The MPF scheme is an employment-based retirement protection system in Hong Kong. It is similar to the work-based pension schemes in the UK. Except for certain exempt persons, employees (including self-employed persons) aged between 18 and 65, and normally residing and working in Hong Kong, are required to join an MPF scheme. Employees and employers who are covered by the MPF System are both required to make regular mandatory contributions to an MPF scheme, subject to the minimum and maximum relevant income levels. Prior to the implementation of the MPF system in 2000, only about one-third of the Hong Kong workforce had some form of retirement protection or pension planning. The MPF is intended to give better retirement protection to employees and to ease the burden of an ageing population in Hong Kong.
Expensive MPF administration fees, minimal supervision over fund performance and the use of accrued benefits derived from employer’s contributions to offset severance and long service payments are just some of the criticisms faced by the MPF scheme since its introduction in 2000. In this article we consider the various proposals affecting both employers and employees.
With its original intent to “beef up” Hong Kong’s employees’ retirement protection, a significant proposal involves the abolishment of an employer’s right to offset severance and long service payments against its contributions to the MPF scheme. Under the current regime, whenever employers make a severance or long service payment to an employee upon termination, it can offset this amount from any of its payments under the employee’s MPF scheme made through the course of his/her employment. Abolishing this right effectively means that employees meeting severance or long service payment requirements will be entitled to receive their severance or long service payment and MPF fund in full. This inevitably will increase the costs of dismissal.
In the future, employers may also face greater scrutiny upon the establishment of an independent law enforcement body aimed at deterring default contributions, with powers to sentence employers contravening the law to immediate imprisonment and blacklisting those companies in government tenders as a form of penalty. In this context, the Legislative Council is also considering the strengthening of the regulation of MPF investment products by regular review of sales practices of intermediaries, elimination of substandard MPF funds and establishing mechanisms for complaints and claims.
Currently, the MPF scheme is criticised for its immobility when an employee changes jobs. After the Employee Choice Arrangement became effective in November 2012, employees are allowed to transfer the accrued benefits derived from the employee contributions made during their current employment to a scheme of their choice. However, the accrued benefits derived from the employer contributions remain non-transferable. Statistics provided by the Mandatory Provident Fund Schemes Authority shows that presently there are over 3 million employee contribution accounts and approximately 4 million preserved accounts. This means that on average, every MPF scheme employee holds more than one account. This creates difficulty in management and in some cases, contributions left in preserved accounts are eroded by administrative fees charged by the trustee, such that the employee is left with little at the end of the day.
To improve this, it is proposed that the current semiportability arrangement should be changed to a full portability arrangement for the MPF Scheme, whereby the employees can also choose their own trustees in respect of the employer contribution and have one “life long account” for both employers’ and employees’ contributions. This diminishes the problem of an employee holding multiple preserved accounts whenever they change jobs, thus achieving substantial reduction in the MPF fees in the long run.
Suggestions to set up a public trustee operating under the government are also being considered. The public body will charge lower administration fees, and provide lowrisk capital preservation funds that are inflation-linked as an option for employees who prefer a more conservative investment portfolio. Ultimately the aim is to improve competitiveness within the market, so that existing trustees can offer lower administrative fees, better fund performance and better service.
The Hong Kong Legislative Council has also urged for the implementation of a universal integrated retirement protection system in addition to the existing MPF scheme, in order to supplement the inadequacies under the MPF scheme.
Though it is unclear when the above proposals will become law in Hong Kong, the changes, if made, would be significant both for employer and employee. In particular for employers, dismissal costs will rise.