Annex A

Framework of MPF System

Basic Structure

‧ Trust Structure : All MPF schemes are to be governed by trust and operated by approved MPF trustees only.

‧ Scheme Types : MPF schemes may be operated as -

-- Master trust schemes : Membership will be open to employees of more than one employer, and self-employed persons;

-- Employer sponsored schemes : Membership will be restricted to the employees of an employer or its associates only; and

-- Industry schemes : Membership will be restricted to the employees and self-employed persons of prescribed industries.

Scheme Management

‧Fiduciary Duties : Trustees are the central parties responsible for all areas of scheme management functions. Although trustees of MPF schemes may delegate their duties to service providers, they have to closely monitor the performance of those service providers in order to fulfil their fiduciary duties with respect to the schemes.

‧Delegation : On the basis of existing market practices, we envisage that the scheme management duties will be performed as follows -

-- " Front line " functions : These include marketing, enrolment, receipt of contributions, handling of enquiries, etc. Trustees will normally assume these functions themselves, except for marketing where they may engage outside distributors.

-- " Back office " functions : These include processing of contributions, withdrawals and transfers, and record keeping. The bigger trustees will normally act as scheme administrators themselves. Smaller service providers would engage outside scheme administrators and rely on the information processed by scheme administrators to liaise with investment managers, custodians and scheme members.

-- Fund management : This includes custodianship of scheme assets and investment. Many trustees will normally delegate the duties to custodians and investment managers, although a small number would have in-house capabilities.

‧ Prescribed Parameters : Service providers will have to comply with the detailed requirements and standards in respect of scheme administration and investment.

Scheme Participation

‧ Coverage : Unless exempted, all employees aged between 18 and 65 and self-employed under 65, will be required to participate as members of registered MPF schemes.

‧ Contributions : Both the employers and employees will be required to contribute 5% of the employee's cash income. Self-employed persons will be required to contribute 5% of their income. Contributions will be subject to the minimum and maximum level of income (HK$4,000, and HK$20,000 per month respectively).

‧ Vesting, Preservation and Portability : The contributions made in respect of a scheme member will be fully and immediately vested in him. The accrued benefits will be required to be preserved until the attainment of retirement age of 65, though earlier benefit payment is allowed under certain prescribed circumstances. An employee will be able to transfer his accrued benefits to another account during change of employment.

‧ Role of Participants :

--Employers : As the MPF System is an employer-based system, employers will be responsible for ensuring that their employees become members of an MPF scheme. They also need to deduct and remit contributions to the trustees.

--Employees : They will select investment funds as provided under their schemes for the investment of their accrued benefits. They will also play a self-policing role on their MPF accounts.

--Self-employed persons : A self-employed persons will be personally responsible for becoming a member of a registered scheme and for remitting their contributions and monitoring their MPF accounts.

Regulation

‧ The MPF Authority (MPFA) will assume a regulatory role as follows :

--Approval of trustees : The MPFA will approve trustees who meet the stringent criteria prescribed by the Ordinance and the Regulation.

-- Registration of schemes : The MPFA will register schemes which comply with the prescribed standards.

-- Compliance : The MPFA will monitor the compliance of trustees through measures such as on-site inspection, internal controls requirements, regular reporting and whistle-blowing provisions. It will also monitor the compliance of enrolment and payment of contributions by employers and self-employed persons.

-- Crisis management : Where there are circumstances that may affect the interests of scheme members, the MPFA will conduct a special audit, inspection or investigation. If a trustee fails to perform a duty, the MPFA will take action to sanction the trustees.

Safety Net

‧Insurance Coverage :

--The MPF trustee of a scheme will be required to make the necessary arrangements for adequate insurance to cover the scheme for losses in scheme assets, including insurance against misfeasance or other illegal conduct by the trustee and its service providers.

‧ Compensation Fund :

-- A Compensation Fund will be set up, by levy on scheme assets and an initial government injection, to compensate scheme members for losses resulting from misfeasance or illegal conduct by the trustee and service providers.

-- If the losses to a registered scheme cannot be totally compensated by the resources of the trustee and other service providers or their insurance, the MPFA may apply to the court to use the Compensation Fund for compensation purpose.