LegCo Panel on Financial Affairs
Information Note
Basic Approach of the MPF System
Obligations and Responsibilities under the MPF System

Purpose

This paper describes the basic approach in requiring trustees and employers to fulfil obligations and responsibilities in order to ensure the smooth operation of the MPF System.

The Basic Approach

2. The MPF Schemes Ordinance requires employers and trustees to fulfil a number of obligations under the MPF System. In the subsidiary legislation, we propose to impose detailed obligations and responsibilities on employers and trustees in order to facilitate the operation of the System.

3. It is important to keep the obligations and responsibilities to be imposed on employers and trustees to a minimum because :

1. given that 87% of employers in Hong Kong employ less than 10 employees, we need to simplify the MPF requirements in order to enable these small employers to fulfil their obligations; and
2. obligations and responsibilities placed on trustees will have direct impact on the administrative costs of the MPF System, which will be borne by scheme members eventually. It is therefore important to streamline the requirements in order to minimise the administrative costs of the System.

Employers’ Obligations

4. We will require employers to fulfill a number of obligations to facilitate the operation of the MPF System. Their major obligations include :

1. Enrolment of employees in MPF schemes : employers need to make the necessary arrangements to enrol all their relevant employees into an MPF scheme;
2. Making contributions : employers need to calculate, deduct and remit the contributions of their relevant employees to the trustee every month together with a remittance statement. They are also required to give a monthly pay slip to each of their relevant employees and to keep proper record of these employees, their payrolls and remittance statements;
3. Disclosure of information : employers will be required to distribute information received from trustees to their employees and to reply enquiries made by employees regarding their relevant income and contributions; and
4. Portability/withdrawal of benefits : employers will be required to follow the relevant procedures prescribed by the MPFA, such as settling with the employee the date of termination and completing the relevant part of the prescribed form.

Assessment

5. The System is streamlined in order to facilitate employers to fulfill their obligations, particularly addressing the following aspects :

1. Enrolment of employees in MPF schemes : in order to reduce the costs to small employers, the MPF System provides for the establishment of master trust schemes in which small employers can enjoy a high degree of efficiency resulting from the economy of scale. Unlike ORSO schemes, scheme registration at the employer’s level within an MPF master trust scheme is not required. This saves a lot of administration work and costs for small employers;
2. Making contributions : although MPF contributions are calculated on the basis of "relevant income", employers are not required to make year-end adjustments to reflect fluctuations in the relevant income of their employees during the year. Whilst this will only have minimal impact on the accrued benefits of employees, the resultant savings in administrative costs will ultimately benefit the employees;
3. Portability/withdrawal of benefits : employers will only be required to fill in a short part of the prescribed form and follow very simple procedures to facilitate portability or withdrawal of benefits; and
4. Accounting/auditing requirements : since a lot of employers in a master trust scheme will be small employers, auditing requirements will be imposed on the master trust schemes as a whole but not on the individual employer units. Unlike ORSO schemes, the MPF System will not impose requirements regarding employer’s auditor.

Trustees’ Obligations

6. Trustees play a central role in the administration and maintenance of MPF schemes. Although certain management and investment functions will be delegated to other service providers, the trustees have the ultimate responsibility of ensuring that all the MPF requirements are fulfilled. The major obligations of trustees include :

1. Registration of schemes : trustees need to register both master trust schemes and employer sponsored schemes with the MPFA;
2. Enrolment : trustees have to make all the necessary enrolment arrangements for participating employers and self-employed persons, including issuing enrolment certificates and scheme information leaflets;
3. Receive and verify contributions : trustees have to receive monthly contributions from employers and verify the calculations. They also have to follow the procedures regarding chasing default contributions and issue annual benefit statements to scheme members via the employers;
4. Portability/withdrawal of benefits : trustees have to facilitate fund transfer and withdrawal process according to the prescribed procedures and complete the process within a prescribed period;
5. Maintaining records : trustees have to ensure that proper records in respect of the registered schemes, scheme membership, contributions, transactions, investments and charges are being maintained;
6. Accounting and auditing : trustees have to meet the prescribed accounting, auditing and reporting requirements. They have also to set up proper internal control systems;
7. Disclosure of information : trustees are required to disclose certain information to scheme members, employers and MPFA, including annual report and accounts; and
8. Winding up : trustees have to facilitate winding up, including making transitional arrangement and seeking the approval of MPFA for voluntary winding up in case of employer sponsored schemes.

Assessment

7. We have streamlined both the administrative mechanisms and procedures and the regulatory requirements of the MPF System in order to minimise the obligations and responsibilities placed on trustees.

Administrative Mechanisms and Procedures

8. We have simplified the administrative procedures and mechanisms in the following aspects :

1. Registration of schemes : we propose to give one blanket registration to the whole MPF master trust scheme without the need for separate registrations for each individual participating employer unit. Unlike ORSO schemes, we rely on the self-certification of trustees in respect of meeting scheme standards at the registration stage rather than requiring certification by external solicitors and auditors. Under the MPF System, a trustee has to be approved under stringent approval criteria before he can register a scheme. External auditors are already involved during the approval of trustees. We believe that self-certification is adequate at the registration stage as the approved trustees will ultimately be legally responsible for the compliance of scheme standards;
2. Receive and verify contributions : trustees are only required to verify the calculation of contributions and to rectify the situation in case there is any discrepancy in the calculations. They will not have to spend a great deal of resources in verifying the calculation of relevant income as the onus for calculating such amount accurately will be placed on the employers and the self-employed persons. The MPF System will also rely on the self-policing role of employees in ensuring the correct calculation of their contributions;
3. Procedures for chasing default contributions : trustees will only be required to send one notice to the default parties and report to the MPFA if the arrears remain outstanding after a month. The MPFA will then take over the responsibility in recovering the default contributions;
4. Portability of benefits : all the concerned parties, including the previous and the new trustees, the employer and employee, will only need to complete one consolidated processing form in a portability case. For administrative convenience, partial transfer of accrued benefits will not be allowed. Employers and employees will also be required to settle their employment issues (i.e. termination date, eligibility for Severance Payment/Long Service Payment and the amount involved) before approaching the trustees for portability. Record transfers among the trustees involved will be kept to a minimum; and
5. Withdrawal of benefits : trustees will be given simple and clear procedures to follow for withdrawal cases. Applicants will only be required to provide documents issued by the relevant authorities, rather than any circumstantial evidence, to prove meeting the eligibility criteria so that trustees will not have to exercise any judgment in processing withdrawal cases.

Regulatory Requirements

9. We have also minimised the regulatory requirements on trustees without compromising security of scheme assets and the interest of scheme members :

1. Accounting and auditing : in view of the large number of small employers and self-employed persons within a master trust arrangement, preparation of annual accounts and auditing under MPF is only mandated at the master trust level instead of each individual participating employer unit. However, trustees are required to keep records which enable them to prepare accounts at the employer level. Any employer under a master trust scheme may arrange with his trustee to prepare audited accounts for his company;
2. Disclosure of information to scheme members : trustees may distribute scheme information to scheme members via the employer instead of distributing the information to individual scheme members. This will reduce the number of units for distribution significantly;
3. Disclosure of information to MPFA :
   1. trustees will only be required to submit returns which will provide essential information for MPFA to perform its regulatory duties. Frequency for returns is normally once a year; and
   2. we will utilise advanced information systems for communication between the MPFA and the trustees as far as possible in order to save the time and costs for compilation of data.

Mandatory Provident Fund Office
28 October 1996

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