PLC Sub-Committee on Subsidiary Legislation of the MPF System
Compensation Fund -
Coverage, Operation, Administration and Levy
This paper describes the proposals regarding the coverage, operation, administration and the levy arrangement of the Compensation Fund under the MPF System (paragraphs 2 to 5).
2.We propose that all benefits, arising from both mandatory and voluntary contributions made by employers and scheme members, should be covered without any limit.
Operation of the Fund
3.The following outlines the proposed mechanism for activating the Compensation Fund :
- upon receipt of a report or complaint from any person in relation to an MPF scheme, the MPFA will conduct a preliminary investigation to see whether the report or complaint is substantiated.
- if the preliminary investigation reveals that there is prima facie evidence to show that there may be a loss in MPF accrued benefits caused by misfeasance or illegal conduct by any person in the administration of the scheme, the MPFA will carry out a full investigation;
- an investigation team will be formed to evaluate the loss and the assets of the scheme net of the loss, and investigate the causes of the loss;
- during investigation, the trustee has to process the portability and withdrawal cases in accordance with the outcome of the asset valuation conducted by the investigation team in (c) above;
- if the MPFA is unable to find service providers to cover all the losses from their own resources or by their insurance, the MPFA will apply to the Court of First Instance in accordance with the prescribed procedures for a determination in order to pay the claims from the Compensation Fund; and
- the MPFA and the trustee will need to pay the claims to the accounts of the relevant scheme members within a prescribed period.
Details of the mechanism are set out at Annex.
Administration and Management of the Fund
4.It is proposed that the MPFA should 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 determine whether it is more appropriate for the MPFA to continue managing the Fund or to appoint an administrator for the purpose.
5.We propose that :
- levying should start from the commencement of the MPF System;
- levying should be suspended when the Compensation Fund reaches a prescribed ceiling i.e. $900 million; and
- the maximum rate of levy should be 0.03% of a scheme member's total accrued benefits.
6.It is stipulated in the MPF Ordinance that the MPFA may establish a Compensation Fund to compensate any scheme member for any loss in the MPF accrued benefits caused by misfeasance or illegal conduct determined by the court on the application of the MPFA by scheme trustees or any other person in respect of the administration of the MPF scheme.
7.We propose that both mandatory and voluntary contributions should be covered by the Compensation Fund because :
- both classes of contributions will be lumped together for investment and will be handled by the same persons involved in managing the retirement scheme; and
- the inclusion of voluntary contributions under the coverage of the Compensation Fund will be in line with the spirit of the Ordinance to provide protection and ensure security of MPF assets.
8.The reasons for the proposal of not imposing any limit on claims are :
Operation of the Fund
- Equitable to members : It will not penalize members with large accrued benefits. These members would likely be long service members near their retirement age who need the coverage of the Compensation Fund most.
- Simple to administer : It will simplify the administration work for both payment of claims and levy collection. In processing claims, full coverage means that all scheme members under a scheme will be treated alike and an identical way for calculation will apply to all members. There is no need to have any specific calculation for members capped by the limit. For levying, only a single rate calculated on the basis of accrued benefits will be needed for all members under the MPF System. This will be both fair to members and simple to administer.
- Easy to understand : It will be easier to understand by all parties including employees , employers and self-employed persons.
- Minimal impact on market : If there were a cap on the claims under the Compensation Fund, scheme members will likely choose to join those schemes operated by brand name service providers which may be perceived as better managed and safer. This will indirectly give such service providers a competitive edge.
9.It is stipulated in the MPF Ordinance that the MPFA shall only apply to the Court of the 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. The Ordinance also provides the MPFA with the powers to investigate, to appoint any appropriate person as an investigator and to ask the scheme trustee to prepare an external auditor report into the circumstances specified by the MPFA.
10.To facilitate the operation of the Compensation Fund, it is necessary to provide in the subsidiary legislation, supplemented by administrative guidelines, a detailed mechanism for activating the Fund, particularly in the following areas :
Administration and Management of the Fund
- Investigation : To ensure that prompt actions will be taken in response to a report or complaint in relation to the Compensation Fund, it is necessary to have clear provisions regarding the objectives of the preliminary investigation and full investigation, the procedures for setting up a full investigation team and procedures for investigators to carry out their duties.
