Provisional Legislative Council

PLC Paper No. CB(1)580
(These minutes have been
seen by the Administration)

Ref : CB1/SS/5/97

Subcommittee on subsidiary legislation of the
Mandatory Provident Fund System

Minutes of the meeting held on Friday, 21 November 1997, at 8:30 am in the Chamber of the Legislative Council Building

Members present :

Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon WONG Siu-yee
Hon HO Sai-chu, JP
Hon NG Leung-sing
Hon LEE Kai-ming
Hon CHAN Kam-lam
Hon KAN Fook-yee

Members absent:

Hon James TIEN Pei-chun, JP
Hon Mrs Elsie TU, GBM
Hon Henry WU
Hon Mrs Peggy LAM, JP
Hon MA Fung-kwok
Dr Hon Mrs TSO WONG Man-yin
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Yuen-han
Hon Kennedy WONG Ying-ho
Hon YEUNG Yiu-chung
Hon LAU Kong-wah
Hon NGAN Kam-chuen
Hon CHOY So-yuk

Public officers attending :

Mr Raymond TAM
Assistant Director
Regulatory Standards

Ms Maisie CHENG
Assistant Director
Scheme Operations

Clerk in attendance:

Miss Polly YEUNG
Chief Assistant Secretary (1)3

Staff in attendance:

Mr LEE Yu-sang
Senior Assistant Legal Adviser

Miss Anita HO
Assistant Legal Adviser 2

Mr Daniel HUI
Senior Assistant Secretary (1)5

I.Meeting with the Administration

Capital Preservation Product
(PLC Paper No. CB(1)505(03) and CB(1)522)

1.Referring to a letter from the Retirement Schemes Subcommittee of the Hong Kong Federation of Insurers (HKFI) to the Chairman, a member expressed concern about the possible lack of providers of capital preservation products (CPP) on the terms as proposed by the Administration. In response, the Assistant Director/Regulatory Standards (AD/RS) explained that under the Administration's proposal, no administration fees would be payable to the investment manager or trustee if the investment earnings of the CPP fell short of comparable interest earned from savings accounts. For the purpose of elucidation, he made the following points :

  1. the Administration's proposal was feasible from the investment point of view but might be perceived by some service providers as not very viable commercially;

  2. as only conservative investment tools were permitted in the management of capital preservation funds, the HKFI was gravely concerned about having to operate at a loss when the interest spread between the savings rate and earnings on the prescribed investments was substantially narrow while the service providers were still required to pay the requisite fees to the MPFA; and

  3. the HKFI had proposed greater flexibility such as relaxation of investment restrictions and limiting the guarantee to capital preservation, or to a rate slightly below the interest rate applicable to savings accounts.

2.In this connection, the Chairman urged the Administration to continue to explore with the insurance industry other viable terms. He also suggested that the concerns raised by the HKFI be further examined by the prospective Bills Committee on the Provident Fund Schemes Legislation (Amendment) Bill 1997 and related draft Regulations. Members agreed. MPFO

3.In response to a member's enquiry, AD/RS confirmed that a MPF scheme member could transfer his accrued benefits from investment in a high-risk product to a CPP at any time on his own accord. However, it would not be permissible for the accrued benefits to be transferred to a bank deposit held in the name of the scheme member because this arrangement would complicate the management of MPF schemes and result in high administrative costs.

4.On whether the Administration would operate a capital preservation fund for MPF scheme members in case the private sector would not provide this investment option, AD/RS assured members that the Administration would pursue the matter with the insurance industry which should be in a position to offer the product if greater flexibility could be agreed upon in the regulatory terms. He reiterated that the Administration would prefer to capitalise on the expertise of service providers in the private sector to achieve greater cost-effectiveness and healthy competition.

Indemnity Insurance
(PLC Paper No. CB(1)505(04))

5.Addressing a member's concerns about risk diversification measures required of insurers of MPF indemnity insurance, AD/RS advised that it was the industry's practice for insurers to arrange reinsurance on the policies issued in order to diversify risks, particularly so if the amount insured was as high as that under MPF indemnity policies. Moreover, risk exposures of authorized insurance companies in Hong Kong were subject to stringent monitoring by the Insurance Authority. For indemnity insurance policies issued by overseas insurance companies, the MPFA would consult the Insurance Authority in deciding on whether the insurance policies were acceptable.

