House Committees -- Subcommittee on subsidiary legislation of the Mandatory Provident Fund System (Minutes) 19 Nov 97

Provisional Legislative Council

PLC Paper No. CB(1)562
(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 Wednesday, 19 November 1997, at 8:30 am in Conference Room A of the Legislative Council Building

Members present :

Hon Ronald ARCULLI, JP (Chairman)
Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon WONG Siu-yee
Hon HO Sai-chu, JP
Hon NG Leung-sing
Hon LEE Kai-ming
Hon Mrs Elsie TU, GBM
Hon Henry WU
Hon YUEN Mo
Hon CHAN Kam-lam
Hon YEUNG Yiu-chung
Hon KAN Fook-yee
Hon NGAN Kam-chuen

Members absent :

Hon James TIEN Pei-chun, JP
Hon Mrs Peggy LAM, JP
Hon MA Fung-kwok
Dr Hon Mrs TSO WONG Man-yin
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Yuen-han
Hon Kennedy WONG Ying-ho
Hon LAU Kong-wah
Hon CHOY So-yuk

Public officers attending :

Mrs Pamela TAN: Director; Mandatory Provident Fund Office
Mr Raymond TAM: Assistant Director; Regulatory Standards
Ms Maisie CHENG: Assistant Director; Scheme Operations

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.Meeting with the Administration

Industry Schemes
(PLC Paper No. CB(1)505(01))

In response to a member's concern about the possible duplication of efforts between the Mandatory Provident Fund Schemes Authority (MPFA) and the approved MPF trustees on the provision of industry schemes, the Assistant Director/Scheme Operations (AD/SO) explained that the MPFA and the trustees would perform different roles and functions under the MPF system. The MPFA would be responsible for the approval of trustees, registration of MPF schemes, monitoring trustees' performance and operation of MPF schemes. Approved trustees would be responsible for scheme management and operations, the main tasks of which included collection of contributions for investment, provision of enquiry services, preparation of benefit statements and reports, and liaison with scheme members etc. AD/SO further said that the MPFA would require about 200 staff members for ensuring the smooth operation of the whole MPF system. Its establishment would have to be increased substantially if it were to act as the operator of the industry schemes. The Administration would prefer to make use of the resources and expertise of service providers in the private sector which would make the schemes more cost-effective.

2.Elaborating on the method of remittance of contributions, AD/SO advised that employers participating in industry schemes could remit contributions direct to the trustees in the normal manner as in other regular MPF schemes, or they might remit contributions at the point of paying the salaries through the use of smart cards. Mr Henry WU suggested that in order to avoid unnecessary disputes between employers and employees on whether remittances had been made, it would be useful to generate hard copy receipts to the employer and employee instantly when contributions were remitted using smart cards. AD/SO noted the member's concern and suggestion and advised that detailed methods on remittance through the use of smart cards or other means were yet to be proposed by the future industry scheme providers when submitting their bids to become an approved trustee of an industry scheme.

3.A member raised concern over the coverage of industry schemes and opined that an industry scheme should also be set up for the transportation industry where job mobility was high. In response, AD/SO explained that industry schemes could help to reduce portability costs for scheme members with a high intra-industry labour mobility rate and would be only viable with suitable eligibility criteria for scheme membership. Based on these principles, the Administration proposed to set up, at the initial stage, industry schemes for the catering and construction industries. The transportation industry had not been included because according to the statistics prepared by the Census and Statistics Department, the intra-industry mobility of the transportation industry was not as high as that of the catering and construction industries. On difficulties in determing eligibility criteria for scheme membership, AD/SO further explained that although driving licences were issued, they were not a reliable criterion for delineating membership as holders of such licences might not necessarily be employed as drivers. Moreover, out of the estimated 100,000 workers in the land transportation industry, almost 30% were self-employed persons with their own individual accounts under the future MPF system, and about 30% were employed in public transport companies with their own retirement schemes. The remaining number of workers would be much smaller than that of the construction and catering industries. Nonetheless, the Industry Schemes Committee to be set up would review the situation in the light of operational experience.

