LegCo Sub-Committee on MPF System
Information Note
ORSO Interface Arrangements -
On-going Requirements
Purpose
This paper describes the proposed mechanism on the following major operational issues relating to the on-going requirements of MPF exempted ORSO registered scheme-
- treatment of accrued rights of "opted-out" members (paragraphs 2 to 8 below);
- employees right upon reduction of future benefits (paragraphs 9 to 10 below) and;
- successor schemes (paragraphs 11 to 12 below).
Proposal
Treatment of Accrued Rights of "Opted-Out" Members
2. For an existing member who opts to join an MPF scheme, the treatment of his accrued rights under the relevant ORSO registered scheme will depend on whether it is a defined contribution or a defined benefit scheme.
I. Defined Contribution Scheme
3. For a defined contribution scheme, it is proposed that the accrued rights of the members under the scheme should be handled as follows:
- the accrued rights should be retained in the relevant ORSO scheme and continue to be credited with investment income until he is entitled to receive the benefits from the scheme; and
- when he is entitled to receive the benefits from the scheme, his "total years of scheme service" should be used in determining his benefit entitlements.
4. For example, if an employee has 3 years of pensionable service at the time he opts out of the ORSO scheme and has 5 years of total scheme service at the time he leaves employment, his vesting percentage should be determined based on 5 years rather than 3 years.
II. Defined Benefit Scheme
5. For a defined benefit scheme, it is proposed that the accrued rights of the members under the scheme should be handled as follows:
- the accrued rights should be retained in the relevant ORSO scheme until he is entitled to receive the benefits from the scheme; and
- when he is entitled to receive the benefits from the scheme, his benefit entitlements, taking into account of his salaries and years of service after he has opted out, should be determined on the following basis:
- pensionable service up to the date he elected to opt out;
- the relevant benefit factor and/or vesting percentage based on total years of scheme service; and
- final average salary determined as at the date of termination.
6. For example, if an employee has 3 years of pensionable service at the time he opts out of the ORSO scheme and has 5 years of total scheme service at the time he leaves employment, his pensionable service under the ORSO scheme should be frozen at 3 years, however, his benefit factor and/or vesting percentage should be determined based on 5 years rather than 3 years. This mechanism has the same effect as calculating his benefits based on total years of scheme service, i.e. 5 years, and then prorate it by the 3 years of pensionable service.
7. Where an MPF exempted ORSO registered scheme provides death, disability or any other benefits in addition to the leaving service and retirement benefits, it is proposed that for an existing employees who opts to join an MPF scheme, his ancillary benefits under the ORSO scheme should be no less than his leaving service benefits determined in accordance with the above opt-out provisions.
8. Annex A sets out some specific examples to illustrate how the proposed mechanism regarding the treatment of accrued rights of the "opted-out" members would work in practice and the consistency in the treatment of Defined Contribution and Defined Benefit Schemes.
Employees Right upon Reduction of Future Benefits
9. If a relevant employer decided to reduce any members future benefit level under an MPF exempted ORSO registered scheme, it is proposed that the relevant member should be given another chance to opt for MPF coverage.
10. For those members who opt for MPF coverage, it is proposed that their accrued rights under the MPF exempted ORSO registered scheme should be treated in the same way as prescribed under "Treatment of accrued rights of "opted-out" members " in paragraphs 2 to 8 above.
Successor Schemes
11. Successor schemes are typically those new ORSO schemes that are established after the transition date, 15 October 1995, due to scheme restructuring or company restructuring where all or a class of members and scheme assets are transferred from one or more existing ORSO schemes to these new schemes. It is proposed that such schemes should be eligible for exemption from MPF requirements.
12. In determining whether a scheme is a successor scheme or not, it is proposed that considerations should be given with regard to the following matters:
- the new scheme should be a scheme established as a result of scheme restructuring or genuine business transactions, including company restructuring and joint ventures;
- if the new scheme is established after the commencement date of section 7 of the Ordinance, the existing ORSO scheme must be an MPF exempted ORSO scheme;
- the terms and conditions of the new scheme should be comparable to the existing scheme; and
- a substantial portion of the membership of the new scheme should comprise former members of the existing scheme.
Justification
Treatment of Accrued Rights of "Opted-out" Members
13. The proposed treatment of accrued rights of "opted-out" members mentioned in paragraphs 2 to 8 above is in line with the generally accepted actuarial principles. For a defined benefit scheme, the benefit factor is based on the total service up to the date of cessation of employment while pensionable service is frozen as at the date of opting-out. This method of prorating benefit by pensionable service is cost neutral to employers. Moreover, the proposal implicitly requires the employer to continue to bear the investment risk, or to guarantee investment return to be equal to salary inflation, even after the member had opted out of the ORSO scheme. In this respect, the accrued rights of the "opted-out" members are protected.
