Provisional Legislative Council

PLC Paper No. CB(1)847

Ref: CB1/BC/3/97

Paper for the House Committee meeting
on 13 February 1998

Report of the Subcommittee on
Report of the Bills Committee on Provident Fund Schemes Legislation (Amendment) Bill 1997

Purpose

This paper reports on the deliberations of the Bills Committee on Provident Fund Schemes Legislation (Amendment) Bill 1997.

Background

2.The Mandatory Provident Fund Schemes Ordinance (Cap. 485) (MPFSO) was enacted in July 1995 to provide a framework for the establishment of mandatory, privately managed retirement schemes to enable the workforce to save systematically for their old age. The Administration has since then worked on the necessary subsidiary legislation to prescribe the implementation details, such as the approval of trustees, registration of schemes, investment management and interfacing arrangements for existing voluntary retirement schemes. An outline of the proposed MPF system is at Appendix I.

3.Pending the Administration’s formal introduction of the subsidiary legislation, a Subcommittee was set up under the House Committee in October 1997 to enable the Administration to brief members on salient issues of the proposed MPF system. Six meetings were held and members also deliberated on some of the major issues brought up by the Subcommittee on MPF System of the former Legislative Council which held 22 meetings during the last legislative session.

4.In the course of developing the subsidiary legislation, the Administration also considered that amendments to the principal ordinance and other related ordinances will also be required for the effective operation and enforcement of the MPF system. The Administration’s package of legislative proposals includes the present Bill introduced into this Council on 26 November 1997, as well as three sets of draft subsidiary legislation.

The Bill

5.The Bill is an omnibus bill seeking to amend the MPFSO and 11 related ordinances which include the Occupational Retirement Schemes Ordinance (Cap.426), the Employment Ordinance (Cap.57) and the Inland Revenue Ordinance (Cap.112). The main objectives of the Bill are :

1. to reconstitute the Mandatory Provident Fund Schemes Authority (MPFA) as a corporation independent of the Government and to impose requirements for accountability;

2. to establish the Mandatory Provident Fund Schemes Advisory Board and the Industry Schemes Committee to provide advice to the MPFA;

3. to provide for the establishment, registration, administration and operation of industry schemes;

4. to make further provisions relating to the operation of mandatory provident fund schemes (MPF schemes) and the enforcement powers of the MPFA; and

5. to introduce consequential amendments to 11 related ordinances to tie in with the implementation of the MPF system.

The subsidiary legislation

6.The Administration has made available the following sets of draft subsidiary legislation to be made under the MPFSO setting out implementation details of the MPF system :

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 Rules (the Rules).

7. The Administration has advised that the draft Regulations and Rules will be finalised in the light of the amendments to the MPFSO and then presented to this Council for formal approval in accordance with the procedure stipulated in section 35 of the Interpretation and General Clauses Ordinance (Cap.1).

The Bills Committee

8. At its meeting on 28 November 1997, the House Committee decided to form a Bills Committee to scrutinise the Bill. As the three sets of draft subsidiary legislation to be made under the MPFSO are an integral part of the legislative package to give effect to the implementation of the MPF system, it was agreed that the Bills Committee should also study the draft Regulations and Rules.

9.Hon Ronald ARCULLI and Dr Hon LAW Cheung-kwok were elected Chairman and Deputy Chairman respectively of the Bills Committee and its membership list is at Appendix II. Up to the end of January 1998, the Bills Committee has held 27 meetings with the Administration, including two meetings with deputations. It has also issued an advertisement to invite public submissions on the Bill and related subsidiary legislation. A list of organizations which have submitted views to the Bills Committee is at Appendix III.

Deliberations of the Bills Committee

10.The Bills Committee has scrutinised various MPF issues as provided under the Bill and related subsidiary legislation. It has also examined the consequential amendments to related ordinances. Members’ major areas of concerns are summarised in the following paragraphs.

