Mandatory Provident Fund Quiz 20

Correct: Statement I accurately reflects the regulatory requirement for Class G insurance policies, which must provide a guarantee on capital or return backed by either the insurer or an authorized third-party financial institution. Statement II correctly describes the nature of Money Market Funds, which focus on capital preservation and liquidity by investing in short-term instruments like certificates of deposit and treasury bills.

**Incorrect:** Statement III is incorrect because the primary objective of a Balanced Fund (Mixed Assets Fund) is to achieve modest growth in both income and capital through a diversified portfolio of shares and bonds, rather than focusing exclusively on interest income. Statement IV is incorrect because Equity Funds are generally high-risk vehicles characterized by high volatility, aiming for long-term capital growth rather than returns slightly above savings accounts.

**Takeaway:** Understanding the distinct risk-return profiles and underlying assets of MPF fund types, as well as the specific guarantee structures of insurance-based products, is essential for providing accurate advice to scheme members. Therefore, statements I and II are correct.

Correct: Statement I is accurate because under the Mandatory Provident Fund Schemes Ordinance, both the employer’s and the employee’s mandatory contributions are vested fully and immediately in the employee as accrued benefits once they are paid to the trustee. Statement III is also correct as the Employee Choice Arrangement (ECA) empowers employees to transfer the accrued benefits derived from their own mandatory contributions made during current employment from their contribution account to a personal account in an MPF scheme of their choice once every calendar year.

**Incorrect:** Statement II is incorrect because investment income or profits (net of losses) arising from the investment of mandatory contributions are fully and immediately vested in the scheme member, rather than being subject to a vesting scale. Statement IV is incorrect because employers are prohibited from clawing back the accrued benefits derived from mandatory contributions; vesting is immediate and absolute regardless of the length of service, though it may be subject to offsetting for severance or long service payments.

**Takeaway:** While mandatory contributions and their investment returns vest immediately and fully in the employee, the vesting of employer voluntary contributions is governed by the specific rules of the MPF scheme. The ECA enhances portability by allowing employees to move their own portion of mandatory contributions while still employed. Therefore, statements I and III are correct.

Correct: The statutory regulatory regime for MPF intermediaries, which came into effect on 1 November 2012, was established to provide a robust legal framework for the oversight of sales and marketing activities. By setting out clear statutory requirements for registration and conduct, the regime aims to ensure that intermediaries act professionally and in the best interests of clients, thereby significantly strengthening the protection of MPF scheme members.

**Incorrect:** The regime does not provide a government guarantee for investment returns, as MPF funds are market-based investments where the risk is borne by the member. It is also incorrect to suggest that intermediaries must be employees of the MPFA; they are generally professionals from the insurance, banking, or securities industries. Finally, the regime did not remove the roles of frontline regulators; instead, it utilizes the existing supervisory structures of the Monetary Authority, the Securities and Futures Commission, and the Insurance Authority to monitor intermediary conduct.

**Takeaway:** The implementation of the statutory regime for MPF intermediaries is a key regulatory pillar designed to enhance market integrity and member protection through the formal regulation of sales and marketing practices.

Correct: Statements I, II, III, and IV are all accurate reflections of the considerations and regulatory requirements for transferring MPF accrued benefits. Statement I correctly identifies the ‘out-of-market’ risk caused by the time lag between redemption and reinvestment. Statement II accurately describes the ‘forward pricing’ mechanism which prevents trading at a specific price. Statement III highlights the potential loss of guaranteed returns when exiting a guaranteed fund prematurely. Statement IV correctly states the general 30-day statutory requirement for the original trustee to complete the transfer after notification.

**Incorrect:** All statements provided are factually correct according to the MPF regulations and the Mandatory Provident Fund Schemes Authority (MPFA) guidelines. A common misconception is that members can time the market by choosing a specific price for the transfer, but the forward pricing mechanism makes this impossible. Another error is assuming the transfer happens instantly, whereas the 30-day window allows for administrative processing by the trustees.

