For discussion
on 3 April 1998


New Capital Account Subhead "Mandatory Provident Fund Schemes Authority"
New Capital Account Subhead "Compensation Fund for the Mandatory Provident Fund Schemes"

Members are invited to approve -

  1. the creation of a new Capital Account Subhead "Mandatory Provident Fund Schemes Authority" with a commitment of $5 billion to finance the setting up and operating costs of the Mandatory Provident Fund Schemes Authority; and

  2. the creation of a new Capital Account Subhead "Compensation Fund for the Mandatory Provident Fund Schemes" with a commitment of $600 million to provide seed money to the Mandatory Provident Fund Schemes Compensation Fund.


To implement the Mandatory Provident Fund (MPF) System, we need to provide funds to meet the setting up and operating costs of the Mandatory Provident Fund Schemes Authority (MPFA), and to help establish the MPF Schemes Compensation Fund.


2. We propose -

  1. to inject $5 billion into the MPFA to meet its setting up and running costs; and

  2. to provide a one-off grant of $600 million as seed money to help to set up the MPF Schemes Compensation Fund.


Functions of the MPFA

3. The MPF Schemes Ordinance aims to provide a mandatory system of privately managed provident fund schemes to assist members of the workforce to accumulate funds for their retirement protection. It provides, inter alia, for the creation of an MPFA to oversee the administration and management of the MPF schemes. The Authority will consist of a Management Board of not fewer than ten directors, of whom a majority will be non-executive directors with at least one, but not more than two, directors each representing the interests of participating employers and employees respectively. The specific functions of the MPFA are -

  1. to ensure compliance with the MPF Schemes Ordinance;

  2. to register provident fund schemes as registered MPF schemes;

  3. to approve qualified persons as approved trustees of MPF schemes;

  4. to regulate the affairs and activities of approved trustees and to ensure that MPF schemes are administered in a prudent manner; and

  5. to make rules or guidelines for the administration of MPF schemes.

In addition to MPF Schemes, the MPFA will take over the functions of the Office of Registrar of Occupational Retirement Schemes to oversee the administration of the schemes governed by the Occupational Retirement Schemes Ordinance (ORSO).

4. Apart from the supervision of service providers and the administration of MPF and ORSO Schemes, the MPFA will monitor the Capital Preservation Product in the MPF System and the Industry Schemes. It will also administer the Compensation Fund. It will undertake responsibilities for dealing with employers, employees and self-employed persons. Such responsibilities include the handling of enquiries and complaints, mediation and conciliation, public education and publicity, etc. With a workforce of about three million, self-employed persons of about 300 000, employer organisations of over 300 000 and existing number of ORSO schemes of 17 000, the complexity and volume of business will be heavy.

Resource Requirements of the MPFA

5. We plan to set up the MPFA as early as practicable to implement the MPF System. It has always been the Administration's publicly stated intention to provide a capital grant for the establishment of the MPFA, subject to the approval of Finance Committee (FC). This grant will meet both the initial setting up costs and the running expenses of the Authority. In the longer term, we expect the MPFA to operate on a self-financing basis through fees and charges collected and investment returns generated from this initial lump-sum grant.

6. Prior to the commencement of the MPF System (i.e. start of MPF contributions by employers, employees and self-employed persons), the MPFA will need to complete all necessary preparatory work, including staff recruitment and training, approval of MPF trustees, registration of MPF schemes, processing of applications for exemption of ORSO Schemes from MPF requirements, public education and publicity programmes, etc. It is therefore necessary for us to establish the Management Board of the Authority as a matter of urgency so that it can oversee the preparatory work and decide on such key issues as organisation and structure, staffing requirements, staff remuneration package.

7. For the period prior to the establishment of the Management Board, the Administration will continue to carry out the necessary ground work in such major areas as defining the job requirements in enforcing the MPF Schemes Ordinance and Regulations, developing a computerised information management system for the Authority and assessing more precisely the associated resource requirements. We envisage that it will take some time for the completion of these tasks, in particular, implementation of an information management system which is crucial to the efficient and effective operation of the MPFA. It is, therefore, necessary to seek early approval of a financial commitment for the setting up and operation of the MPFA.

