Background of Retirement Protection in Hong Kong

Nowadays in Hong Kong, there is neither government-supported pension fund nor social security for retirement.

However, the reality of ageing population due to low birth rates and long life expectancies and thus the increasing burden on working population to support the elder in this city is crucial and unavoidable:

• In 2011, 13% of Hong Kong population over the age of 64 and each retiree was supported by 6 working age adults;
• The figure are expected to be worsen in 2041, while one-third of resident is retiree and 2 working adults are supporting each retiree.

The Hong Kong government policy makers have to tackle this challenge ahead, they has established a three-pillar approach (as envisioned by World Bank) covering a large portion of the population of their old age protection, they are listed as follows:

1. a publicly managed, tax-financed social safety net;
2. a mandatory, privately managed, fully funded contribution scheme; and
3. voluntary personal savings and insurance.

Based on the purpose of the second pillar, the Mandatory Provident Fund (MPF) system which operate under the framework of Mandatory Provident Fund Schemes Ordinance (MPFSO) has been established in December 2000. Before the establishment of MPF system, if employers established retirement schemes for their employee, these older funds often migrate and keep operating under the Occupational Retirement Schemes Ordinance (ORSO). Both MPF and ORSO schemes are regulated by the Mandatory Provident Fund Schemes Authority which is a statutory body to ensure the regulation of privately managed MPF schemes and thus to ensure the provision of retirement protection for Hong Kong’s working adults.

Employees can choose whether they would like to join and contribute to the ORSO scheme (if it is provided by their employers) or an MPF scheme.

Under MPFSO and ORSO,  every single dollar of contribution made by employers and employees will be saved into employee’s account and under the employee’s control. The money saved is for the future retirement of the employee (exemption is available).

Mandatory Provident Fund (MPF) System

Who is covered?

All self-employed person (i.e. business owner of a sole proprietorship firm or a partnership firm), regular employee (known as permanent worker who directly work for and get paid by a single employer) and causal employee (known as temporary worker) who are at least 18 but under 65 years of age and regardless the industries they are working are required to join an MPF scheme.

The people exempted from MFP under MPFSO are as follows:

• domestic employees;
• self-employed hawkers;
• people covered by statutory pension or provident fund schemes, such as civil servants and subsidized or grant school teachers;
• members of occupational retirement schemes which are granted MPF exemption certificates;
• people from overseas who enter Hong Kong for employment for not more than 13 months, or who are covered by overseas retirement schemes; and
• employees of the European Union Office of the European Commission in Hong Kong.

How to join the MPF system?

Since both qualified full-time and part-time employees are covered by the MPF system (except of exempt persons), their current employers must enroll their employee in an MPF scheme no later than the first 60 days of an employment.

For qualified self-employed persons who are at least 18 but under 65 years of age, they must also enroll themselves in an MPF scheme within 60 days after they have started their self-employed businesses.

How the MPF system works?

When an employee and self-employed persons are qualified to enroll to the MPF system, both your employer and you will make monthly contributions (or yearly contribution for self-employed person) to a MPF scheme until the day that the employee leave that company (or ease the business). The contributions paid by an employee and his employer are saved into a “contribution account” under the MPF scheme.

A qualified MPF trustee (the corporation in charge of managing your MPF scheme) of the MPF scheme (selected by employer and by employee) manages the contribution account which is vested to the employee, and the trustee invest the contribution continuously in the combination of funds portfolio within the MPF schemes selected by employee.

Unlike conventional “buy low, sell high” investment strategy that highly rely on the timing of execution of one investment for profits, MPF trustee must take the “Dollar Cost Averaging” strategy which means investing a fixed amount regularly into a particular investment regardless of unit price:

• The same amount of investment buys fewer units when unit price is high,
• The same amount of investment buys more units when unit price is low.

As regular contributions are invest in your MPF fund(s) regularly, the effect of short-term market fluctuations are diminished by averaging out the cost of units.

The accumulated contributions and returns from investment, which are collectively named “accrued benefit”, are kept under the account of employee under MPF scheme, this MPF contribution process will repeat itself throughout employee’s working life.

The employee can withdraw all the accrued benefit under his MPF scheme when he reaches 65 years old or under [these situation].

