House Committees -- Subcommittee on subsidiary legislation of the Mandatory Provident Fund System (Minutes) 7 Nov 97

Provisional Legislative Council

PLC Paper No. CB(1)509
(These minutes have been
seen by the Administration)

Ref : CB1/SS/5/97

Subcommittee on subsidiary legislation of the
Mandatory Provident Fund System

Minutes of the meeting held on Friday, 7 November 1997, at 10:45 am in the Chamber of the Legislative Council Building

Members present :

Hon Ronald ARCULLI, JP (Chairman)
Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon WONG Siu-yee
Hon NG Leung-sing
Hon LEE Kai-ming
Hon Mrs Elsie TU, GBM
Hon Mrs Peggy LAM, JP
Hon YUEN Mo
Dr Hon Mrs TSO WONG Man-yin
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Kam-lam
Hon Kennedy WONG Ying-ho
Hon YEUNG Yiu-chung
Hon LAU Kong-wah
Hon KAN Fook-yee
Hon NGAN Kam-chuen

Members absent :

Hon James TIEN Pei-chun, JP
Hon HO Sai-chu, JP
Hon Henry WU
Hon MA Fung-kwok
Hon CHAN Yuen-han
Hon CHOY So-yuk

Public officers attending :

Mrs Pamela TAN: Director
Mandatory Provident Fund Office: Mr Raymond TAM
Assistant Director: Regulatory Standards
Ms Hendena YU: Senior Manager; ORSO Interface

Clerk in attendance:

Miss Polly YEUNG: Chief Assistant Secretary (1)3

Staff in attendance :

Mr LEE Yu-sang: Senior Assistant Legal Adviser
Ms Bernice WONG: Assistant Legal Adviser 1
Miss Anita HO: Assistant Legal Adviser 2
Mr Daniel HUI: Senior Assistant Secretary (1)5

I.Confirmation of minutes of meeting
(PLC Paper No. CB(1)415)

The minutes of the meeting held on 24 October 1997 were confirmed.

II.Meeting with the Administration

2.The Chairman explained that the purpose of the meeting was to receive a briefing by the Administration on salient features of the Mandatory Provident Fund (MPF) system. As members would still have an opportunity to examine the draft legislation after the latter has been formally introduced into the Provisional Legislative Council (PLC), he suggested that the Subcommittee should concern itself primarily with discussing and clarifying with the Administration necessary information on the proposed system while members' dissenting views and major concerns would be duly recorded and be addressed when scrutinising the proposed legislation. Members agreed.

Framework of Mandatory Provident Fund (MPF) System
(PLC Paper No. CB(1)440(01)

Contributions and coverage

3.Members enquired about the minimum and maximum level of income for the purpose of calculating monthly contributions to MPF Schemes, and whether domestic workers would be covered by the MPF system. The Director/MPF Office (D/MPFO) explained that if an employee's salary was less than $4,000 per month, he would be allowed to choose not to make any contribution but his employer would still be required to make the monthly contribution at 5% of his salary. On the other hand, if an employee's salary was in excess of $20,000 per month, the employer and the employee would only be required to contribute at 5% of $20,000. Nevertheless, employers and employees would be at liberty to make non-mandatory contributions above the statutory level of contributions. She also confirmed that by virtue of Schedule I of the principal ordinance, domestic workers and their employers were exempted from MPF coverage.

Regulation and administration costs

4.Noting that the MPF Authority (MPFA) to be set up to assume a regulatory role might entail high administration costs, members were concerned about the source of finance for the MPFA and the proposed measures to minimize the Authority's operating costs. D/MPFO advised that subject to the approval of the Finance Committee of the PLC, the Government would provide a capital funding of $5 billion to the MPFA at its inception. The investment income from this seed money, the annual fees to be levied on MPF scheme assets, as well as fees charged for services such as schemes registration and licensing of trustees would hopefully enable the MPFA to be self-financing in future. The MPFA would streamline procedures and computerize as far as possible in order to reduce costs. D/MPFO shared a member's concern about the need to maintain a simple but effective regulatory regime.

Compensation Fund

5.On the proposed size of the Compensation Fund (CF) and its possible increase following the growth in scheme assets over time, D/MPFO advised that the Government would inject $300 million for setting up the CF. Thereafter, a proposed levy of 0.03% of scheme assets would be collected until the CF reached $900 million. As there existed other avenues for compensating scheme members for losses resulting from misfeasance or illegal conduct by trustees and service providers, D/MPFO did not anticipate many cases of payment from the CF. She added that the experience of overseas countries operating similar pension systems had indicated that the chance of having to activate a compensation fund was quite low.

6.Responding to members' concerns, D/MPFO clarified that for exigency reasons and subject to the approval of the legislature, the MPFA could borrow money from the Government or increase the rate of levy so as to make payment of claims. She nevertheless reiterated the Administration's stance not to act as the final guarantor for the MPF system, lest service providers might seek to undertake unduly risky investments in the belief that the Government would bail the system out in case of difficulties.