8. We plan to commission a consultancy study to help to determine the appropriate pay and conditions for staff of the MPFA. The consultant will also advise on the organisation and structure of the MPFA. Upon completion of the study, the MPFA Management Board will consider and decide on the proposed remuneration package as well as the structure and staffing requirements of the Authority. At such time, we will be in a position to assess more precisely the operating costs of the Authority. The figures quoted in our preliminary assessment on the MPFA's resource requirements are, therefore, indicative only.

9. Our preliminary assessment is based on the assumption that the pay and conditions of the MPFA staff are comparable to that of other regulatory bodies overseeing financial services in Hong Kong. We have also taken into account the functions of the MPFA, the nature of its work and the envisaged workload of the MPFA (paragraphs 3 and 4 above). On this basis, our tentative assessment is that in order to discharge effectively its functions and responsibilities, the MPFA will need to have an establishment of about 260 staff, about 10% of which are at senior professional ranks or above. A chart showing the preliminary proposed structure of the MPFA and the distribution of responsibilities is at Enclosure 1.

10. We estimate that the initial start-up cost for the MPFA is about $330 million, comprising largely the costs of the computerised information management system for monitoring the administration of the MPF System and the setting up of the office of the MPFA. The 1995 Consultants' Report on the MPF System has recommended that approximately $200 million would need to be invested in systems hardware and software. Regarding operating expenses of the Authority, our preliminary estimate is that the annual requirement would be about $280 million.

11. A breakdown of the preliminary estimates of the setting up costs of the Authority and its annual recurrent budget is at Enclosure 2.

12. As regards revenue, the MPF Schemes Ordinance provides that the MPFA shall require the approved trustees to pay an annual registration fee, the amount of which may be determined by reference to the current value of the assets of the individual registered scheme. However, the amount must not be fixed at a level that exceeds the cost incurred by the MPFA in exercising and performing its functions with respect to registered schemes. At this early stage, for reasons explained in paragraph 8 above, we do not have the costing of the MPFA's various functions. It is therefore not possible to determine the rate of the registration fee. Our intention is to seek the legislature's approval of the rates of registration fee and other service fees to be imposed by the MPFA when we have worked out more precisely the operating costs of the Authority.

13. The Administration's intention is that, with the initial capital injection of $5 billion, the MPFA will operate on a self-financing basis. Our preliminary assessment indicates that taking into account the above mentioned estimated expenditure requirements and income from investment returns generated from the initial grant and fees to be collected, the proposed lump-sum capital grant of $5 billion is likely to be able to support the MPFA in the foreseeable future.

MPF Schemes Compensation Fund

14. The MPF Schemes Ordinance stipulates that the MPFA may establish a compensation fund to compensate any scheme member and others who have beneficial interest in the schemes for any loss in the MPF accrued benefits caused by misfeasance or illegal conduct determined by the Court of First Instance on the application of the MPFA by scheme trustees or any other person in respect of the administration of the MPF Scheme. The MPF Schemes Compensation Fund will cover all losses in accrued benefits arising from both mandatory and voluntary contributions made by employers and scheme members without any limit. The MPFA will be the administrator of the Compensation Fund during the initial period of its establishment. The MPFA may review this role at a later stage to consider whether it is more appropriate to appoint an administrator for the purpose.

15. Regarding the operation of the Compensation Fund, the MPF Schemes Ordinance stipulates that the MPFA must apply to the Court of First Instance if it has reasonable grounds to believe that a loss in accrued benefits has occurred as a result of misfeasance or illegal conduct and that the matter has not been resolved to the satisfaction of the person who suffers from the loss. If the Court determines that there is misfeasance or illegal conduct, the MPFA shall compensate the scheme members or their beneficiaries who have suffered accrued benefit losses in accordance with the order made by the Court.

