Ill-judged legislation threatens benefits

MR A.G. O'Brien from the Financial Services Branch attempts to defend ORSO - Occupational Retirement Scheme Ordinance (South China Morning Post, November 3) against the criticisms I made of it (Post, October 12).

He says that there is 'no evidence to support' the assertion that the legislation will discourage the continuation or establishment of defined benefit schemes. This is absolutely wrong. There is very compelling evidence already available from the subvented sector.

I take the case of the University of Hong Kong (HKU). It has a retirement scheme which has been in existence for seven years, and which is a contributory defined benefit scheme (broadly similar to a preceding scheme established in 1980). It has around 3,000 members, the majority of whom are junior employees earning modest salaries.

The contributions of employer and employee are not varied up or down, even though a shorter term actuarial judgment could justify short-term changes in both directions (as often occurs in such schemes in the private sector). But this evens out over time. In the last 15 years the schemes achieved an average per annum growth in real terms of two/three per cent and their solvency level has varied from about 95 per cent to about 150 per cent.

It must be emphasised here that 'solvency', a term with which Mr O'Brien makes much play, is a technical measure based upon a fiction (that all members left on the day on which the calculation is made). The fiction is not harmful, provided that we realise that for such a scheme a floor of 90/95 per cent is probably appropriate before regulatory intervention is needed.

It must be emphasised that this HKU scheme has not encountered problems, and was described by a government inquiry as 'sound' only two or three years ago. There is no reason to doubt that without ORSO it could have continued as a reliable and adequately administrated scheme able to meet present and long-term commitments to its members.

However, as a direct result of ORSO, the Council of the University of Hong Kong has now made a drastic change in the Trust Deed, without attempting to obtain the consent of the members of the scheme, a change which is potentially to their great disadvantage, and which in effect means that our scheme is no longer a defined benefit scheme in the normal sense of the term (since benefits are no longer a known factor of final salary, but subject to a possible reduction at times of poor investment performance, even in the very short term).