Employees Right upon Reduction of Future Benefits
14. At the time the option between ORSO scheme and MPF scheme is offered, employees make their choice on the basis of the existing terms and conditions of the two schemes. It is necessary to have some safeguards in place to protect the employees benefits should such terms and conditions of the ORSO scheme be revised unilaterally by the employer subsequently.
Successor Schemes
15. The proposal prescribed in paragraphs 11 to 12 above are intended to waive the transition date requirement to those new schemes that are established as a result of genuine business transactions or scheme restructuring but not to those schemes that are established to avoid MPF requirements.
Mandatory Provident Fund Office
Financial Services Branch
16 January 1997
[Ref. : Paper/MPF/SC/OI-6]
Annex A
Treatment of Accrued Rights of "Opted-Out" Members
Illustration
The following three examples illustrate how the mechanism would work and the consistency in treatment between defined benefit and defined contribution schemes.
Example I - Defined Contribution Scheme
|
Contribution Rate :
|
Employee
|
Employer
|
|
5%
|
5%
|
|
Vesting Scale :
|
Years of service
|
Vesting percentage
|
|
less than 3
|
0%
|
|
3
|
30%
|
|
4
|
40%
|
|
:
|
:
|
|
:
|
:
|
|
9
|
90%
|
|
10
|
100% |
Leaving Service Benefit = Employee Account Balance +
|
Employer Account Balance x Vesting
|
|
Percentage |
For an employee who has 3 years of pensionable service at the time he opts out of the ORSO scheme, his account balances are -
Employee Account Employer Account
|
as at date of opt-out
|
HK$ 20,000
|
HK$ 20,000 |
His vested benefits as at the opt-out date is:
HK$20,000 + HK$20,000 X 30% = HK$26,000
At the time he leaves employment, he has 5 years of total service and his account balances are -
Employee Account Employer Account
|
as at date of opt-out
|
HK$20,000
|
HK$20,000
|
|
investment income
|
HK$ 4,000
|
HK$ 4,000
|
|
as at date of termination
|
HK$ 24,000
|
HK$24,000 |
His leaving service benefits under the ORSO scheme would be :
HK$24,000 + HK$24,000 x 50% = HK$36,000
Example II - Defined Benefit Scheme
Benefit Formula : 2.0 x Final Month Salary x Pensionable Service x Vesting Percentage
where vesting scale is the same as the one defined under Example I.
For an employee who has 3 years of pensionable service at the time he opts out of the ORSO scheme and his salary at that time is HK$10,000, his vested benefits at the time he opts out is:
2.0 x HK$10,000 x 3 years x 30% = HK$18,000
At the time he leaves employment, he has 5 years of total service and his final month salary at that time is HK$12,000; his leaving service benefits under the ORSO scheme would be :
2.0 x HK$12,000 x 3 years x 50% = HK$36,000
2. The following example is a variation of Example II where benefit factors are defined with respect to years of service. This type of defined benefit scheme is more popular among the large employers and universities. It does not prescribe any explicit vesting scale, however, vesting is implicitly applied through the design of the benefit factors. The benefits described under Example II and III are identical for the first 10 years.
Example III - Defined Benefit Scheme
Benefit Formula : Benefit Factor x Final Month Salary x Pensionable Service
where Benefit Factor is defined as follows -
|
Total Service
|
Benefit Factor
|
|
|
less than 3 years
|
0
|
|
|
|
3
|
0.6
|
|
|
4
|
0.8
|
|
|
5
|
1.0
|
|
|
6
|
1.2
|
|
|
7
|
1.4
|
|
|
8
|
1.6
|
|
|
9
|
1.8
|
|
|
10
|
2.0
|
|
|
:
|
:
|
|
|
:
|
:
|
|
|
20 or more years
|
3.0 |
For an employee who has 3 years of pensionable service at the time he opts out of the ORSO scheme and his salary at that time is HK$10,000, his vested benefits at the time he opts out is:
0.6 x HK$10,000 x 3 years = HK$18,000
At the time he leaves employment, he has 5 years of total service and his final month salary at that time is HK$12,000; his leaving service benefits under the ORSO scheme would be :
1.0 x HK$12,000 x 3 years = HK$36,000
Last Updated on {{PUBLISH AUTO[[DATE("d mmm, yyyy")]]}}