- Allocation of loss : We propose that the first task of the investigation team will be to evaluate within a prescribed period the assets of the scheme net of the loss. The trustee will be required to process portability and withdrawal cases in accordance with such valuation result. The purpose is to enable the loss to be allocated to all scheme members concerned as soon as possible whilst the scheme is still under a full investigation or court proceedings. Otherwise, members who leave the scheme during this period of time may be able to withdraw or transfer amounts of fund larger than they should have entitled to at the expense of other scheme members.
- Settlement of loss : Under our proposed system, scheme trustees will be required to obtain adequate insurance cover. A minimum capital requirement will also be imposed on various service providers, including trustees, custodians and investment managers, which can be used by them to cover losses due to their improper acts. These should cover most cases of losses due to misfeasance or illegal conduct. We envisage that most losses are likely to be settled by the service providers so as to preserve their reputation in the industry. Therefore, only if the MPFA believes that the service providers will not settle the loss by themselves or insurance, the MPFA will apply to the court to use the Compensation Fund to settle the loss.
- Application to Court : Clear court procedures will be set out in the subsidiary legislation to facilitate the handling of the claims. These include application procedures to be followed by the MPFA, necessary requirements in respect of the investigation report of a claim and procedures for hearing the case.
- Payment of claims : To ensure swift payment of claims, clear payment requirements will be imposed on the MPFA and the trustees.
11.The principal Ordinance allows the MPFA to make regulations regarding the appointment of persons to act as administrators of the Compensation Fund. We will incorporate such provisions in the subsidiary legislation for use when necessary. For the initial period, we propose that the MPFA should be responsible for the administration of the Compensation Fund, because many of the duties cannot be delegated to any organisation outside the Authority :
- Handling of complaints/reports : It is envisaged that some of the reports on misfeasance or illegal conduct which lead to losses in scheme assets will be triggered off by service providers (e.g. auditors) during their course of work. It is not appropriate to require these reports to be made to any organisation other than the MPFA. Moreover, many important decisions will be required in the handling of such complaints or reports, such as whether full investigation or application to court is needed. These responsibilities should not be delegated.
- Collection of levy : It is not appropriate to delegate decisions on the need to replenish the Compensation Fund and the timing for levy collection.
- Education : It is appropriate for education campaigns relating to Compensation Fund to be part and parcel of the overall education programme for MPF. Messages can be sent across in a more coherent and structured way.
12.The areas of administration work in respect of the Compensation Fund which can be delegated will mainly be :
- collection of levy;
- payment of claims;
- keeping of books and records; and
- prepare an audited financial statement.
As the number of MPF schemes and the number of claims are expected to be small, and the levy is only collected annually, the volume of work in the above areas will not be large.
13.However, as the principal Ordinance envisages the appointment of administrators for the Fund, we still incorporate relevant provisions in the subsidiary legislation. This enables the MPFA to review its role in the administration of the Fund in future and appoint administrator in the appropriate areas of administration work if necessary.
14.The Government had undertaken that, subject to the approval of the Legislative Council, a fund of HK$300 million should be injected as the seed money of the Compensation Fund. On top of this seed money, we propose to start levying for the Compensation Fund at the commencement of the MPF System so as to build up a larger reserve and hence a more sizeable protection cover.
15.We propose to set a ceiling of $900 million for the Fund having regard to a number of factors :
- Arbitrary estimate : As there are no such claims in overseas countries such as Australia and Canada, there are no statistics overseas to help us to estimate the size of the Fund required. Unknown variables include the number, frequency and size of possible claims; and
- Prudential controls : We have a very tight control system under the MPF System, including stringent approval criteria for service providers, investment guidelines, separation of custodian role from trustees and requirement of annual returns and audited accounts. The powers of the MPFA to remove, revoke and suspend trustees would also be effective deterrents. The chances of loss due to misfeasance or illegal conducts committed by service providers should be small. It is not justifiable to set aside an unduly large amount of scheme members' money for a small number of claims.