All the contributions and returns MUST be invested into the fund(s) offered by MPF trustee. The member cannot direct his trustee to transfer them into cash account thus saving only. MPF system is a compulsory investment system, and all the members have to bear the risk of loss.

Fees incurred by the fund’s operation and management are deducted from member account on the each transaction and thus is averaged out, the member only receive the net value.

With the vast variety of MPF schemes and funds portfolio on the market, comparison of their fees regularly is highly recommended for maximize the amount of investment returns.

How much is the mandatory contribution?

Important note:  Any amount of mandatory contributions paid for an employee and self-employed person are immediately vested in the them once they are paid to their selected MPF trustee, so as any financial return derived from the investment of the mandatory contributions is also immediately vested in the them.

Firstly, we have to understand which incomes of an employee to be assessed for calculation of MPF contribution. MPF Ordinance states that all monetary payments paid or payable by an employer to an employee, including wages, salary, leave pay, fees, commissions, bonuses, gratuities, perquisites or allowances are the “relevant income” for the calculation of mandatory contribution in a regular and a causal employment; The “assessable profits” stated in the most recent notice of assessment issued by the Inland Revenue Department can be taken as “relevant income” for the calculation of mandatory contribution in a self-employment.

Both employees and employers, and self-employed person are free to make voluntary contributions in addition to mandatory contributions to employees’ and self-employed person’s contribution accounts.

In a regular and a causal employment, both employer and employee are required to make regular contribution into the “Contribution Account” of the employee. Both contributions are calculated at 5% of the employee’s relevant income to an MPF scheme where income ceiling for them to calculate the maximum amount of calculation and income floor for employee to free from contribution are applied.

For most of the employee who are paid monthly, the employee’s mandatory contribution are automatically transferred to employee’s Contribution Account by his employer before they receive their monthly salaries, the details are as follows:

In a self-employment, the self-employed persons who are covered by the MPF System must make regular mandatory contributions calculated at 5% of their relevant income to an MPF scheme, subject to the minimum and maximum relevant income levels. They can opt to make mandatory contributions on a monthly or yearly basis. The minimum and maximum relevant income levels are $7,100 per month (or $85,200 per year) and $30,000 per month (or $360,000 per year) respectively.

The relevant income floor of $7,100 per month applies to contribution periods commencing on or after 1 November 2013 while the current maximum relevant income level of $30,000 per month applies to contribution periods commencing on or after 1 June 2014.

For self-employed person, annual relevant income floor of $85,200 per year or ceiling of $360,000 per year applies additionally.

Can I enjoy tax deduction for contributions?

Within a tax accessible year, employed taxpayers for salaries tax and self-employed taxpayers for profits tax can claim tax deductions for their mandatory contributions only which are made for themselves to their MPF scheme. The maximum amount of deductions to taxable income per taxpayer is $18,000.

For employers (i.e. who is either a corporation, partnership and sole-proprietorship), they can claim tax deductions for both the mandatory and voluntary contributions made for their employees MPF scheme. However, the maximum amount of deduction is capped at 15% of their business expense of total employee’s emoluments per tax accessible year.

Any employee’s and self-employed person’s voluntary contributions are not tax deductible.

Can I transfer the accrued benefits in my MPF scheme?

Since all the accumulated contributions and their return of investment (collaboratively named as accrued benefits) are vested to the employee and self-employed person immediately and fully whenever they are made, and they can only withdraw the amount after their age of 65 years old and [these circumstances], voluntarily withdrawal from their MPF scheme.

However, their accrued benefits are allowed to be transferred from accounts to accounts within their MPF scheme under curtain restrictions. How are the accrued benefit are saved for employed person in the MPF system:

• Contribution Account: the primary purpose of this account is for receiving mandatory and voluntary contributions made by a employee and his employer under the current employment or a self-employed person under self-employment.
• Personal Account: the primary purpose of this account is for receiving the accrued benefits accumulated in ex-employment and ex-self employment from other MPF accounts. The accrued benefit in this account can be transfer to any other MPF scheme of employee’s choice at any time.

