LegCo Subcommittee on MPF System
Information Note
Default Contributions: Mechanism for Recovery

Purpose

This paper describes the proposed mechanism for recovery of default contributions :

  1. roles of trustees and the MPFA in chasing default contributions (paragraph 2); and

  2. adoption of a two-tier penalty system (paragraph 3)

Proposal

2. We propose to involve both trustees and the MPFA in chasing default contributions :

  1. trustees should issue a reminder, within 30 days of the discovery of the default contributions, chasing the arrears;

  2. trustees should report to the MPFA if the default contributions remain unpaid after the lapse of the 30 days;

  3. the MPFA would issue two notices, within one month after receipt of the report, demanding payment of the unpaid contributions within a stipulated period, and imposing financial penalties on the default party; and

  4. the MPFA may take further recovery actions involving civil proceedings or prosecutions if (c) above fails to recover the arrears.

3. As regards (c) above, we also propose that a two-tier penalty system be adopted :

(a) Penalty fine: not exceeding $5,000 or 10% of the default amount, whichever is higher, payable to the MPFA to help cover the MFPA’s administrative costs in chasing the default contributions.
(b) Penalty interest : not exceeding an interest of 15% per annum of the default amount, to be credited to the scheme members concerned.

The MPFA may impose the two types of penalties concurrently. Details of the proposed mechanism for recovering default contributions and imposing penalties are set out at Annex A.

Justification

Involvement of Trustees

4. We propose to involve the trustees in chasing default contributions because they are the first point of contact with the employers or self-employed persons, and, as such, are in the best position to settle efficiently default cases caused by inadvertent omissions or other unintentional reasons. It is not necessary for them to report to the MPFA as soon as default contributions are detected.

Imposition of Financial Penalties

5. We propose to impose financial penalties on the default parties for the following reasons :

  1. Cost effectiveness : Many default cases may only involve small amounts of money since the MPF System covers a considerable number of small employers and self-employed persons. Prosecution would not be a cost-effective way to deal with such small sums of money, although it would be an appropriate means for handling persistent offenders and cases involving large sums of money.

  2. Implications for scheme members : Although trustees will be allowed to charge the default parties for recovery of administrative costs incurred in chasing the arrears, it is not always easy to identify the exact cost. In any case, in a highly competitive market, trustees may not wish to impose such a specific charge. The costs incurred would then be borne by scheme members eventually. To avoid an unfair burden on scheme members, we need to have enforcement measures with deterrent effect.

  3. Precedents in other legislation : Authorities responsible for collection of payment are usually empowered to impose financial penalties upon default parties. Some examples are listed at Annex B.

Two-tier Penalty System

6. The objectives of the proposal for two tiers of financial penalties are :

  1. Penalty fine : It will be used to recover the administrative costs incurred by the MPFA in chasing the arrears from the defaulting parties specifically. Otherwise, they would have to be passed onto scheme members generally in the form of registration fees for MPF schemes.

  2. Penalty interest : It will be used to compensate scheme members for their potential loss of investment earnings. This is proposed on the grounds of equity. To avoid employers’ arithmetical errors in calculating the penalty interest and simplify the verification and allocation duties of the trustees, the MPFA will prescribe a level amount of interest in the demand notices (paragraph 2(c) above) issued to the default employers which will apply equally to all members concerned (details of the application of the penalty interest are set out in Appendix to Annex A).

Mandatory Provident Fund Office
Financial Services Branch
29 January 1997

Annex A

Mechanism to Chase and Recover Default Contributions

  • Where a scheme trustee notes the mandatory contributions (in part or in whole) are not paid within the stipulated time, he is required to send, within 30 days after discovery of the default contributions, a reminder to the default party chasing the arrears.

  • If the default contributions are still unpaid after the lapse of the aforementioned 30 days, the trustee has to report the case to the MPFA within 7 days after the 30-day period.

  • Upon receipt of report of default contributions, the MPFA will issue a notice to the default party to :

    (i) ask for information including the scheme members involved, their relevant income, the default amounts, etc.;
    (ii) impose a penalty on the default contributions which may consist of a fine and a penalty interest;
    (iii) ask for payment of the arrears and the penalties within a prescribed period; and
    (iv) direct the default party to pay the penalty fine to the MPFA direct and the default contributions and penalty interest to the trustee for allocation to the employees concerned.

