Mandatory Provident Fund

Due to low birth rates and increased life expectancy, Hong Kong is facing a rapidly ageing population. As the population grows older, the working population will have a much larger number of retirees to support. 

The debate over a suitable retirement protection system for Hong Kong started in the 1960s. In 1994, the World Bank published its report “Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth”, in which a three-pillar approach to protection for the aged was put forward. The three pillars were:

(i) a publicly managed, tax-financed social safety net;
(ii) a mandatory, privately managed and fully funded contribution scheme; and
(iii) a voluntary personal savings and insurance. 

Hong Kong’s Mandatory Provident Fund (“MPF”) system was designed to form the second pillar for retirement protection. In 1995, the Mandatory Provident Fund Schemes Ordinance (Cap 485) (“MPFSO”) was enacted, supplemented by subsidiary legislation passed in 1998, 1999 and 2000. The MPF system was launched in December 2000.

There are three types of MPF schemes in Hong Kong: Master Trust Schemes, Employer-sponsored Schemes and Industry Schemes.
  • Master Trust Schemes
Master Trust Schemes are the most common type of MPF schemes in Hong Kong. It is open to relevant employees of participating employers, self-employed persons and persons with accrued benefits transferred from other schemes. By pooling together contributions from various employers and their relevant employees and those from self-employed persons, Master Trust Schemes have a high degree of efficiency in terms of scheme administration because of economies of scale.
  • Employer-Sponsored Schemes
Employer-Sponsored Schemes are schemes limited to the employees of a single employer and its associated companies. Because of restrictions to membership, it is only cost-effective to run an Employer-Sponsored scheme with a large number of employees.
  • Industry Schemes
Industry Schemes refer to pension schemes which have been specially established for employees in the catering and construction industries, particularly casual employees (i.e. workers employed on a day-to-day basis or for a fixed period of less than 60 days). Casual employees do not need to change schemes when they change jobs within these two industries, providing their previous and new employers have registered with the same Industry Scheme.

To ensure that employees’ interests are adequately and properly protected, Mandatory Provident Fund Schemes Authority (“MPFA”) has a comprehensive approval and monitoring system. There are Stringent Approval and Registration Criteria; On-going Monitoring; Professional Indemnity Insurance; and Compensation Fund. 
  • Stringent Approval and Registration Criteria
Companies incorporated in or outside Hong Kong may apply to become MPF approved trustees by meeting stringent statutory criteria on capital adequacy; sufficient presence and control in Hong Kong; capability the conduct the business of administering MPF schemes; fitness and propriety of the controllers; the skill, knowledge, experience and qualifications of the directors and the chief executive officer and the company's internal standards of control.
Natural persons can also apply to become MPF approved trustees. However, at present, all the approved trustees are companies incorporated in Hong Kong. MPF trustees are responsible for appointing investment managers and other service providers and to ensure that they comply with all MPF requirement, standards and guidelines.
  • On-going Monitoring
As the regulator of the MPF system, MPFA monitors MPF trustees to ensure their compliance with the MPF legislation and to facilitate early detection and correction of errors and deficiencies. All MPF trustees are required to regularly lodge returns, financial statements and internal control reports with MPFA. MPFA conducts field inspections of trustees and investigates cases of suspected non-compliance as they arise. If trustees fail to comply with the MPF legislation, depending on the nature of the failure, they may receive a warning from MPFA or be subject to financial penalties and ordered to take immediate remedial action.
In case of serious breaches, MPFA can take other action against non-compliant trustees in accordance with the MPF legislation. For example, in a case where the MPFA reasonably suspects that the trustee is unable to carry out any of its duties as an approved trustee, the MPFA may suspend the trustee from administration of the MPF scheme and appoint a new administrator to administer the scheme on a temporary basis. If the MPFA has reasonable grounds to consider that the trustee of a scheme is unable to carry out any of its duties as an approved trustee, the MPFA may revoke the approval of the trustee. Non-compliant trustees may be subject to criminal prosecution.
  • Professional Indemnity Insurance
MPF trustees are required to take out adequate insurance to provide indemnity in respect of prescribed risks attributable to the administration of the scheme by the trustees or their service providers.
  • Compensation Fund
The MPFSO also requires the establishment of a Compensation Fund by the MPFA to compensate members of MPF schemes for losses of accrued benefits caused by misfeasance or illegal conduct committed by MPF trustees and others concerned with the administration of the MPF schemes. The government provided a one-off grant of HK$600 million as seed money when the Compensation Fund was established in 1999. 

