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

Information Note

Total Picture on Measures to Minimize Administrative Costs


This paper summarizes our proposals in the following areas which aim at establishing a cost-effective MPF System :

  1. Simple and effective system

    Administrative requirements

    1. Master trust arrangement (paragraph 4)
    2. Registration of schemes (paragraph 5)
    3. Exemptions (paragraph 6)
    4. Mandatory contributions (paragraph 7)
    5. Voluntary contributions (paragraph 8)
    6. Default contributions (paragraph 9)
    7. Portability (paragraph 10)
    8. Scheme management (paragraph 11)
    9. Use of information technology (paragraph 12)

    Regulatory requirements

    1. Accounting and reporting requirements (paragraph 13)
    2. Indemnity insurance (paragraph 14)
    3. Winding Up (paragraph 15)

  2. Market competition

    Fair competition

    1. No-quota system (paragraph 16)
    2. Approval criteria (paragraph 17)
    3. Investment standards and guidelines (paragraph 18)

    Transparent system

    1. Ready access to information (paragraph 19)
    2. User-friendly presentation (paragraph 20)
    3. Education (paragraph 21)

  3. Governmental contribution

    Financial contributions

    1. Establishment of MPFA (paragraph 22)
    2. Compensation Fund (paragraph 23)

    MPFA structural aspects

    1. Slim establishment (paragraph 24)
    2. Low percentage fee (paragraph 25)


2.It is essential to set up a cost-effective MPF System so as to avoid imposing an unduly heavy burden on scheme members, particularly the low-income group. Whilst it is important to contain costs when designing the System, it is equally important to provide sufficient safeguards to ensure the security of scheme assets.


3.We propose to set up a cost-effective MPF System through :

  1. establishment of a simple and effective MPF System;

  2. enhancement of market competition and transparency in scheme operations; and

  3. providing financial support to and streamlining the structure of the MPFA.

The above three-pronged approach should keep the administrative costs of the MPF System at a low level without the need for direct government intervention. Instead, the Government's role will be to design an MPF System with built-in simplicity and efficiency as well as allow market forces to operate as freely as possible. A wide range of measures under this three-pronged approach are summarised below.

Simple and Effective System

Administrative Requirements

4.Master trust arrangement. The framework of the MPF System as set out in the principal legislation is already designed in such a way as to reduce the costs to small businesses in joining MPF schemes. This is achieved by the provision for the establishment of master trust schemes. By pooling small schemes together for administration and investment, master trust funds can enjoy a high degree of efficiency resulting from the economies of scale.

5.Registration of schemes. The MPF scheme registration requirements will be simplified as follows :

  1. Registration process : Under ORSO, separate registration is required for each participating employer unit in a pooled arrangement. Under the MPF System, we propose to register schemes at the master trust level without the need to register the individual employer units. This will help reduce administrative work and costs of both employers and trustees.

  2. Self-certification : ORSO scheme registration requires certification by external solicitors and auditors. MPF scheme registration requires self-certification by approved trustees instead of external certification. This will help save considerable professional charges.

6.Exemptions. Foreign employees and self-employed persons who are eligible for exemptions from the MPF requirements are not required to apply for exemptions. They will be granted exemption automatically.

7.Mandatory contributions. We propose to adopt the following measures to simplify the computation of the amount of contributions :

  1. Relevant income of self-employed persons : If self-employed persons have notice of assessment (NoA) issued by the Inland Revenue Department, they may adopt the assessable profits as computed in the NoA as their relevant income. If they choose to make the maximum contribution of $1,000 per month (viz. 5% of $20,000 which is the statutory maximum income for contribution purposes), they are not required to produce any evidence to substantiate their relevant income. This will help simplify the calculation of relevant income of the self-employed persons.

  2. Verification of calculation : Approved trustees are not required to verify the calculation of relevant income done by employers or self-employed persons. Instead, they are only required to verify the arithmetic calculation of the amount of contributions.