Reconstitution of the MPFA

11.Under the MPFSO, the MPFA is an officer to be appointed by the Chief Executive. The Bill seeks to reconstitute the MPFA as an independent statutory corporation to be headed by an Executive Director. Whilst the newly added sections 6 to 6P provide for the functions, regulatory powers and statutory duties of the MPFA, there are no provisions for the setting up of a board of directors or a management board as in the case of other statutory bodies such as the Securities and Futures Commission (SFC), Employees Retraining Board and Airport Authority. The majority of members are gravely concerned about the apparent lack of checks and balances on the wide range of powers to be vested with the Executive Director of the MPFA. They urge for the establishment of a properly constituted management board with decision-making powers and to which the Executive Director will be accountable. The majority of deputations share similar concerns and call for the setting up of a management board to enhance transparency and representativeness of the MPFA.

12. In the course of deliberation, one member has expressed support for the proposed arrangements under the Bill. Although the majority of members support the establishment of a management board in principle, they have not reached a common view on the membership of the board. The Committee has considered two proposals put forward by different members. Under both proposals, the management board of the MPFA should consist of two or three representatives from employers and from employees, two from other sectors, two public officers and the Executive Director of the MPFA. The major difference lies in whether the other two places should be allocated to service providers in the retirement scheme industry.

13.Some members hold the view that service providers should not be appointed to the board because of the possible conflict of interests but they may be enlisted as members of the MPF Schemes Advisory Board. These members consider that the remaining two places should be given to related professionals such as accountants and actuaries. Some members however stress that industry players have a vital role in the implementation of the proposed privately managed MPF system and should be represented on the management board. In the light of the experience of other statutory bodies, they disagree that the appointment of service providers on the board will necessarily result in conflict of interests. One member has also mentioned the desirability that section heads of the MPFA should be on the management board.

14.The Administration has reserved its position on both proposals. It has nevertheless agreed to re-examine issues related to the reconstitution of the MPFA and revert to the Bills Committee on 12 February 1998. Subject to the outcome of further discussion with the Administration, members have indicated that they may propose Committee stage amendments (CSAs) to the Bill in furtherance of their respective proposal.

Trustees

15.As all MPF schemes are required to be set up under trust, the trustee is the central party responsible for all the administration, management and maintenance of a MPF scheme in accordance with its statutory and fiduciary duties detailed in the General Regulation which range from the appointment of investment managers and auditors to the preparation and submission of reports to the MPFA. Under proposed section 20 of the MPFSO, companies and natural persons applying to become trustees have to meet the requirements prescribed in the General Regulation and be approved by the MPFA. Where a MPF trustee has contravened an approval condition, has breached investment guidelines, or is unable to perform its duties, the MPFA may, depending on the seriousness of the offence, impose sanctions which include financial penalties, prosecution and suspension/revocation of approval.

16.The Committee has reviewed the various eligibility requirements in the General Regulation pertaining to the qualifications, suitability and financial resources of individual or corporate applicants and sought assurances that these are on-going requirements not just to be fulfiled on application. On the proposed requirement of a minimum paid-up capital of HK$30 million for a corporate trustee, members are concerned about the adequacy of this capital level following the growth in scheme assets managed by the trustee over time. The Administration advises that the proposed requirement compares favourably with overseas standards and has been set in consultation with the industry. Moreover, if the capital adequacy requirement is set too high, market competition may be stifled as local companies with a relatively smaller capital base will not be able to enter the MPF business Nevertheless, the future MPFA will keep the capital adequacy requirement under review.

Investment management

17.According to the Administration, its proposals are adopted from the best industry practices to safeguard assets security and to provide sufficient flexibility for achieving investment targets and maximising returns for scheme members. Members have reviewed the exhaustive list of permissible investments, the quantitative restrictions on certain investment activities such as equities and securities lending, as well as related arrangements prescribed in the General Regulation.

18.A scheme trustee is required to engage an investment manager which is a duly registered investment adviser incorporated in Hong Kong with capital and net assets of not less than HK$10 million. On overseas investment management, the investment manager concerned can only delegate such functions to its overseas subsidiary or associate. Members are concerned that such a requirement may be unduly in favour of large international corporations and disadvantage local investment companies without overseas networks. In response, the Administration has agreed to amend the relevant section of the General Regulation to the effect that the MPF investment manager may delegate overseas investment to another investment company duly registered with an overseas authority. However, the delegate must have a branch office or an associated company in Hong Kong which is registered with the SFC.