**Takeaway:** When transferring MPF benefits, members must account for investment risks such as market fluctuations during the ‘sell low, buy high’ window and the potential forfeiture of fund guarantees, while trustees are bound by a 30-day limit to execute the transfer. Therefore, I, II, III & IV is correct.

Correct: The Net Asset Value (NAV) per unit is determined by calculating the sum of the market value of the fund’s underlying investments and its cash holdings, then subtracting all accrued liabilities such as management and administrative fees. This net amount is then divided by the total number of units currently issued. In this specific scenario, the calculation is (HKD 240,000,000 + HKD 12,000,000 – HKD 450,000 – HKD 150,000) / 20,000,000 units, resulting in a NAV of HKD 12.57 per unit.

**Incorrect:** A result of HKD 12.60 is incorrect because it only considers the total assets (investments plus cash) without deducting the accrued expenses. A result of HKD 12.63 is incorrect because it erroneously adds the accrued expenses to the assets instead of subtracting them as liabilities. A result of HKD 11.37 is incorrect because it treats the cash balance as a liability to be subtracted rather than an asset to be added to the investment value.

**Takeaway:** To accurately calculate the NAV per unit of an MPF constituent fund, all administrative and management fees accrued to date must be deducted from the aggregate market value of investments and cash before dividing by the number of units issued.

Correct: MPF Conservative Funds are subject to strict investment and fee regulations to protect members seeking a low-risk option. They are strictly prohibited from investing in equities or commodities to minimize volatility. Furthermore, the law stipulates that no initial fees (bid spreads) or redemption charges (offer spreads) can be imposed on members for this specific fund type. These funds are designed to be highly liquid and conservative, prioritizing capital preservation over high growth.

**Incorrect:** The assertion that the fund can invest in non-Hong Kong dollar assets is incorrect, as regulations require it to be 100% invested in Hong Kong dollar-denominated instruments. The claim regarding fixed administrative fees is also wrong; these fees can only be deducted if the fund’s monthly performance exceeds the prescribed savings rate declared by the MPFA. Lastly, the fund is restricted to short-term, high-quality debt or deposits, making a significant allocation to high-yield corporate bonds—which carry higher credit risk—inconsistent with the fund’s mandate.

**Takeaway:** To maintain a low-risk profile and protect member interests, MPF Conservative Funds must be 100% HKD-denominated, avoid volatile assets like equities, and are restricted from charging entry or exit fees.

Correct: Relevant income is defined under the Mandatory Provident Fund Schemes Ordinance to include all monetary payments made by an employer to an employee in consideration of their employment. This encompasses the base salary, any performance or productivity bonuses, and cash-based allowances such as a housing allowance. Because these items are paid in cash as part of the remuneration package, they must be aggregated to calculate the mandatory contribution.

**Incorrect:** Excluding the productivity bonus or the housing allowance is incorrect because the regulatory definition specifically includes bonuses and allowances. Conversely, including the reimbursement for the business dinner is incorrect because reimbursements for actual out-of-pocket business expenses are not considered income earned by the employee; they are simply the employer covering a cost incurred by the employee on the firm’s behalf.

**Takeaway:** For MPF purposes, relevant income includes almost all cash payments arising from employment (salary, bonuses, commissions, and allowances) but excludes non-monetary benefits and reimbursements for specific business-related expenses.

Correct: Statements II, III, and IV are accurate according to the MPFA Guidelines VI.2. If a principal intermediary does not have an audio recording system, it is permitted to arrange for the approved trustee, sponsor, or promoter to conduct the post-sale call. Furthermore, all records related to these calls, including audio files and written documentation, must be retained for a minimum of seven years. In cases where a risk mismatch is identified, the call must specifically confirm that the fund choice was the client’s own decision and remind them of the risk profile discrepancy.

**Incorrect:** Statement I is incorrect because the Guidelines explicitly require that the post-sale call be conducted by an authorized person of the principal intermediary who is NOT the subsidiary intermediary who conducted the regulated activity. This separation of duties is intended to provide an independent layer of verification for the client’s protection.

