Provisional Legislative Council

PLC Paper No. CB(1)1184

Ref : CB1/SS/12/97

Paper for the House Committee meeting on 27 March 1998

Report of the Subcommittee on subsidiary legislation relating to Mandatory Provident Fund Schemes

Purpose

1 This paper reports on the deliberations of the Subcommittee on subsidiary legislation relating to Mandatory Provident Fund Schemes.

Background

2 The Mandatory Provident Fund Schemes Ordinance (Cap.485) (MPFSO) provides a statutory framework for the establishment of mandatory, privately managed retirement schemes to enable the workforce to save systematically for their old age. The implementation details of the MPF system are to be prescribed in subsidiary legislation to be made under the principal Ordinance.

3 The Administration introduced into this Council in November 1997 the Provident Fund Schemes Legislation (Amendment) Bill 1997 which sought to amend the MPFSO and 11 related Ordinances. It also made available three sets of draft subsidiary legislation relating to MPF Schemes for Members’ consideration. Both the Bill and the draft subsidiary legislation have been studied in detail by a Bills Committee. Pursuant to a decision of the House Committee on 23 January 1998, a Subcommittee was formed to take up further scrutiny of the subsidiary legislation upon passage of the aforesaid Bill on 25 February 1998.

The subsidiary legislation

4 The present legislative proposals consist of the following:

1. the Mandatory Provident Fund Schemes (General) Regulation (the General Regulation);

2. the Mandatory Provident Fund Schemes (Exemption) Regulation (the Exemption Regulation); and

3. the Mandatory Provident Fund Schemes (Amendment of Schedule 6) Notice 1998 (the Notice).

5 The three sets of subsidiary legislation have been made by the Chief Executive in Council under relevant sections of the MPFSO and presented to this Council for approval in accordance with section 35 of the Interpretation and General Clauses Ordinance (Cap.1). The Administration has advised that the aforesaid Regulations and Notice have been finalised in the light of the amendments to the MPFSO and members’ views expressed at the meetings of the Bills Committee. The Legal Adviser has also confirmed that the legal and drafting aspects of the Regulations and Notice are by and large in order.

The Subcommittee

6 Hon Ronald ARCULLI and Dr Hon LAW Cheung-kwok were elected Chairman and Deputy Chairman respectively of the Subcommittee and its membership list is at Appendix I. The Subcommittee has held two meetings to follow up key issues with the Administration. It has also noted views on the MPF subsidiary legislation from 15 organisations listed in Appendix II.

Deliberations of the Subcommittee

7 Members have scrutinised all the legislative proposals. Apart from a number of controversial subjects under the General Regulation, they have not raised Special queries on the Exemption Regulation and the Notice.

Mandatory Provident Fund Schemes (General) Regulation

8 The General Regulation is grouped under 16 Parts and four Schedules dealing with MPF scheme membership, scheme registration, approval of trustees, investment matters and other operational issues. Members’ major concerns, most of which relate to investment matters, are summarised in the following paragraphs.

Capital preservation product

9 The capital preservation product (CPP) is proposed to be offered under each MPF scheme as a low-risk and low-charge investment option. After protracted discussion with members and the retirement scheme industry, the Administration has proposed that funds of the CPP may only be invested in short-term Hong Kong dollar deposits and quality bonds. The trustee may charge administration fees only if the investment return of the CPP exceeds the savings deposit interest rate. It may, however, recoup losses in administration fees over the past 12 months when the investment income in future months is sufficiently high.

10 In principle, the Subcommittee supports the provision of a low-risk investment option at low charges to cater for the perceived needs of the low income group. Some members however hold a different view on the investment return of the CPP. They consider that apart from disallowing trustees to charge fees in the case of unsatisfactory investment return, there should be an additional legal requirement that the CPP should provide a guaranteed return of 2% above the savings deposit rate so as to ensure a reasonable level of retirement benefits in due course. If the investment return cannot meet the guaranteed rate, the members suggest that the Government should consider topping up the shortfall by way of a loan. They consider their proposal viable, having studied the arrangements for statutory schemes such as the Subsidized Schools Provident Fund and after consulting some sectors of industry players.

11 The Administration maintains that it will not agree to the proposal on account of the practical difficulties of implementation and its incompatibility with a privately managed MPF system. It points out that there is in fact no investment product that can guarantee a real rate of return after inflation although some long-term investments with high earnings growth potentials (such as stocks which is not a permissible investment option for CPP funds) may be able to hedge inflation risk. The Administration re-affirms that it will not top up shortfalls or losses in investment returns incurred by MPF schemes. According to the Administration, it is more advisable to rely on the future competitive MPF market to generate a product similar to that proposed by members than to prescribe such a product in law.