6.Responding to a member's enquiry, AD/RS said that the premium of MPF indemnity insurance would range from 0.05% to 0.15% of scheme assets. He also confirmed that the indemnity insurance would protect scheme assets against losses arising from misfeasance and illegal conduct of approved trustees and service providers. In this connection AD/RS clarified that losses arising from deliberate breaches of investment limits specified in the statement of investment policy of the scheme concerned would also be covered by the indemnity insurance.

Compensation Fund - Coverage, Operation, Administration and Levy
(PLC Paper No. CB(1)505(05))

7 .The Deputy Chairman reiterated his view that the Government should act as the ultimate guarantor to compensate scheme members' losses arising from misfeasance or illegal acts of the trustee and service providers where such losses could not be met by the indemnity insurance and the Compensation Fund (CF). AD/SO explained that according to the Administration's estimate, the indemnity insurance and CF could provide a total maximum coverage of $1.4 billion. In the event that this amount was insufficient, section 17 of the principal ordinance provided that subject to the approval of LegCo, the Government might provide grants or loans to the administrator of the CF to compensate scheme members for losses. She also pointed out that according to the experience in overseas countries with a privately run MPF system underpinned by a CF, the chance of having to activate the CF was in fact very low.

8.Since the Government would provide a capital funding of $300 million to set up the CF, some members asked whether levying on scheme members could be deferred. In reply, AD/SO considered it appropriate to collect the levy from the inception of the MPF system because it would take time to accumulate funds up to the proposed target of $900 million for the CF. In this connection, the Chairman urged the Administration to consider injecting a larger capital sum to set up the CF so that scheme members who would retire a few years after implementation of the MPF system would not have to pay the levy.MPFO
9.Members were deeply concerned about the lead time required in conducting investigations and obtaining a court order before payments could be made from the CF. In response, AD/SO advised that to facilitate the operation of the CF and expedite payment of claims, the proposed amendments to the MPF Schemes Ordinance and requirements included in the draft MPF Schemes (General) Regulation would provide a detailed mechanism covering the following areas :

  1. duties of the MPFA to conduct investigation on claims;

  2. the court procedures in handling the claims, including information required for application to the court and procedures for hearings on case; and

  3. payment requirements on the MPFA and the trustees.

AD/SO supplemented that a MPF scheme under investigation or court proceedings could transfer or pay out MPF benefits upon completion of the valuation of loss on scheme assets which might only take about two weeks. The trustee would then be required to process portability and withdrawal cases in accordance with the valuation results.

10.On the authority to make payment from the CF, AD/SO advised that it was the Administration's original intention to empower the MPFA to authorize payments from the CF on being satisfied that illegal conduct or misfeasance had been involved. However, when deliberating on the bill in 1995, the former LegCo considered that the authority in deciding whether illegal conduct or misfeasance was involved in a claim case should be vested with the court. The relevant provisions in the bill had therefore been amended to their present form.

11.As regards a member's proposal to set up a tribunal to handle exclusively claims for payment from the CF, AD/SO explained that this option had been considered but was not adopted for the following reasons:

  1. depending on the complexity of the cases concerned, the establishment of a tribunal might not shorten the time required in making payment;

  2. since only a small number of claims from the CF were anticipated, it would not be cost-effective to establish a tribunal; and

  3. the costs of maintaining a tribunal would ultimately be borne by scheme members.

Nevertheless, AD/SO assured members that the Administration would continue to discuss with the Judiciary the feasibility of using summary procedures to deal with less complicated cases.

12.Responding to a member's enquiry, AD/SO confirmed that it would be up to the scheme member retiring at the age of 65 to decide whether to withdraw his accrued benefits. The accrued benefits of a retiree not yet withdrawn would be transferred to a personal account continued to be held in the name of the retiree.

II.Any other business

13.The Chairman informed members that the series of briefings to the Subcommittee was completed. He would make a verbal report to the House Committee at its meeting on 21 November 1997. Subject to the decision of the House Committee on 28 November 1997, a Bills Committee would be formed to examine the Provident Fund Schemes Legislation (Amendment) Bill 1997 and the related draft subsidiary legislation.

14.The meeting ended at 10:30 am.

Provisional Legislative Council Secretariat
27 November 1997