PLC Sub-Committee on Subsidiary Legislation of the MPF System
" No-rejection " Requirement and
Protective Measures for Low-Income Earners
When discussing the Residual Provident Fund Scheme (RPFS) on 13 February 1997, Members of the previous LegCo Subcommittee on MPF System had suggested imposing on MPF trustees the requirement not to reject any employer or self-employed persons seeking to join their schemes. Members urged the Government to examine the feasibility of the proposal.
2.This paper describes :
- the proposal to impose " no-rejection requirement " on all MPF trustees (paragraphs 3 to 10) ; and
- special measures to protect the interests of low-income earners (paragraphs 11 to 14).
No Rejection Requirement
3.We propose to impose a statutory requirement on all approved trustees that they shall not reject employers or self-employed persons who apply to join their registered schemes.
Procedures to process a formal application
4.When an employer or self-employed person applies in writing " to join a registered scheme with an approved trustee, the trustee shall not reject any application.
5.We will require the trustee to fully disclose the following information to any employer or self-employed person :
- the application procedures for joining a scheme under his management, e.g. the application forms to be filled in by the applicant and the various submission methods.
- the information to be provided by an applicant for application to that scheme; e.g. the documentation required, information regarding the employees in case the applicant is an employer.
- the terms and conditions of that scheme; including the fee structure, investment options and arrangements in respect of breaches of scheme terms, participation and termination of trust.
6.The information requested by the trustee and the application procedures for application to a scheme should be within reasonable limits and shall not pertain to drive away applicants. We agreed to issue guidelines for trustees for the purposes.
7.The trustee shall issue a notice of acceptance to an applicant within 30 days from the date the applicant has submitted all the requested information and agreed in writing to the terms and conditions of that scheme.
8.If an applicant does not finish the application process (e.g. does not provide the information as requested or does not agree to the terms and conditions of a scheme), the application procedures are deemed to be incomplete and the trustee concerned is not obliged to accept his application.
Termination of scheme participation
9.An approved trustee shall not terminate the participation of employers and self-employed persons in the scheme under his management without their agreement.
10.The MPFA will investigate into complaints and reports from employers or self-employed persons of incidents of alleged non-compliance with the above requirements. Any approved trustee who is found to have breached the requirements will be subject to a variety of sanctions :
Special Measures for the Protection of Low-income Earners
- Warning : The MPFA will issue a warning notice to the trustee concerned demanding immediate rectification to the situation ;
- Financial penalties : The MPFA may impose financial penalties on the trustee concerned for non-compliance of the requirements;
- Public sanction : The MPFA will consider to publicly censure the approved trustee for his conduct if appropriate;
- Court order : In the unlikely event where the trustee does not rectify the situation after MPFA has taken actions in (a) to (c) above, the MPFA may apply for a court order to enforce the requirements.
11.We propose that the MPFA shall designate a team of staff members to monitor the situation of availability and affordability of MPF products to low-income earners through :
12.We will also require all MPF schemes to provide a capital preservation product which will be discussed under a separate paper on " Capital Preservation Products'.
- monitoring the compliance of the " no-rejection " requirement by trustees;
- monitoring the fee level of MPF products for low income earners (see paragraph 13 below for details);
- consulting 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; and
- in the light of the experience in running the MPF System and the outcome of the consultation in (c) above, devising improvements to the MPF System to assist their participation in the system, including tightening up the statutory requirements upon trustees as suggested in paragraphs 3 to 10 above if necessary.
Monitoring fee level of MPF products
13.We propose to monitor the fee level of MPF products through the following measures :
- Registration of scheme : 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, 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.
- Disclosure requirement :
- We will require all trustees to disclose in full detail all kinds of fees to be charged under an MPF scheme.
- To enable such information to be presented in a user-friendly way to employers and scheme members, a trustee needs 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).
- For example, each MPF scheme will have to prepare the actual amount of annual fees to be charged for a small and a medium size employer-unit (5-employee or 10-employee unit), with employees' monthly income at different levels ($4,000 or $8,000).
- Such quotations of fees and their calculations need to be disclosed in the context of the scheme information containing fee structures for public distribution.
14.We propose that the MPFA shall, through the public education programme, encourage employers, employees and self-employed persons to make good use of the scheme information disclosed by trustees. They would also be encouraged to seek assistance from, report or complain to the MPFA, if they have difficulties in :
- finding a suitable MPF scheme; and/or
- making an application to an MPF scheme (e.g. the trustee has asked for an unreasonable amount of information to support the application or impose other unreasonable requirements in the application procedures in order to drive him away).
15.We have considered different approaches in designing the proposed statutory " no-rejection " requirement. The present proposal represents a balanced approach between protection of employers and self-employed persons without complicating the MPF System unnecessarily.
The complex approach
16.We recognise that in theory, trustees may circumvent a broad " no-rejection " requirement and avoid rejecting applicants directly by offering high fees or poor services to the applicants to " drive " them away. In view of this, we have considered setting out very detailed statutory requirements in preventing such circumvention by adding requirements that trustees must offer applicants " reasonable " fees and should maintain a reasonable level of service for all customers.
17.However, adopting such a complex approach has a lot of drawbacks and problems :
18.Adopting a complex approach would unnecessarily complicate the operation of the MPF System and lead to compliance and enforcement problems. In the end, it would be the interest of the majority of the scheme participants which will be sacrificed for a cause that is not and has not been proved in reality a necessity.