12 In this connection, a member suggests that to address concerns about investment returns and to provide greater flexibility, the future MPF Schemes Authority should be empowered under the Regulation to authorise new investment products which compare no less favourably than the CPP as currently proposed. The Subcommittee has not reached a common view on this issue. Miss CHAN Yuen-han has indicated that the Democratic Alliance for Betterment of Hong Kong will move amendments to further provide for an investment product with a guaranteed return of 2% above the savings deposit rate.

Minimum Hong Kong dollar currency exposure

13 To insulate scheme assets from excessive foreign currency risks, an MPF scheme is required under the General Regulation to invest at least 30% of its funds in Hong Kong dollar denominated assets, but currency hedging is allowed for fulfilling this 30% requirement. According to the Administration, the requirement is closely in line with existing market practice and has been set after lengthy negotiation with the industry to strike a reasonable balance between safeguarding scheme assets and providing flexibility for diversifying investment risks.

14 Some members of the Subcommittee consider the minimum 30% requirement too low, having regard to the recent market turmoils and sharp depreciation in Southeast Asian currencies. They call for a higher minimum requirement for Hong Kong dollar content of 50% or more so as to boost investment in the local economy and to further reduce currency risks. The Subcommittee notes that the 50% proposal has the support of the Hong Kong Capital Markets Association while most sectors of the retirement scheme industry do not support a minimum requirement above 30%. The latter group further cautions about relatively limited choices of quality investments in the local market for the available funds.

15 The Administration does not consider it appropriate to legislate for a higher percentage at the inception of the MPF system. It believes that with further development in Hong Kong’s debt market, there will be greater choices in local investments, thus reducing the need for foreign investments. In this connection, the Subcommittee has not taken a common position but some members have indicated intention to move amendments to provide for a higher minimum percentage of 50% in local assets holdings.

Statutory restriction on investment in shares

16 The Administration has not proposed any statutory limit on the proportion of scheme funds to be invested in shares, thus giving the trustee a free hand to work out the investment portfolio for an MPF scheme. It also points to the worldwide trend of de-regulating investment rules on pension funds, as well as a study by the Organization for Economic Cooperation and Development showing that countries with no limitation in shares investment have out-performed countries with such limitation. The Hong Kong Investment Funds Association and a number of other industry players support the current proposal.

17 While acknowledging the need for flexibility and maximising investment returns, some members are deeply concerned about recent financial market turmoils which have caused a sharp decline in share prices in local and overseas markets. As a further safeguard, they propose that the investment of funds in shares should be capped at 50% for all MPF products and are considering amendments to this effect. The Hong Kong Capital Markets Association has indicated support for the 50% cap.

18 Some members have expressed concerns about possible abuse of provisions under the General Regulation allowing not more than 10% of the funds of an MPF scheme to be invested inter alia in shares listed on stock exchanges outside the recognised list. In response, the Administration has advised that the 10% allowance is to provide some flexibility within safety limits for the investment manager to maximise returns by investing in shares listed in some rapidly developing markets such as the Mainland and Latin America.

Delegation of investment management and transactions between connected parties

19 To address members’ concerns about a level playing field for all MPF market players, the Administration has revised its proposal to the effect that the MPF investment manager may delegate overseas investment management to another investment company duly registered with an overseas authority and with a local branch office or associated company registered with the Securities and Futures Commission (SFC). The previous proposal was that such overseas functions could only be delegated to the investment manager’s overseas subsidiary or associate and was considered to be disadvantageous to local companies without overseas networks.

20 To minimise potential conflicts of interest arising from fund managers directing securities dealings through brokers or banks in the same group of companies, the General Regulation has adopted the relevant SFC rule which limits such transactions to a maximum of 50% of the total value of transactions conducted during the scheme financial period. There is concern that the 50% limit may be unduly in favour of financial groups which offer both fund management and securities services.

21 In this regard, the Subcommittee has taken note of the Administration’s explanation highlighting the importance of quicker and less costly transactions when dealing with associated brokers and banks. Moreover, as the 50% limit is in line with that imposed by the SFC, the Administration advises that the future MPFA can also rely on the existing machinery of the SFC for monitoring compliance.

