annual accounts : The Administration proposes that MPF trustees should submit the audited accounts of MPF schemes to the MPFA within six months after the end of the schemes’ financial year end. Members express concern that the MPFA may not be able to obtain financial information of a scheme on a timely basis and request the Administration to impose a tighter deadline for the submission of annual accounts.
  2. Comparative figures : The Administration proposes that last year’s comparative figures should be shown for every amount included in MPF scheme accounts. Members suggest that MPF scheme accounts should provide comparative figures for 3 to 5 years to enable better assessment of scheme’s performance.

Administration’s Response and Action

Timing for submission of annual accounts

9. We have consulted the accounting profession and the retirement fund industry again regarding Members’ concern and suggestions. We consider that a six months’ period for the submission of audited accounts is appropriate for the following reasons :

  1. Existing practice for ORSO schemes : Currently, ORSO scheme accounts have to be filed with the Registrar of Occupational Retirement Schemes within six months after the scheme’s financial year end. Our proposed six months’ period for the submission of MPF scheme accounts is consistent with that for existing ORSO schemes. We anticipate that MPF master trust schemes will have a much larger membership size than existing ORSO schemes and will involve a lot more small employers. As such, the preparation of MPF accounts may take even more time than that of ORSO schemes, particularly in the following areas:

      - calculation of accruals of contributions at year-end;

      - obtaining reports and confirmation from custodian and investment managers on the value of investment; and

      - reconciling individual members’ accrued benefits with overall scheme assets.

      Shortening the filing period may therefore create practical difficulties for scheme trustees and auditors.

  2. Costs : Tightening the reporting and filing deadline will create resource constraints to both the trustees and auditors. They may have to recruit temporary staff or work overtime in order to meet the deadline. This will result in additional administrative costs and audit fees, which will ultimately be passed on to scheme members.
  3. Other regulatory and protective measures in the MPF System : The intention of tightening the filing deadline is to enhance disclosure requirements so as to enable both the MPFA and scheme members to obtain scheme information on a more timely basis. The MPF System has already had other built-in regulatory measures that will serve the same purpose. These include requirements of trustees to report on significant events, on-going monitoring by MPFA and whistle blowing requirements upon auditors and other service providers. Given the existence of such protective measures, the costs incurred as a result of tightening the reporting deadline will far outweigh the added value derived therefrom.

Comparative figures

10. We have consulted the accounting profession and the retirement scheme industry on the proposal of disclosing comparative figures for more than one year for each amount in the financial statements. We consider that disclosing comparative figures for more than 1 year for all items in accounts may not be very useful to scheme members. It is unlikely that scheme members will be interested in certain items in the scheme accounts such as depreciation charged, overheads incurred in respect of the scheme. Such kind of disclosure is also costly and is not consistent with international practice.

11. Instead, we propose to require trustees to provide a three year summary of the following key financial indicators:

    - Net investment income

    - Investment assets.

Where a scheme provides investment options to scheme members, separate disclosure should be made for each investment fund.

12. We believe that scheme members will be more interested in these key financial indicators as they are helpful in assessing the performance of the scheme.

No-rejection Requirement (2.4.1997)

LegCo’s Comments

13. Members request for clarification of what is considered as :

  1. reasonable period of time for the trustee to issue a notice of acceptance to an applicant; and
  2. reasonable amount of information the trustee may request for processing an application to an MPF scheme.

Administration’s Response and Action

Reasonable period of time

14. In the subsidiary legislation, we propose to require the trustee to finish processing an application and issue a notice of acceptance to an applicant within 30 days after the applicant has completed the application procedures.

15. Based on the experience of existing market operation in Hong Kong, we foresee that in the future MPF market service providers will normally be able to finish processing an application within a shorter period. However, we do not suggest to impose a tighter deadline. The imposition of a statutory deadline is intended to avoid the unlikely event where a trustee may circumvent the proposed "no-rejection" requirement by delaying instead of rejecting an application directly. The legislative intention is not to control the quality of service to be provided by future MPF trustees. As a result, what is considered as "reasonable" period of time should not be the period when trustees would normally be able to finish processing an application, but a period beyond which it is reasonably clear that the trustee concerned is delaying and avoiding to process the application. A 30-day deadline would leave a bit of a leeway to cater for special situations where trustees may not be able to process an application within a period of time normally required for processing an application.

Reasonable amount of information

16. We believe that the yardstick for determining whether the information requested by the trustee is "reasonable" should be whether such information is relevant for the consideration of the application to join an MPF scheme. We anticipate that trustees are likely to request for the following information in processing an application :

  1. General information : Such information is commonly needed by trustees to process any application. For example, the name of the employer or self-employed person, the names and relevant income of the employees, information in relation to payment of contributions (e.g. bank information); and
  2. Special information : Such information may be needed by trustees for certain schemes with special terms and would vary between different schemes. For example, if an employer wishes to set up an employer-sponsored scheme, the trustee may need more information in drawing up special scheme terms and designing the scheme features.

Detailed guidelines will be developed along this direction.

17. We do not propose to specify in the subsidiary legislation what constitute a reasonable amount of information for the following reasons :

  1. It is impossible to exhaust all possibilities to specify the items of information different trustees need to process applications for different schemes, particularly the special information needed.
  2. As analysed in the LegCo paper "No-rejection Requirement" at the meeting on 2 April 1997, in the future MPF market, there will be very few employers and self-employed persons, if at all, who will have difficulties in joining MPF schemes in the market. As a result, we do not foresee a need to create cumbersome and complicated requirements of what information MPF trustees can request from scheme members at this stage.
  3. In the unlikely event where an applicant feels that a trustee is requiring information that is not relevant to the processing of an application, he can seek assistance from the MPFA. The MPFA will intervene and liaise with the trustee concerned to rectify the situation.
  4. In the extremely unlikely event where the situation in (c) cannot be rectified, the MPFA may consider initiating prosecution against the trustee for violating the statutory "no-rejection" requirement. The court will then consider the case and the reasonableness of the request by the trustee for information according to the special circumstances of that particular case.

Continue monitoring

18. The team of staff in the MPFA responsible for monitoring the implementation of the "no-rejection" requirement and the availability and affordability of MPF products will review the situation and the reports and complaints received from applicants and see whether there is a need to tighten or loosen the deadline and the "no-rejection" requirement in future.

Mandatory Provident Fund Office
Financial Services Branch
28 April 1997

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