LegCo Sub-Committee on MPF System
Information Note
Exemption Criteria for ORSO Registered Schemes

Purpose

This paper describes the proposed requirements to be met by occupational retirement schemes registered under ORSO ("ORSO registered schemes") to be exempt from the MPF System -

  1. transition date - 15 October 1995 (paragraph 8 below);
  2. minimum standards on trusteeship and investments (paragraphs 10 to 11 below);
  3. grandfather existing members (paragraph 12 below);
  4. preservation and portability requirements on new members (paragraphs 13 to 15 below); and
  5. one-off option for both existing and new members to choose between ORSO schemes and MPF coverage (paragraphs 16 to 18 below).

Background

Differences between MPF & ORSO

2. ORSO schemes are occupational retirement schemes which are voluntarily established by employers to provide retirement and leaving service benefits for their employees. They are either registered or exempted under the Occupational Retirement Schemes Ordinance (Cap. 426) ("ORSO") and are subject to requirements as stipulated therein. As the setting up of occupational retirement schemes is voluntary in nature, many ORSO requirements are less stringent than those of the Mandatory Provident Fund Schemes Ordinance ("MPFSO").

3. The MPFSO has specific requirements on calculation of contributions, scheme arrangement, governing law, approval of trustees, etc. Also, MPF schemes will be subject to full and immediate vesting of contributions, preservation of benefits until age 65 and portability upon changes of job requirements. There will also be more stringent investment standards imposed on MPF schemes. MPFSO also provides for the setting up of a compensation fund for losses in respect of accrued benefits caused by misfeasance or illegal conduct.

4. A comparison of the key features of MPFSO and ORSO is shown in the following table :

Key Features

MPFSO

ORSO

Nature

Mandatory

Voluntary

Arrangement

Trust only

Trust or insurance

Governing law

Hong Kong

Hong Kong or offshore

Approval of trustees

Required

Not required

Compensation Fund

Yes

No

Preservation and portability requirements

Yes

No

Vesting

Full and immediate

Vesting scale

Investment standards

More stringent

Minimal restrictions

Contribution rate

Based on total cash income

Usually based on basic salary

Administration’s Policy Objectives

5. Before ORSO came into being, many of these schemes were informal arrangements. The introduction of ORSO meant that the employers had expended considerable sums of money on professional fees to set up the schemes properly.

6. Even for those employers who had ‘proper’ schemes, they have also expended significantly to amend the trust deeds and investment mandates etc. to meet with ORSO requirements. Many employers also took the opportunity to consolidate their schemes so as to facilitate future reporting requirements under ORSO, and this was a costly exercise.

7. The proposals of the Administration on interface of ORSO schemes with the MPF system have, therefore, been designed to achieve the following policy objectives :

  1. not to upset the existing contractual relationship between employers and existing employees;
  2. provide equitable treatments to employees;
  3. protect employees’ right and their interests;
  4. minimum interference to existing scheme arrangements; and
  5. preservation of benefits for retirement either through ORSO or MPF schemes.

Proposal

Transition Date - 15 October 1995

8. We propose that interface arrangements are only available for ORSO registered schemes that are :

  1. established on or prior to 15 October 1995, which is the deadline for all existing ORSO schemes to send in applications for registration under ORSO; and
  2. applied for exemption or registration under ORSO on or prior to 15 January 1996, which is the 3 months deadline allowed for making an application for registration under ORSO for a proposed scheme established on 15 October 1995.

9. However, no exemption will be given to new schemes established after such date.

Minimum Standards on Trusteeship and Investments

10. We propose that an MPF exempted ORSO registered scheme must meet the minimum requirements set out in the paper "Minimum Standard on Trusteeship and Investments" on the qualifications of trustees and investment advisers and the standards of investments. These minimum requirements are set having regard to existing good practices of ORSO schemes and are less stringent than those imposed under the MPF System.

11. The current trusteeship and investment arrangements of ORSO registered scheme will be grandfathered. However, any newly appointed trustees and investment advisers must meet these requirements.

Grandfather Existing Members

12. It is proposed that all existing members of an ORSO registered scheme which meet all the requirements prescribed under the interface arrangements ("MPF exempted ORSO registered scheme") will be grandfathered. That is, they will be exempt from all MPF requirements, even for their future benefits accrued under the scheme until they leave the scheme.

Preservation and Portability Requirements on New Members

13. We propose that all new eligible employees may be admitted to the MPF exempted ORSO registered scheme and they will be exempt from the full and immediate vesting requirement. However, they will be subject to the preservation, portability and withdrawal provisions, but only up to the portion of accrued benefits which is equivalent to the accumulation of the MPF statutory minimum contributions ("minimum MPF benefits")

14. The "minimum MPF benefit" is defined as :

1.2 x Final 12 months Average Monthly Relevant Income (subject to the maximum HK$20,000) x Years of Service

15. Whenever a new member is entitled to receive benefits under an MPF exempted ORSO registered scheme, his minimum MPF benefits must be transferred to an MPF registered scheme which can be either established or participated in by his new employer, or a master trust scheme of his own choice.

