Provisional Legislative Council

PLC Paper No. CB(1)824
(These minutes have been
seen by the Administration)

Ref : CB1/BC/3/97

Bills Committee on
Provident Fund Schemes
Legislation (Amendment) Bill 1997

Minutes of the meeting held on Tuesday, 16 December 1997, at 8:30 am in Chamber of the Legislative Council Building

Members present :

Hon Ronald ARCULLI, JP (Chairman)
Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon WONG Siu-yee
Dr Hon TANG Siu-tong, JP
Hon LEE Kai-ming
Hon CHAN Yuen-han
Hon Ambrose LAU Hon-chuen, JP
Hon NGAN Kam-chuen
Hon CHOY So-yuk

Members absent :

Hon James TIEN Pei-chun, JP
Hon HO Sai-chu, JP
Hon Mrs Peggy LAM, JP
Hon Henry WU
Hon MA Fung-kwok
Dr Hon Mrs TSO WONG Man-yin
Hon CHAN Kam-lam
Hon YEUNG Yiu-chung
Hon Paul CHENG Ming-fun, JP

Public officers attending :

Mrs Pamela TAN

Director

Mandatory Provident Fund Office

Ms Maisie CHENG

Assistant Director

Scheme Operations

Mr Raymond TAM

Assistant Director

Regulatory Standards

Attendance by invitation :

Hong Kong Retirement Scheme Association

Mr Peter H Y WONG

Chairman

Mr Stuart H LECKIE

Vice Chairman

Life Insurance Council

Mr Greg WILLIS

Member, Retirement Subcommittee

Mr Graham CHAN

Member, Retirement Subcommittee

Hong Kong Social Security Society

Dr Henry MOK

Vice-Chairperson

Dr Fernando CHEUNG

Ex-co member

The Federation of Hong Kong & Kowloon Labour Unions

Mr CHAN Wai-lun

Social Affairs Supervisor

Ms NG Wai-yee

Propaganda & Education Supervisor

Hong Kong Women Workers�Association

Ms TO Kit-lai

Co-ordinator

Ms WONG Kam-foon

Organiser

Hong Kong Investment Funds Association

Mr Desmond CHAN

Chairman, Pensions Subcommittee

Ms Sheba BRENER

Member, Pensions Subcommittee

Hong Kong Trustees�Association Limited

Mr Alastair MURRAY

Chairman

Ms Carolyn BUTLER

Executive Committee

William M Mercer Limited

Mr Mark BAXTER

Managing Director

Mr William WONG

Associate Director

Hong Kong-Kowloon Trades Union Council

Mr LEE Kwok-keung

Chairman

Mr CHAN Yun-che

General Secretary

Clerk in attendance:

Miss Polly YEUNG

Chief Assistant Secretary (1)3

Staff in attendance :

Mr LEE Yu-sung

Senior Assistant Legal Adviser

Miss Anita HO

Assistant Legal Adviser 2

Mr Daniel HUI

Senior Assistant Secretary (1)5

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I. Meeting with deputations

The Chairman welcomed representatives of the non-government organizations and said that the purpose of the meeting was to receive their views on the Mandatory Provident Fund Schemes Legislation (Amendment) Bill 1997 and the draft subsidiary legislation.

Hong Kong Retirement Scheme Association (HKRSA)

(PLC Paper No. CB(1)604(01))

2.Mr Peter WONG and Mr Stuart LECKIE presented salient points of the HKRSA’s written submission and highlighted the Association’s major concerns on the Bill and draft Regulations as follows:

1. under proposed section 6 of the Mandatory Provident Fund Schemes Ordinance (MPFSO), the structure of the future MPF Schemes Authority (MPFA) would resemble a Government agency with the MPF Advisory Board acting as an advisory body only. The HKRSA considered it more cost-effective and viable for the MPFA to be a statutory organization independent of the Government, similar to the Securities and Future Commission (SFC) and with its own management board and supporting staff;

2. proposed section 31 of the draft MPF Schemes (General) Regulation (MPFS(G)R) which required mandatory provision of the capital preservation product (CPP) should be deleted. HKRSA was of the view that products to be offered in a MPF Scheme should not be regulated by legislation; and

3. in the light of the recent turmoil in the financial market and as the product was prescribed by the Government, it was estimated that about 80% to 95% of new scheme members would choose to invest in the CPP. This would not be in the best interest of scheme members because the yield of CPP could not beat inflation in the long term. It was also doubtful as to whether the size of the money market in Hong Kong could accommodate the substantial amount of money to be put into CPP funds.

