Mandatory Provident Fund (MPF)
The world today is very different from that say 50 years ago. Nowadays, many places in the world have a rapidly ageing population problem. Saving for your future is not just a wise saying - it is prudent and essential to do so.
Hong Kong has a rapidly ageing population statistics show that by 2036 26.4% of Hong Kong’s population will be over 65.
Prior to the introduction of the MPF System, only about one-third of the nearly three million workforce in Hong Kong enjoyed some form of retirement protection or provision.
The Hong Kong Mandatory Provident Fund was implemented in 1 December 2000, following the enactment of the Mandatory Provident Fund Schemes Ordinance in August 1995 and Provident Fund Schemes Legislation (Amendment) Ordinance 1998 in March 1998.
About Mandatory Provident Fund The MPF System
The MPF System is the “second pillar” of the multi-pillar retirement protection framework recommended by the World Bank. The key features of the MPF System include:
- Coverage: All employees and self-employed persons aged 18 to 64, unless exempt under the Mandatory Provident Fund Scheme Ordnance (“MPFSO”), are covered by the MPF System, to which the employee’s employer must also contribute.
- Exemption: Under the MPFSO, the following are exempt persons who are not required to join an MPF scheme:
1. Person’s covered by statutory pension or provident fund schemes (e.g. civil servants, judicial officers, and teachers in subsidised or grant schools);
2. Member’s of occupational retirement schemes regulated under the Occupational Retirement Schemes Ordinance (“ORSO”) (Chapter 426, Laws of Hong Kong) that are granted exemption under the MPFSO (i.e. MPF-exempted ORSO schemes);
3. Person’s from overseas who enter Hong Kong for employment or self-employment for not more than 13 months; or who are members of retirement schemes of a place outside Hong Kong;
4. Employee’s of the European Union Office of the European Commission in Hong Kong; domestic employees; and self-employed hawkers.
5. Employee’s who are employed for less than 60 days, excluding casual employees as defined under the MPFSO are also exempt from joining an MPF scheme.
- Mandatory contributions: An employee and his/her employer are both required to contribute 5% of the employee’s relevant income as mandatory contributions for and in respect of the employee to an MPF scheme, subject to a maximum relevant income level for contribution purposes (currently, $30,000 per month or $1,000 per day). An employee whose income is less than the minimum level of relevant income (currently, $7,100 per month or $280 per day) is not required to contribute. However, his/her employer is still required to make mandatory contributions for him/her. Self-employed persons also have to contribute 5% of their relevant income as mandatory contributions, subject to the minimum and maximum levels of relevant income for contribution purposes.
Relevant income: $15,000 per month
Employee: The employee and the employer must each make mandatory contributions of $750 (5% of $15,000)
Self-employed person: Mandatory contributions of $750 (5% of $15,000)
Relevant income: $40,000 per month
Employee: Mandatory contributions by the employee and the employer limited to $1,500 each (5% of $30,000 maximum level of relevant income for contribution purpose). Additional amounts may be paid by the employee or the employer or both as voluntary contributions.
Self-employed person: Mandatory contributions of $1,500 (5% of $30,000 maximum level of income for contribution purpose). Additional voluntary contributions may be made.
- Vesting: Any mandatory contributions paid to an MPF scheme for and in respect of an employee and any investment return derived from the investment of the mandatory contributions are fully and immediately vested in the employee as accrued benefits (i.e. accumulated contributions and investment returns), except for those derived from the employer’s mandatory contributions which can be used for offsetting severance payments and long service payments. Similarly, contributions made by a self-employed person and the related investment returns are fully and immediately vested in the person.
- Preservation of benefits: Accrued benefits derived from mandatory contributions must be preserved until a scheme member reaches the retirement age of 65 or satisfies other circumstances specified in the MPFSO, namely early retirement on attaining the age of 60, permanent departure from Hong Kong, total incapacity, terminal illness, small balance of $5,000 or less in an MPF scheme, and death.
- Portability of benefits: When an employee ceases employment or changes jobs, he/she can transfer the accrued benefits from his/her contribution account to:
- a contribution account in his/her new employer’s MPF scheme;
- or an MPF personal account in any MPF schemes
- Voluntary contributions: Contributions paid in excess of the mandatory amount are voluntary in nature. Employees and self-employed persons may make voluntary contributions to accumulate more accrued benefits for retirement. Employers may also make voluntary contributions for their employees.
- Tax deduction: Subject to limits, mandatory contributions of employees and self-employed persons, and mandatory contributions made by employers for their employees are tax deductible.
- Enforcement Against Non-compliant Employers: To protect employees’ rights and benefits under the MPF system, Mandatory Provident Fund Authority (MPFA) adopts various practicable means to enforce the law against non-compliant employers. In accordance with the MPF legislation, a surcharge calculated at 5% of the default contribution amount is imposed on employers who fail to make mandatory contributions for their employees on time. The surcharges received are credited into the relevant employees’ MPF accounts. After completing investigations into employers regarding contributions and surcharges in arrears, MPFA may pursue civil claims against the employers in substantiated cases. The MPFA is empowered to impose a financial penalty of $5,000 or 10 per cent of the amount of default contribution, whichever is greater, on a defaulting employer. Where sufficient evidence is available, prosecution may be initiated against employers who do not enrol their employees in MPF schemes, fail to make contributions for employees or do not comply with a court order to settle outstanding contributions. Upon conviction, defaulting employers are subject to a fine and imprisonment.
Types of MPF Funds
MPF Conservative Fund: Is a type of money market fund and generally described as a money market fund. All MPF schemes are required to offer an MPF Conservative Fund. All investments involve risks. This fund type is a low-risk fund, but its return may not beat inflation and may even be negative.
Risk Tolerance level – Relatively low
Equity Fund: There are usually three types of Equity Funds, those investing in a single market (e.g. Hong Kong Equity Fund, regional market (e.g. Asian fund) of global market. They invest mainly stocks listed on the stock exchanges approved by the MPFA.
Risk Tolerance level – Relatively high
Bund Fund: The bonds must meet the minimum credit rating or listing requirements prescribed by the MPFA
Risk Tolerance level – Low to medium
Mixed Assets Fund: Also know as balanced funds. Different Mixed Assets Funds have a proportion of stocks and bonds. In general, a greater proportion of stocks is associated with a higher level of risk. Labelling the fund “balanced” does not necessarily imply a 50-50 split between stocks and bonds in the fund’s assets. Some trustees also offer Target Date Funds, Life-Cycle Funds or asset rebalancing services to help scheme members adjust the proportion of various funds in their portfolios at different life stages.
Risk Tolerance level – Medium to high, depending on relative weight of different assets in the investment portfolio. In general, a greater proportion of stocks is associated with a higher level of risk
Guaranteed Fund: The funds two major types of guarantees, capital guarantees and return guarantees. Both capital and return guarantees can either be conditional or unconditional. For conditional guarantees, the guarantee conditions must be met to benefit from the guarantee. Guaranteed funds can be investment linked (i.e. the fund return is based on the performance of the funds assets), or non-investment linked (i.e. the fund return does not hinge on the performance of the fund assets). The guarantor has the right to retain the investment earnings if they exceed the guaranteed return. The retained investment earnings may be taken as guarantor’s profit.
Risk Tolerance level – Relatively low, but it also depends on whether the guarantee conditions are met when the MPF is withdrawn