  • In addition to the penalties, the MPFA may also seek information from the default party, if necessary :

    (i) contribution and payroll records; and/or
    (ii) special payroll audit report.

  • If the default party does not pay within the prescribed period, the MPFA may issue a final notice to the default party. The contents of the final notice will be similar to the first one except that there will be heavier penalties. Details of the application of the fine and penalty interest are shown in Appendix.

  • The employer is required to forward to the trustee a remittance statement on a prescribed form, showing the amount of default contributions and penalty interest for each relevant employee.

  • The purpose of requiring such remittance statement is to facilitate the scheme trustee to credit each employee concerned with the proper amount.

  • If the default contributions and/or the penalties are not paid within the stipulated time, then the MPFA shall, depending on circumstances, consider prosecution.

  • Depending on circumstances, the MPFA may also seek recovery of default contributions by civil proceedings in any court. For small amount of arrears not more than $15,000, the MPFA may lodge a claim in the Small Claims Tribunal. For larger amounts, the claim may be pursued in the District Court and the High Court.

  • If a trustee notes an employer or self-employed person habitually takes advantages of the 30 days chasing period to defer making contributions, then he has the duty to report such case to the MPFA for consideration of prosecution. Guidance notes to the trustees will be issued by the MPFA in this connection.

Appendix to Annex A

Application of the Penalty Fine and Interest on Default Contributions

Penalty fine

  • In the first notice issued by the MPFA, the Authority may impose a fine at a sum lower than the maximum prescribed limit.

  • If the default party still fails to pay, the MPFA may, in the final notice, impose a heavier fine which may be the maximum prescribed amount.

Penalty interest

  • We propose to calculate the penalty interest on the basis of a level amount of penalty interest (e.g. $20 per employee in the first notice and $30 per employee in the final notice) and the total number of employees whose contributions have been held up. The penalty interest seeks to cover the whole defaulting period, including the initial 30 day chasing period.

  • This means that all the employees concerned will be compensated the same amount of interest, regardless of the default amount. The reasons are :

    1. This is easy for calculation, verification and allocation.

    2. As the amount of interest receivable by employees will not be substantial, it is not cost effective to calculate the penalty interest on a basis which would entail different amounts to be allocated to different members [e.g. At an interest rate of 15% per annum, the interest for the maximum contributions of $2,000 is $25 a month whilst that for the minimum contributions of $400 is $5]. This would require a lot of resources in calculation, verification and allocation.

Annex B

FINANCIAL PENALTIES IN OTHER LEGISLATION

ORDINANCE

PENALTY PROVISIONS

(I)Inland Revenue Ordinance

Where any tax is in default, Commissioner of Inland Revenue (CIR) may in his discretion impose a fine.

A sum or sums not exceeding 5% in all of the amount in default to be added to the tax.

Where on the expiry of a period of 6 months from the date when any tax is deemed to be in default, CIR may impose a fine.

A sum or sums not exceeding 10% in all of the unpaid amount to be added to the unpaid amount.

(II) Travel Agent Ordinance

Travel Industry Compensation Fund

(Amount of Ex Gratia Payments and Financial Penalty) Rules

Travel Industry Compensation Fund Management Board may impose on the travel agent concerned a financial penalty.

(a) $10,000 as regards a failure to pay levy.

(b) $50,000 as regards a second failure within the period of 2 years beginning on the date of a previous failure.

(c) $100,000 as regards a third or any subsequent such failure with the period of 2 years referred to in (b).

(III) Pneumoconiosis (Compensation) Ordinance

If levy or surcharge is not paid to the Pneumoconiosis Compensation Fund Board within the prescribed time, the Board may impose a fine.

5% of the amount unpaid.

If levy or surcharge including penalty above is not paid within 3 months after the expiry of the prescribed period, another fine may be imposed.

$1,000 or 5% of the amount unpaid, whichever is greater.

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