For employee contributor, all the contribution made by him and his employer are received by his contribution account. Most likely, the transfer  Following the implementation of the Employee Choice Arrangement (ECA), he is allowed to transfer his portion of accrued benefits from contribution account some of the allowed scheme once a year, details can be found here.

When the employee leaves for a new job, all of the accrued benefit in the contribution account will be migrated to his personal account (because his contribution account is no longer receiving benefit from the employer), employee can either keep the benefit in the original MFP scheme in your personal account, other scheme in your personal account, and consolidate the benefit into the MPF scheme in the contribution account of your new employer.

For self-employed person, he can transfer his accrued benefits in either contribution account or personal account to any other MPF scheme of his choice at any time.

For an employer, when he is liable to pay his employee Severance Payments or Long Service Payments under the Employment Ordinance, he has the right to withdraw his portion of MPF accrued benefit from his employee’s MPF account for offsetting these 2 payments. If the benefit is insufficient to cover the liable payment to the employee, the employer is still required to recover the difference according to the requirement of employee.

How can I withdraw my accrued benefit earlier than 65 years old?

Under  either of the following circumstances, you can claim the early withdrawal:

1. Early retirement when you are at least 60 years old.
2. Permanent departure from Hong Kong.
3. Total incapacity to work.
4. Small balance account of less than $5,000.
5. Death.

As a employee, how do I confirm if my employer is making my contributions?

As a proof of joining a MPF scheme, you will receive a membership certificate issued by MPF trustee within 60 days after you have become a member of the MPF scheme such as joining the employer’s MPF scheme on the commencement of an employment.

To keep track on the regular contribution, you should found a pay-record on your regular (e.g. monthly) payroll.

Most of the MPF trustees offer online portal website for their MPF members to check updates of their accounts, funds performance, and contact information.

How to choose the best MPF scheme?

Step 1: Individual Risk Tolerance Assessment

No two people see alike, every person should have personal investment strategy to achieve specific financial goal. There are always 2 underlying factors which determine a MPF member’s risk tolerance to choose “the best” MPF scheme:

• Capability of taking risk: Primarily based on current financial circumstances of a MPF member – a younger MPF member is believed to take on more risk because he has more time to make up for higher losses.
• Attitude toward risk: Primarily personal attitude and reaction when suffering loss regardless the financial circumstances – it differs the fund portfolio of individuals who have similar financial circumstances, one with “aggressive for gains” attitude prefers a high risk portfolio and still feels comfortable while one with “play it safe” attitude prefers a lower risk portfolio.

Therefore, the level of risk tolerance of an individual is changing from time to time when he is in different stage of life. A young and single MFP member usually has a higher risk tolerance and can opt for higher-risk funds which may field better returns. However, when he is nearing retirement or has family dependents, he will have lower risk tolerance and thus lower-risk funds.

Step 2: Available Tools of Investment

When you know your needs, you can find the funds that suit your need and make you feel comfortable.

• MPF Bond Fund: Generally considered to be a lower-risk investment, the MPF Bond Fund invests in bonds or debt instruments issued by governments, public organizations, banks, commercial organizations or supranational agencies like the World Bank.
• MPF Equity Fund: Generally considered to be volatility investment, the MPF Equity Fund seeks a higher rate of return through capital appreciation of stocks (or shares), traded mainly on approved stock exchanges.

If a MPF members opt for a aggressive approach, invest the bulk of your assets into equity funds. A portfolio with mixing bond fund and equity fund is the best way diverse and adjust its risk level.

Step 3: Comparison of Funds

Don’t invest all your money in one company. Never put all your eggs in one basket.

It is important you have a good understanding of different types of funds, what are the fund’s investment objectives and whether or not these are suitable for you.

Finally, it is crucial to revisit periodically and review investment strategy accordingly.

Occupational Retirement Schemes Ordinance (ORSO)

Alike MPF schemes, ORSO schemes is occupational retirement protection schemes set up for employees in Hong Kong. ORSO differs from MPF schemes schemes that ORSO is employers’ voluntary setup for their employee to provide retirement benefits for their employees.

Since the launch of the MPF System in 2000, MPFA has exempted a number of existing ORSO schemes that  are qualified with the relevant requirements. Employers of these MPF exempted ORSO schemes have to give new eligible employees a one-time option to choose between joining an MPF scheme or the MPF exempted ORSO scheme.