- it is extremely difficult, if not impossible, to assess and set standards of what is considered " reasonable " fees and service for different trustees and service providers;
- setting such standards and drawing a line for " low-income " earners will be unavoidably arbitrary and unfair;
- if the standard of " reasonable " fees is defined clearly in dollar terms, service providers would hesitate to charge a higher-than-standard fee for improvement in service, thus restricting innovation and improvements; they will also have very low incentive to charge a lower-than-standard fees as they may be viewed by the public as providing lower than standard services; and
- if the standard is vaguely defined, it would pose numerous compliance and enforcement problems.
Experience in HK and in other countries
19.In the future MPF market, we believe that different trustees and service providers, through competition, will provide different level of fees and service to suit the needs of different customers. Availability and affordability of MPF products should not be a problem even for the small employers and self-employed persons.
20.The experience in retirement systems and in other comparable areas (banking, insurance) both in HK and in other countries (including the US, Canada, UK, Australia and Chile) also confirms that availability and affordability of products under the free market environment is generally not an issue. This is reflected by the fact that a statutory " no-rejection requirement " or elaborate residual arrangements rarely exist in these areas.
21.We are unable to find any similar statutory " no-rejection " provision in the field of retirement schemes, banking and insurance in Hong Kong. In other countries, such a provision is not at all common in pension systems. It is most likely to be found in legislation requiring compulsory insurance, e.g. employees' compensation and automobile insurance. However, we only find " no-rejection " provision for the purpose of anti-discrimination (i.e. race, age, etc.) rather than business reasons.
22.In solving the problem of availability of mandatory insurance products, we found that the usual practice in other countries is for all the insurers to set up residual market mechanisms, either voluntarily or by law, for persons who cannot obtain insurance through ordinary channels to join. There is no additional " no-rejection " requirements on top of the residual market mechanisms for ensuring provision of products.
The balanced approach
23.We adopt a balanced approach because it is extremely unlikely that small employer-units and self-employed persons would be discriminated against in terms of fees in the future MPF market. Under ORSO, there are over 6,000 small individual schemes (i.e. 43%) with less than 10 employees. This shows that even small employers can afford to set up and operate a scheme under the voluntary ORSO environment.
24.We foresee that the MPF environment is even more favourable to small employer-units and self-employed persons because :
25.As a result, we do not foresee that there is a need for creating cumbersome and complicated requirements to avoid MPF trustees from circumventing the proposed " no-rejection " requirement at this stage. However, the MPFA will closely monitor the situation of availability and affordability of MPF products to low-income earners through the series of special measures suggested in paragraph 11 above, and would consider tightening the legislative requirements in the unlikely event where further protective measures for low-income earners is necessary.
- Nature of the market : There are a larger 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 the otherwise.
- Master trust schemes : With the establishment of large-scale master trust scheme, not only will the small employers and self-employed persons enjoy economy of scale, they can also save the costs for setting up their own schemes. Specialist Group Members also indicate that in view of the large amount of small units in the MPF System, it is most likely that service providers will charge on a percentage basis for all the participating units in the same scheme. This will enable the small units to enjoy cross-subsidization.
26.To deter trustees from non-compliance of the " no-rejection " requirement, it is necessary to provide effective enforcement measures. We therefore propose to build in a system where the MPFA will issue warning notice and impose financial penalties where necessary to ensure that trustees would accept all the applicants. The MPFA is also empowered to invoke court actions against the trustees in case they do not comply with the requirement.
Special Measures for the Protection of Low-income Earners
27.As a result of the " no-rejection " requirement, low-income employees will join regular schemes in the market rather than the RPFS. We need to ensure that the " no-rejection " requirement is adequate and effective and trustees are not circumventing the requirement by driving certain " unwelcome " applicants away by offering high fees to them.
28.We believe that scheme members will be able to find affordable MPF products in the market. We will ensure that all schemes provide a " capital preservation " product as an investment option. This caters for scheme members who prefer low investment risks and protection of their contributions against erosion by fees.
Monitoring fee level of MPF products
29.Through the proposed measures in paragraphs 11 to 14, the MPFA will be able to closely monitor the cost implications of the " no-rejection " requirement, in particular :
30.The requirement of demonstrating the fee structures in cash terms scheme would facilitate the MPFA to compare the fee levels faced by low-income earners in different schemes. Based on the data, in conjunction with consultation with relevant parties and reports and complaints received, the MPFA will assess whether the fees faced by low-income earners are reasonable and affordable. In the unlikely event where there is a problem with the availability and affordability of MPF products to low-income earners, the MPFA will consider measures to tackle the problem, including tightening the " no-rejection " requirements if necessary.
- how will the service providers design their fee structures under the " no-rejection " environment ;
- whether small employer-units and self-employed persons may face higher fees in comparison to other scheme members in general.
31.Full disclosure and user-friendly way of presentation of fee levels is also a very important measure to increase transparency of the system and to induce keener competition among service providers. Employers, self-employed persons and employees can easily understand and compare the fees in different schemes.
32.It is important to educate employers and self-employed persons to report or complain to the MPFA regarding any difficulties in finding suitable schemes or applying to join an MPF scheme. It is through reports and complaints from scheme members that the MPFA will be able to assess whether the existing MPF market is adequately catering for the needs of all participants, in particular those with low income.
Mandatory Provident Fund Office
Financial Services Bureau
14 November 1997