Provisional Legislative Council

PLC Paper No. CB(1)965
(These minutes have been
seen by the Administration)

Ref : CB1/BC/3/97

Bills Committee on
Provident Fund Schemes
Legislation (Amendment) Bill 1997

Minutes of the meeting held on
Monday, 12 January 1998, at 2:30 pm
in Chamber of the Legislative Council Building

Members present :

Hon Ronald ARCULLI, JP (Chairman)
Hon WONG Siu-yee
Hon LEE Kai-ming
Hon Mrs Peggy LAM, JP
Hon Henry WU
Hon MA Fung-kwok
Hon CHAN Yuen-han
Hon CHAN Kam-lam
Hon YEUNG Yiu-chung
Hon Ambrose LAU Hon-chuen, JP
Hon Paul CHENG Ming-fun, JP
Hon NGAN Kam-chuen

Members absent :

Dr Hon LAW Cheung-kwok (Deputy Chairman)

Hon James TIEN Pei-chun, JP
Hon HO Sai-chu, JP
Dr Hon Mrs TSO WONG Man-yin
Dr Hon TANG Siu-tong, JP
Hon CHOY So-yuk

Public officers attending :

Mrs Pamela TAN
Mandatory Provident Fund Office

Ms Maisie CHENG
Assistant Director
Scheme Operations

Mr Raymond TAM
Assistant Director
Regulatory Standards

Attendance by invitation :

Life Insurance Council

Member, Retirement Subcommittee

Mr Graham CHAN
Member, Retirement Subcommittee
Citizens Party

Ms Christine LOH
Hong Kong Social Security Society

Dr Henry MOK

Dr Fernando CHEUNG
Executive Committee member
The Federation of Hong Kong & Kowloon Labour Unions

Mr CHAN Wai-lun
Social Affairs Supervisor

Ms NG Wai-yee
Propaganda & Education Supervisor
Hong Kong Trustees’ Association Limited

Mr Alastair MURRAY
Hong Kong Investment Funds Association

Mr Peter LORD
Chairman of HKIFA

Mr Desmond CHAN
Chairman, Pensions Subcommittee
Hong Kong Retirement Scheme Association

Mr Stuart H LECKIE
Vice Chairman

William M Mercer Limited

Mr Edouard MERETTE
Managing Director - Asia

Managing Director - Hong Kong
Hong Kong-Kowloon Trades Union Council

Mr LEE Kwok-keung
Watson Wyatt Hong Kong Limited

Hong Kong Bar Association (HKBA)

Mr Nicholas PIRIE
Member of HKBA Subcommittee

Member of HKBA Subcommittee

Mr David KHOSA
Member of HKBA Subcommittee

Clerk in attendance:

Miss Polly YEUNG
Chief Assistant Secretary (1)3

Staff in attendance :

Mr LEE Yu-sung
Senior Assistant Legal Adviser

Miss Connie FUNG
Assistant Legal Adviser 3

Mr Daniel HUI
Senior Assistant Secretary (1)5

I. Meeting with deputations

The Chairman welcomed representatives of the non-government organizations and said that the purpose of the meeting was to receive views on the draft Mandatory Provident Fund Schemes (General) Regulation and the draft MPF Schemes (Exemption) Regulation.

Lift Insurance Council (LIC)

(PLC Paper No. CB(1)736(01))

2.Mr Graham CHAN presented the LIC’s written submission on the draft subsidiary legislation and highlighted the Council’s major concerns as follows:

  1. LIC fully supported a privately managed MPF system as currently proposed; and

  2. the Council’s main concern was about the provisions on capital preservation product (CPP) under proposed section 31 of the draft MPFS (General) Regulation. Since the long-term investment return of CPP was unlikely to beat the inflation rate, the product would not be in the best interest of scheme members. In view of the Bills Committee’s strong views on the inclusion of CPP in the legislation, the LIC would have no objection to the CPP but would urge members to consider relaxing the investment restrictions on CPP funds.

Citizens Party

(PLC Paper No. CB(1)736(02))

3.Ms Christine LOH made the following points:

  1. the Citizens Party considered that even though the proposed MPF system might not be the ideal solution for the provision of retirement benefits in Hong Kong, it would at least provide a form of retirement protection to the working population. Any further delay in passing the relevant legislation would do more harm than good;

  2. as the employees’ MPF contributions would be mandatory and part of the contributions would be used to finance the operation of the MPF Schemes Authority (MPFA), it would only be equitable if the employees’ MPF contributions should be deductible for the purpose of calculating salaries tax; and

  3. the CPP was a misnomer as the investment return on CPP was not linked to inflation and there would be no real "capital preservation". The Government, legislators and people in the retirement scheme industry should work out a revised proposal on CPP.