What are the major difference between ORSO to MPF?

Dealing with aspects of the extraction benefits when leaving an employment and investment options, ORSO and MPF are different.

ORSO: No Legal Requirement of Contribution

ORSO can be divided into a Defined Benefit and Defined Contribution Schemes.

Defined Benefit Schemes is operated by the employee’s employer. when the employee retire or leave his job, the employer can use a pre-defined formula to calculate the amount of benefits which this employee is eligible to. The employer usually take the employee’s years of service and salary into account.

As for Defined Contribution Schemes, it is a bit alike a MPF scheme of which the scheme is selected by employers only and the contributions by them are managed by the trustee and invested into the portfolio within the scheme.

Regarding to the aspect of contribution, there is no specific restrictions that the contributions must be solely made by employers, a scheme, alike MPF, requiring employees’ contribution together with employers’ one is possible.

Some of the ORS adjusts the weighting of the employers’ contribution proportional to employees’ year of services. The most familiar ORS is the Hong Kong government’s ORS for civil servant, the government contribution rate of 5% will be increased to that of 25% in maximum by an annual increment of 2 – 3%. Indeed, ORS is much more attractive than MPF in view of employees.

ORSO: Flexible Employee’s Benefit Withdrawal

Another attractiveness of ORS, the employee is able to withdraw the benefit when he leave the job. However, the employee can only withdraw the calculated “attributable proportion” according to his year of service.

However, some organizations include further ORS enrollment restriction on employee with minimum year of employment, e.g. if a employee leaves the job less than 3 years of service while his employer has imposed a restriction of not less than 3-year of employment to enroll in ORS, he does not receive any employers’ contribution and thus none of benefit withdrawal on leaving.

For the working people who are adventurous to new career every several years, MPF is more advantageous to ORS because the employee can obtain the compulsory contributions from employer during the full period of their services.

ORSO: Diversification of Investment Portfolio

As long as the Defined Benefit Schemes is complied with Companies Ordinance (companies laws in Hong Kong), the employers who operate this scheme can choose a wide range of investment for better returns, including aggressive hedge funds or real estate investment funds.

On the other hand, the Defined Contribution Scheme which is administrated by the trustee can take a more aggressive investment strategy and approach to achieve even higher returns by including high-risk investment products since the schemes has less legal compliance than Defined Benefit Schemes as well as MPF schemes.

It is because MPF ordinance regulates the MPF funds must retain at least 30% assets in Hong Kong dollar, and the amount of investment in a certain stock must not excess 10% of the fund’s assets. MPF fails to operate like ORS funds to inject its fund aggressively into a single projects for maximum returns.

On the other hand, high-rick investment does not guarantee high-return. Since a Define Benefit Scheme usually include a pre-defined formula for calculation of employees’ benefits on their retirement, when adverse investments bring loss on the scheme, employers are liable to offset the shortfall and paid the defined amount of benefit to employee. For the Defined Contribution Schemes, employees’ retirement benefit may suffer huge loss when stocks market is in adversity.

MPF: Agility to Market Condition

For most of the employee who are saving for retirement, frequently mobilizing MPF investment portfolio in response to market conditions is the common practice to maximize returns. However, Defined Benefit Schemes in ORS, which is managed by  employers, does not granted employee rights to change the portfolio; Members of Defined Contribution Scheme can only make a quarterly or half-yearly fund conversion from investment.

For employees, MPF scheme has its unique advantage since every contributions made by either employees and employers are vested to employees fully and immediately, they can fully mobilize the MPF in unlimited frequency. Moreover, the implementation of “‘Employee Choice Arrangement” since Nov 2012 allow employee to transfer assets in current contributing MPF scheme to their choice of MPF scheme, more flexibility is granted.

Conclusion: A coin has 2 sides

In Hong Kong labour market, generally employers provide their employees for either ORSO and MPF to choice (the offered ORS must be exempted from MPF legally). For employees who are offered both choices on the commencement of their employment, they are not allowed to interchange their retirement schemes during the employment.

Source: The Mandatory Provident Fund Schemes Authority of Hong Kong