Payment of accrued benefits

7.Since accrued MPF benefits would be payable in a lump sum, some members cautioned that the retiree might spend the entire amount for other purposes and continue to rely on the Government for retirement assistance. In reply, D/MPFO said that the issue had been thoroughly debated during the passage of the principal ordinance and it was considered that it would be too paternalistic for the Government to require retirement benefits to be paid by instalments. She envisaged that the pension industry would in due course develop annuity products to attract retirees to join annuity schemes. The Administration would also launch educational and promotional programmes to raise public awareness of the need for prudent financial planning for retirement.

8.On a member's enquiry about receipt of retirement benefits under MPF Schemes and possible restriction from applying for Comprehensive Social Security Assistance (CSSA), D/MPFO confirmed that MPF Schemes and CSSA served different objectives and that the MPF system was not intended to replace the CSSA for eligible elderly persons.

9.As regards fund investment, D/MPFO said that the Government would not require MPF scheme providers to guarantee a minimum rate of return but past records of major retirement funds showed an average net return of about 7% per annum in the past 14 years. Moreover, employees were free to choose among investment products available under MPF Schemes to suit their investment objectives.

Occupational Retirement Schemes Ordinance (ORSO) Interface Arrangement - Exemption Criteria for ORSO Registered Schemes
(PLC Paper No. CB(1)440(02))

10.A member enquired whether a person remaining in his current employment could revert to ORSO schemes after exercising the one-off option to switch to MPF coverage for reason of unsatisfactory investment return. The Assistant Director/Regulatory Standards (AD/RS) confirmed that such a reversion would not be allowed and reiterated the three permissible circumstances under which an employee could exercise the one-off option . D/MPFO supplemented that employees were discouraged from frequent switchings between ORSO and MPF schemes because this would lead to substantial administrative costs as evident in the Chilean employee-based system. Moreover, the investment manager could not formulate a long-term investment strategy if membership and the amount of contributions were unstable.

11.On whether an employer of an ORSO scheme could reduce its contribution from a higher rate to just 5% as required under the MPF system, AD/RS advised that since ORSO schemes were voluntary schemes and depending on the terms of the contract between the employer and the employee, the employer might be entitled to reduce its contribution. In such an event of reduction in future benefits, the employee would have the one-off option of switching to MPF coverage. Alternatively, if the employer decided to terminate an ORSO scheme, he would be required to arrange MPF coverage for his employees. In this connection, he emphasized that one of the objectives of the proposed interface arrangement was to minimise disruption to existing ORSO schemes.

ORSO Interface Arrangements - On-going Requirements
(PLC Paper No. CB(1)440(03)

12.In response to members' concerns about employers' withholding right under an ORSO scheme upon dismissing an employee for cause, AD/RS informed members that upon the request of the former Subcommittee on MPF system, the Administration would include in the interface arrangements a requirement that taking the implementation of the MPF system as a cut-off date, when the employer of an exempted ORSO scheme dismissed an employee for cause, he could not withhold the employer's funded portion of the employee's retirement benefits up to the amount equivalent to the minimum MPF benefits. Such benefits would be payable upon dismissal. On the other hand, he also advised that under a MPF scheme, an employee's accrued benefits would be fully vested and preserved irrespective of the reason of dismissal.

13.In this connection, the Chairman added that the proposed withholding arrangement had been discussed by the former Subcommittee and agreed to by major employer associations.

14.As regards arrangements of the provident fund schemes of subvented bodies, AD/RS said that if these schemes were duly exempted in accordance with the principal ordinance, the relevant scheme rules would prevail. He also confirmed that upon implementation of the MPF system, staff employed on fixed-term and gratuity-bearing contracts and their employers would be required to participate in the system.

ORSO Interface Arrangements - Minimum Standards on Trusteeship
(PLC Paper No. CB(1)440(04))

15.Members noted the contents of this paper and that " trusteeship " would be one of the subjects for a future briefing.

III.Any other business

16.In reply to the Chairman, D/MPFO said that the Administration had proposed to brief members in four meetings. The subjects to be covered in the coming three meetings would include:

operational details of the MPF system, including collection of contributions, circumstances and fees for portability and accounting and reporting requirements;
special arrangements for employees in industry with high intra-industry mobility and low-income earners; and
measures to protect scheme assets, including the monitoring system, investment guidelines and safety net.

17.D/MPFO informed members that drafting of the bill and related subsidiary legislation had been completed. The proposed legislation would be introduced into the PLC before the end of November 1997.

18.Members agreed to hold the next three meetings on the following dates:

18 November 1997 (2:30 pm - 4:30 pm); and

19 November 1997 (8:30 am - 10:30 am).

19.The meeting ended at 12:30 pm.

Provisional Legislative Council Secretariat
12 November 1997