Hong Kong Trustees’ Association (HKTA)

(PLC Paper No. CB(1)806(02))

4.Mr Alastair MURRAY said that the HKTA generally supported the proposed MPF system. The only concern of the Association was on the CPP provisions specifying that the approved trustee would not be paid any fees if the investment return was lower than the savings deposit interest rate. The Association considered this proposed requirement unfair as investment of scheme funds had to be undertaken by the investment manager and investment performance was beyond the direct control of the trustee. Mr MURRAY added that whilst members of the HKTA were prepared to absorb their own costs if the investment return of CPP could not meet the prescribed benchmark, they should not be required to assume the contingent liability of paying the other fees such as the auditor’s fees and scheme registration fees. He urged that the non trustee-related fees be charged to the CPP funds.

Watson Wyatt Hong Kong Limited

(PLC Paper No. CB(1)772(01))

5.Mr Steve BUTLER highlighted the following points in the company’s written submission:

  1. In general, the company was in support of the proposed MPF system;

  2. the proposed provisions on CPP would be unattractive to many trustees and deter service providers from operating MPF schemes which would in turn stifle healthy competition in the market. Moreover, mandatory provision of the CPP might give employees a wrong perception that this was the preferred investment option;

  3. the inclusion of casual employees in the MPF system would have major costs implications to the service providers, particularly during the initial period. Casual employees should be excluded from MPF coverage in the initial stage and the case for their inclusion should be reviewed in the light of experience after implementation of the system; and

  4. the requirement that the transfer of accrued benefits from one scheme to another upon change of employment had to be handled free of charge would incur significant administrative cost on service providers. Moreover, the absence of a transfer fee might induce a large number of unjustified switchings between MPF schemes, as evidenced in the Chilean pension system.

6.At the Chairman’s request for elaboration on point (d) above, Mr BUTLER explained that as there was no transfer fee under the Chilean pension system, service providers offered very attractive commissions to agents who succeeded in transferring new funds to a scheme. In fact, scheme members had to bear the commission payments which were a part of the overall costs for service providers.

William M Mercer Limited (WMML)

(PLC Paper No. CB(1)806(04))

7.Mr Mark BAXTER raised the following points in its written submission:

  1. It was undesirable to specify CPP in the legislation because employees might perceive that the CPP was recommended by the Government;

  2. the proposed fee structure was unfair to employees who did not choose the CPP because they had to pay fees irrespective of the investment return of the investment product concerned; and

  3. a transfer fee should be levied on scheme members who switched accrued benefits from one scheme to another in order to allow service provider to cover part of the administrative costs for handling transfer cases. Otherwise, the costs in handling transfer cases would have to be shared by scheme members who did not transfer scheme.

Hong Kong Investment Funds Association (HKIFA)

8.Mr Peter LORD advised that the HKIFA fully supported the proposed privately managed MPF system because past records had shown that retirement schemes managed by the private sector provided satisfactory investment return to scheme members. The Association’s main concern was about the CPP which, in its opinion, could not provide real growth in investment return to scheme members in the long term. The Association urged that the relevant provisions be modified.

9.In reply to the Chairman, Mr LORD agreed to present in writing the Association’s proposal on the CPP.

(Post-meeting note: HKIFA’s written submission has been circulated to members vide PLC Paper No. CB(1)843(04), (05) and CB(1)852.)

Hong Kong Bar Association (HKBA)

(PLC Paper No. CB(1)806(05))

10.Mr Nicholas PIRIE presented HKBA’s position as set out in its written submission and highlighted the following concerns:

  1. the expression "penalty interest" was inappropriate because requiring interest payment on contributions in arrears should not be considered as a penalty;

  2. the insurance provisions in the draft MPF (General) Regulation which covered indemnity insurance, performance guarantee and the Compensation Fund, appeared to be inconsistent and overlapping and should be reviewed;

  3. under the Trustee Ordinance, trustees were not allowed to hold futures contracts. The HKBA was concerned whether there would be any inconsistency for the draft MPF (General) Regulation to permit a MPF scheme, which would be administered by an approved trustee, to hold futures contracts; and

  4. under the proposed MPF system, nearly all important duties including the collection of contributions, protection of scheme assets, monitoring of investment manager, etc. were entrusted to the approved trustee. Consideration should be given to requiring the employer to share some of the duties.

Federation of Hong Kong and Kowloon Labour Unions (FHKKLU)

(PLC Paper No. CB(1)806(01))

11.Mr CHAN Wai-lun and Ms NG Wai-yee highlighted the FHKKLU’s views as follows:

  1. both the employers’ and employees’ monthly MPF contributions should be deductible for the purpose of calculating profits tax and salaries tax respectively;

  2. under proposed section 150 of the draft MPF (General) Regulation, the trustee should be required to pay the accrued benefits within 15 days, not 30 days as presently proposed, after the lodgement of a claim for the payment of a scheme member’s accrued benefits; and

  3. to safeguard security of scheme assets, the eligibility requirement on overseas corporate trustees should be more stringent than similar requirement on locally incorporated trustees.

