PLC Bills Committee on
Provident Fund Schemes Legislation (Amendment) Bill 1997
Total Picture on Measures to Protect the Low-income Group
This paper summaries the proposed measures to be introduced under the MPF System to cater for the special needs of the low-income group, including :
- Availability of MPF schemes
- Master trust schemes (paragraph 8(a) below)
- No-rejection requirement (paragraph 8(b) below)
- Minimise administrative fees (paragraph 9(a) below)
- Full disclosure of fees (paragraph 9(b) below)
- User-friendly presentation of fees (paragraph 9(c) below)
- Minimise erosion by fees (paragraph 9(d) below)
- Measures to Minimise Costs of Portability
- Simple mechanism for portability (paragraph 10(a) below)
- No fees for portability (paragraph 10(b) below)
- Setting up of industry schemes (paragraph 10(c) below)
- Account Management
- Education (paragraph 11(a) below)
- Duty of trustees (paragraph 11(b) below)
- Incentive measures (paragraph 11(c) below)
- Tracking of scattered accounts (paragraph 11(d) below)
- Measures to Encourage Cross-Subsidization
- Flat fees (paragraph 12(a) below)
- Fees for portability (paragraph 12(b) below)
- Small balance accounts (paragraph 12(c) below)
- Special Monitoring by the MPFA
- Availability of MPF products (paragraph 13(a) below)
- Fee level (paragraph 13(b) below)
- Public consultation (paragraph 13(c) below)
- Devise improvements (paragraph 13(d) below)
- Public education (paragraph 13(e) below)
Needs of Low-income Group
2.The future MPF System will cover employees and self-employed persons, including a large number of small employers with a handful of low-income employees and many self-employed persons with low and unsteady income. It is paramount that the MPF System is designed in such a way that this low-income group is adequately protected. There are a number of areas where the low-income group should be specially taken care of.
Low Level of Contributions
3.Due to the low-income and thus low level of contributions, the low-income group may face a number of problems in the MPF System :
- Availability of MPF schemes : the low-income group may not be attractive targets for future MPF service providers. As a result, theoretically, they might be unable to find any scheme that are willing to take them as customers.
- Administrative fees : the administrative fees of MPF schemes would be high and would become a burden on low-income earners.
- Erosion by fees : the MPF benefits of scheme members, particularly low-income earners, would be eroded by fees or suffer from poor investment performance.
4.Many low-income earners may have relatively high labour mobility. As a result, they may incur higher costs in transferring their benefits when they change employment due to the portability feature of the system.
5.Scheme members, in particular low-income earners, may not be able to manage their MPF accounts very effectively to minimise costs. In particular, scheme members may create a large number of fragmented accounts during changes of employment which will be difficult to trace. In addition, the balance of these accounts may be very small and hence become vulnerable to erosion by fees which will not be in the interest of scheme members.
6.A full range of measures are in place to ensure that the interest of the low-income group will be adequately protected under the MPF System. These measures are summarised below.
Availability of MPF Schemes
7.Although it is theoretically possible that the low-income group may have difficulties in finding suitable MPF schemes, in reality, we foresee that there will be very few employers and self-employed persons, if at all, who will find it difficult in joining MPF schemes in the market. From the experience in other countries and in Hong Kong, the availability of products under the free market environment is generally not an issue. Furthermore, as there will be a large number of small employers and self-employed persons in the future MPF market, service providers would have to structure their fees to attract these clients and it is extremely unlikely for them to do otherwise.
8.Nonetheless, the following measures will be put in place to ensure that low-income earners will definitely be able to join MPF schemes and would not be rejected by future MPF trustees :
- Master trust schemes : With the establishment of large-scale master trust schemes, it is easier and less costly for small employers and self-employed persons to join these schemes.
- No-rejection requirement : We have added a statutory requirement on all approved trustees that they shall not reject any persons who apply to join their registered schemes, regardless of their income level.
9.We propose a number of measures to ensure that the low-income group will not be subject to unreasonably high fees under the MPF System :
Measures to Minimise Costs of Portability
- Minimise administrative fees : We aim to design a cost-effective MPF System to ensure that the administrative costs for scheme members, including low-income earners, will be kept to a minimum. Details are described in the other paper " Total Picture on Measures to Minimise Administrative Costs'.
- Full disclosure of fees : We will require all trustees to disclose the fee structures of MPF products during the registration of schemes. For those schemes which have a fee structure that may potentially incur a higher fee to small balance accounts or small employer-units (e.g. schemes with flat fees), we will require the trustees to submit statistical returns which enable the MPFA to monitor the impact of such fees on small balance accounts or small employer-units.
- User-friendly presentation of fees : We will require all trustees to demonstrate in cash terms the actual amount of annual fees to be charged, under his fee structure, for scheme members at various prescribed income levels and different size of employer-units under normal circumstances (i.e. no transfer of account and no switches in investment options). This will have a number of benefits :
- it will facilitate the MPFA to compare the fee level faced by low-income earners in different schemes and ensure that the low-income group are not subject to high fees;
- the low-income group can use the quotations of the fee levels of a scheme as yardsticks to compare the fees in different schemes easily; and
- both full disclosure and user-friendly way of presentation of fee levels are very important to increase transparency of the system and to induce keen competition among service providers.
