LegCo Sub-Committee on MPF System
Information Note
Report on Outstanding Issues - ORSO Interface


This paper presents a summary of the comments raised by Members of this Subcommittee on issues relating to interface arrangements for ORSO schemes at the meetings held on 14 January 1997 and 20 January 1997, together with the response from the representatives of Employer Groups.


2.The requirements stipulated by the Occupational Retirement Schemes Ordinance ("the ORSO") are very different from those of the Mandatory Provident Fund Schemes Ordinance ("the MPFSO") since ORSO is formulated for voluntary arrangements and MPF is a mandatory system.

3.Because ORSO schemes are voluntary arrangements, it is up to the employers to decide whether they want to :

  1. continue to operate the ORSO schemes with appropriate modifications in order to apply for MPF exemption; or

  2. set up or participate in new MPF schemes and use ORSO schemes to provide supplementary benefits (no need to apply for MPF exemption); or

  3. set up or participate in new MPF schemes and wind-up the ORSO schemes.

4.If the interface arrangements incur substantial costs or burden on the employers, the risk is that some employers may choose to wind-up their ORSO schemes which often provide more generous benefits than MPF and thus is detrimental to the interest of the existing members of these schemes.

5.Thus, having considered the initiative of employers in setting up retirement schemes and the costs incurred in order to comply with the requirements under ORSO and MPFSO, our key objective is to develop interface arrangements for ORSO schemes which will have :

  1. minimum interference to their existing scheme arrangements;
  2. minimum cost impact on employers;
  3. equitable treatment of employees; and
  4. sufficient protection of employees’ rights and interests.

Our Proposed Arrangements

Transition Date - 15 October 1995

6.We have proposed that interface arrangements are only available for ORSO registered schemes that are :

  1. established on or prior to 15 October 1995, which is the deadline for all existing ORSO schemes to send in applications for registration under ORSO; and

  2. applied for exemption or registration under ORSO on or prior to 15 January 1996, which is the 3 months deadline allowed for making an application for registration under ORSO for a proposed scheme established on 15 October 1995.

7.However, no exemption will be given to new schemes established after such date.

Minimum Standards on Trusteeship and Investments

8.We have proposed that an MPF exempted ORSO registered scheme must meet the minimum requirements set out in the paper "Minimum Standard on Trusteeship and Investments" (CB(1)667/96-97(04)) on the qualifications of trustees and investment advisers and the standards of investments. These minimum requirements are set having regard to existing good practices of ORSO schemes.

9.The current trusteeship and investment arrangements of ORSO registered scheme will be grandfathered. However, any newly appointed trustees and investment advisers must meet these requirements.

Grandfather Existing Members

10.We have proposed that all existing members of an MPF exempted ORSO registered scheme will be grandfathered. That is, they will be exempt from all MPF requirements, even for their future benefits accrued under the scheme until they leave the scheme.

Preservation and Portability Requirements on New Members

11.We have proposed that all new eligible employees may be admitted to the MPF exempted ORSO registered scheme and they will be exempt from the full and immediate vesting requirement. However, they will be subject to the preservation, portability and withdrawal provisions, but only up to the portion of accrued benefits which is equivalent to the accumulation of the MPF statutory minimum contributions ("minimum MPF benefits")

12.The "minimum MPF benefit" is defined as :

1.2 x Final 12 months Average Monthly Relevant Income (subject to the maximum HK$20,000) x Years of Service

13.Whenever a new member is entitled to receive benefits under an MPF exempted ORSO registered scheme, his minimum MPF benefits must be transferred to an MPF registered scheme which can be either established or participated in by his new employer, or a master trust scheme of his own choice.

One-off Option

14.We have proposed that both existing members and new eligible employees will have a one-off option to choose between the ORSO scheme and MPF coverage.

15.The employees’ option should be one-off and only available:

  1. at the implementation date of the MPF System;
  2. at change of employment; and
  3. upon reduction of members' future benefits.

16.If any members or new eligible employees opt for MPF coverage, the relevant employer is required to make arrangement for either setting up an employer sponsored scheme or participating in a master trust scheme to comply with the provision of the Ordinance.

Employees’ Right upon Reduction of Future Benefits

17.We have proposed that should a relevant employer decide to reduce any member’s benefit level under an MPF exempted ORSO registered scheme, the relevant member should be given another chance to opt for MPF coverage.

Specific Issues Raised by LegCo

18.In view of the disparities between ORSO and MPF schemes, Members of this Subcommittee requested the Administration to consider the following seven additional requirements with regard to ORSO interface arrangements.

I. Full and immediate vesting

19.The current proposals on ORSO interface arrangements do not impose any requirements on vesting. The vesting rules of ORSO schemes may thus be retained.

20.However, Members proposed that full and immediate vesting requirements should be imposed on all ORSO schemes seeking MPF exemption with respect to the minimum MPF benefits so that employers will not be able to accord partial vesting of employers’ funded portion of the minimum MPF benefits based on the employees’ length of service.

II. Relinquish employers’ right to withhold benefits upon dismissal for cause

21.It is quite common for retirement schemes to allow employers to withhold the employers’ funded portion of employees’ retirement benefits upon dismissal for cause.

22.Under the current proposal on interface arrangements, new members of MPF exempted ORSO registered schemes are subject to the preservation rule and, in consequence, upon dismissal for cause, only the amount of the member’s benefits in excess of the minimum MPF benefits may be forfeited.

23.However, existing members of MPF exempted ORSO schemes are exempt from all MPF requirements, including the preservation requirement. Thus, if they are dismissed for cause, their employers still have the right to withhold the entire employers’ funded portion of their retirement benefits.

24.Members suggest that employers should not be allowed to withhold, not only new members’ benefits but, existing members’ benefits as well upon dismissal for cause.