One-off Option

16. We propose that both existing members and new eligible employees will have a one-off option to choose between the ORSO scheme and MPF coverage.

17. The employees’ option should be a one off and only available:

  1. at the implementation date of the MPF System;
  2. at change of employment; and
  3. upon reduction of members' future benefits.

18. If any members or new eligible employees opt for MPF coverage, the relevant employer is required to make arrangement for either setting up an employer sponsored scheme or participating in a master trust scheme to comply with the provision of the Ordinance.

Justifications

Transition Date - 15 October 1995

19. In recognition of the fact that employers with existing schemes have just gone through a major exercise for registration under ORSO and with the announcement of the MPF System coming so close to the implementation of the ORSO, the main purpose of the exemption arrangement is to minimize the immediate impact of the MPF System to those schemes that were established prior to the announcement of the MPFSO.

20. However, it is the Government’s long term objective to cover most of the workforce under the MPF System with regard to the prescribed minimum contributions. It is necessary to impose a transition date to circumscribe the number of MPF exempted schemes so as not to undermine the integrity and viability of the MPF System.

21. In determining what is the most appropriate date, we have considered two options. One is 3 August 1995 which is the date of enactment of the MPF Schemes Ordinance, and the other is 15 October 1995 which is the deadline for all Occupational Retirement Schemes to send in applications for registration under ORSO. Since a very large number of the existing schemes sent in their applications for registration between 3 August and 15 October, we believe it would be fair and administratively simple to use 15 October 1995 as the transition date.

Minimum Standards on Trusteeship and Investments

22. The proposals in paragraphs 10 to 11 above are intended to offer greater protection to members of MPF exempted ORSO registered scheme by enhancing the standards on trusteeship and investments.

Grandfather Existing Members

23. One of the key policy objectives in the interface arrangements is not to upset the existing contractual relationship between the employers and the existing employees. The proposals in paragraph 12 above ensure that there is no impact on all exiting members of an MPF exempted ORSO scheme.

Preservation and Portability Requirements on New Members

24. In order to achieve the policy objectives of providing equitable treatments to employees and preservation of minimum benefits for retirement either through ORSO or MPF schemes, it would only be fair and equitable to impose preservation and portability requirements on all new members of an MPF exempted ORSO registered scheme.

One-off Option

25. The reasons for proposing a one-off option for employees to choose between the ORSO scheme and MPF coverage instead of imposing a statutory minimum contribution/benefit level and vesting requirement are that :

  1. If imposing full and immediate vesting requirement on a statutory minimum contribution/benefit level, it would have the following implications:
    1. It will increase administrative cost due to the complexity in record keeping since each member’s accounts would have to be divided into pre-MPF benefits and post-MPF benefits. The post-MPF benefits would have to be further sub-divided into two, one for identifying basic MPF contributions (to which full and immediate vesting would apply) and the other for identifying excess non-mandatory contributions.
    2. It will increase funding cost due to the full and immediate vesting requirement, since there will not be any forfeiture, i.e. non-vested benefits, reverted back to the employer to reduce or off-set future contributions.
    3. It is particularly difficult for non-contributory schemes to cope with these requirements.
    4. If these requirements are imposed on new employees only, it will create two ‘classes’ of employees and strain employer-employee relations.
  2. By giving employees a choice, they will take into consideration of their own personal circumstances (e.g. years of service, intention to stay or leave) and the scheme benefit features (e.g. contribution rate, benefit level and vesting scale) to choose the scheme which is more beneficial to him.
    1. Those employees who have short years of service and not intending to stay long will mostly prefer to join an MPF scheme to take advantage of the full and immediate vesting.
    2. However, if the ORSO scheme provides much more generous benefit levels and it does not take long for the employees to accrue higher benefits than the MPF prescribed minimum, then the employee will most likely join the ORSO scheme (and take the risk that there would be a small chance that he may receive lower benefits than the MPF minimum - if his plan to stay with the existing employer was changed suddenly).

26. The assessment of the risk to receive lower benefits than the MPF minimum lies entirely with individual employees. It is for them to decide whether they want to resign when their accrued benefits are lower than the MPF minimum. In the case of termination of employment by the employer, many ORSO schemes would offer the employees less benefits than under an MPF scheme because of vesting scale. However, those employees who meet the criteria for Long Service Payment and/or Severance Payment under the Employment Ordinance would still receive such payments - which, in many instances, would provide comparable level of benefits as the employer funded portion of MPF.

Mandatory Provident Fund Office
Financial Services Branch
[Ref.: Paper/MPF/SC-OI-2]
8 January 1997

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