PLC Sub-Committee on Subsidiary Legislation of the MPF System

Information Note

Circumstances and Fees for Portability


This paper describes the proposals regarding :

  1. the circumstances of portability (paragraphs 2 to 5); and

  2. measures to minimise the cost of portability (paragraphs 6 to 10).


Circumstances for Portability

2.There are different circumstances for transfer of accrued benefits between registered schemes, including :

  1. transfer during changes or cessation of employment; and

  2. transfer of individual accounts.

Transfer during changes of employment

3.Under the principal ordinance, the employee must join his new employer's scheme after change of employment for contributions derived from the new employment. However, he will have three options to deal with his accrued benefits derived from his current employment :

  1. he may retain his accrued benefits in an individual account in the master trust scheme or industry scheme of the current employer;

  2. he may transfer his accrued benefits to the scheme of his new employer; or

  3. he may transfer his accrued benefits to an individual account in a master trust scheme.

4.In order to facilitate the relevant employee to exercise his options in (a) and (b) above, we propose to impose a duty on the new employer, the current trustee and the new trustee to facilitate the scheme member in transferring or retaining his accrued benefits in accordance with his option.

Transfer of individual accounts

5.Individual accounts may be created during changes of employment in paragraph 3(a) and (c) above, or held by a self-employed person. A scheme member may transfer his individual account to another MPF scheme at anytime other than during changes of employment. The change will be subject to the governing rules of the scheme.

Measures to Minimise Costs of Portability

6.The measures proposed to minimise the costs of portability for scheme members are set out below.

Simple mechanism for portability

7.The mechanism for portability is simplified so that the administrative costs involved in portability transactions are minimised. The portability mechanism for a relevant employee is as follows :

  1. Current employer : The current employer is only required to fill in the relevant part of the application form for portability and pass it to the scheme member within a prescribed period from the date of termination of employment. The information to be filled in includes the date of termination of employment and whether severance payments and long service payments (SP/LSP) are payable to the employee;

  2. Employee : The relevant employee should fill in the relevant part of the application form and pass it to the trustee of the scheme selected by him, that is, either the new trustee if he transfers his account to another master trust scheme or the current trustee if he retains his accrued benefits in his original master trust scheme or industry scheme. Submission of form by the employee will not be subject to any deadline;

  3. New trustee : If the relevant employee selects to transfer his accrued benefits, the new trustee shall take the initiative in co-ordinating the fund transfer process by requesting the current trustee to process fund transfer;

  4. Current trustee : The current trustee shall finish processing the fund transfer application within 30 days from the day of receiving the application and issue a benefit statement to the scheme member and to the new trustee. He shall continue to have the responsibility of keeping the membership records of the scheme member for 7 years from the date of fund transfer.

8.The portability mechanism for scheme members and self-employed persons with individual accounts is very similar, except there is no need to involve any employer in filling forms. A diagram outlining the mechanism for portability is at Annex.

Consolidation of individual accounts

9.We would encourage scheme members through education and publicity programme to avoid creating a large number of individual accounts and to consolidate their individual accounts as far as possible. In order to encourage the consolidation of accounts, we propose that no administrative fees should be charged during portability of accrued benefits from an MPF account, except for specific expenses incurred for the redemption of investments.

10.For dormant accounts of small balances (i.e. $5,000 or less), we would require the trustee and service providers not to charge any fees, not even the expenses incidental to the redemption of investment, provided that the transfer occurs within one year of the account becoming dormant. This is to encourage small balance accounts holders to consolidate their benefits which are possibly at risk of erosion due to fees and expenses.

Circumstances for Portability

11.It is stipulated in the principal ordinance that a scheme member may have the choice either to transfer or retain the accrued benefits during changes of employment. We will set out clearly in the subsidiary legislation the various options available to the scheme member under different circumstances. 12.To enable the scheme member to exercise his options in paragraph 3(a) and (b) above during changes of employment, the new employer, the new trustee and the current trustee will be obliged to transfer or retain the accrued benefits in accordance with the option of the scheme member.