3.As regards the proposed re-constitution of the MPFA, the Chairman said that the Bills Committee had expressed similar concerns and that the Administration had agreed to examine the issue further and revert to the Committee. Meanwhile, he also invited the HKRSA to provide the Committee with more detailed proposals on the set-up of the MPFA.

4.The Chairman reported that the Bills Committee had mixed views on the proposed CPP. On the HKRSA’s comments that the yields of CPPs would unlikely match inflation, the Chairman requested the Association to provide further information in support of their view for members’ reference. In this connection, Mr LECKIE said that even if proposed section 31 of the MPFS(G)R was removed, retirement scheme providers would still offer products with guaranteed investment returns to cater for the needs of those who preferred low investment risks.

5.Members questioned the HKRSA’s basis of estimating that about 80% to 95% of scheme members would choose the CPP. In reply, Mr WONG advised that in the light of operational experience, new entrants to retirement schemes who were not familiar with long-term investment approaches would tend to choose an investment product which had the least risk exposure. A sustained programme of education would be required to enable the community to develop an informed attitude on investment.

6.Noting the HKRSA’s proposal of phasing out long service payments (LSP) after implementation of the MPF system as outlined in its written submission, a member enquired on the HKRSA’s position on the issue of severance payments (SP). In reply, Mr LECKIE explained that LSP should be phased out because its objective would be better served by the MPF and its payment at the time of contract termination was incompatible with the principle of preservation as provided under the proposed MPF system. On SP, Mr LECKIE opined that in view of its wide implications, the Government should take the opportunity to review the subject.

Life Insurance Council (LIC)

(PLC Paper No. CB(1)645(02))

7.Mr Greg WILLIS said that in general, the LIC supported the Bill and the draft Regulation which it considered a substantial improvement in the provision of retirement benefits to the working population. LIC however had the following concerns:

1. the proposed constitution of the MPFA should be revamped, having regard to the constitution of statutory authorities such as the SFC, Hong Kong Monetary Authority and the Housing Authority; and

2. as the CPP was the only MPF product prescribed in the legislation, employees might perceive it as the preferred investment option, thus resulting in a substantial portion of MPF funds being put into it. This would not be in the best interest of scheme members because their accrued benefits would be eroded by inflation if investment returns, which were linked to savings interest rate, were consistently below the rate of inflation.

8.On mandatory provision of CPP, Mr Graham CHAN supplemented that products similar to the CPP were available for schemes registered under the Occupational Retirement Schemes Ordinance (ORSO) even though there was no such mandatory requirement. LIC shared the HKRSA’s view that there was no need to introduce proposed section 31 under the draft MPFS(G)R.

9.As regards LIC’s concern about whether electronic transmission of MPF information was permissible under proposed section 47A of the MPFSO, the Director/MPF Office (D/MPFO) confirmed that transmission of data by electronic means would be allowed.

10.On the objective of requiring the mandatory provision of CPP under each MPF Scheme, D/MPFO explained that the CPP had been proposed in response to concerns of the former LegCo Subcommittee on the MPF system that in addition to the "no-rejection" requirement which would ensure a member’s enrolment in a MPF scheme, a scheme member should also be assured of the availability of a product with positive investment returns and minimum risks for their choice.

11.Responding to LIC’s written request for more time in reviewing the lengthy draft Regulation, the Chairman informed the meeting that the legislative timetable for processing the Bill and draft subsidiary legislation was indeed very tight. In order to avoid clashes with PLC Members’ examination of the Budget for 1998-99, he said that the Bills Committee would aim at completing scrutiny of the proposed legislation by 18 February 1998. The Chairman therefore urged representatives at the meeting to forward their views on the draft Regulations in writing to the PLC Secretariat not later than the first week in January 1998.

Hong Kong Social Security Society (HKSSS)

(PLC Paper No. CB(1)645(03))

12.Dr Henry MOK said that the HKSSS was against the MPF system for the reasons detailed in its written submission. He stressed that a central provident fund supplemented by an old-age pension scheme would provide better retirement protection. HKSSS considered that the MPF system should be modified in the following areas:

1. investment practices for MPF Schemes should be modelled on those applicable to the Land Fund with investments in equity markets not exceeding 30% of scheme assets;

2. foreign currency investments should be restricted to 10% of scheme assets in order to encourage investments in the local economy;

3. MPF Schemes should be required to provide a guaranteed investment return of not less than the inflation rate;

4. the MPFA should impose a cap on administration fees to be charged by trustees on scheme members; and

5. in devising the MPF system, the Administration should have regard to the existing retirement protection system in the Mainland.

