PLC Sub-Committee on Subsidiary Legislation of the MPF System

Information Note

Accounting and Reporting Requirements


Purpose

This paper describes the proposed accounting and reporting requirements to be imposed on MPF schemes (paragraphs 2 and 3).

Proposal

2.We propose the following accounting and regular reporting requirements to be imposed on MPF schemes :

  1. Entity for audited accounts : Scheme accounts should be prepared and audited at the global level, i.e. at the master trust level and the employer sponsored scheme level, as opposed to the employer unit level. However, employers should have the voluntary option of having additional accounts prepared and/or audited at the employer unit level.

  2. Distribution : The annual report and audited accounts should be submitted to the MPFA and provided to scheme members and employers upon request.

  3. Format of annual report and accounts : The format of the annual report and accounts should follow the MPF subsidiary legislation and the Hong Kong Society of Accountants (HKSA) accounting guidelines on retirement scheme accounts. The key features of the HKSA accounting guidelines should be included in the MPF subsidiary legislation (see Annex A). The annual report and accounts should be made available in both English and Chinese languages.

  4. Trustees' Report on internal controls : The trustee of a registered scheme should prepare an audited report to the MPFA setting out the main control objectives and the procedures and internal controls to achieve these objectives in respect of a registered scheme.

  5. Auditors' opinion : The annual accounts and internal control report of an MPF scheme should be audited by external auditors who should give their opinion thereon ( Annex B).

3.In addition to the regular reporting requirements, we also propose that :

  1. Report on events of significant nature : MPF trustees should report any event of 'significant nature " to the MPFA, either before the occurrence of the event if it is foreseeable, or as soon as practicable after the event has occurred if it is unforeseeable. A list of the events to be reported to the MPFA are set out at Annex C.

  2. " Whistle-blowing " requirement : Relevant persons, including auditors of MPF schemes and other service providers appointed by the trustee in respect of the administration and management of a scheme, will have a duty to report to the MPFA certain matters that come to their attention in the performance of their normal duties, and which in their opinion :

    1. adversely affects the financial position of the scheme to a material extent; or

    2. significantly threatens the safety of members' assets.

The specific matters that these relevant persons have a duty to report to the MPFA are set out at Annex D.

Justification

Accounting and Regular Reporting Requirements

Entity for audited accounts

4.A master trust scheme is open to membership to the employees of more than one employer, the self-employed persons, and other individual scheme members. The accounting systems for MPF schemes should be capable of preparing financial information at three levels as follows :

  1. at a master trust level;

  2. at an employer unit level within a master trust; and

  3. at an individual scheme member level.

5.Our proposed requirement is that annual accounts are prepared and audited at the master trust level rather than at an employer unit level within a master trust scheme. Such accounts would therefore comprise all the transactions under the global arrangement rather than just the transactions pertaining to a subset thereof.

6.The justification for this approach is that it will result in a more efficient and cost effective system whilst still giving appropriate levels of comfort to scheme members and the MPFA as follows :

  1. The preparation of accounts by the trustee is a means of ensuring that the trustees are accountable to the scheme members. This provides comfort to scheme members and the MPFA as to the stewardship function performed by trustees.

  2. The accounts show the overall investment performance of the scheme which may be used by scheme members to monitor the performance of the scheme.

  3. The accounts provide reassurance to the scheme members and the MPFA that the assets exist and are safeguarded.

  4. The audit of the accounts acts as an independent control on trustees and may be a preventive measure against trustees acting against members' interests.

  5. Consistent and independently audited documents would be produced for each MPF scheme which could be available to scheme members and prospective scheme members for the purposes of gathering information about different schemes so as to select between schemes.

7.In view of the abundance of small employers and individual account holders (i.e. self-employed persons, holders of dormant accounts) within a master trust scheme, the preparation of audited accounts at the employer unit and individual scheme member level will be very costly and have serious implications for administrative fees. Under our proposed system, individual employers with sufficient resources will have the flexibility to arrange with their trustees for accounts to be prepared and/or audited at the employer unit level on a voluntary basis. Besides, the trustees will be required to issue annual benefit statements to individual scheme members, which will enable scheme members to monitor the financial position of their own MPF benefits.