4.As regards investment returns for industry schemes, AD/SO advised that these schemes would be subject to the same MPF regulatory framework on investments and their return should be in line with the performance of regular MPF schemes.

5.On whether there would be numerous industry schemes, thus defeating their effectiveness in reducing the costs of portability, AD/SO clarified that the MPFA had the power to designate the industries for which industry schemes would be set up and determine the number of such schemes. The Administration proposed that initially, two schemes would be set up for the construction and catering industries. AD/SO added that this arrangement represented a balance between promoting healthy competition and avoiding switches between too many schemes which would defeat the purpose of reducing portability costs.

6.On the role of trade unions and trade associations, AD/SO confirmed that trade unions and trade associations had been consulted in drawing up proposals on industry schemes. The relevant trade unions and associations had also agreed to assist in organizing promotional and educational activities when the schemes were launched. Moreover, the Government would appoint members to the Industry Schemes Committee which would monitor schemes operation and advise on future development. Membership of the Committee would likely include representatives from the relevant trade unions and associations.

7.Regarding the industry schemes for the construction industry, members cautioned about the possible problem of sub-contractors and their employees evading participation in the MPF system for various reasons. AD/SO shared the member's concerns and said that the MPFA would organise educational activities to enhance the awareness of employers and employees on their obligations and entitlements under the MPF system. Field investigations would also be made by MPF investigators for enforcement purposes. Non-compliance with MPF requirements would be liable to prosecution.

" No-rejection " Requirement and Protective Measures for Low-Income Earners
(PLC Paper No. CB(1)505(02))

8.The Deputy Chairman expressed concern about foreign exchange transactions with quotation spreads wider than the market rates which would result in hidden costs to scheme members. The Assistant Director/Regulatory Standards (AD/RS) assured members that all foreign exchange transactions between an MPF investment manager and its associated banks or companies had to be at arm's length and subject to specific regulation.

9.As regards the fee level of MPF products, AD/SO explained that the estimated fee would be between 0.9% to 2.3% of the contributions, not 5% as estimated by some concern groups. The Administration reiterated its stance against prescribing fees as suggested by a member for the following reasons :

it was extremely difficult to set a " reasonable " standard of fees as fees should also be related to the level of services provided; and
with a prescribed level of fees, service providers might be reluctant to improve their services since they would not be able to recover any additional costs incurred through higher fees. This would restrict market innovation and improvements.

In this connection, AD/SO supplemented that the MPFA would monitor the fee level of MPF products to ensure that the fee structures would not disadvantage low-income earners. She stressed the importance of transparency in fee structures and free competition among service providers which would keep the level of fees low. In reply to the Chairman, AD/RS advised that under existing ORSO schemes, the fees charged on small schemes were not substantially higher than those charged on large schemes.

10.A member held the view that the Administration should not rely on free competition to keep fees low as keen competition might stifle small scheme providers and result in market monopolisation by a few large corporations. In response, AD/SO pointed out that there had been a trend in the financial services sector for merger of relatively small service providers in order to increase their capital base and competitiveness. She anticipated that there should be market niche for small to medium-sized scheme providers in the MPF system.

II.Any other business

11.Noting that the Provident Fund Schemes Legislation (Amendment) Bill 1997 would be introduced into the Provisional Legislative Council on 26 November 1997 and considered by the House Committee on 28 November 1997, members agreed to make the following proposals to the House Committee at its meeting on 21 November 1997 :

(a).if a Bills Committee was formed, it would study both the Bill and the related draft Regulations; and

(b).subject to the agreement of the House Committee, the Secretariat would call membership for the Bills Committee prior to its formation so that the Bills Committee could hold its first meeting in the first week of December 1997.

CAS(1)3

12.Members also agreed to defer the discussion on PLC Papers CB(1)505(03), (04) and (05) to the next meeting of the Subcommittee on 21 November 1997 at 8:30 am.

13.The meeting ended at 10:30 am.

Provisional Legislative Council Secretariat
27 November 1997