13.At the Chairman’s request, D/MPFO made the following points on protection of MPF scheme assets and investment returns:

1. the six fraudulent cases cited by HKSSS in its written submission were related to investment funds, and not retirement funds which normally were subject to more stringent monitoring. MPF Schemes in Hong Kong would also be closely monitored by the future MPFA;

2. MPF scheme assets would be held under trust and strictly separated from the assets of the employer and the trustee. Hence, scheme members’ benefits would not be affected as a result of insolvency of the employer or trustee. The Baring incident in 1995 was a case in point; and

3. in the past 14 years, retirement funds in Hong Kong had achieved an average investment return of 16.4% per annum. MPF scheme members should therefore be able to gain a real investment return in long term after discounting inflation and the administrative costs.

14.In reply to a member’s enquiry about investment in China, D/MPFO and the Assistant Director/Regulatory Standards (AD/RS) advised that MPF Schemes would be allowed to invest in national bonds of the Mainland if the bonds had a credit rating at ‘BBB’ or above by a recognized agency.

15.A member noted that according to the estimate of the HKSSS, administrative costs for MPF Schemes would be 5% of scheme assets whereas according to the MPFO’s estimate, they would only range from 0.9% to 2.3%. He enquired about the reasons for the discrepancy. In reply, AD/RS said that the discrepancy might be due to over-estimation of premium payable for professional indemnity insurance. The premium payable should be 3% of the insured amount, not 3% of total scheme assets. Moreover, the MPFO had estimated that the operation cost of the future MPFA would be about 0.1% of scheme assets, instead of 1.7% as estimated by the HKSSS.

16.On welfare provisions for the elderly, D/MPFO advised that as a matter of policy, issues related to the provision of additional social security assistance to the elderly would be considered by the Elderly Commission in due course.

17.Commenting on the Deputy Chairman’s remarks that the MPF system should be supplemented by Comprehensive Social Security Assistance and personal savings, Dr Fernando CHEUNG said that retirement protection for low-income earners would be inadequate because they would have little personal savings and their accrued MPF benefits would be insignificant due to small contributions and low investment return.

The Federation of Hong Kong and Kowloon Labour Unions (FHKKLU)

(PLC Paper No. CB(1)666(03))

18.Mr CHAN Wai-lun and Ms NG Wai-yee presented FHKKLU’s views as set out in its written submission.

19.On the proposed structure of the future MPFA, Mr CHAN said that the FHKKLU had not taken a common view but had agreed that monitoring of the MPFA should be improved. He suggested that one possible way would be for the proposed MPF Schemes Advisory Board to assume a monitoring function.

20.Regarding FHKKLU’s suggestion that employers employing a person beyond the age of 65 should continue to make mandatory contributions in respect of the employee, D/MPFO considered it reasonable to set an age limit under the MPF system so that employers would have a clear understanding of the extent of their statutory obligations. In this connection Mr CHAN elaborated that in the FHKKLU’s view, an employee who had reached the age of 65 should be allowed to withdraw his MPF benefits and if he was re-employed, both the employer and the employee concerned should continue to make mandatory contributions.

21.Some members raised concern about a situation whereby an employee withdrew his accrued benefits at the age of 65, with LSP being offset, and continued to work for the employer for a period of less than 5 years. Since MPF coverage was not mandatory if the employee had reached 65 and the employee’s "post-retirement" service fell short of 5 years which was the minimum qualifying period of service for LSP, the employee would not be entitled to LSP or MPF in respect of his "post-retirement" years of service. At members’ request, the Administration would examine the concerns.

Admin.

22.As regards the Residual Provident Fund Scheme (RPFS), the FHKKLU supported the establishment of a RPFS to provide a last safety net for persons who were genuinely unable to join a MPF Scheme in the market.

Hong Kong Women Workers’ Association (HKWWA)

(PLC Paper No. CB(1)679(02))

23.Ms TO Kit-lai and Ms WONG Kam-foon gave the following comments on the MPF system:

1. the proposed system would not provide any retirement protection to the 600,000 housewives in Hong Kong;

2. the retirement benefits to be provided to low-income women workers under the MPF system would be inadequate because of small contributions out of low income; and

3. the HKWWA would support an old-age pension scheme rather than the MPF system.