  • Employees
The 60-day employment rule is one of the important factors used to evaluate coverage under the MPF scheme. Any full-time or part-time employee who has been employed for 60 days or more under an employment contract must be covered under the MPF scheme. The 60-days are counted by calendar days (including holidays) and determined by the employment relationship between the employee and employer. The number of actual working days or hours is irrelevant for the calculation. Employers MPF obligations cannot be evaded by breaking up an employee’s employment into a series of periods of less than 60 days. If the total employment over te period is more than 60 days the employer must enroll the employee in an MPF scheme and pay the contributions.
The 60-day employment rule does not apply to a causal employees in the construction and catering industries.

MPF is an employment-based retirement protection system for employees (both regular and causal) and self-employed persons, aged 18 to 65 years, normally residing and working in Hong Kong.
  • Relevant Income
Under the MPFSO, relevant income includes any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance (including housing allowance or other housing benefit) expressed in monetary terms, that are paid or payable by an employer to the employee in consideration of his/her employment.

Each of the following sources of incomes is regarded as relevant income: wages and salary; reimbursement or allowance in cash form; transportation and car subsidy; commission; tips collected by an employer; and court awards.

On the contrary, the following sources of income are not regarded as relevant income: reimbursement or allowance; travel allowance on non-monetary basis; tips not collected by an employer; employees’ benefits; termination payment; and other non-monetary income.

There are certain categories of persons in Hong Kong who are not required to join an MPF scheme. Employers of exempt persons are exempted from contributing to an MPF scheme for these exempt persons.

Should an individual cease to be exempt, the enrolment and contribution requirements apply from the cessation of the xemption. The following exempt persons not required to join an MPF scheme: 
  • Employees and self-employed persons under 18 years or 65 years and older;
  • domestic employees;
  • self-employed hawkers;
  • individuals 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;
  • foreigners 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.
  • Regular employees who are paid monthly
Employees and employers who are covered by the MPF system are each required to make regular mandatory contributions to an MPF scheme. The contributions are calculated at 5% of the employee’s relevant income, subject to minimum and maximum relevant income levels. For a monthly-paid employee, the minimum and maximum levels are respectively HK$7,100 (from 1 November 2013) and HK$30,000 (from 1 June 2014). Both employees and employers are free to make voluntary contributions in addition to mandatory contributions.
  • Casual employees who are not paid on a monthly basis
The calculations of mandatory contributions for casual employees in the Industry Schemes differ from those for regular employees. Casual employees in the construction and catering industries are commonly paid on daily, weekly or bi-monthly basis. Employers should calculate the minimum and maximum levels of relevant income in the differing payroll cycles, to determine the amount of the contribution. The calculation should be based on the daily minimum relevant income of HK$280 (from 1 November 2013) and the daily maximum level of HK$1,000 (from 1 June 2014). The employees and employers are free to make voluntary contributions in addition to mandatory contributions.
  • Self-employed persons
Self-employed persons who are covered by the MPF system must make regular mandatory contributions to an MPF scheme, calculated at 5% of their relevant income, subject to the minimum and maximum relevant income levels. They can opt to make mandatory contributions on a monthly or yearly basis. The respective minimum and maximum relevant income levels are HK$7,100 per month (or HK$85,200 per year) and HK$30,000 per month (or HK$360,000 per year) (from 1 June 2014). Self-employed persons are free to make voluntary contributions on top of their mandatory contributions. 
  • Transfer of accrued benefits
The MPF contributions made by an employee and their current employer are held in a contribution account for investment within the MPF scheme selected by the employer (i.e. the original scheme). When an employee changes jobs, they have three alternatives in dealing with their accrued benefits (i.e. the accumulated contributions and investment returns) held in the contribution account under the original scheme:

(a) transfer the accrued benefits from the contribution account in the original scheme o a personal account in any other Master Trust Scheme or Industry Scheme of the employee’s choice;

(b) retain the accrued benefits in the original scheme under a persona account (this option does not apply to members of Employer-sponsored Schemes on changing employment); or

(c) transfer the accrued benefits from the contribution account in the original scheme to the contribution account in the scheme of the new employer.  
  • Withdrawal of accrued benefits
Since the MPF system was introduced to help the workforce save for old age, withdrawal of accrued benefits is only allowed when a scheme member reaches retirement age at 65 year, as stipulated in the MPFSO.
However, there are circumstances under which accrued benefits may be paid before a scheme member reaches the age of 65 years, provided that the following specified conditions can be met:

(1) early retirement at the age of 60;
(2) permanent departure from Hong Kong;
(3) total incapacity;
(4) a small balance account of HK$5,000 or less and no contributions have been made to an MPF scheme for twelve months; or
(5) death. 

November 2015

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