Measures to Minimise Costs of Portability

Simple mechanism for portability

13.The administrative procedures involved in the portability of fund have been streamlined in order to minimise costs. All the parties concerned, including the current employer, the scheme member, the current trustee and the new trustee will only need to fill in one consolidated application form so as to minimise exchanges of correspondence and record keeping. Record transfers between the new and current trustees are reduced to a minimum whilst adequate records will be kept for a reasonable period to facilitate investigation. The duties of the current employer are limited to the existing duties of settling various employment issues in accordance with the Employment Ordinance (i.e. date of termination of employment and SP/LSP) and filling in a short part in the application form.

Consolidation of individual accounts

14.It is not in the interest of scheme members to possess numerous individual accounts in different registered schemes. It is important to encourage scheme members to consolidate their fragmented individual accounts as far as practicable because :

  1. it will achieve higher cost efficiency because of economy of scale and hence the fees payable by the scheme member will possibly be lower ;

  2. it will lower the number of small balance dormant accounts which would be more vulnerable to erosion by administrative fees; and

  3. it will facilitate account management by scheme members and also reduce the number of accounts with unclaimed benefits.

15.We recognise that there are some drawbacks for not allowing trustees and service providers to charge administrative fees for transferring accrued benefits. Service providers will relocate the costs incurred in portability transactions to other fees payable by scheme members. As a result, all scheme members will have to share the costs of frequent portability of highly mobile employees.

16.However, we believe that there are good grounds for the proposed cross-subsidization measure. The reasons are :

  1. High cost on a certain sector : Whilst we have proposed a simple portability mechanism to reduce administrative costs, the costs may still be a burden for those employees who change jobs a few times a year. Although industry schemes may be set up to help reduce the costs of portability for employees with high intra-industry mobility, this cannot resolve the cost issue for employees with high inter-industry mobility. Most of these employees are low income unskilled workers. They will be forced to bear higher costs of portability if they are charged each time for fund transfer.

  2. Socialisation of costs : Some degree of cross-subsidisation should be allowed to relieve the burden of the MPF System on a particular sector of the workforce. Socialisation of costs already exists in the cost structures of many existing voluntary retirement schemes e.g. schemes charging in percentage terms on the basis of contributions or asset value of an account. The industry estimates that the administrative costs of the proposed portability mechanism under the MPF System will be around $80 for each transfer case. This should not have a significant impact on scheme members if the costs are embedded in other fees and spread among all scheme members.

  3. Market practice : This is in line with the current market practice for many voluntary retirement schemes where administrative fees are usually not charged for benefit withdrawal.

17.We believe that the proposal not to impose administrative fees for portability will not have the unfortunate effect of inducing scheme members to transfer their accrued benefits more frequently than they need, because employees will still need to pay other bank charges for redemption of investment. Scheme members would take such cost implications into account when considering a transfer.

18.We also recognise that dormant accounts of small balances are at risk of erosion by administrative fees. The reasons for prohibiting all fees on transfer of small dormant balances, provided the transfer is done within a year, are :

  1. Removal of barrier : The proposal recognises the implications of the costs for portability such as redemption costs and possibly penalty charges, which may deter scheme members from consolidation.

  2. Providing incentives : The proposal provides scheme members with incentives to consolidate their small accounts as they can enjoy the fee waivers only if they consolidate the accounts on a timely basis.

  3. Limited impact on fee structures and other scheme members : The proposal recognises the likely impact of fee regulation measures on the overall fee levels and structures in the market and the shifting of the cost burden onto other scheme members as a result of cross-subsidisation. Hence, it confines the scope of fee regulation to exit charges only.

  4. Long term benefits : In the long run, the overall MPF System will gain by encouraging consolidation of small dormant accounts as the reduction in the number of accounts of an uneconomic size will help reduce the overall administrative costs.

Mandatory Provident Fund Office
Financial Services Bureau
11 November 1997