Hong Kong Investment Fund Association (HKIFA)

(PLC Paper No. CB(1)679(03))

24.Mr Desmond CHAN and Ms Sheba BRENER briefed members on the HKIFA’s position as follows:

1. HKIFA agreed that proposed MPF investment guidelines should be more stringent. Nevertheless, on the minimum of 30% of exposure of Hong Kong dollar currency investment, HKIFA considered that the proposed 30% was acceptable but cautioned against further restriction which would hamper fund managers’ flexibility in maximizing investment return for scheme members;

2. Although it was feasible to manage a CPP portfolio according to the proposed guidelines specified in the draft Regulation, the HKIFA was concerned about the serious problems and reservation raised by some key service providers on the proposal, and would urge the Administration to reconsider the whole issue;

3. HKIFA was neutral on the need for a RPFS but considered that the "no-rejection" requirement and the RPFS should not co-exist in order to avoid a wastage of resources for implementation of both requirements at the same time; and

4. HKIFA was neutral on the Administration’s proposal that an investment manager would only be allowed to delegate overseas investment management functions to its overseas associate.

25.In response to the Deputy Chairman’s concern about administrative fees, Mr Desmond CHAN considered that by ensuring sufficient competition in the market and transparency in the fee structure, market forces would keep administrative fees to be charged on scheme members low. He added that pending finalisation of various legislative requirements, it would not be possible to estimate the level of fees to be charged for maintaining viability.

26.A member enquired whether it would be acceptable to the retirement fund industry if the CPP was to be provided in the RPFS. In reply, Mr Desmond CHAN stressed that encouraging scheme members to invest in CPP would not be in their long-term interest because the investment return from CPP could not beat inflation. In this connection, Ms BRENER added that even though it was not a mandatory requirement for ORSO schemes to provide CPP, "guaranteed return investment funds" and various money market funds were being offered to cater for the needs of investors who preferred low risks. She did not consider it appropriate to legislate on the products to be offered in MPF Schemes.

Hong Kong Trustees’ Association (HKTA)

(PLC Paper No. CB(1)666(01))

27.Mr Alastair MURRAY and Ms Carolyn BUTLER informed members that the HKTA’s principal concern was about the mandatory provision of CPP and the proposal that trustees would not be paid their fees if the investment return of CPP fell short of the savings interest rate. However, under such circumstances, a trustee would still have to pay the MPFA fees out of its own pocket. As trustees would not be allowed to undertake investment management but had to engage the service of fund managers, the HKTA considered the proposal unfair as the trustee had to bear the consequence of unsatisfactory investment results which were beyond their control.

28.In reply to the Chairman, Mr MURRAY and Ms BUTLER confirmed that they were not aware of any similar requirement for mandatory provision of CPP in overseas retirement systems.

29.Elaborating on the proposed provisions on CPP in section 31 of the draft MPFS(G)R, AD/RS informed the meeting that the draft provisions on investment restrictions resembled those on the money market funds authorized by the SFC. He considered that it was feasible from an investment point of view to provide a CPP but the trustee might need more flexibilities in charging administrative fees in order to enhance the commercial viability of CPP.

William M Mercer Limited (WMML)

(PLC Paper No. CB(1)666(02))

30.Mr Mark BAXTER made the following points:-

1. the scheme rules of a registered MPF Scheme should not include provisions which would pre-empt employers from terminating service providers;

2. service providers who made false representations at the point of sale or who refused to comply with representations should be subject to penalties by the MPFA;

3. there was no need to legislate for mandatory provision of CPP as market forces would prompt service providers to offer a full range of investment products including CPP; and

4. the draft Regulation should provide that small balance accounts with funds below a specified amount must not be eroded by administrative expenses. This would provide real protection to low-income earners.

31.In reply to the Chairman, Mr BAXTER said that he was not aware of any provident fund scheme rules which provided that no administrative fees would be payable if certain investment return benchmark was not met.

Hong Kong and Kowloon Trades Union Council (HKKTUC)

(PLC Paper No. CB(1)679(01))

32.Mr LEE Kwok-keung presented the HKKTUC’s position outlined in its written submission and added the following points:

1. the Government should require MPF Schemes to guarantee a minimum investment return not lower than the rate of inflation;

2. HKKTUC was concerned that implementation of the MPF system would have an adverse impact on salary increases because mandatory contributions would result in higher staff costs for employers;

3. mandatory contributions should be structured in a sliding scale so that contributions payable by elderly employees would be lower than those payable by younger employees; and

4. the Government should ensure that contributions from employees would not be increased substantially. In reviewing the contribution rate, the Government should take into account the affordability of employees.

33.The Chairman thanked representatives from the non-government organizations for attending the meeting and invited them to forward further views on the draft subsidiary legislation to the Secretariat not later than the first week in January 1998.

34.The meeting ended at 11:30 am.

Provisional Legislative Council Secretariat
3 February 1998