  3. Year-end adjustments : Employers are not required to make year-end adjustments for bonus, salary increase and income fluctuation in the calculation of the relevant income of the employees. This will help trustees save considerable work and costs in computation and verification.

8.Voluntary contributions. To encourage the making of voluntary contributions and to save the administrative costs of the MPFA, the MPFA will allow automatic exemption of voluntary contributions from the provisions of vesting, preservation and portability.

9.Default contributions. We propose to alleviate the cost burden on scheme members through :

  1. Chasing mechanism : The mechanism of reporting default contributions to the MPFA by trustees and imposing fines on the default employers by the MPFA is designed in a way that will be activated automatically so as to reduce unnecessary correspondence and communication between the parties involved.

  2. Expenses of court proceedings : The cost of prosecuting the defaulting parties and recovering default contributions will be borne by the MPFA.

10.Portability. The procedures for transferring accrued benefits will be streamlined in the following areas :

  1. Application procedures : To activate the transfer of accrued benefits, the employee, employer and the new and former trustees will only be required to complete a consolidated application form so as to reduce exchanges of correspondence.

  2. Record transfer : The record transfers among the new and former trustees in portability cases will be kept to a minimum.

11.Scheme management. The following measures will be introduced to encourage members not to keep a considerable number of fragmented MPF accounts :

  1. Education : We will, through education and publicity campaign, encourage scheme members to consolidate their MPF accounts so as to reduce the administrative costs that their accounts are susceptible to.

  2. Portability fees : No administrative fees, except those in relation to redemption of investment, will be charged by trustees for any transfer of MPF accounts.

  3. Small balance accounts : No fees, including fees for redemption of investment, will be imposed for the consolidation of small dormant accounts with a balance of less than $5,000 if the consolidation is made within one year after the account becomes dormant.

12.Use of information technology. The MPF System is designed in a way that modern information technology can be fully utilized such as :

  1. Forms and returns : Although the MPFA will prescribe the contents and proforma of specific forms and returns to facilitate compliance, trustees will be allowed to provide such documents by their information systems rather than on pre-printed forms.

  2. Enrolment : Enrolment procedures and forms will not be prescribed so that trustees can design their procedures with the use of information technology.

  3. Communication between MPFA and trustees : A computer network will be set up between MPFA and trustees to ensure exchange of information to be done in a cost effective way.

Regulatory Requirements

13.Accounting and reporting requirements. Such requirements are kept to a minimum but adequate to enable the MPFA to fulfil its regulatory functions and scheme members to monitor their MPF schemes :

  1. Level of auditing : In ORSO pooling arrangements, preparation of annual accounts and auditing are required for each participating employer unit. Under MPF, auditing requirement is only mandated at the master trust level for master trust schemes.

  2. Report distribution : The trustees will only be required to distribute annual report and audited accounts of the scheme to scheme members and participating employers upon their request.

  3. Languages of reports : Even though the reports and accounts should be made available to scheme members in English and Chinese, the trustee may dispense with this requirement if all scheme members agree to have the reports and accounts prepared in only one of the languages.

  4. Well defined duties : The areas in which internal control requirements and " whistle blowing " requirements will be imposed will be clearly specified to avoid incurring unduly high costs.

14.Indemnity insurance. Although the approved trustee of a scheme is required to take out comprehensive insurance coverage to indemnify the scheme for losses in scheme assets, a suitable cap will be prescribed taking into account the implications for costs and the capacity of the insurance market.

15.Winding up. To avoid imposing a burden on scheme members, it will be stipulated in the subsidiary legislation that the expenses of scheme winding up will not be borne by scheme members and scheme assets.

Market Competition

Fair Competition

16.No-quota system. We propose that service providers who wish to apply for approval as MPF trustees should not be subject to any quota. This means so long as they meet the approval criteria, they can become MPF approved trustees. This is to ensure the competitiveness of the MPF market at all times.