19.The Administration confirms that the proposal under the General Regulation requiring at least 30% of the assets of a MPF scheme to be invested in Hong Kong dollar denominated assets is closely in line with existing market practice where some 25% to 45% of the retirement funds are invested in Hong Kong dollar assets. The investment fund industry would prefer a lower percentage although it has accepted the proposed 30% threshold. They consider that a higher threshold will hamper the fund manager’s strategy in achieving investment objectives and caution about relatively limited choices of quality investments in the local market for the available funds. The Bills Committee does not have a common view on this issue. Some members hold the view that the percentage should be raised so as to boost investment in the local economy and to minimise risks associated with foreign currencies. In this connection, some members have indicated that they may consider amending the said requirement.

20.Members note that to cater for new investment practices emerging from time to time which may prejudice the financial soundness of MPF schemes, the MPFA is empowered under proposed section 28 of the MPFSO to publish, in a timely manner and after consultation with the Financial Secretary, guidelines on forbidden investment practices not to be undertaken by MPF schemes. Breach of the guidelines may result in suspension or termination of the trustee’s administration of a scheme.

21.In response to concerns about the independence of the investment manager from the trustee and custodian, the Administration has advised that while it is common for a corporate trustee to use the pooled investment vehicles offered by its associated companies, all transactions between connected parties must be at arm’s length and for valuable considerations. The investment manager only directs instructions on investments while the trustee will settle the transactions and hold title to all scheme assets. Members also note that one of the cardinal requirements for MPF schemes is the separation of scheme assets from those of the employer, the trustee, the investment manager and other service providers.

No-rejection requirement and Residual Provident Fund Scheme

22.The Bill proposes that as a condition for scheme registration under the MPFSO, an approved trustee has to enter into an undertaking with the MPFA not to reject any eligible person applying in writing to become a member of its scheme. Members note that the no-rejection requirement has been proposed to address serious concerns about difficulties faced by the low-income group in joining MPF schemes because of the relatively low profit margins they will produce for the service providers.

23.The Administration has all along reiterated its view that the competitive MPF market will be able to meet the needs of all different sectors, including small employers and low-income earners who will account for a very large proportion of the future clientele. Nevertheless, to provide a last resort, the Administration has included in the MPFSO enacted in 1995 provisions for the setting up of a Residual Provident Fund Scheme (RPFS). Any person who is unable to join a MPF scheme after placement assistance by the MPFA can become a member of the RPFS. The Bill seeks to replace the RPFS with the proposed no-rejection requirement. The Administration considers that the RPFS will become redundant as all eligible persons will be able to obtain MPF coverage when the statutory no-rejection requirement is in force. There are also doubts on whether any service provider will be interested in offering the RPFS when there is little prospect for business.

24.While welcoming the no-rejection requirement, the majority of members do not support the concurrent repeal of RPFS-related provisions in the MPFSO. They reiterate the need for retaining the RPFS to cater for persons who are ultimately unable to enrol in a MPF scheme in the market, although such an eventuality may be remote. Members have urged the Administration to re-consider the matter and revert to the Committee by 12 February 1998 as well. They have also agreed that should the Administration decide to abolish the RPFS as currently proposed, the Chairman will move CSAs on behalf of the Bills Committee to retain the option for setting up a RPFS under section 23 of the MPFSO.

Capital preservation product

25.With a view to protecting contributions against erosion by risky investment and high administrative charges, the Administration has included under the General Regulation a requirement that each MPF scheme must provide a capital preservation product (CPP) as an investment option to scheme members. Funds of the CPP may only be invested in short-term Hong Kong dollar deposits and quality bonds. The trustee may charge management fees only if the gross investment return of the CPP exceeds the savings deposit interest rate.

26.In principle, the Bills Committee 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 attach great importance to the CPP in the wake of recent turmoils in the financial market and further suggest that the CPP should be offered by the Government. The Administration has re-affirmed its stance that the product should be provided by the respective scheme operators.

