For discussion FCR(95-96)81
on 24 November 1995

ITEM FOR FINANCE COMMITTEE

HEAD 148 - GOVERNMENT SECRETARIAT : FINANCIAL SERVICES BRANCH
Subhead 700 General other non-recurrent

Members are invited to -

1. note the financial implications, estimated at $21.2 million in non-recurrent staff costs and $14.4 million in non-recurrent departmental expenditure, of setting up a temporary Office in the Financial Services Branch responsible for the development of the Mandatory Provident Fund Schemes System;
2. note the financial implications, estimated at $5 million, of creating under delegated authority a new commitment for a consultancy on the technical specification of a management information system for Mandatory Provident Fund Schemes; and
3. approve a new commitment of $22 million for engaging consultants to provide the necessary professional support for the preparation of the subsidiary legislation of the Mandatory Provident Fund Schemes Ordinance.

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PROBLEM
PROPOSAL
JUSTIFICATION
FINANCIAL IMPLICATIONS
BACKGROUND INFORMATION

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PROBLEM

We do not have sufficient manpower and expertise to prepare the subsidiary legislation to be made under the Mandatory Provident Fund Schemes Ordinance (the MPF Ordinance).

PROPOSAL

2. The Secretary for Financial Services (SFS) proposes to set up a temporary MPF Office to undertake the necessary preparatory work for the introduction of the MPF Schemes. He also proposes to create a new commitment of $22 million for engaging consultants for the provision of professional support services required for the preparation of the subsidiary legislation of the Ordinance.

JUSTIFICATION

3. The MPF Ordinance was passed in July 1995. It provides for, amongst other things, the establishment of non-governmental Mandatory Provident Fund (MPF) Schemes for the purpose of funding benefits on retirement, the registration of such schemes, the setting up of a regulatory regime and the establishment of a Mandatory Provident Fund Schemes Authority (MPFA) to oversee the administration and management of registered schemes.

4. The immediate task of the Administration is the preparation of the necessary subsidiary legislation. This is to enable us to discharge our commitment to the Legislative Council to consult Members on the subsidiary legislation before the implementation of the MPF System. The main areas where subsidiary legislation has to be drafted include the following -

1. specification of standards for trust schemes, including vesting, preservation and portability of benefits, withdrawal of benefits and winding up of schemes;
2. registration and regulation of MPF Schemes;
3. approval and prudential supervision of trustees;
4. interface arrangements between MPF Schemes and existing schemes under the Occupational Retirement Schemes Ordinance;
5. investment guidelines; and
6. Residual Provident Fund Schemes, Compensation Fund and Appeal Board.

5. SFS assesses that the development of detailed rules and regulations covering the above areas requires expertise and substantial hands-on experience in the following fields -

1. pension trust arrangement and custodian arrangement for pension investments;
2. investment of pension assets, investment practices of pension funds and custodian arrangement for pension investment;
3. pension scheme administration and operational arrangement of retirement scheme managers; and
4. auditing and accounting aspect of retirement schemes.

At present, the requisite expertise and experience are either not available or insufficient in the civil service. To cover such shortfall, SFS considers it necessary to engage consultants to provide the essential technical input.

6. To ensure a close monitoring and review of the work of the consultants, SFS intends that the consultants should work, as an integral team, with staff of the Financial Services Branch on the task of developing the MPF System. For this purpose, SFS intends to set up within his Branch, initially for one year, a Mandatory Provident Fund Office (MPF Office) if Members approve the proposed commitment. SFS envisages that this Office will take overall charge of the development of the MPF System. The tasks include the supervision of the work of the consultants, taking charge of the consultation on the subsidiary legislation as well as preparation for its consideration by the Legislative Council, and developing procedures for monitoring and supervision of future MPF Schemes. If Members approve the proposed commitment, SFS will approach the Establishment Subcommittee of the Finance Committee in December seeking the creation of four supernumerary directorate posts (one Administrative Officer Staff Grade ‘B1’ (D4), one Administrative Officer Staff Grade ‘C’ (D2), one Assistant Commissioner of Insurance (D2) and one Principal Executive Officer (D1)) - and the increase in the establishment ceiling of the Financial Services Branch to provide for the creation of 20 non-directorate posts (ten professional and administrative staff and ten support staff). A full list of the posts that SFS wishes to create for the MPF Office is at the Enclosure. SFS intends these posts to be created for a period of 12 months.

7. Given the complexity of the MPF System, there is a need for a sophisticated management information system to facilitate monitoring of the various schemes. If Members approve the proposed commitment for the consultancy for the preparation of the subsidiary legislation, SFS will then approach the Secretary for the Treasury for the creation, under delegated authority, of another new commitment of $5 million for a four-month long consultancy on the technical specification of the management information system.

8. SFS will conduct a progress review in mid-1996 and make a report to the Legislative Council Panel on Financial Affairs.

FINANCIAL IMPLICATIONS

9. On the basis of his informal discussions on a no-commitment basis with consultants in the field, SFS estimates that the consultancy would probably take 12 months to complete and require around ten professionals in total to cover the areas listed in paragraph 4. Taking into consideration the current remuneration of professionals in the disciplines set out in paragraph 5, SFS estimates that the consultancy will cost $20 million. SFS proposes to seek the creation of a new commitment of $22 million, broken down as follows -

10. SFS intends that the consultancy will commence in January 1996 and complete in twelve months. The estimated cash flow is as follows -

11. If Members approve the proposal, we shall make provision for 1995-96 under delegated authority and include sufficient provision in the 1996-97 draft Estimates.

12. As foreshadowed in paragraphs 6 and 7 above, if Members approve the present proposal, SFS will proceed to secure the other resources essential to the development of the MPF System, as follows -

1. setting up a temporary MPF Office for one year in the first instance (at a cost of $35,596,720) - .The full cost of the staffing proposals set out at the Enclosure is estimated at $21,165,720 per year. To provide for accommodation and other overheads of the Office, SFS will also require additional provision for departmental expenses of $6,775,000 in 1995-96 and $7,656,000 in 1996-97. SFS intends to approach the Establishment Subcommittee meeting on 13 December 1995 regarding these staffing proposals. Subject to the endorsement of these proposals by Establishment Subcommittee and approval by Finance Committee, the necessary supplementary provision for this year will be approved under delegated authority; and
2. seeking the creation, under delegated authority, of a new commitment of $5 million for a consultancy on the technical specification of a management information system for the future MPF Schemes.

BACKGROUND INFORMATION

13. On 27 July 1995, the Legislative Council passed the Mandatory Provident Fund Schemes Bill, the enabling legislation outlining the main features of the MPF System. We aim to complete the development of the subsidiary legislation by 1997.

Financial Services Branch
November 1995

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Enclosure to FCR(95-96)81

Proposed Establishment of the Mandatory Provident Fund Office within the Financial Services Branch

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