LegCo Subcommittee on MPF System
Information Note
Small Balance Accounts

Purpose

This paper describes the proposed protective measures for different types of small balance accounts (paragraphs 3-5 below).

Background

2. Small balance accounts can be divided into dormant and active accounts :

  1. Dormant accounts arise under two circumstances -
    1. employees who have entered the job market for a short period of time (e.g. housewives); and
    2. employees who choose to retain their benefits in their original accounts without transferring or consolidating during changes of employment.
  2. Small active accounts exist in the MPF System as there are low-income employees in the workforce.

Proposal

Definition

3. We propose to define a small balance account as an account of HK$5,000 or less.

Protective Measures

4. We propose to adopt different approaches to deal with different types of small balance accounts :

  1. Small dormant accounts of members who left the workforce : A scheme member will be allowed to withdraw the accrued benefits provided that :
    1. the small account has been dormant for one year or more;
    2. the member has not kept any active MPF account during that period of time; and
    3. the member makes a statutory declaration to the trustee that he has left the workforce for longer than one year and does not expect to return to the workforce in the foreseeable future.
  2. Small dormant accounts of members still in the workforce : We propose to facilitate and encourage scheme members to consolidate their dormant balances by the following means :
    1. educational programmes be launched to educate the public as to the importance of consolidating their accounts;
    2. no fees be levied by MPF trustees or service providers when a member transfers out a small balance, provided the transfer occurs within one year of the account becoming dormant.
  3. Small active balances : Small active balances should grow over time through new contributions and should reach a level where they are not at risk of erosion over the long term. For instance, a member contributing to an MPF scheme at the lowest income threshold (for compulsory member contributions) of HK$4,000 per month would accumulate a balance of HK$4,800 in one year. His account will be able to exceed the risk level of HK$3,500 - $5,000 from the second year onwards (please see paragraph 8 for the calculation of the risk level). Therefore no special protective measures are needed for such balances.

On-going Monitoring

5. To enable the MPFA to monitor the situation, we propose that scheme trustees should submit an annual return with statistics, at a macro level, on member balances which have reduced due to fees and expenses exceeding investment returns and income.

Justification

Definition

6. We propose to set the small balance accounts at the level of $5,000. It is estimated that MPF accounts below this level will possibly be at risk of erosion due to fees and expenses.

7. The estimates are done on the current fee levels of a few major ORSO schemes. These estimates have, necessarily, been done on very crude assumptions. Firstly, the ORSO fees may not be applicable to the MPF System due to the difference in operating environment and employer size. Secondly, the fees may also vary widely from scheme to scheme as different service providers may structure their fees differently to attract scheme members and suit their different needs.

8. Assuming an investment return of 9% , the break even point under the ORSO fee levels is between HK$3,500 to HK$5,000. This means that for any account below this level, the fees will likely exceed the investment return and hence erode the accrued benefits. To offer wider protection to scheme members, we therefore take a more conservative view and define a small balance as not exceeding $5,000.

Protective Measures

Small dormant accounts of members who left the workforce

9. The proposal to allow early withdrawal of small dormant balances by members who have left the workforce may appear contrary to the MPF principle of preservation. This can, however, be justified as follows :

  1. Limited retirement protection : In the absence of any further contributions to the accounts in the near future, the small balances will not contribute in a meaningful way towards an individual’s retirement.
  2. Interest of members : Since the small dormant accounts will be at risk of eroding, it is likely to be in the individual’s best financial interest to withdraw the benefits rather than suffer from a reduction as a result of preservation in the MPF System.
  3. Benefits to the MPF System : Any fee regulation measure for the protection of small accounts will require cross-subsidization from other scheme members. It is in the overall interest of MPF scheme members to confine fee regulation to those areas which are absolutely essential (paragraph 12 below).

Small dormant accounts of employees still in the workforce

10. In view of the high labour mobility in Hong Kong, we envisage that most of the small dormant accounts will arise from employees opting to retain their benefits in the original MPF schemes during changes of employment. The reasons that a person does not transfer small dormant balances when they leave a job may be twofold : apathy by the person and portability costs. We, therefore, propose a two-pronged approach to facilitate and encourage scheme members to consolidate their small dormant accounts.

11. First, through education programmes, we will remind employees of the problems of keeping fragmented small dormant accounts with different MPF schemes :

  1. such accounts are more vulnerable to erosion by fees;
  2. it will be more expensive to maintain a number of accounts than a single account as the member cannot enjoy economy of scale; and
  3. it will be more difficult for scheme members to manage and keep track of the accounts.

12. Second, as an incentive measure for employees, we propose to prohibit all fees on transfer of small dormant balances provided the transfer is done within a year. The justifications are :

  1. Removal of barrier : The proposal recognises the implications of the costs for portability such as redemption costs and possibly penalty charges, which may deter scheme members from consolidation.
  2. Providing incentives : The proposal provides scheme members with incentives to consolidate their small accounts as they can enjoy the fee waivers only if they consolidate the accounts on a timely basis.
  3. Limited impact on fee structures and other scheme members : The proposal recognises the likely impact of fee regulation measures on the overall fee levels and structures in the market and the shifting of the cost burden onto other scheme members as a result of cross-subsidization. Hence, it confines the scope of fee regulation to exit charges only.
  4. Long term benefits : In the long run, the overall MPF System will gain by encouraging consolidation of small dormant accounts as the reduction in the number of accounts of an uneconomic size will help reduce the overall administrative costs.

Small active balances

13. We propose that no specific measures should be introduced to protect small active balances. These accounts should not suffer erosion of principle in the long term. New contributions should over time build these balances to a size where income more than covers fees and expenses. For scheme members earning a monthly income of HK$4,000 or more, their accounts will be able to exceed the risk level in a very short period of time (i.e. a year). Scheme members earning a monthly income lower than HK$4,000 will also be able to build up their account reserve gradually and will not be exposed to the risk of erosion by fees.

On-going Monitoring

14. The proposed statistical return will enable the MPFA to monitor the issue of small balances and re-assess the effectiveness of the protective measures if necessary.

Mandatory Provident Fund Office
Financial Services Branch
10 February 1997

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