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.