LegCo Subcommittee on MPF System
Information Note
Accounting and Reporting Requirements

Entity for audited accounts : Scheme accounts should be prepared and audited at the global level, i.e. at the master trust level and the employer sponsored scheme level, as opposed to the employer unit level. However, employers should have the voluntary option of having additional accounts prepared and/or audited at the employer unit level.
Distribution : The annual report and audited accounts should be submitted to the MPFA and provided to scheme members and employers upon request.
Format of annual report and accounts : The format of the annual report and accounts should follow the MPF subsidiary legislation and the Hong Kong Society of Accountants (HKSA) accounting guidelines on retirement scheme accounts. The key features of the HKSA accounting guidelines should be included in the MPF subsidiary legislation. The annual report and accounts should be made available in both English and Chinese languages.
Trustees Report on internal controls : The trustee of a registered scheme should prepare an audited report to the MPFA setting out the main control objectives and the procedures and internal controls to achieve these objectives in respect of a registered scheme.
Auditors opinion : The annual accounts and internal control report of an MPF scheme should be audited by external auditors who should give their opinion thereon.

Justification

Entity for Audited Accounts

3. A master trust scheme is open to membership to the employees of more than one employer, the self-employed persons, and other individual scheme members. The accounting systems for MPF schemes should be capable of preparing financial information at three levels as follows :

at a master trust level;
at an employer unit level within a master trust; and
at an individual scheme member level.

4. Our proposed requirement is that annual accounts are prepared and audited at the master trust level rather than at an employer unit level within a master trust scheme. Such accounts would therefore comprise all the transactions under the global arrangement rather than just the transactions pertaining to a subset thereof.

5. The justification for this approach is that it will result in a more efficient and cost effective system whilst still giving appropriate levels of comfort to scheme members and the MPFA as follows :

The preparation of accounts by the trustee is a means of ensuring that the trustees are accountable to the scheme members. This provides comfort to scheme members and the MPFA as to the stewardship function performed by trustees.
The accounts show the overall investment performance of the scheme which may be used by scheme members to monitor the performance of the scheme.
The accounts provide reassurance to the scheme members and the MPFA that the assets exist and are safeguarded.
The audit of the accounts acts as an independent control on trustees and may be a preventive measure against trustees acting against members interests.
Consistent and independently audited documents would be produced for each MPF scheme which could be available to scheme members and prospective scheme members for the purposes of gathering information about different schemes so as to select between schemes.

6. In view of the abundance of small employers and individual account holders (i.e. self-employed persons, holders of dormant accounts) within a master trust scheme, the preparation of audited accounts at the employer unit and individual scheme member level will be very costly and have serious implications for administrative fees. Under our proposed system, individual employers with sufficient resources will have the flexibility to arrange with their trustees for accounts to be prepared and/or audited at the employer unit level on a voluntary basis. Besides, the trustees will be required to issue annual benefit statements to individual scheme members, which will enable scheme members to monitor the financial position of their own MPF benefits.

Distribution

7. The audited accounts will form part of an annual report and must be submitted to the MPFA by trustees within six months of the scheme year end. The annual report and audited accounts will be available on request to scheme members and employers. Automatic distribution would be more expensive, and it is expected that not all members will be interested in receiving such a document.

Format of Annual Report and Accounts

8. The format of the annual report and accounts should be guided by the MPF subsidiary legislation and the HKSA accounting guidelines on retirement scheme accounts. At present, compliance with the HKSA accounting guidelines is merely guidance as to best practice. However, for MPF purposes, we propose that a few key features of the HKSA guidelines should be included in the MPF subsidiary legislation to ensure that such features are followed (details at Annex A). The justifications are :

This is to ensure that the annual report and accounts are informative to scheme members and employers.
It should help ensure consistency between the annual reports accounts of different schemes and therefore facilitate comparison between schemes.

Trustees Report on internal controls

9. To enhance the security of scheme assets and to enable the MPFA to monitor the controls exercised by a scheme trustee over an MPF scheme, we propose to require the trustee to submit, on an annual basis, a report on the internal control measures over the scheme. An exception to this reporting requirement is where the MPF scheme concerned is an employer sponsored scheme with less than 1,000 scheme members. In view of the scale of such schemes, the daily management and operation of these schemes will be much simpler. Such a control environment will require much less sophisticated control procedures. Hence, the benefits derived from the preparation and audit of the internal control reports of these schemes will be limited, while the cost implications for scheme members will be significant. The preparation of audited accounts will be a more cost effective way to offer reasonable level of comfort to scheme members as to the protection of scheme assets.