27.The Committee has noted the strong objection from the retirement scheme industry to the proposed CPP. The service providers contend that no similar mandatory requirement is found in overseas pension systems and that the stringent restrictions on the investment of CPP funds are not conducive to achieving good returns. They caution that choosing to invest substantially in the CPP will not be in the long-term interest of scheme members in view of the very conservative level of return yielded by such a product. Trustees in particular consider the proposal unfair as they will not be allowed to charge fees unless the investment return, over which they have no control, meets the prescribed benchmark while they still have to pay the necessary fees to the MPFA and related service providers.

28.After protracted discussion with the industry and members on the viability of the CPP and the charging of fees, the Administration has submitted a few revised proposals which include (a) allowing trustees to charge a fee which must be the lowest among all products under the MPF scheme, (b) relaxing the investment restrictions and (c) allowing trustees to recoup past "losses in administrative fees" in future months when the investment income is sufficiently high.

29.Some members have raised strong objection to proposals (a) and (b) for fear that scheme members’ interest will be compromised. Hon CHAN Yuen-han confirms that the Democratic Alliance for Betterment of Hong Kong and the Hong Kong Federation of Trade Unions will only be prepared to accept proposal (c). One member supports the proposed relaxation of investment restrictions. Another member is dissatisfied with the Administration’s decision against making some concession on fees payable to the MPFA as suggested by some service providers. Members hold divergent views on the revised proposals and have not reached a consensus.

Industry schemes

30.The main purpose of industry schemes is to provide a special arrangement for industries with high intra-industry mobility whereby most of the employers in the industry will join the same scheme. As such, the costs of portability for employees upon frequent job changes within the industry can be reduced.

31.The future MPFA will prescribe the industries for which industry schemes should be set up. The Administration’s initial plan is to set up, by way of public tender, industry schemes for the construction and catering industries. Commenting on some members’ suggestion that the transport industry should also be included in view of its high job mobility, the Administration points out that intra-industry mobility is in fact highest in the construction and catering industries. Moreover, the business registration and licensing system for these two industries will provide reliable criteria for determining whether the employers, employees or self-employed persons belong to the industry and hence, qualify for scheme membership. The Administration nevertheless assures members that the future MPFA will review the scope of industry schemes with regard to changes in employment practices and labour mobility.

32.To provide greater incentives for employers to join an industry scheme, their duties in respect of calculation and remittance of contributions, record keeping and distributing information to employees will be waived and the scheme trustee concerned will be required to perform some of these duties. Members note that these exemptions are necessary for industries with special characteristics such as short-term employment and daily or weekly paid workers.

33.On the proposed Industry Schemes Committee (ISC) to be set up under the MPFSO to advise the MPFA on matters related to the operation of industry schemes, some members have expressed reservation on the role of the ISC which is mainly advisory. To enable the ISC to better gauge the practical problems of the industries concerned, members suggest that its membership must include representatives of employers and trade unions. They also consider that the upper limit on membership should be removed to facilitate the appointment of additional members if new industries are prescribed. The Administration has accepted members’ suggestions and will amend the provisions related to membership of the ISC.

Self-employed persons

34. Self-employed persons are also required to participate in the future MPF system. Under the Bill, failure to do so is a prosecutable offence liable on conviction to a fine at level 6 and imprisonment for 12 months, which is the same as the proposed penalty for employers. Unlike the case of employees where some statutory duties such as remitting contributions will be undertaken by the employer, self-employed persons will be responsible for paying contributions to the trustee and monitoring their own accounts. Members are thus concerned that non-compliance on the part of self-employed persons may be inadvertent and may not necessarily affect other scheme members and call for a less stringent penalty. Noting these concerns, the Administration will lower the proposed penalty to a fine at level 5 and six months’ imprisonment on first conviction; and a fine at level 6 and one year’s imprisonment on subsequent convictions.

