The Mandatory Provident Fund Schemes Authority ("MPFA"), the regulator of retirement scheme industry in Hong Kong, recently commenced a consultation process to overhaul the retirement scheme regulatory regime in Hong Kong.
The proposed reform will result in a major overhaul for most global employers in Hong Kong. In particular, every employer currently running any global retirement benefit arrangement (e.g. for its executives or internationally mobile staff) and with executives or staff under such arrangement stationed in Hong Kong will likely need to restructure its global arrangements or severely restrict the number of employees it places in Hong Kong.
The current position
The underlying legislation governing occupational retirement schemes in Hong Kong is the Occupational Retirement Schemes Ordinance ("ORSO"). ORSO was first enacted back in 1994 and introduced a framework for the registration, administration and funding of occupational retirement schemes.
In essence, ORSO is a requirement that any arrangement, which falls into the broad definition of "occupational retirement scheme", is obliged to be registered or exempted with the regulator (now the MPFA). Any employer who administers or contributes to an occupational retirement scheme that is not registered or exempted under ORSO commits a criminal offence.
Schemes registered with the MPFA are subject to detailed restrictions concerning their structure, investment of their assets, as well as their solvency. Schemes that are able to apply for exemption from the MPFA (such exemption is not granted by default, it must be applied for) are subject to a materially reduced range of regulatory restrictions.
Broadly speaking, only schemes with a small number of Hong Kong permanent residents as members can obtain exempt status; all other schemes need to be registered.
By the end of last year, there were 4,709 registered schemes and 740 exempt schemes. ORSO schemes managed in excess of HK$300 billion.
The proposed changes
The changes being proposed by the MPFA are as follows:
A contract of employment between the employer and the members of the scheme must exist.
All scheme members must be holders of Hong Kong identity cards.
All exempted schemes will cease to exist in three years.
Change 1 should not be a problem. However, employers should ensure that "deferred members" (namely employees who have ceased to be employees, but have left their benefits in the scheme) can continue to be members of such scheme.
Changes 2 and 3 are where the position gets radical.
In a nutshell, Change 2 means that only persons living in Hong Kong can be members of an occupational retirement scheme. Currently, there is no restriction as to the type of employees who can become members of such scheme.
The proposed changes will materially impact a large number of employers. For instance, many global organisations have a retirement or pension scheme based in some countries other than Hong Kong. Typically, such scheme is set up in order to provide benefits for the group's employees on a global scale. It may be that case that the scheme is focused on the most senior executives in the organisation (who are regularly transferred to various jurisdictions) or it could be for all employees over a certain seniority threshold. In any case, it would be typical that the number of Hong Kong employees only constitutes a small fraction of all the members of such scheme.
If Changes 2 and 3 were to become law, an international scheme of this type will not be able to be registered under ORSO, nor will it be able to apply for exemption. Such scheme cannot be registered since many of its members do not have Hong Kong identity cards (hence, they have no connection with Hong Kong). In addition, such scheme cannot apply for exemptions as the concept of “exempted schemes” will be scrapped.
As such, employers would not be able to continue the scheme for its Hong Kong employees without facing criminal sanctions.
Although no data indicates the number of schemes of this nature that are put in place in Hong Kong, they do exist. Such schemes are typically set up by the largest international employers, with the flexibility to invest their resources in various places in Asia. There is an argument that the proposed changes could reduce the attractiveness of Hong Kong as a regional hub for global companies.
The MPFA has unfortunately failed to explain the rationale for the proposed changes. It merely states that "certain areas of [ORSO] that should be improved in order to make the policy intention, particularly the intended coverage of the ORSO regime, unequivocally clear". We hope the MPFA can clarify the mischief it is attempting to cure, so that the industry is able to propose changes to the legislation, making it less invasive and potentially less damaging for Hong Kong.
Finally, the fact that the MPFA is proposing "briefing sessions", which will be held just seven days before Christmas Day and with a six-day notice is, perhaps, an indication that it intends to quell the attention these changes may attract.