LegCo Subcommittee on MPF System
Information Note
Non-Mandatory Contributions :
Nature, Regulation and Compliance
Purpose
This paper describes the proposals regarding :
- the nature of non-mandatory contributions (paragraph 2); and
- regulation and compliance in respect of non-mandatory contributions (paragraphs 3 to 7).
Proposals
Nature
2. We propose to confine the nature of non-mandatory contributions to defined contributions (DC) only.
Regulation and Compliance
Employer obligations
3. Employers should be obliged to make the necessary arrangements with their scheme trustees for non-mandatory contributions if they are so requested by their employees who wish to make non-mandatory contributions for themselves. They should also make the necessary deductions and remittance for these employees in the same manner as for mandatory contributions.
Exemptions from provisions of vesting, preservation and portability
4. During the process of scheme registration, the MPFA will give blanket approval to a scheme for exemption of non-mandatory contributions from the provisions of vesting, preservation and portability. Employers or scheme members who do not wish to be so exempted can notify the trustee and make special arrangement for themselves.
Account keeping
5. Separate accounts should be kept for the non-mandatory contributions made by employers and employees respectively.
Termination
6. The governing rules of an MPF scheme should enable scheme members to request the trustee to distribute the accrued benefits derived from non-mandatory contributions under circumstances specified in the governing rules.
7. Such circumstances should include situations where an employer has agreed to make non-mandatory contributions for the scheme members but fails to pay such contributions within six months after the contributions are due. The arrangement in respect of the employers non-mandatory contributions will be terminated after such distribution.
Justification
Nature
8. We consider it not appropriate to open up the MPF System for defined benefit (DB) schemes for the following reasons :
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Maintaining a simple MPF System : The basic concepts and mode of operation of DB schemes are different from DC schemes. Different ways of calculating benefits would be needed for the two arrangements regarding fund transfer, benefit withdrawal, scheme winding up and payment of claims under the Compensation Fund. Regulatory provisions regarding solvency, funding requirements and actuarial reports for DB schemes would be required under the MPF System. To monitor the solvency of a DB scheme, provisions for actuarial review may also be required when there is a significant membership movement resulting in portability and withdrawal of benefits en masse. This is to ensure that the solvency of the DB non-mandatory part of the scheme will not affect the financial position of the whole MPF scheme. Expanding the MPF System to allow for DB schemes would make the whole System complex and cumbersome. It would also increase the regulatory and compliance costs.
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Focusing on the core need : 87% of the employers in Hong Kong are small employers employing less than ten employees. Most of these employees are not currently covered by voluntary retirement schemes. The majority of them are believed to have lower income than those who now have coverage under the voluntary retirement schemes. It is imperative that the MPF System be designed to be simple, efficient and cost-effective. Expanding the MPF System to allow for DB schemes would defeat this objective.
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Anticipated number of DB schemes : As at 31 December 1996, only 558 out of a total of 14,922 ORSO schemes (or 3.7%) were of DB nature. In view of the employer profile under the MPF System, it is anticipated that the number of employers who wish to run DB schemes would be minimal. It would therefore not be justified to make the MPF System much more cumbersome and to spend considerable resources to deal with such minor portion of DB schemes in the MPF System.
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Arrangement for ORSO interface : We recognise that some employers may argue that the Government should facilitate employers who want to provide generous benefits to their employees, by allowing DB schemes under the MPF System so that they do not need to operate two separate schemes. Our views are :
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We believe that most of the employers who can afford or are willing to provide retirement benefits of DB nature on top of the mandatory minimum are those who are currently operating ORSO schemes. As current consultation with employers is progressing smoothly and many of these employers are willing to operate two schemes (one ORSO scheme and one MPF scheme), they can retain their top-up benefits portion in their existing ORSO schemes.
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The costs of providing non-mandatory contributions on DB basis under the MPF System will not necessarily be lower than doing it under ORSO. As discussed in paragraph 8(a) above, such non-mandatory part would need to be subject to regulatory provisions regarding solvency, funding requirements and actuarial reports similar to those under ORSO. In addition, accounts for non-mandatory contributions would also be required to be kept and assessed separately to facilitate monitoring, reporting and benefit withdrawal purposes. There would be no major cost difference from running two separate schemes.
Regulation and Compliance
Employer obligations
9. The proposed employer obligations in respect of non-mandatory contributions are similar to those for mandatory contributions. This will enable scheme members to make voluntary contributions in a convenient manner which is simple and easy to understand. As employers will only need to deduct and remit the non-mandatory contributions together with the mandatory contributions, the additional compliance works for employers are minimal.
Exemption from provisions of vesting, preservation and portability
10. The principal legislation requires an application by an employer or a scheme member to the MPFA for exemption of the non-mandatory contributions from the requirements of vesting, preservation and portability. It further requires the employer or member to give a notice of approval granted by the MPFA to the trustee.
11. It is likely that persons making non-mandatory contributions would prefer to have greater flexibility and wish to be exempt from the requirements of vesting, preservation and portability for such contributions. We also envisage that there are no particular reasons for the MPFA to disapprove such applications for exemption. To streamline the mechanism and to encourage non-mandatory contributions, we propose to make the approval procedures automatic.
Account keeping
12. The reasons for requiring separate accounts to be kept for the non-mandatory contributions made by an employee and his employer (details at Annex) are as follows :
- To facilitate payment of accrued benefits which may not be subject to the requirements of vesting, preservation and portability.
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To facilitate annual reporting of the financial position of such contributions which may have a different investment portfolio from that of the mandatory contributions.
Termination
13. Since non-mandatory contributions will be automatically exempted from the requirements of vesting, portability and preservation, unless an employer or a scheme member wishes otherwise, there should be a mechanism to enable the employer and scheme member to terminate the non-mandatory part of a scheme without affecting the operation of the mandatory part.
Mandatory Provident Fund Office
Financial Services Branch
29 January 1997
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