Understanding the Mandatory Provident Fund (MPF) System in Hong Kong

The Mandatory Provident Fund (MPF) System in Hong Kong is a crucial component of the city’s retirement protection framework. Designed to cater to the needs of the workforce, the MPF System is the “second pillar” of the multi-pillar retirement protection framework recommended by the World Bank. This blog post aims to provide a comprehensive overview of the MPF System, including its coverage, features, and benefits, to help you better understand how it works and how it can benefit you.

Coverage and Eligibility

The MPF System covers a broad range of individuals, including employees and self-employed persons aged 18 to 64. However, there are certain exemptions under the Mandatory Provident Fund Schemes Ordinance (MPFSO). These exemptions include:

• Statutory Pension or Provident Fund Schemes: Individuals covered by statutory pension or provident fund schemes.
• Occupational Retirement Schemes: Members of occupational retirement schemes regulated under the Occupational Retirement Schemes Ordinance (ORSO).
• Short-Term Employment: Persons from overseas who enter Hong Kong for employment or self-employment for not more than 13 months.
• Specific Employment Roles: Employees of the European Union Office of the European Commission in Hong Kong, domestic employees, and self-employed hawkers.
• Casual Employees: Employees who are employed for less than 60 days, excluding casual employees as defined under the MPFSO.

Contributions and Benefits

Mandatory Contributions

Both employees and employers are required to make mandatory contributions to the MPF scheme. Each party contributes five per cent of the employee’s relevant income. The maximum relevant income level for contribution purposes is currently $30,000 per month or $1,000 per day. Employees whose income is less than the minimum level of relevant income (currently $7,100 per month or $280 per day) are not required to contribute, but their employers are still required to make mandatory contributions for them.

Self-employed persons also have to contribute five per cent of their relevant income as mandatory contributions, subject to the minimum and maximum levels of relevant income for contribution purposes.

Voluntary Contributions

In addition to mandatory contributions, employees and self-employed persons can make voluntary contributions to accumulate more accrued benefits for retirement. Employers may also make voluntary contributions for their employees. These voluntary contributions are not required but can help build a larger retirement fund.

Tax Deductions

Mandatory contributions made by employees and self-employed persons, as well as mandatory contributions made by employers for their employees, are tax deductible, subject to certain limits. This can provide additional financial benefits by reducing taxable income.

Preservation and Withdrawal of Benefits

Accrued benefits derived from mandatory contributions must be preserved until the scheme member reaches the retirement age of 65 or satisfies other specified circumstances. These circumstances include:

• Early Retirement: On attaining the age of 60.
• Permanent Departure from Hong Kong: If the individual permanently leaves Hong Kong.
• Total Incapacity: If the individual is totally incapacitated.
• Terminal Illness: If the individual is diagnosed with a terminal illness.
• Small Balance: If the balance in the MPF scheme is $5,000 or less.
• Death: Upon the death of the scheme member.

When an employee changes jobs, they can transfer their accrued benefits from their contribution account to a contribution account in their new employer’s MPF scheme or an MPF personal account in any MPF scheme (excluding an employer-sponsored scheme). The Employee Choice Arrangement allows employees to transfer their accrued benefits derived from their mandatory contributions to an MPF personal account in any MPF scheme of their choice once every calendar year.

Protection and Regulation

To ensure the interests of scheme members are adequately protected, all MPF schemes are managed and maintained by MPF trustees. MPF scheme assets are kept under the safe custody of qualified custodians and are separate from the assets of employers, MPF trustees, and other service providers. The MPF System includes a “safety net” mechanism, which consists of capital adequacy requirements, professional indemnity insurance, and a Compensation Fund.

MPF investments must be permissible investments prescribed in the MPF legislation and are subject to stringent regulation to safeguard scheme members against undue investment risks. MPF trustees and investment managers are bound by detailed duties and powers set out in the law regarding the administration and investment management of MPF funds.

Education and Compliance

The MPF Authority (MPFA) has implemented various measures to ensure that MPF trustees and service providers comply with legislative requirements and act in the best interests of scheme members. These measures include stringent approval and registration criteria, ongoing monitoring, and enforcement against non-compliant employers. The MPFA has also established a set of Compliance Standards to assist MPF trustees in establishing a rigorous framework for monitoring their compliance with statutory duties and responsibilities.

The MPFA has issued a Code on Disclosure for MPF Investment Funds to improve the disclosure of information on fees and charges and the performance of MPF funds. Additionally, the MPFA rolls out MPF education programmes to reinforce the public’s understanding of the MPF System, publicise significant changes to the System, and educate scheme members on practical issues, including how to manage their MPF investments, the features and relative risk levels of major types of MPF funds, and the issues to note when making decisions at different stages of their lifelong investment process.

Conclusion

The Mandatory Provident Fund (MPF) System in Hong Kong is a vital component of the city’s retirement protection framework. It ensures that employees and self-employed persons have a secure financial future by requiring mandatory contributions and offering the option for voluntary contributions. The system is well-regulated and includes a safety net to protect the interests of scheme members. By understanding the MPF System, you can make informed decisions about your retirement savings and ensure a more secure financial future.

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