- Protection cover : There are compulsory insurance coverage, including insurance for breach of trust, and minimum capital adequacy requirement for trustees that can be used to protect improper acts of service providers within the MPF System. This means that claims of a scale which are affordable to service providers will likely be settled outside the Compensation Fund. This further reduces the potential number of claims and the need for a very large reserve in the Compensation Fund.
- Management considerations : A reserve of $900 million would not be too large to cause management and investment problems.
16.We propose that the levy rate be set at 0.03% per year of the accrued benefits of members. The impact of such a rate for individual scheme members will be insignificant. If such a rate is adopted, it will take 11 years to build up the proposed reserve of $900 million, provided there are no claims during this period. The maximum accumulated amount of levy payable by an employee (i.e. maximum level of income for contribution purposes is $20,000) during these first 11 years of the establishment of the MPF System is less than HK$550.
Mandatory Provident Fund Office
Financial Services Bureau
14 November 1997
Detailed Procedures Regarding Operation of the Fund
I. Complaint and report
II. Preliminary investigation
- The MPFA receives a report or complaint from any person in relation to an MPF scheme.
- The MPFA will conduct a preliminary investigation to see whether the report or complaint regarding a loss of scheme assets as a result of misfeasance or illegal conduct is substantiated.
- If the preliminary investigation concludes that there is, prima facie, no loss or the loss is not caused by misfeasance or illegal conduct by persons in the administration of the scheme, the MPFA will inform and explain to the complainant accordingly.
- The Authority may later review the case if additional facts emerge.
III. Full Investigation
IV. Liaison with Service Providers
- If the preliminary investigation reveals that there is, prima facie, evidence to support that losses may have been caused by misfeasance or illegal conduct by persons in the administration of the scheme, the MPFA will carry out a full investigation.
- The MPFA will set up an investigation team, which may consist of suitable professionals inside or outside the MPFA. The main duties of the team are to evaluate the total assets of the scheme net of the loss; to carry out a detailed investigation as to the amount and causes of loss; and to prepare a report for submission to the MPFA setting out the findings of the investigation.
- In the course of or after carrying out a full investigation, the MPFA may take the following actions, depending on the nature and seriousness of the act of misfeasance or illegal conduct:
--If there is apparent breach of the standards and guidelines imposed by the MPF Ordinance, the MPFA will require the concerned scheme administrators to rectify the situation as soon as possible to avoid further losses.
-- The MPFA will judge if further actions (e.g. suspension or removal of the trustee or initiation of winding up of the scheme) are required to rectify the situation.
- During investigation and court proceedings, the scheme trustee has to follow the valuation of the total assets of the scheme net of the loss as done by the investigation team in (ii) above when processing applications for portability and withdrawal of accrued benefits.
V. Application to the Court
- The MPFA may need to liaise closely with the service providers concerned throughout the process of preliminary and full investigation.
- Once the MPFA is in a clear position to know the estimated loss and that there are reasonable grounds to believe the loss is caused by misfeasance or illegal conduct, the MPFA will discuss with the responsible service providers as regards settlement of the loss from their own resources or from their insurance.
VI. Payment of claims
- The MPFA may decide to apply to the court for a determination in order to make a pay out from the Compensation Fund if other avenues for compensation for the loss are exhausted (e.g. the service providers challenge the conclusion of the investigation; none of the concerned service providers nor their insurers are able to pay for the losses).
- If the court determines that there is misfeasance or illegal conduct, the MPFA shall compensate the scheme members who have suffered losses as a result in accordance with the findings in the investigation report.
- Subsequent to the receipt of the court order regarding the payment of claims, the MPFA shall pay the claims to the trustee of the scheme as soon as practicable after it has liquidated adequate assets of the Fund for the purpose.
- The trustee has to distribute the payment from the Compensation Fund to the MPF account of the relevant scheme members within 30 days from the date of receiving the payment.
- If the scheme concerned has been wound up, the MPFA has to publish in one or more English language newspaper and one or more Chinese language newspaper a notice specifying payment arrangement for scheme members listed out in the notice.