16. As in the case of other compensation funds, the MPF Compensation Fund should be financed by levies borne by participants whose interests are protected by the Fund. The MPFA will start levying for the Compensation Fund at the commencement of the MPF System so as to build up a reasonably large reserve and hence a more sizeable protection cover. We shall set the levy rate at 0.03% per year of the accrued benefits of members. However, in recognition that the Fund would take time to build up its resources, the Government undertook in July 1995 when the MPF Schemes Bill was tabled for discussion in the previous Legislative Council that, subject to the approval of Finance Committee, we would provide a grant or loan of $300 million as seed money for the Compensation Fund. In the course of the recent deliberations on the MPF legislation, we have received suggestions from Members of the Provisional Legislative Council (PLC) that Government should provide a greater financial commitment to support the setting up of the Fund. In the light of these suggestions, we now propose to make a seed money grant of $600 million for the establishment of the Fund. Investment return from this seed money grant will also help to build up the Fund's reserve over time.

17. At a levy rate of 0.03% per year of the accrued benefits of members, we estimate that the maximum amount of levy payable by an employee earning $20,000 or above each month is about $50 per year. On the basis of present estimates, we envisage that the Compensation Fund could cease to collect levies once the level of the accumulated reserve reaches $900 million. The MPFA will keep under constant review the optimum level of the Fund's reserves, in the light of the total accrued benefits and other prevailing factors. With a grant of $600 million as seed money and taking account of the investment return thereon which will accrue to the Fund, we do not envisage any need for a further grant.


18. The estimated total non-recurrent expenditure of the proposal is $5.6 billion. We will disburse the money to the MPFA when it has been formally set up. Before then, the Secretary for Financial Services (SFS) will be the controlling officer of the two new subheads. He may charge expenses for the setting up of the MPFA to the relevant subhead. If Members approve the proposal, we will provide the supplementary provision required in 1998-99 under delegated authority.


19. The MPF Schemes Ordinance provides for the setting up of a bank account in Hong Kong to retain funds received by the MPFA for meeting the expenditure incurred in relation to the functions of the Authority. The Ordinance also empowers the MPFA to invest these funds in any manner in which trust funds may be lawfully invested or in any other manner as approved by the Financial Secretary. There will be an appropriate control mechanism for the investment of these funds as our intention is to involve the MPFA Management Board in deciding and overseeing the investment plan for the surplus funds. The same control mechanism will also apply to the seed money for the MPF Schemes Compensation Fund.


20. Following the enactment of the MPF Schemes Ordinance in August 1995, SFS set up a working group on MPF within Financial Services Bureau to prepare for the development of the subsidiary legislation under the MPF Schemes Ordinance. At the FC meeting held on 24 November 1995, Members approved a commitment of $22 million for engaging consultants to provide the necessary professional support for the preparation of the required subsidiary legislation. On 9 February 1996, FC approved the creation of 25 supernumerary civil service posts to staff the MPF Office which is responsible for making preparation for the implementation of the MPF System. On 25 March 1998, Establishment Subcommittee supported the extension of the MPF Office for another 12 months from 1 April 1998 to prepare for the setting up of the MPFA and implementation of the MPF System. The PLC passed on 25 February 1998 the MPF Schemes Amendment Ordinance. The motion debate on the MPF regulations and rules is scheduled for 1 April 1998.

Financial Services Bureau
March 1998

Enclosure 2 to FCR(98-99)6

Estimated expenditure of the Mandatory Provident Fund Schemes Authority (MPFA)
at 1997-1998 prices


Estimated non-recurrent start up cost

$ million

1. Installation of a computerised information management system


2. Fitting-out for new office including site preparation work for computer room


3. Furniture and fixture including standard furniture for MPFA staff and other non-standard items


4. Office equipment including telephones, simultaneous interpretation equipment, interactive voice response system and other general office equipment




Plus 10% for contingency



Estimated recurrent running expenses for the initial year

$ million

1. Staff cost

- staff cost for 260 permanent staff

- cost for hiring about 100 temporary staff 1


2. Office rental and related charges


3. General expenses including general office expenses, hire of professional services and telephone charges etc.


4. Recruitment and development expenses including costs of recruitment advertisement, engagement of recruitment agencies and staff training programmes


5. Publicity and education programmes




Plus 10% for contingency


1.The temporary staff are hired in the initial year of the setting up of the MPFA to assist in processing applications for exempting ORSO schemes from MPF requirements, to handle publicity and education programmes, enquiries, etc.