The Mandatory Provident Fund (MPF) is a compulsory pension fund designed by the Hong Kong government as a major protection scheme for the aged and retired residents. Most employees and their employers are required to contribute monthly. A 2012 study by the Consumer Council shows that almost half of the MPF funds have posted losses in each of the past five years.
Employee choice changes the face of Hong Kong's MPF
Cynthia Chung, a partner at Deacons, discusses implications of changes to the pension scheme
The long-awaited employee-choice arrangement (ECA) for Hong Kong's mandatory provident funds took effect on November 1, 2012.
What happened to MPF contributions before the ECA?
Since the implementation of the MPF regime in 2000, employers have been responsible for choosing the MPF scheme for their employees. Employees could only choose which investment funds to invest into within the employer's choice of MPF scheme.
Before the ECA, accrued benefits derived from both the employer's mandatory contributions and the employee's mandatory contributions had to stay in the MPF scheme of the employer's choice until the cessation of employment. Where an employee had transferred accrued benefits from mandatory contributions relating to any former employment or self-employment to the contribution account of his current employment, such benefits could also not be transferred.
For voluntary contributions from both the employer and the employee in respect of the current or any former employment, transferability was subject to the governing rules of the relevant MPF scheme.
What changed on 1 November?
Employees now will have greater autonomy and flexibility in choosing the MPF scheme. The employees will be allowed, but not obliged, to transfer accrued benefits derived from their own mandatory contributions made to an MPF scheme of their own choosing.
Unless the governing rules of the original MPF scheme provide for greater frequency, the transfer can be carried out on a lump-sum basis once every calendar year. Also, if an employee has transferred accrued benefits derived from mandatory contributions relating to former employment or self-employment to the contribution account for current employment, such contributions can also be transferred to another MPF scheme in a lump sum at any time.
Accrued benefits which have been transferred out will be kept in the employee's "personal account" in an MPF scheme of choice and can thereafter be transferred at any time.
For contributions from employers, the ECA introduces no changes, either to the transferability of the employer's mandatory contributions made during the employment or to voluntary contributions from the current or any former employment.
What are the rights and obligations of employees?
With the implementation of the ECA, employees will be given additional rights to transfer their accrued benefits to any MPF scheme. Before making any decision to do so, an employee should consider carefully all the relevant factors and, if necessary, seek professional advice.
If an employee has decided to transfer accrued benefits, he or she is responsible for completing and sending a prescribed transfer form to the trustee of the chosen scheme. The whole transfer process will take 6-8 weeks.
In terms of cost involved, the trustee can only charge for the "necessary transaction costs" that are incurred or reasonably likely to be incurred by the trustee in selling or purchasing investments in order to give effect to the transfer.
What are the rights and obligations of employers?
The ECA has not provided additional legal rights nor has it imposed additional legal obligations on employers. Employers will not be required to be involved in the transfer process.
From an employer's perspective, the mandatory contributions from current employees will continue to be made to the employer's MPF scheme.
There is also no change in the off-setting arrangement for statutory severance payment or long-service payment. Any off-setting will be made from the accrued benefits derived from the employer's mandatory contributions.
Even though employers will not be involved in the transfer process, they should be prepared for inquiries from employees and provide employees with relevant information, such as the employer's identification number for the completion of the transfer form and, where possible, information on different MPF schemes.
Employers could also communicate with their MPF service provider to understand if the transfers have been running smoothly for their employees.
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