35.Owing to the fact that many self-employed persons earn a low and unsteady income, the Administration has proposed that payment of contributions should be effected in arrears on the basis of the person’s actual income earned during the relevant period. Members have also pursued with the Administration possible ways of simplifying various requirements under the General Regulation. For example, to assist self-employed persons in calculating business net loss for contributions purposes, the Administration will issue guidelines to facilitate compliance.

36.At present, a self-employed person who is a hawker as defined under the Public Health and Municipal Services Ordinance (Cap.132) is exempted from the MPFSO. Members recognize the enforcement difficulties involved but have urged the Administration to take into account a growing number of hawkers in recent years and the need to accord them retirement protection as well. The Administration notes members’ view and advises that the proposed coverage of the MPF system will be reviewed in the light of experience after implementation of the system.

Enforcement and monitoring

37. A two-pronged penalty system has been proposed to deal with default MPF contributions. Proposed section 18 of the MPFSO empowers the MPFA to impose on the defaulting party a penalty interest on the outstanding amount of mandatory contributions to be credited to the scheme members concerned. To address members’ concerns about the deterrent effect, the Administration will amend the relevant provisions to raise the maximum penalty interest from 15% to 20% per annum. In addition, under proposed amendments to section 45 of the MPFSO, a person who defaults payment of mandatory contributions will also be required to pay a financial penalty up to $5,000, or 10% of the defaulted amount, whichever is higher, to the MPFA.

38.Members consider that it is a serious offence for an unapproved person to carry on business as a trustee and suggest that the penalty should include imprisonment. Having examined the proposed penalties for the offences of failure of employers to arrange MPF coverage for employees, obstructing the MPFA in its work and making false or misleading statements, members in general agree that the penalties should be structured in two tiers according to first and subsequent offences. They also call for a higher maximum level of fine to be prescribed under the General Regulation. The Administration has accepted members’ suggestions and will introduce the necessary amendments to the MPFSO.

39.Members note that new section 42A of the MPFSO stipulate a number of "whistle-blowing" provisions on auditors and related service providers which are also found in other ordinances such as the Banking Ordinance. Members have also reviewed detailed provisions in the General Regulation on the functions of auditors and identified a number of drafting and substantive issues for the Administration’s re-consideration.

40.On the related issue of voluntary cessation of employer sponsored schemes for reasons such as company mergers or acquisitions, members have queried whether the proposed requirement for formal liquidation proceedings is necessary and in the interest of scheme members, given that cessation in such cases is not due to financial problems of the scheme. They concur that the transfer of membership and accrued benefits to a new scheme should be effected expeditiously. The Administration has accepted members’ suggestion and will amend the relevant provisions to enable the MPFA to decide whether it is necessary to appoint a liquidator on the merits of each case.

Portability and withdrawal of accrued benefits

41.Key features of the proposed MPF system which are not found in existing retirement schemes include full and immediate vesting of benefits and portability of accrued benefits between registered schemes upon an employee’s change of employment. However, an employee who changes jobs frequently will accumulate a number of accounts. Members consider that effective consolidation of these accounts is necessary to protect the balances from being eroded by administrative fees over time.

42.To encourage consolidation, the Administration has included in the General Regulation a requirement that the MPF scheme trustee must not charge any fees for transferring accrued benefits between accounts, except for actual and reasonable expenses incurred for the redemption of investments. For dormant accounts with a balance of $5,000 or less and where the transfer of accrued benefits takes place within 12 months of the account becoming dormant, the trustee will not be allowed to charge any fees, not even expenses incidental to investment redemption.

43.Pursuant to proposed section 12A of the MPFSO and consequential amendments to the Employment Ordinance, the amounts of severance payment (SP) and long service payment (LSP) may be offset against the employer-funded portion of the employee’s accrued benefits under a MPF scheme. The Administration has maintained that pending further advice from the Labour Advisory Board on the interface of SP and LSP with the MPF system in the long run, the current arrangements will be preserved.

44.Some members, however, object to the proposed offsetting arrangements on the grounds that SP and LSP are a form of terminal compensation payable to employees and must not be subsumed under MPF benefits which cater for retirement. Hon CHAN Yuen-han has indicated her intention to move CSAs to abolish the offsetting provisions.