17.Approval criteria. Whilst we put paramount importance to the security of scheme assets, our proposed approval criteria for MPF trustees will not be so stringent as to stifle the healthy development of the retirement schemes industry. Under the MPF System, any individual, local or offshore company that meets the approval criteria will be eligible to be MPF approved trustee. Smaller players will not be prejudiced against in the MPF market. The provision of such a level playing field will help to keep the market competitive and hence reduce costs.

18.Regulatory and administrative requirements. All approved trustees and MPF products will be subject to the same MPF administrative and regulatory requirements in the MPF legislation. For example, the requirements on trustees and the investment standards and guidelines have been developed after extensive consultation with the relevant industry and by reference to relevant international standards and practices. The purpose is to ensure that service providers can compete fairly to maximize scheme members' return, while a high level of asset security is achieved.

Transparent System

19.Ready access to information. A transparent MPF System will maintain the System's competitiveness and keep the costs to a low level. Under the MPF System, scheme members will have ready access to information regarding the scheme as well as their own contributions and accrued benefits. This information includes :

  1. pamphlets on scheme terms, investment strategy and options;

  2. monthly pay slip from employers which contains information on contributions made;

  3. enquiry services by trustees to check monthly contributions and other matters in respect of MPF accounts;
  4. annual benefit statement which contains information on investment returns and accrued benefits as at year end; and

  5. annual reports and audited accounts of the schemes.

20.User-friendly presentation. Approved trustees and other service providers will be required to disclose the fees and charges under the scheme, including information in respect of the circumstances of fee charging and the basis of fees. All trustees will be required 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 sizes of employer units under normal circumstances (i.e. no transfer of account and no switches in investment options). This will facilitate employers and scheme members to compare the fee scales of MPF schemes and induce keener market competition.

21.Education. We will also launch a series of education campaign to enhance scheme members' understanding of the MPF System and to enable them to make full use of the scheme information so as to monitor their MPF accounts effectively.

Governmental Contribution

Financial Contributions

22.Establishment of MPFA. The MPFA will be a self-financing body. To keep the burden of MPFA fees on scheme members to a minimum, we propose that, subject to LegCo approval, the Government will inject a capital of $5 billion for the establishment of the MPFA. With this seed money, the fees to be payable by trustees to the MPFA can be maintained at a low level during the initial period of the establishment of the MPF System when the asset value of the System is still meagre.

23.Compensation Fund. To offer additional protection to scheme members, a Compensation Fund will be established. The Government will, subject to the approval of LegCo, inject HK$300 million as the seed money of the Compensation Fund. This will ensure that only a minimal levy of 0.03% per annum will be required to build up the Fund's reserve. When the Compensation Fund builds up a reserve of HK$900 million, levying will be suspended.

MPFA Structural Aspects

24.Slim establishment. In order to reduce the administrative costs of the MPFA, the Authority will be set up with a slim establishment. This objective will be achieved through streamlined administrative procedures in respect of scheme registration, recovery of default contributions and reporting requirements in respect of approved trustees. In addition, advanced information systems will be used as far as possible to facilitate communication between trustees and the MPFA and to enable the Authority to fulfil its monitoring role in a cost effective way.

25.Low percentage fees. To avoid imposing a heavy burden on scheme members, we have accepted the suggestion of the previous LegCo Subcommittee on MPF System that the fees payable to the MPFA will be charged at a low, flat percentage.


26.When designing the MPF System, we recognise that the major concerns are security of assets and the administrative fees to be borne by scheme members. The key to success for the System is to strike an appropriate balance between prudent regulation and reasonable fees. This is taken as the major factor for consideration in working out the administrative and regulatory requirements for the System.

27.With the comprehensive range of measures in various aspects of the System to contain costs, we believe that the level of fees that scheme members will need to pay will be reasonable. In view of the experience of other countries, the fee levels would likely be reduced in the long run due to keen market competition.

Mandatory Provident Fund Office
Financial Services Bureau
26 November 1997