- Minimise erosion by fees : We propose to require all MPF schemes to provide a capital preservation product as one of the investment options so that scheme members, particularly the low-income group, will be provided with an option with low investment risks under all schemes. This is to ensure that those low-income scheme members who are not willing to take high investment risks will have a choice and their MPF benefits will not be eroded by fees or poor investment performance.
10.We propose a number of measures in order to minimise the costs of portability for scheme members, particularly low-income members :
- Simple mechanism for portability : The mechanism for portability is simplified so that the administrative costs involved in portability transactions are minimised. This is achieved by means of streamlining the procedures in processing an application for portability and minimising the requirements regarding exchange of correspondence among all parties involved as well as record transfers among new and former trustees.
- No fees for portability : We propose that no fees should be charged during portability of accrued benefits, except for the expenses incurred for the redemption of investments, which are usually incurred as a percentage of the scheme assets. As a result, the effect of fees for portability will not be higher for scheme members with low income.
- Setting up of industry schemes : We propose to set up industry schemes for the certain industries with particularly high intra-industry mobility in order to reduce their costs of portability. Special features will be introduced to attract employers of the prescribed industries to join and to facilitate compliance with the MPF requirements.
11.We have proposed a number of measures to facilitate scheme members, particularly low-income members, to manage their MPF accounts more efficiently and to minimise cost :
Measures to Encourage Cross-subsidization
- Education : We would encourage scheme members through education and publicity programme to avoid creating a large number of individual accounts and to consolidate their individual accounts as far as possible.
- Duty of trustees : As suggested by the previous LegCo Subcommittee on MPF System, we will impose a duty on trustees to remind employees to transfer or consolidate their MPF accounts so that the scheme members would not forget to exercise their options after change of employment.
- Incentive measures :
- The propoal mentioned in paragraph 9(b) that no administrative fees should be charged during portability of accrued benefits would facilitate consolidation of accounts.
- In order to further encourage consolidation of small balance accounts with a balance of $5,000 or less, we proposed that no fees, including redemption fees, be levied by trustees when a scheme member transfers a small balance account, provided the transfer occurs within one year after the account becoming dormant.
- Tracking of scattered accounts : We propose that the MPFA would set up a mechanism with all MPF trustees to help scheme members who have forgotten the whereabouts of their scattered accounts to trace these accounts. Upon request from a scheme member, the MPFA will contact all MPF approved trustees to track the MPF accounts under the scheme member's name and identity card number.
12.There are a number of measures in place which would encourage cross-subsidization of fees among all scheme members, thus lowering the burden of the MPF System on the low income group :
Special Monitoring by the MPFA
- Flat fees : As mentioned in paragraph 9(b) above, we propose to require schemes with fee structures that may potentially incur a higher fee to small balance accounts or small employer-units (e.g. schemes with flat fees) to submit statistical returns. This measure is likely to discourage trustees from charging fees that may have a more significant impact on the low-income group.
- Fees for portability : As mentioned in paragraph 10 (b) above, we propose to disallow trustees from charging administrative fees during portability. This would result in cross-subsidization among scheme members so as to ensure that scheme members with high labour mobility would not have to bear an unfairly high costs of portability under the System.
- Small balance accounts : As mentioned in paragraph 11(c) above, we propose to disallow trustees to charge any fee, including redemption fees, when a scheme member transfers a small balance account with a balance of $5,000 or less, provided the transfer occurs within one year after the account becoming dormant. The costs of such transfer are likely to be shared by all scheme members and would not create a heavier burden on low-income employees and self-employed persons with such small balance accounts.
13.The MPFA will set up a special team of staff to closely monitor the situation of the low-income group in the MPF System, including :
- Availability of MPF products : to monitor the availability of MPF products to the low-income group and the implementation of the " no-rejection " requirement, including the cost implications of the " no-rejection requirement " and how will the service providers design their fee structures under the " no-rejection " environment;
- Fee level : to monitor the fee level of MPF products for low-income earners and see whether small employer-units and self-employed persons may face higher fees in comparison to other scheme members in general;
- Public consultation : to consult service providers, employers' organisations, unions and other relevant parties, on a periodic basis, in order to assess the availability and affordability of MPF products to low-income earners;
- Devise improvements : to devise improvements to the MPF System to assist the participation of the low-income group if necessary; and
- Public education : to encourage employers and scheme members, through the public education programme, to make good use of the scheme information disclosed by trustees and to seek assistance from, report or complain to the MPFA, if they have difficulties in finding a suitable MPF scheme or making an application to an MPF scheme.
14.In designing the various aspects of the MPF System, we have taken into full account the characteristics of low-income group (low level of contributions, high mobility, management of small and fragmented accounts). Through introducing various measures specially tailored to meet their special needs, we strive to ensure that no low-income earners will have problems in joining MPF schemes in the market whilst at the same time the fees to be borne by them would be minimised and would not erode their benefits. The MPFA will also play an important role to monitor the situation of the low-income group, to review whether they are adequately protected and to devise more protective measures when necessary. With all these protective measures and monitoring mechamisms in place, we are confident that the MPF System can benefit the low-income group and help them to save for their old age.
Mandatory Provident Fund Office
Financial Services Bureau
25 November 1997