45.Members note that pursuant to consequential amendments to the Inland Revenue Ordinance, existing tax arrangements for retirement benefits will be extended to accrued MPF benefits whereby such benefits withdrawn on retirement, death, total incapacity or permanent departure from Hong Kong in accordance with the MPFSO will be exempted from salaries tax. However, an employee’s monthly contributions to a MPF scheme will still be subject to salaries tax.

46.Since participation in MPF schemes is mandatory, members and some deputations call for greater tax incentives and urge that employees’ monthly MPF contributions should also be deductible for salaries tax purposes. In response, the Administration reiterates that the suggestion will have profound implications on the existing policy on salaries tax assessment and should be studied separately in greater detail.

Interface arrangements for schemes under the Occupational Retirement Schemes Ordinance (ORSO) with the MPF system

47. At present, there are about 18,000 schemes set up voluntarily by employers under the ORSO covering more than 850,000 employees. One of the Administration’s declared objectives in proposing the interface arrangements is to minimise interference with existing scheme arrangements while ensuring equitable protection for employees. The detailed interface arrangements are provided in the Exemption Regulation.

48.The Administration proposes to exempt from MPF requirements those ORSO schemes which have been established and registered on or before 15 October 1995, as well as those schemes established on 15 October 1995 which applied for exemption or registration under the ORSO on or before 15 January 1996. No exemption will be given to new schemes set up after 15 October 1995. Some deputations and members do not agree entirely that a transition date should be imposed as it may have become a disincentive for employers to set up new voluntary retirement schemes. In response, the Administration has advised that it is necessary to put a limit on the number of MPF-exempted schemes so as not to undermine the integrity and viability of the MPF system.

49.Another issue of concern is the employer’s existing right under an ORSO scheme to withhold the employer-funded portion of benefits upon dismissing an employee for cause. An employee’s accrued benefits under a MPF scheme, on the other hand, are fully vested with the employee and subject to preservation irrespective of the cause of dismissal. Some members are thus deeply concerned about the predicament of long-serving employees who have to forfeit their entitlement to the employer’s contributions under an ORSO scheme on being dismissed for misconduct.

50.In this connection, members in general accept the consensus reached by the former LegCo Subcommittee with the Administration and employer groups after detailed discussion that taking the implementation of the MPF system as a cut-off date, an employee’s accrued benefits under an ORSO scheme up to the amount equivalent to his minimum MPF benefits will not be subject to withholding even upon dismissal for cause.

Consequential amendments to 11 related ordinances

51.Members have reviewed all the proposed amendments. Apart from consequential amendments to the Employment Ordinance and the Inland Revenue Ordinance related to the offsetting of SP and LSP and the tax treatment of accrued benefits respectively, members have not raised queries on the remaining consequential amendments to other ordinances.

Draft MPF subsidiary legislation

52. The Committee has scrutinised the three sets of draft MPF subsidiary legislation, requested clarifications on and suggested amendments to about 100 items in the General Regulation, the Exemption Regulation and the Rules. Members’ queries include both the drafting aspects and substantive contents of the Regulations and Rules. The Administration is in the course of studying the Committee’s comments.

Committee stage amendments

53. The draft CSAs proposed by the Administration and the Bills Committee are attached at Appendix IV (a) and (b) respectively.

Latest position

54.The Administration has undertaken to revert to the Bills Committee on 12 February 1998 regarding its decision on the reconstitution of the MPFA and the RPFS. It has also advised that it will give notice to resume the Second Reading debate on the Bill on 25 February 1998.

55.At the meeting on 23 January 1998, the House Committee decided that should a Subcommittee be required to follow up on the relevant subsidiary legislation upon the Bill being passed, it would be advisable for those Members who have taken part in this Bills Committee to join the Subcommittee for the sake of continuity. While other interested Members would be welcome, Members nevertheless noted that as the Bills Committee had already studied all the draft provisions in detail, there would not be any scrutiny of the provisions afresh.

Advice to be sought

56.Members are invited to note the deliberations of the Bills Committee and the latest position reported in the foregoing paragraphs.

Provisional Legislative Council Secretariat
4 February 1998