Hong Kong - Kowloon Trades Union Council (HKKTUC)

12.Mr LEE Kwok-keung presented HKKTUC’s comments as follows:

  1. A levy should not be imposed on scheme assets to fund the Compensation Fund (CF). Instead, the CF should be provided by the Government before implementation of the MPF system;

  2. employees should be given the right to choose investment products within a MPF scheme;

  3. the MPFA should in future issue detailed guidelines on the approved trustee’s responsibilities in monitoring the performance of the investment manager; and

  4. the approved trustees should be required to provide information on accrued benefits, investment returns, etc, directly to scheme members concerned, instead of through the employers as presently proposed.

13.As regard paragraph 12(a) above, the Chairman said that members had requested the Administration to consider increasing the initial injection to the CF from $300 million to $900 million so that scheme members would not be required to pay the CF levy. The Administration had agreed to consider the matter. Admin

Hong Kong Social Security Society (HKSSS)

(PLC Paper No. CB(1)772(02))

14.Dr Henry MOK highlighted the HKSSS’s position as follows:

  1. MPF schemes should not be allowed to invest all the funds in equities which were high-risk investments as evidenced in the recent stock market turmoils. Moreover, to stabilize the investment return of MPF schemes, the Administration should consider setting up a fluctuation reserve mechanism as in the Chilean pension system;

  2. MPF schemes should not be allowed to invest more than 10% of its funds in foreign currency denominated assets;

  3. the MPF legislation should specify that the annual administrative fees to be paid by scheme members to the approved trustees should not be more than 1.5% of scheme assets; and

  4. the HKSSS was basically against the proposed MPF system and considered that a central provident fund supplemented by an old-age person scheme would provide better retirement protection.

15.As regards the fluctuation reserve system mentioned by Dr MOK, the Assistant Director/Regulatory Standards (AD/RS) said that a reserving mechanism for stabilization of investment return was provided for under many guaranteed retirement schemes products operated in Hong Kong and such a requirement was therefore not included in the proposed legislation.

Hong Kong Retirement Scheme Association (HKRSA)

(PLC Paper No. CB(1)806(03))

16.Mr Stuart LECKIE explained the following main concerns of the HKRSA:

  1. the MPFA should be a statutory organization independent of the Government;

  2. the proposed provision of CPP should be deleted as the product could not provide real investment return to scheme members;

  3. there should not be any restriction on the percentage of scheme funds which could be invested in foreign currency denominated assets so as to provide flexibility to the investment manager for maximizing investment returns;

  4. Industry Schemes were not necessary and should not be prescribed in the proposed legislation; and

  5. the Administration’s proposal that retirement schemes registered under ORSO after 15 October 1995 could not apply for exemption under the MPFSO was inappropriate. The Administration should consider extending the cut-off date until the actual implementation of the MPF system.

II. Capital Preservation Product

17.The Chairman opened the floor for discussion on proposed provisions on CPP in the draft MPF Schemes (General) Regulation which were of major concern to the deputations.

18.In reply to a member’s question on cross-subsidization of administrative fees between non-CPP funds and CPP funds, the service providers advised that cross-subsidization was inequitable and would only attract more scheme members to invest in CPP which would not be in the scheme members’ long-term interest.

19.Members questioned the basis for estimating that about 60% of MPF scheme members would invest in CPP. In response, the service providers made the following points:

  1. according to operational experience, about one third of retirement scheme numbers had chosen products similar to the CPP. A recent survey carried out by William M Mercer Limited in January 1998 showed that more people were likely to switch to products like the CPP in the wake of recent market turmoils; and

  2. the 60% estimate was based on the working experience of practitioners in the retirement industry. The trustees were concerned that if employees perceived that CPP was the product recommended by the Government, the amount of funds invested in CPP might even be higher. The trustees would also have to risk operating at a loss if the investment return of CPP could not meet the prescribed benchmark.

20.Some members did not concur with the views of the retirement scheme industry on the investment return of CPP. In this connection, Mr Graham CHAN clarified that since funds in CPP were only allowed to invest in short- term bank deposits and quality bonds, the investment return would unlikely be sufficiently higher than the savings deposit interest rate to allow trustees to be paid the administrative fees, particularly so if the interest rate rose rapidly within a short time span. He suggested that another alternative would be to relax the investment restrictions on CPP so that the investment manager could explore other means to increase the investment return.

21.Elaborating on the background of the proposed CPP, the Director/MPF Office advised that the CPP was proposed in response to concerns of the former LegCo Subcommittee on MPF System on the need to protect contributions against erosion by risky investments and high administrative charges. The former Subcommittee also considered that a low risk investment product had to be made available for scheme members’ choice as free market forces might not ensure the availability of such an investment product.

22.Members urged the Administration and the service providers to re-consider possible amendments to the CPP and reach a mutually acceptable proposal for further consideration by the Committee. The LIC and the HKIFA undertook to submit their proposals to the Committee as soon as possible.

23.At the Chairman’s request, the Administration agreed to provide a consolidated response to the concerns raised by the deputations. Admin

24.The Chairman thanked the deputations for attending the meeting and reminded members that the next meeting of the Committee would be held on 13 January 1998, at 8:30 am.

25.The meeting ended at 4:40 pm.

Provisional Legislative Council Secretariat
17 February 1998