LegCo Paper No. CB(1)1352/96-97
(These minutes have been seen by the Administration
Ref : CB1/HS/1/96/2

Subcommittee on Mandatory Provident Fund System

Minutes of Meeting
held on Monday, 24 March 1997, at 2:30 p.m.
in Conference Room B of the Legislative Council Building

Members present :

    Hon Ronald ARCULLI, OBE, JP (Chairman)
    Dr Hon LAW Cheung-kwok (Deputy Chairman)
    Hon CHAN Yuen-han
    Hon NGAN Kam-chuen

Members absent :

    Dr Hon HUANG Chen-ya, MBE
    Hon Christine LOH Kung-wai
    Hon James TIEN Pei-chun, OBE, JP
    Hon LEE Cheuk-yan
    Hon CHAN Wing-chan
    Hon Paul CHENG Ming-fun
    Hon LAW Chi-kwong
    Hon MOK Ying-fan
    Hon SIN Chung-kai

Public officers attending :

Mrs Pamela TAN
Mandatory Provident Fund Office
Ms Maisie CHENG
Assistant Director
Scheme Operations
Mr Lawrence WONG
Acting Senior Assistant Crown Solicitor
Legal Department

Clerk in attendance :

Miss Polly YEUNG
Chief Assistant Secretary (1)3

Staff in attendance :

Ms Connie SZETO
Senior Assistant Secretary (1)5

I Meeting with the Administration

Compensation Fund : coverage, operation, administration and levy

(LegCo Paper No. CB(1)1125/96-97)

Levy arrangement of the Compensation Fund

Responding to members’ enquiries on the levying arrangement for the Compensation Fund (CF), the Assistant Director, Scheme Operations (AD/SO) explained that the Administration would provide $300 million as the seed money of the Fund and the proposed ceiling of $900 million would be inclusive of this seed money. The remaining $600 million would be met by levy at the proposed rate of 0.03% of the aggregate scheme assets. As regards compensation funds in overseas pension systems, AD/SO confirmed that in the past decade, there had not been any claim on the compensation fund of the Australian system. The compensation fund in Canada, on the other hand, did not only cover losses due to illegal conduct or misfeasance on the part of the service providers and there was also no record of claims on these grounds.

2. Miss CHAN Yuen-han expressed reservation on the requirement for scheme members to pay a levy to the CF. She was of the view that since the MPF system was a mandatory one, as a matter of principle, the Government should take up the responsibility for compensating members for losses of accrued benefits. She then enquired on the feasibility of prescribing a lower levy rate for low-income employees to relieve their burden. The Chairman also enquired whether the Administration would provide contingency funds in the event of exhaustion of the CF.

3. In response to members’ views, AD/SO and the Director of MPF Office (D/MPFO) explained the Administration’s position as follows:

  1. besides the $300 million seed money to be injected to the CF, in the unlikely event when the Fund could not meet the claims, loans can be made available for emergency purpose, subject to the approval of LegCo pursuant to section 17(6) of the principal ordinance;
  2. the principal ordinance had empowered the MPF Schemes Authority (MPFSA) to collect levies for the Fund and make regulations on the rates to be imposed. Such regulations would also be subject to the approval of LegCo;
  3. it had been made clear at the outset that the Government’s commitment was to provide $5 billion for setting up the Mandatory Provident Fund Schemes Authority (MPFSA) and to inject $300 million into the CF as the seed money;
  4. as the Fund would only operate as a last resort to compensate for losses in scheme assets caused by misfeasance or illegal conduct of service providers after exhausting all other avenues such as the professional indemnity (PI) insurance, the potential number of claims to the Fund was expected to be small and it would be unnecessary to build up a large reserve; and
  5. it would be fair and simple if a single rate of levy was adopted. Stipulating a lower rate for low-income employees or exempting them from paying levies would complicate the mechanism and result in those earning a relatively higher income having to pay more in order to build up the necessary reserve.

4. The Chairman remarked that the proposed rate of levy was by and large acceptable. Moreover, the provision that any change in the rate should be subject to the approval of LegCo would ensure proper monitoring.

Operation of the Fund

5. Members were concerned about the procedures for activating the CF and the time required to obtain a court order to make payment from the Fund. In order to expedite the processing of claims, some members suggested that when there was sufficient evidence to substantiate losses caused by illegal conduct/misfeasance of service providers, the Fund should be activated immediately to compensate scheme members for such losses and the payout would be recovered from the service providers later. They asked the Administration to consider alternative arrangements similar to those under the Protection of Wages on Insolvency Fund.

6. Regarding the protection for scheme members and the need to exhaust all possible avenues for compensation for losses, AD/SO clarified the proposed arrangements as follows:

  1. the law had not prescribed the sequence of actions to be taken by the MPFSA. Where the Authority was satisfied that the compensation would unlikely be recovered from the service providers and the PI insurance, it could apply to the court direct for an order so as to make payment from the CF;
  2. as court proceedings might take a long time, it would be in the interest of scheme members to recover the losses from the service providers as far as possible; and
  3. when the MPFS Bill was introduced in 1995, the LegCo had amended the relevant provisions to the effect that it was necessary for the MPFSA to obtain a court order if payments were to be made from the CF.

7. The Acting Senior Assistant Crown Solicitor (SACS(Atg)) commented that unlike cases of insolvency in which the inability to pay debts could be ascertained more easily, it was much more difficult to substantiate misfeasance/illegal conduct. Hence, a court ruling was necessary as lest, the MPFSA might risk making payment from the CF for reasons other than misfeasance/illegal conduct and would not be able to recover the amount later on.

8. Miss CHAN Yuen-han enquired whether the costs of the investigation team formed to evaluate losses and investigate into their causes would be borne by the MPFSA. In reply, AD/SO advised that in principle, the costs for administrating the Fund should be met by the Fund. Nevertheless, since some of the preliminary investigation work would be carried out by the MPFSA, the Authority would absorb these costs. If it was necessary to engage the service of experts outside the MPFSA, such costs would be borne by the CF. In this connection, Miss CHAN Yuen-han expressed concern about the substantial cost required for engaging outside experts which might have to be borne by the Fund.

Other concerns

9. Responding to the Deputy Chairman’s enquiry on the responsibility of service providers to compensate scheme members for losses, AD/SO explained that pursuant to section 17(7) of the principal ordinance, service providers were responsible for compensating such losses. They were also required to reimburse the CF the amount paid out from the Fund and the interest thereon. On his concern that service providers might vary the scheme terms in order to evade their responsibilities, SACS(Atg) advised that any scheme terms purporting to reduce the service providers’ obligations under the MPFSO would be null and void.

II Any other business

Date of next meeting

10. Since the Subcommittee had completed discussion on the Compensation Fund, members agreed that the meeting previously scheduled for 25 March 1997 would not be held. The next meeting would be held on 2 April 1997 at 8:30 a.m.

11. The Administration noted Miss CHAN Yuen-han’s request for a consolidated paper outlining the various fees/costs that had to be borne by scheme members of MPF schemes.


Research on overseas retirement systems

12. The Chairman said that to follow up on the Subcommittee’s decision to undertake research on overseas retirement systems, the Research and Library Services Division had prepared a research proposal which would be circulated to members for consideration. Members would be requested to forward their views on the issues to be researched into.

(Post-meeting note: The research proposal was circulated vide LegCo Paper No. CB(1)1146/96-97)

13. The meeting ended at 3:50 p.m.

Legislative Council Secretariat
24 April 1997

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