LegCo Panel on Financial Affairs
Basic Approach of the MPF System
Security of Scheme Assets
This paper describes the comprehensive system of prudential regulation and supervision of MPF service providers and other measures to ensure security of scheme assets.
2. Whilst over-regulation will be avoided, we will also take steps to assure scheme members of the security of their MPF benefits. We aim to strike a balance so that there will be effective supervision without imposing too heavy an administrative burden on the service providers. The proposals are set out as follows
(a) Built-in Features of the MPF System
- trust arrangement (paragraph 3)
- qualification of service providers (paragraph 4)
- internal controls in scheme management (paragraph 5)
- investment standards and restrictions (paragraphs 6 and 7)
- regulation of investment management (paragraph 8)
- transparency of investment operation (paragraph 9)
(b) Supervision and Monitoring
- the MPFA (paragraphs 10 and 11)
- auditing (paragraph 12)
- whistle blowing by service providers (paragraph 13)
- self-policing by employees (paragraph 14)
(c) Safety Net
- capital requirements (paragraph 15)
- performance guarantees (paragraph 16)
- professional indemnity insurance (paragraph 17)
- compensation fund (paragraph 18)
Built-in Features of the MPF System
3. The assets of MPF schemes will be held in trust which will be secured and properly managed through the following means :
- all trusts will be governed by Hong Kong law. The trust assets are required to be kept separate from assets of the employer, trustee and custodian. Trust assets must also be applied for the purposes of the scheme only;
- trustees have fiduciary duties to manage the scheme in the best interest of scheme members. They also have the duties to comply with standards and guidelines in the administration and management of schemes and to ensure that other service providers, i.e. investment managers, custodians and scheme administrators, also comply;
- investment managers must be independent from the trustees and custodian; and
- all transactions with connected parties of the service providers must be at arms length and for valuable considerations.
Qualification of Service Providers
4. All MPF service providers will need to satisfy minimum requirements to ensure that they are qualified to conduct MPF business :
- trust company: they must be registered trust companies meeting minimum criteria of capital adequacy and financial soundness;
- trust company directors/independent trustee: they must be fit and proper with relevant qualifications and substantial experience in retirement schemes and trusts administration;
- custodian: the custodian should be an authorised banking institution or a trust subsidiary of a substantial financial institution registered in Hong Kong;
- investment manager: the investment manager should be a Hong Kong investment management company meeting capital adequacy and registered with the SFC.
5. Trustees have the duty to ensure that there are adequate internal control and procedures over the management of MPF schemes and scheme assets. Where the trustees delegate certain functions to other persons, the trustees still have the responsibility to supervise and monitor the persons including the adequacy of internal controls. Trust companies are expected to appoint compliance officers to ensure that their internal operational procedures fully comply with MPF requirements and engage external auditors to audit their internal control systems.
Investment Standards and Restrictions
6. The scheme members accrued benefits should be invested prudently and not subject to undue and unnecessary risks. The standards and restrictions will lay down the outer limits of reasonable investment behaviour striking a balance between flexibility to achieve investment performance and safeguard against excessive risk taking. These rules are formulated based on existing good industry practices in the investment of retirement funds with reference to SFCs Code on Unit Trusts and Mutual Funds.
7. Qualitative standards will specify permissible investments based on investment grades, liquidity and valuation considerations, whilst quantitative restrictions will be placed on risky investments and asset concentration. These rules will also apply to collective investment products that are authorized by the SFC and products of insurers regulated by the Insurance Authority.
Regulation of Investment Management
8. The management of investment portfolio must be handled by qualified investment managers, who are regulated by the SFC, to ensure that investments are conducted properly and in the best interests of scheme members. Investment managers may only sub-delegate to qualified associated overseas investment management company who is subject to an "acceptable supervisory regime". Unit trusts and insurance funds for MPF schemes are subject to the same requirements. There must be an investment management agreement between the trustee and the investment manager setting out the terms of the appointment including the investment mandate.
