The maximum relevant income level for Mandatory Provident Fund (MPF)  contributions will be increased from HKD 25,000 to HKD 30,000 1  per month with  effect from 1 June 2014. This increase will mean that employees earning HKD 30,000  or more per month, and their employers, will each be required to make a monthly  contribution of HKD 1,500 instead of the current HKD 1,250. The minimum relevant  income level has also been revised from HKD 6,500 to HKD 7,100 per month, taking  effect on 1 November 2013.

Employers in Hong Kong are required to enrol employees  in a retirement scheme known as the MPF Scheme, to  which the employer and employee must make certain  contributions. There is an exemption for foreign nationals  if they are posted to work in Hong Kong for a period of less  than 13 months or if they belong to a retirement scheme  outside Hong Kong. In some cases, Hong Kong nationals  who work outside Hong Kong may still be required to  make contributions if their employment has sufficient  connection with Hong Kong. 

The MPF mandatory contributions are calculated at 5%  of monthly income up to the maximum relevant income  level. Whilst employees who earn less than the minimum  relevant income level (ie. HKD 7,100) are not required to  make contributions, their employers must contribute 5% of  monthly income for the relevant employees. 

The change is expected to assist higher earning employees to  save more for the future. Once an individual has reached the  age of 65, except for those who qualify for early withdrawal  of benefits, they will have more accrued benefits to withdraw  in a lump sum. The increase in contributions is estimated to  boost the projected MPF accrued retirement savings at age  65 for the average worker making HKD 30,000 per month  from HKD 2.3 million (USD 296,600) to approximately  HKD 3.5 million (USD 450,000).

The current change came from a review conducted in July  2010. The revision to the maximum and minimum levels of  MPF contributions was then made by a resolution passed  by the legislative council last year. 

As the Mandatory Provident Fund Schemes Ordinance  stipulates that the minimum and maximum relevant  income should be revised every 4 years, the next review is  due to begin as early as July this year (although, we suspect  that, as with the last review, any changes are unlikely to be  effective for a few years). 

Other proposals for change

Whereas present retirees are required to withdraw their  entire fund at retirement (which they are free to invest),  it is proposed that retirees will in future be entitled to  withdraw accrued benefits in instalments up to 4 times  a year, upon early retirement at 60 or retirement at 65, so  that retirees can continue to accrue benefits of the scheme  after retirement. It is also proposed that early retirees  who have declared that they do not intend to seek further  employment in the future will be allowed to return to work  if their circumstances change. Details on how this proposed  amendment should be implemented in practice are still  under discussion.

New tax avoidance rules

Separately, the Hong Kong and the US governments have  recently reached an agreement to exempt MPF, and certain  other pension or investment products, from disclosing  to the US Internal Revenue Service (IRS) information  regarding funds managed by them for employees in Hong  Kong who are US citizens. The US Foreign Account Tax  Compliance Act (Fatca), which takes effect on 1 July this  year in the US, has global reach as it requires all foreign  financial institutions to disclose information to IRS  when dealing with US clients. Firms that fail to comply  with the reporting requirements will be subject to a 30%  withholding tax on all US sourced income. This new US law  is intended to curb worldwide tax evasion by US citizens.  MPF and other pension products are now exempted from  this reporting measure as it is believed that the chance of  them being used as tax avoidance vehicles is low.  While this may be good news for the MPF fund houses  and insurers, similar tax measures imposed by different  countries may be looming. Western countries and China  are devising new laws to require financial institutions to  report tax information about their wealthy citizens. This  transpires as the Chinese government recently announced  that it will need to review its policy for international tax  collection, to clamp down on tax evasion. If China has its  own version of Fatca, Hong Kong financial institutions,  including MPF fund houses and insurers, are likely to face  heavier reporting and compliance duties given the large  number of mainland clients involved.