PLC Sub-Committee on Subsidiary Legislation of the MPF System

Information Note

Default Contributions : Mechanism for Recovery

Purpose

This paper describes the proposed mechanism for recovery of default contributions :

  1. roles of trustees and the MPFA in chasing default contributions (paragraph 2); and

  2. adoption of a two-tier penalty system (paragraph 3).

Proposal

2.We propose to involve both trustees and the MPFA in chasing default contributions :

  1. trustees should issue a reminder, within 30 days of the discovery of the default contributions, chasing the arrears;

  2. trustees should report to the MPFA if the default contributions remain unpaid after the lapse of the 30 days;

  3. the MPFA would issue two notices, within one month after receipt of the report, demanding payment of the unpaid contributions within a stipulated period, and imposing financial penalties on the default party; and

  4. the MPFA may take further recovery actions involving civil proceedings or prosecutions if (c) above fails to recover the arrears.

3.As regards (c) above, we also propose that a two-tier penalty system be adopted :

  1. Financial penalty : not exceeding $5,000 or 10% of the default amount, whichever is higher, payable to the MPFA to help cover the MFPA's administrative costs in chasing the default contributions.

  2. Penalty interest : not exceeding an interest of 15% per annum of the default amount, to be credited to the scheme members concerned.

The MPFA may impose the two types of penalties concurrently. Details of the proposed mechanism for recovering default contributions and imposing penalties are set out at Annex A.

Justification

Involvement of Trustees

4.We propose to involve the trustees in chasing default contributions because they are the first point of contact with the employers or self-employed persons, and, as such, are in the best position to settle efficiently default cases caused by inadvertent omissions or other unintentional reasons. It is not necessary for them to report to the MPFA as soon as default contributions are detected.

Imposition of Financial Penalties

5.We propose to impose financial penalties on the default parties for the following reasons :

  1. Cost effectiveness : Many default cases may only involve small amounts of money since the MPF System covers a considerable number of small employers and self-employed persons. Prosecution would not be a cost-effective way to deal with such small sums of money, although it would be an appropriate means for handling persistent offenders and cases involving large sums of money.

  2. Implications for scheme members : Although trustees will be allowed to charge the default parties for recovery of administrative costs incurred in chasing the arrears, it is not always easy to identify the exact cost. In any case, in a highly competitive market, trustees may not wish to impose such a specific charge. The costs incurred would then be borne by scheme members eventually. To avoid an unfair burden on scheme members, we need to have enforcement measures with deterrent effect.

  3. Precedents in other legislation : Authorities responsible for collection of payment are usually empowered to impose financial penalties upon default parties. Some examples are listed at Annex B.

Two-tier Penalty System

6.The objectives of the two-tier penalty system are :

  1. Financial penalty : It will be used to recover the administrative costs incurred by the MPFA in chasing the arrears from the defaulting parties specifically. Otherwise, they would have to be passed onto scheme members generally in the form of registration fees for MPF schemes.

  2. Penalty interest : It will be used to compensate scheme members for their potential loss of investment earnings. This is proposed on the grounds of equity. To avoid employers' arithmetical errors in calculating the penalty interest and simplify the verification and allocation duties of the trustees, the MPFA will prescribe a level amount of interest in the demand notices (paragraph 2(c) above) issued to the default employers which will apply equally to all members concerned (details of the application of the penalty interest are set out in Appendix to Annex A).


Mandatory Provident Fund Office
Financial Services Bureau
11 November 1997