III. Mechanism to adjudicate matters arising from reduction in future benefits

25.Under the current proposals, employers’ right to reduce employees’ future retirement benefits are not interfered. Members are of the opinion that in case there is dispute between employers and employees over any reduction of benefits, some mechanism should be made available for the employees to negotiate with their employers.

IV. Employees’ choice upon any change in future benefits level

26.Under the current proposal, employers are required to give an option to the relevant employees to choose whether to stay in the ORSO scheme or to opt for MPF coverage if there is a reduction in future benefits level. Members suggest that an option to choose should be given to employees upon any changes in future benefits level rather than only upon reduction in future benefits level.

V. Trustee and investment management standards

27.As the Administration intend to minimize the interference on the existing arrangements, the current proposal allows the existing trusteeship and investment management arrangements to continue and only require new appointments to be subject to the new standard.

28.However, Members are concerned about the time frame it will take before all schemes are in compliance with the new standard and suggest the Administration to impose a transition period beyond which all MPF exempted ORSO schemes must comply with the new trusteeship and investment management standard.

VI. Compensation fund coverage for MPF exempted ORSO schemes

29.In view of the many differences between ORSO and MPF schemes, particularly with respect to compensation fund coverage, Members are concerned that members of some of these MPF exempted ORSO schemes may not be well protected and request the Administration to consider to provide compensation fund coverage to these schemes.

VII. Criminal sanction on employers influencing employees’ choice

30.Under the current proposal, employees are given a one-off option to choose between ORSO schemes and MPF coverage. Members are concerned that employers may, in order to avoid the burden of complying with the MPF requirements, try to influence their employees in making their choice by wilfully forcing them or providing misleading information.

Employer Groups’ Response

31.To consider Members’ proposals, a number of meetings were held with the members of the Panel of Specialists and the representatives of the Employer Groups. In the meetings, the panel members and the employers’ representatives made various comments on the proposals, as summarised in the following paragraphs.

32.Employers’ representatives opined that the proposed amendments are either unacceptable or unnecessary, in particular the followings:

I. Full and immediate vesting

--Employers’ funding costs will increase substantially as no partial vesting will be applied on employees.

--Employers may need to reduce long service employees’ future benefits in order to compensate for the increase in funding costs due to the short service employees. This will incur inequitable treatment to employees. In addition, it contradicts the orginal intention for employers to set up ORSO schemes, that is to retain long service employees by providing more benefits to long service employees through the vesting scale.

--Employers may simply wind up the ORSO schemes and enrol all employee into MPF schemes to avoid the higher funding costs of ORSO schemes. This may not be beneficial to employees.

II. Relinquish employers’ right to withhold benefits upon dismissal for cause

--Since ORSO schemes are voluntarily set up by employers, it has never been employers’ intention to make use of this clause for the purpose of not to pay any benefits to employees.

--This clause was there for the purpose of discouraging employees to misbehave.

III. Mechanism to adjudicate matters arising from reduction in future benefits

--This issue can be resolved by the existing provisions under ORSO through consultative committees.

IV. Employees’ choice upon any change in future benefits level

--Employees’ interests are already protected by giving them a choice upon reduction in future benefits level.

--In the case of increase in future benefits level, if employees have choosen to stay in the ORSO scheme at the existing level of benefits, why would they want to opt out when there is an increase in benefits level. Hence, an option to choose under this scenario is totally unnecessary.

--This will impose unnecessary administrative costs and burden on employers.

V. Trustee and investment management standards

--This proposal will cause great nuisance to existing schemes.

--Some of the existing trustees may not meet the new standards. It is difficult for these schemes to have replacement trustees within a short period of time.

VI. Compensation fund coverage for MPF exempted ORSO schemes

--This will increase the operating costs of employers as under most ORSO schemes, levy fees would be absorbed by the employers.

--There is no need for members of defined benefit schemes to have compensation fund coverage as the employers are obliged to provide sufficient funding to the schemes.

VII. Criminal sanction on employers influencing employees’ choice

--This proposal is based on the wrong assumption that employers will exert influence on employees.

--It will discourage employers to provide any advice to their employees in order to avoid any future litigation.

--Employer may simply wind up the ORSO schemes to avoid the risk of future litigation.

33.Both panel members and employers’ representatives have expressed concern that Members’ proposals were in principle against the spirit of ORSO interface with the MPF system as they are not interfacing ORSO with MPF but trying to impose MPF requirements onto ORSO schemes.

34.It seemed to them that Members’ proposals were built on some misconceptions that ORSO schemes were inferior and that employers would misbehave to influence employees’ choice.

35.Before ORSO came into being, many of these schemes were informal arrangements. The introduction of ORSO meant that the employers had expended considerable sums of money on professional fees to set up the schemes properly. ORSO requires all schemes to be formally established, assets to be separated from employers and requires employers to fulfil their obligations by meeting the funding requirements. The registration process under ORSO has already weeded out bad schemes.

36.Furthermore, there has not been any bad experience with ORSO schemes since the implementation of ORSO (15 October 1993).

37.They are of the view that some of the Members’ concerns had already been addressed by giving employees a choice under the current proposal and some of the concerns can be addressed through educational programmes to make it clear to employees that they have a right to choose.

38.They also opined that similar concerns have been discussed fully in previous meetings with the MPF Office and a lot of compromises have already been incorporated into the current proposed interface arrangements before they were presented to LegCo. The ORSO schemes will rapidly form a negligible minority in the overall scheme of things and as such it would be a waste of time if the current proposed interface arrangements were scrapped and the discussion of ORSO interface arrangements were to start all over again.

Mandatory Provident Fund Office

Financial Services Branch

20 May 1997

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