Distribution

8.The audited accounts will form part of an annual report and must be submitted to the MPFA by trustees within six months of the scheme year end. The annual report and audited accounts will be available on request to scheme members and employers. Automatic distribution would be more expensive, and it is expected that not all members will be interested in receiving such a document.

Format of annual report and accounts

9.The format of the annual report and accounts should be guided by the MPF subsidiary legislation and the HKSA accounting guidelines on retirement scheme accounts. At present, compliance with the HKSA accounting guidelines is merely guidance as to best practice. However, for MPF purposes, we propose that a few key features of the HKSA guidelines should be included in the MPF subsidiary legislation to ensure that such features are followed (details at Annex A). The justifications are :

  1. This is to ensure that the annual report and accounts are informative to scheme members and employers.

  2. It should help ensure consistency between the annual reports accounts of different schemes and therefore facilitate comparison between schemes.

Trustees' report on internal controls

10.To enhance the security of scheme assets and to enable the MPFA to monitor the controls exercised by a scheme trustee over an MPF scheme, we propose to require the trustee to submit, on an annual basis, a report on the internal control measures over the scheme. An exception to this reporting requirement is where the MPF scheme concerned is an employer sponsored scheme with less than 1,000 scheme members. In view of the scale of such schemes, the daily management and operation of these schemes will be much simpler. Such a control environment will require much less sophisticated control procedures. Hence, the benefits derived from the preparation and audit of the internal control reports of these schemes will be limited, while the cost implications for scheme members will be significant. The preparation of audited accounts will be a more cost effective way to offer reasonable level of comfort to scheme members as to the protection of scheme assets.

11.The scope of the internal control report should include, but not limited to, the control environment of the following aspects of the scheme :

  1. safeguarding of assets;

  2. compliance with investment standards and guidelines;

  3. separation of scheme assets from those of employers, trustees and other third parties; and

  4. compilation of prudential returns to the MPFA.

The MPFA will issue detailed guidance notes on the specific areas to be reported.

Auditors' opinion

12. We propose that both the annual accounts and the report on internal controls of an MPF scheme to be prepared by the scheme trustee should be audited by an external auditor. The purpose is to provide independent control over the trustee and to ensure that such important documents are properly prepared by the trustee. The scope of reporting should enable the MPFA to assess an MPF scheme's compliance with the relevant requirements of the MPF legislation. The proposed scope of the audit reports is set out at Annex B.

Other Reporting Requirements

Report on events of significant nature

13.To enable the MPFA to detect problems on a timely basis, it will be crucial to require trustees to report significant events.

" Whistle-blowing " requirements

14.We believe that auditors and the MPF service providers involved in the administration and management of an MPF scheme will very likely be able to obtain first-hand information in respect of an MPF scheme during performance of their normal duties. The " whistle-blowing " requirements will therefore improve the overall regulatory system by allowing important matters relevant to the functions of the MPFA to be brought to its attention on a timely basis. For example, auditors would report details of an accounting break-down by a trustee as soon as it came to their attention rather than the MPFA discovering this from a qualified audit report, issued perhaps several months later.

15.We propose that relevant persons have a general duty to report to the MPFA on specific matters of non-compliance of major significance (details at Annex D). These are matters that may have adverse impact on scheme members' interests and need to be dealt with promptly.

16.We propose that relevant persons merely need to report relevant matters which come to their attention, in the course of performing their normal duties and responsibilities, but do not need to search out reportable matters. This is to ensure that unreasonable demands are not made of relevant persons. This will also prevent extra costs being incurred by such persons which ultimately will need to be recovered from MPF members through higher fees and charges.


Mandatory Provident Fund Office
Financial Services Bureau
11 November 1997