Stock Lending

22 Some members are concerned about perceived risks and speculative element associated with stock lending and whether or not this activity should be prohibited for MPF schemes.

23 The Administration clarifies that stock lending is conducted by the scheme custodian, not by the investment manager, in return for a fee. This activity is widely used by unit trusts and pension funds for generating additional interest income to offset part of custodian fees, thus resulting in some enhancement in the net income for scheme members. The Administration also refers to stringent lending conditions laid down in the General Regulation such as the requirement for full collateral in cash or highly secure government bonds and the future issuance of relevant guidelines by the MPFA.

24 To address members’ concerns, the Administration has undertaken to include the subject of stock lending in its comprehensive review of financial services in Hong Kong in the wake of recent market turmoils. Pending the outcome of the review, the Administration considers it appropriate to retain the option of stock lending for MPF schemes with strengthened safeguards, rather than disallowing it altogether.

Winding up of registered schemes

25 The Subcommittee has taken note of the concerns expressed by the accounting profession on certain operational arrangements such as the voluntary winding up of employer sponsored schemes. As accountants play an important role in the liquidation and winding up processes, members urge that the Administration must consult the profession in finalising its proposals to ensure that the arrangements are workable and proper.

26 In response, the Administration has revised the relevant Part on winding up of registered schemes under the General Regulation in the light of the profession’s concerns. On the issue of liquidator’s fees, for example, members note the revised requirement that in appointing a liquidator to conduct the winding up of an employer sponsored scheme, the MPFA may require the employer concerned to produce to the Authority a performance guarantee issued in writing by an authorised financial institution which can serve as a guarantee for the payment of fees to the liquidator.

Mandatory Provident Fund Schemes (Exemption) Regulation

27 The Exemption Regulation deals with the interface arrangements for schemes set up under the Occupational Retirement Schemes Ordinance (ORSO) with the future MPF system.

28 The Bills Committee and the former LegCo Subcommittee have deliberated inter alia on two major interfacing issues at length. Firstly, the Subcommittee notes the Administration’s decision to retain 15 October 1995 as a cut-off date for purposes of exempting ORSO schemes from MPF coverage so as to maintain the integrity and viability of the future MPF system. Secondly, a major change reached as a result of discussion with the Administration and employer groups is that taking the implementation of the MPF system as a cut-off date, an employee’s accrued benefits under an ORSO scheme up to his minimum MPF benefits will not be withheld even upon dismissal for cause. This arrangement serves to address concerns about the predicament of long-serving employees who may have to forfeit the employer-funded portion of their retirement benefits on being dismissed for cause.

29 The Subcommittee is generally agreeable to the proposed provisions under the Exemption Regulation which have been finalised by the Administration after detailed discussion with the Bills Committee and the former Subcommittee.

Mandatory Provident Fund Schemes (Amendment of Schedule 6) Notice 1998

30 The Notice sets out a list of decisions made by the MPFA under the Exemption Regulation to be added to Schedule 6 of the MPFSO so as to allow any person aggrieved by any of these decisions to appeal to the MPF Schemes Appeal Board. Members have not raised queries on the Notice.

Amendments

31 As outlined in the foregoing paragraphs, individual members have indicated intention to move amendments to certain investment-related provisions in the General Regulation.

32 So far, the Administration has not advised that it will propose further amendments relating to major policy issues in the subsidiary legislation. The Subcommittee will not move any amendment in its name.

Advice sought

33 Members are invited to note the Subcommittee’s deliberations reported in the foregoing paragraphs and that the Administration has given notice to move three Resolutions on the subsidiary legislation under sections 5, 46 and 48 of the MPFSO on 1 April 1998.

Provisional Legislative Council
24 March 1998

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Appendix I

Subcommittee on subsidiary legislation relating to Mandatory Provident Fund Schemes

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Appendix II

List of organizations which have given views on the MPF subsidiary legislation

1. Hong Kong Retirement Scheme Association

2. Life Insurance Council

3. Hong Kong Social Security Society

4. Hong Kong Trustees’ Association

5. William M. Mercer Limited

6. The Federation of Hong Kong & Kowloon Labour Unions

7. Hong Kong & Kowloon Trades Union Council

8. Hong Kong Women Workers’ Association

9. Hong Kong Investment Funds Association

10. Watson Wyatt Hong Kong Limited

11. Citizens Party

12. Hong Kong Bar Association

13. Hong Kong Society of Accountants

14. Hong Kong Blind Union

15. Hong Kong Capital Markets Association