Preliminary statistics by the Mandatory Provident Fund Schemes Authority (MPFA) show there were about 7,100 applications for MPF exemption based on the Occupational Retirement Schemes Ordinance (Orso) registered scheme by the May 3 deadline. Undoubtedly, there are a number of employers who have not decided on their Orso/MPF interface strategy and just lodged applications for MPF exemption to keep their options open. Technically speaking, pursuant to Section 15 of the Mandatory Provident Fund Schemes (Exemption) Regulation, an employer 'shall, as soon as practicable after an application has been made' give and brief its employees (in the prescribed manner) the choice between remaining in the Orso registered scheme or migrating to the MPF scheme that the employer has chosen and arranged for its employees to join. Employers must ensure that they to make a decision no later than 50 days before December 1. There are some concerns as to whether once an application for MPF exemption is made, employees are given the option to remain in the Orso scheme if they wish. Would this mean that without the employees' consent, employers who have got exemptions, could still wind up the Orso scheme and only provide employees with the MPF scheme (even with top-up contributions)? There is no straightforward answer to this question as there are different aspects to consider. It seems the majority view is 'no', at least before an exemption certificate is issued. Employers who applied for MPF exemption as a strategic measure in order to meet the May 3 deadline should quickly make a decision on their Orso/MPF interface strategy. The decision should be made before an MPF exemption certificate is issued under Section 16 of the regulation. The certificates are expected to be issued in July. The following are some of key factors worth considering in making a decision on the Orso/MPF interface strategy: Staff morale issues: 1) Do employees contribute to the current Orso scheme? 2) The impact on the preservation rule for mandatory contributions until age 65 on the employees. For this, employers would need to consider the age group of their employees, the existing retirement age, etc. 3) The attraction of employees' right to direct investment of contributions in an MPF scheme. 4) The attraction of the immediate and full vesting of mandatory contributions on employees. Employers should note this factor will be neutral to both the employees and themselves in respect of employees who will, by December 1, 2000, vest with what would otherwise be the mandatory contributions under the Orso scheme. This means this group of employees will not gain by joining an MPF scheme due to the immediate and full vesting rule on mandatory contributions. By the same token, employers would not lose out if they join the MPF scheme. Financial impact on employers: 1) Will employees be required to contribute more under the MPF scheme? 2) Will employers be required to contribute more to an MPF scheme compared with the Orso scheme as a result of a different base of contribution? This will be the case if the current rate of contribution is 5 per cent on basic salary and for employees whose basic monthly salary is lower than $20,000 but with a high bonus, commission or overtime allowance. 3) The impact of the staff turnover rate on the immediate and full vesting of mandatory contribution. 4) Costs to employers in maintaining the Orso versus the MPF scheme. 5) Employers' perception on the investment attitude of their employees. For instance, if an employee takes an aggressive investment stance, he may choose to invest the contributions in high-risk funds. Let's assume that this person is entitled to long-service pay when he leaves the company, but that his investment losses are so great that the accrued MPF benefits, attributable to employer contributions, are insufficient to set off the long-service payments. In such a situation, the employer is required to make up the difference. Those employers who decide against MPF exemption, should immediately inform the MPFA to withdraw their application for exemption. At the same time, depending on the drafting of the deed of variation, amending the deed/rules of the existing Orso scheme, employers will need to consider whether the deed as amended would need to be changed again when they are not going to apply for MPF exemption. After an MPF exemption certificate is issued, again pursuant to Section 18 of the Regulation, employers must as soon as practicable exhibit the certificate in their office and provide each member of the scheme with a copy. Once this is done, employees will expect to be given the choice to remain in the Orso scheme. If the employers were to say to the employees that they can only join the MPF scheme, there may be a legal issue as to whether the employers can, in fact, do this. This will certainly have an impact on staff morale. The employer must also apply to the MPFA to withdraw the exemption certificate. It must be noted that the MPFA will only withdraw the certificate if it is satisfied about the grounds for withdrawal and that if the certificate were to be withdrawn, the employer will not be in breach of MPF legislation. My understanding is that the MPFA is formulating a guideline on this. There is also some uncertainty as to whether after the MPF exemption certificate is issued, the effect of the 'mandatory conditions' stated in Schedule 2 of the Regulation will immediately take effect (and not after November 30) Purely from a reading of Section 17 of the Regulation, it would seem that once an MPF exemption certificate is issued, the Orso scheme (now MPF-exempted), the members, the employer and the administrator are each subject to the mandatory conditions. As in the case of many legal issues, there are always other perspectives. If the mandatory conditions are to take immediate effect after an exemption is allowed, then due to the condition (7) (1) (i) of Schedule 2, employers cannot simply roll-over the benefits accrued in the Orso scheme to an MPF scheme. Instead it must first seek the agreement of the employees (condition (7) (3)). Otherwise, the benefits must be frozen in the Orso scheme so that it cannot be wound-up completely. Due to so many uncertainties, employers who have applied for MPF exemption purely as a strategic move should quickly decide their Orso/MPF interface strategy, preferably before an MPF exemption certificate is issued. If they decide not to seek MPF exemption, employers must immediately give written notice to the Mandatory Provident Fund Schemes Authority. Phillip Mak is a partner in PricewaterhouseCoopers' Tax and Legal Support Division specialising in financial services. He is the company's industry leader, in charge of all Orso and MPF-related advisory work.