Transparency of Investment Operation
9. A high degree of transparency will promote operation efficiency of the system and facilitate self-policing role of scheme participants. Regarding the investment of scheme assets, transparency will be enhanced in the following ways -
- positive vetting of investment materials of master trust scheme and investment products by the SFC;
- trustee must formulate a statement of investment policy and objectives to be filed with the MPFA and available to scheme members on request;
- there should be a disclosure of scheme investments and investment expenses in annual accounts to be filed with the MPFA and is available to members on request;
- there must be an investment management agreement between the trustee and the investment manager setting out the terms of the appointment including the statement of investment policy and objectives; and
- there must be a formal agreement with the custodian on custody of scheme assets.
Supervision and Monitoring
10. The following measures will enable the MPFA to have effective supervision and regulation of the trustees and the service providers to ensure their compliance with the requirements -
- the filing of annual returns to the MPFA and ad-hoc reports on request;
- routine field inspections by MPFA;
- requiring the trustee to commission a special auditors report on suspected circumstances which may prejudice the interest of scheme members;
- appointing inspectors to conduct investigation in suspected breaches of duties or contravention of requirements; and
- publishing special auditors report or investigation reports.
11. If the trustee or its delegates are found to be in breach of the requirements, the MPFA may take the following actions to rectify the situation and to protect the accrued benefits of scheme members -
- Indemnify losses: the trustee is required to indemnify the scheme for losses;
- Corrective and Remedial Action: the MPFA may require the trustee, including assistance of external expertise, to take corrective actions;
- Financial Penalties: the MPFA may impose financial penalties on less serious offences in order to deter non-compliance and expedite rectification;
- Revocation, Suspension and Removal: the MPFA may revoke, suspend or remove the trustee if it has contravened an approval condition, is unable to perform its duties, or its conduct adversely affects the financial position of the scheme;
- Replacement trustee : the MPFA may appoint a replacement trustee to take over the trusteeship of a scheme;
- Prosecution: the MPFA may instigate prosecution proceedings against serious offences for failures to comply with the requirements; and
- Winding Up of Schemes: the MPFA may initiate the winding up of a registered scheme if it is in the interest of scheme members to do so.
12. Trustees must engage external auditors to perform annual audits on the scheme operation. The scope of auditing includes -
- the keeping of proper books and records;
- the adequacy of internal controls in scheme management;
- the compliance with investment standards and restrictions; and
- the preparation of scheme accounts.
Whistle Blowing by Service Providers
13. To facilitate timely detection of non-compliance or contravention in the MPF System, we will impose a duty on auditors and other service providers (e.g. investment managers, scheme administrators, custodians) to report to the MPFA if they detect any incident in their course of work which will adversely affect the financial position of an MPF scheme.
Self-policing by Employees
14. The MPF System will provide employees with sufficient information and facilities to enable them to monitor the employers and trustees in discharging their duties and obligations :
- employers must inform employees of the amount of contributions deducted from their salary and remitted to the trustee;
- trustee must have facilities for scheme members to check monthly contributions made and issue annual benefit statement;
- scheme members may request for annual reports, audited accounts and statement of investment policy and objectives; and
- scheme members may make complaints and enquiries to the MPFA.
15. The requirements on capital and financial resources of corporate trustees will ensure that, in case they fail to discharge their trustee duties properly or exercise adequate control over other service providers, they have -
- the ability to indemnify losses to scheme assets as a result of such failure; and
- the means to rectify deficiencies in scheme management and administration.
16. An individual trustee have to be covered by adequate performance guarantees by way of a bank bond or fidelity insurance policy payable on demand to the MPFA to satisfy amounts for which he is personally liable when he fails to discharge his duties in the proper manner causing losses to scheme assets.
Professional Indemnity Insurance
17. In the event where there are losses in scheme assets due to improper conduct of trustees or other service providers, professional indemnity insurance with comprehensive coverage will indemnify the scheme for losses in scheme assets.
18. In the event where there are losses in scheme assets due to misfeasance or illegal conduct and after exhausting the professional indemnity insurance and resources of the trustee, the Compensation Fund will act as a last resort to compensate for such losses.
Mandatory Provident Fund Office
28 October 1996
Last Updated on 18 August 1998