LegCo Panel on Financial Affairs
Information Note
Basic Approach of the MPF System
Setting Up a Cost-effective MPF System

Purpose

This paper describes the basic approach to be adopted in setting up a cost-effective MPF System to ensure that the administrative costs of for the System will be kept to a minimum.

The Basic Approach

2. It is intended that the objective of setting up a cost-effective MPF System should be achieved through :

  1. establishment of a simple and effective MPF System;
  2. enhancement of market competition and transparency in scheme operations; and
  3. setting the fees and charges payable to MPF Authority (MPFA) at a reasonable level.

3. The above measures should keep the administrative costs of the MPF System at a low level without the need for direct government intervention. Instead, the Government’s role will be to design an MPF System with built-in simplicity and efficiency as well as allow market forces to operate as freely as possible.

Establishment of a Simple and Effective MPF System

4. The framework of the MPF System as set out in the principal legislation is already designed in such a way as to reduce the costs to small businesses in joining MPF schemes. This is achieved by the provision for the establishment of master trust schemes. By pooling small schemes together for administration and investment, master trust funds can enjoy a high degree of efficiency resulting from the economy of scale.

5. In the subsidiary legislation, we will aim to minimise the administrative and regulatory requirements by the MPFA for employers and trustees without sacrificing the protection for scheme members.

  1. Employers : the System is streamlined in order to facilitate employers, in particular small employers, to fulfil their obligations in enroling employees into schemes, making contributions and in enabling their employees to transfer or withdraw their accrued benefits.
  2. Trustees : administrative procedures regarding scheme registration, collection of contributions, record keeping, portability and withdrawal mechanisms are simplified. Regulatory requirements including accounting and auditing and information disclosure requirements are also minimised.

For details of the obligations and responsibilities of employers and trustees under the MPF System, please refer to the Information Note on "Obligations and Responsibilities under the MPF System".

6. All the above measures will reduce the volume of administrative work and the costs in the operation of the MPF System significantly. This will have direct benefits for scheme members as the administrative costs incurred by trustees will eventually be borne by scheme members.

Enhancement of Market Competition and Transparency in Scheme Operations

7. We believe that market competition will be an effective deterrent against unreasonable charges by service providers. Given the size of the MPF funds, it is expected that a considerable number of service providers, both existing and new-comers, will be attracted to the market, leading to a competitive environment for the MPF System.

8. To make full use of market forces, we will give special consideration to the following aspects in drawing up the subsidiary legislation :

  1. Approval criteria for trustees : the criteria need to be worked out carefully so that the market will not be monopolised by a handful of top scale service providers. It is, however, important not to compromise quality for the sake of increasing competition.
  2. Transparency in fee structure : trustees and service providers will be required to disclose the scales of fees and charges under the scheme, including information as to the circumstances of fee charging and the basis of the fees.

Reasonable Level of Fees and Charges Payable to MPFA

Fees to the MPFA

9. It is our intention that the MPFA should be self-financing in the long run. Subject to the approval of the Finance Committee of the Legislative Council, the Government has decided to inject a capital of HK$5 billion towards the establishment of the MPFA. This is expected to be sufficient to subsidise the expenses of the MPFA for the first 10 to 15 years. This capital injection would be supplemented by recurrent fees and charges including, for example, charging for approval of trustees or registration of schemes, annual fees etc.

10. It is expected that the fees will be translated into scheme expenses and will be borne by scheme members eventually. We should aim to keep the structure of the MPFA slim so that the fees to be payable to the MPFA can be kept at reasonable levels and will not become a burden to scheme members :

  1. Role of the Authority : the role of the Authority should be limited to supervision and enforcement, while the responsibility for operating MPF schemes should rest with services providers. Such an arrangement should cover the Residual Provident Fund Scheme as well.
  2. Regulation of schemes : to alleviate the burden of regulatory work of the MPFA, the self-policing role of scheme members should be enhanced. This can be achieved through building up a transparent system by means of suitable requirements upon employers and service providers to disclose information. The MPFA will also need to launch large-scale education and publicity programmes to facilitate the exercise of self-policing role of scheme members.
  3. Simplicity of the MPF System : a simple MPF system with streamlined administrative procedures and regulatory requirements will not only reduce the workload and administrative costs of the MPFA directly, but it will also facilitate the self-policing role of scheme members.

Levy for Compensation Fund

11. The MPFA may also have to charge a levy for the purpose of building up a reasonable size of reserve for the Compensation Fund. The reserve will provide assurance to scheme members that a protection cover is in place and the MPF scheme assets are secure. The level of levy will be kept to a very low level with minimal adverse impact on scheme members.

Mandatory Provident Fund Office
28 October 1996

Last Updated on 18 August 1998