10. The scope of the internal control report should include, but not limited to, the control environment of the following aspects of the scheme:

safeguarding of assets;
compliance with investment standards and guidelines;
separation of scheme assets from those of employers, trustees and other third parties; and
compilation of prudential returns to the MPFA.

The MPFA will issue detailed guidance notes on the specific areas to be reported.

Auditors Opinion

11. We propose that both the annual accounts and the report on internal controls of an MPF scheme to be prepared by the scheme trustee should be audited by an external auditor. The purpose is to provide independent control over the trustee and to ensure that such important documents are properly prepared by the trustee. The scope of reporting should enable the MPFA to assess an MPF schemes compliance with the relevant requirements of the MPF legislation. The proposed scope of the audit reports is set out at Annex B.

Mandatory Provident Fund Office
Financial Services Branch
08 May 1997

Annex A

Format of the Annual Report and Accounts of an MPF Scheme

Format of Annual Report

The MPF subsidiary legislation will stipulate that an Annual Report of an MPF Scheme should consist of :

a scheme report including:
1. a commentary on the financial development of the scheme as disclosed in the audited financial statements;
2. an outline of any changes in the governing rules;
3. such other information as is necessary, in the trustees opinion, to provide scheme members with a proper understanding of the main aspects of the scheme;
an investment report setting out:
1. an analysis of the investments held by the scheme and the investment income and returns earned by these investments during the period covered by the report;
2. a commentary on this analysis;
3. an outline of the investment policies pursued by the scheme in the period during the year;
contact details for scheme members to direct enquiries; and
the name of each auditor, bank, administrator, custodian, investment manager or other person or organisation acting for the trustee in respect of the scheme during the period being reported upon.

Format of Annual Accounts

Key features of the existing HKSA accounting guidelines to be incorporated into MPF subsidiary legislation

The financial statements of registered schemes should include the following items :
An operating statement: The operating statement will contain details of the results of the schemes investment activities and the costs of administration in respect of the financial period being reported.
A statement of net assets: The statement of net assets will set out the disposition of assets and liabilities of the scheme at the end of the related financial period.
A statement of accounting policies: The statement of accounting policies will set out the principal accounting policies followed by a registered scheme in preparing financial statements.

The amount for the previous year (comparative figure) should be shown for every amount included in the accounts (except in the first year for which the accounts are prepared).

The accounts should be accompanied by the auditor's report thereon.

Matters to be incorporated into the MPF rules which are not addressed in the accounting guideline

The statement of net assets should be signed by at least two trustees in the case of individual trustees, one of them must be independent trustee, or where the trustee is a corporate trustee by two directors of the trustee company, for and on behalf of the trustee company, as evidence of approval.
The accounts should include a statement as to whether the accounts have been prepared in accordance with the HKSA accounting guideline. The particulars of any material departures should be set out in a note to the accounts.

Annex B

Scope of Audit on Annual Accounts and Report on Internal Controls

Audit of Annual Accounts

The auditor will be required to opine as to whether :
1. The financial statements show a true and fair view of the financial transactions of the scheme during the year and of the disposition, at the last day of the year, of its assets and liabilities.
2. The financial statements comply with the accounting and disclosure requirements of the MPF legislation.
3. Proper books and records have been kept as regards all assets, liabilities and financial transactions of the scheme.
4. The assets of the scheme are subject to any charge, pledge, lien, mortgage or other encumbrance as at the end of the financial period.
5. The requirements in respect of forbidden investment practices, as defined in the MPF legislation have been complied with.
The auditor should also qualify in his audit report where :
1. He has been denied access to the books and records of the scheme whether in the custody of the trustee or another party.
2. He has not been given necessary information and explanations for the purposes of his audit.

Audit of Report on Internal Controls

The auditor will be required to opine as to whether:
1. The report describes fairly, in all material respects, the internal controls and procedures in place.
2. The internal controls and procedures as described in the report are suitably designed to provide reasonable assurance that the specified control objectives would be achieved if the described policies and procedures were complied with satisfactorily.
3. The policies and procedures as described in the report are operating with sufficient effectiveness to provide reasonable assurance that the related control objectives were achieved.
4. In the course of his review of the internal controls and procedures, he became aware of any control weaknesses which could potentially affect the financial position of MPF schemes under the trusteeship of the trustee to a material extent.

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LegCo Subcommittee on MPF System Information Note Accounting and Reporting Requirements

Purpose

Proposal