Provisional Legislative Council
PLC Paper No. CB(1)549
(These minutes have been
seen by the Administration)
Ref : CB1/SS/5/97
Subcommittee on subsidiary legislation of the
Mandatory Provident Fund System
Minutes of the meeting held on Tuesday, 18 November 1997, at 2:30 pm in the Chamber of the Legislative Council Building
Members present :
Hon Ronald ARCULLI, JP (Chairman)
Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon WONG Siu-yee
Hon James TIEN Pei-chun, JP
Hon NG Leung-sing
Hon LEE Kai-ming
Hon Mrs Elsie TU, GBM
Hon Henry WU
Hon MA Fung-kwok
Dr Hon Mrs TSO WONG Man-yin
Hon LAU Kong-wah
Hon NGAN Kam-chuen
Hon CHOY So-yuk
Members absent :
Hon HO Sai-chu, JP
Hon Mrs Peggy LAM, JP
Hon YUEN Mo
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Yuen-han
Hon CHAN Kam-lam
Hon Kennedy WONG Ying-ho
Hon YEUNG Yiu-chung
Hon KAN Fook-yee
Public officers attending :
- Mrs Pamela TAN
- Director Mandatory Provident Fund Office
- Mr Raymond TAM
- Assistant Director Regulatory Standards
Clerk in attendance:
- Miss Polly YEUNG
- Chief Assistant Secretary (1)3
Staff in attendance :
- Mr LEE Yu-sang
- Senior Assistant Legal Adviser
- Ms Bernice WONG
- Assistant Legal Adviser 1
- Miss Anita HO
- Assistant Legal Adviser 2
- Mr Daniel HUI
- Senior Assistant Secretary (1)5
I.Meeting with the Administration
Approval Criteria for Trustees
(PLC Paper No. CB(1)493(01))
A member enquired on whether the capital adequacy requirement of a trust company would be raised as a result of the growth in scheme assets after the implementation of the Mandatory Provident Fund (MPF) system, the Assistant Director/Regulatory Standards (AD/RS) advised that the proposed minimum paid-up capital requirement of HK$30 million and net assets of at least the same amount compared favourably with international standards. The MPF Authority (MPFA) would monitor the adequacy of the capital requirement in the light of operational experience.
2.In reply to a member's enquiry on the proposed proportion, if any, of individual, local corporate or offshore corporate trustees managing MPF Schemes, AD/RS confirmed that there would not be any prescribed proportion of trustees. However, it was anticipated that under the future MPF system, the majority of small or medium-sized employers would join master trust schemes most of which would be managed by local corporate trustees. As regards the operators of schemes set up under the Occupational Retirement Schemes Ordinance (ORSO), AD/RS informed members that about half of them were Hong Kong-based. In this connection, the Director/MPF Office (D/MPFO) stressed that in ensuring the standard of prospective trustees, it would be more important to provide a level playing field and set appropriate criteria for all trustees to meet, irrespective of their places of origin.
3.Responding to some members' concerns about the requirements on trustees for MPF Schemes vis-a-vis requirements on trustees of ORSO schemes, AD/RS advised as follows:
- the proposed requirements on MPF trustees were more stringent than those for ORSO trustees;
- there were about 30 to 40 companies undertaking retirement scheme business for ORSO schemes; and
- the standards of trustees managing ORSO schemes were mainly governed by the law of equity whereas many of these general law requirements would be codified under the future MPF system.
4.Regarding the impact of the accumulated fund assets of the future MPF system on Hong Kong's economy, AD/RS opined that they would likely instill more vigour into and provide more capital for the local financial market. AD/RS also referred to reports of the World Bank which showed that the performance of privately managed retirement schemes was better than that of centrally/state-managed pension systems.
Sanctions of Trustees
(PLC Paper No. CB(1)493(02))
5.Members noted the contents of the paper.
Investment Management
(PLC Paper No. CB(1)493(03))
6.A member was concerned about possible difficulties faced by employers and employees who were not conversant with investment strategies and choices. In response, AD/RS said that the MPFA would organise educational and promotional activities to enhance the awareness of employers and employees on retirement protection, as well as the different investment strategies and their implications. He supplemented that different investment options would be available under future MPF Schemes and that for each MPF Scheme, the trustee would be required to formulate a statement of investment policy which would form part of the investment management agreement with the investment manager. Each statement must contain an investment objective. The MPFA would work out guidelines on the statements after consultation with the industry.
7.In reply to a member, AD/RS confirmed that the proposed minimum capital requirement of HK$10 million for an investment manager of MPF Schemes was already higher than similar requirement imposed by the Securities and Futures Commission (SFC) and that there would not be a cap on the value of scheme assets to be managed by the investment manager. He also advised that the MPFA would issue guidelines to trustees to assist them in the selection of investment managers.
8.On the question of cash commission rebates and soft dollar benefits, AD/RS clarified that in line with the requirements of the SFC, cash commission would be prohibited. Soft dollar benefits which were beneficial to the MPF Scheme (such as relevant computer softwares) could be retained if permitted by the trustee.
9.Addressing some members' concerns about the availability of investment information to scheme members, D/MPFO advised that apart from the annual report furnished to the MPFA which was available to members upon request, the trustee concerned should also provide an enquiry service to handle investment and other scheme-related enquiries.
Investment Restrictions and Guidelines
(PLC Paper No. CB(1)493(04))
10.Commenting on the proposed limit on foreign currency exposure of a fund's assets, the Deputy Chairman opined that the proposed limit of 70% should be lowered in order not to upset Hong Kong's monetary system. In reply, AD/RS said that the proposed 70% was considered appropriate and would not cause any significant impact on the local monetary market since the initial MPF scheme assets were only estimated to be about HK$12 billion. He further advised that although there was no statutory restriction on whether the 70% exposure should be made up of a single or multiple currencies, the investment manager should also base his investment decision on the principles of prudent investment.
11.Responding to a member's enquiry on investment portfolios, AD/RS said that there would not be any requirement for a designated proportion of scheme assets to be invested in bonds, listed shares or bank deposits. In this connection, a member held the view that the Administration should require the investment of a higher proportion of MPF scheme assets in the local financial market with a view to benefiting the economy of Hong Kong. AD/RS however cautioned that such a requirement might not be in the interest of MPF Schemes seeking to maximise investment returns for retirement benefit purposes. Apart from the capability of the local market in absorbing the funds, he pointed out that this form of intervention was incompatible with the global trend towards deregulation and free market.
12.On general investment restrictions, AD/RS confirmed that the investment manager of a MPF Scheme could not make borrowings for the purpose of subscribing for newly issued shares.
13.A member expressed grave concerns about the effective monitoring of investment managers and financial transactions. In response, AD/RS reiterated the following proposed regulatory measures:
- the investment manager and any other party involved in any financial transactions had to deal with each other at arm's length;
- the investment manager should be independent from both the scheme trustee and the custodian;
- all financial transactions were subject to end-of-year and random checkings by auditors; and
- the MPFA would conduct field inspections to examine transaction records.
II.Any other business
14.The Chairman reminded member that the next meeting of the Subcommittee would be held on 19 November 1997 at 8:30 am.
15.The meeting ended at 4:30 pm.
Provisional Legislative Council Secretariat
20 November 1997