**Takeaway:** The MPF post-sale call process is a critical compliance measure for risk-mismatch scenarios, requiring independent verification, specific disclosures regarding risk, and a robust seven-year record-keeping period to ensure investor protection. Therefore, statements II, III and IV are correct.

Correct: Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), the Mandatory Provident Fund Schemes Authority (MPFA) is empowered to impose several types of disciplinary orders against regulated persons (including registered intermediaries and responsible officers) who fail to comply with performance requirements. These orders include the revocation or suspension of registration/approval, the issuance of public or private reprimands, and the imposition of a pecuniary penalty. The maximum pecuniary penalty is the greater of $10,000,000 or three times the amount of profit gained or loss avoided due to the failure.

**Incorrect:** Imprisonment is a criminal sanction that can only be imposed by a court of law following a criminal conviction; it is not a disciplinary order that the MPFA can directly issue. Therefore, any selection suggesting the MPFA can order a term of imprisonment as a disciplinary measure is inaccurate. Similarly, options that omit the pecuniary penalty or the reprimand powers fail to capture the full scope of the MPFA’s administrative authority under the Ordinance.

**Takeaway:** It is crucial to distinguish between the MPFA’s administrative disciplinary powers (reprimands, fines, registration status) and the criminal penalties (fines and imprisonment) determined by the court system for statutory offences.

Correct: Statements I, III, and IV are correct. Under the Mandatory Provident Fund (MPF) Schemes Ordinance, all mandatory contributions (both employer and employee portions) are fully and immediately vested in the scheme member as soon as they are paid into the scheme. The MPF System is designed as a “fully-funded” system, meaning it maintains assets that are sufficient to cover the accrued benefits of its members, rather than relying on future taxpayers. Furthermore, while mandatory contributions vest immediately by law, the vesting schedule for voluntary contributions is governed by the specific rules of the individual MPF scheme or the employment agreement.

**Incorrect:** Statement II is incorrect because the MPF System is specifically not a “pay-as-you-go” system. In a “pay-as-you-go” model, the contributions from the current working population are used to fund the pensions of current retirees. The MPF System, by contrast, requires that assets be accumulated and invested in individual accounts to meet future withdrawal requirements.

**Takeaway:** A fundamental pillar of the MPF System is that it is fully-funded with immediate vesting of mandatory contributions, ensuring that the system possesses adequate assets to cover all future benefit payments for members. Therefore, statements I, III and IV are correct.

Correct: Statement II is accurate because the Guidelines require that if a client cannot be reached by telephone for the post-sale call after several attempts, the principal intermediary must send a written document to confirm the fund choice and the risk mismatch. Statement III is correct as the mandatory retention period for audio recordings and related correspondence regarding post-sale calls is seven years. Statement IV is correct because a subsidiary intermediary is required to identify themselves during the initial contact by providing a business card that displays their registered name and MPF registration number.

**Incorrect:** Statement I is incorrect because the Guidelines explicitly state that the post-sale call must be conducted by an authorized person of the principal intermediary who is NOT the subsidiary intermediary who performed the regulated activity. This separation is intended to provide an independent check on the sales process.

**Takeaway:** To protect clients in cases of risk mismatch, MPF regulations mandate an independent post-sale call (or written follow-up if unreachable) and require intermediaries to maintain these records for seven years while ensuring transparent disclosure of their registration details from the outset. Therefore, statements II, III and IV are correct.

Correct: Under the Inland Revenue Ordinance and the Mandatory Provident Fund (MPF) regulatory framework, employers are permitted to claim tax deductions for the contributions they make toward their employees’ retirement. This deduction is applicable to the aggregate of both mandatory and voluntary contributions, capped at a maximum of 15% of the total annual emoluments of the employees concerned.

**Incorrect:** Voluntary contributions are not exempt from the standard investment restrictions; they must adhere to the same investment rules as mandatory contributions to ensure the prudent management of funds. Furthermore, the MPF Compensation Fund provides protection for accrued benefits derived from voluntary contributions in the same manner as it does for mandatory contributions. Finally, trustees are not prohibited from taking action regarding unpaid voluntary contributions; rather, they are required to follow up with employers regarding any such arrears in accordance with the scheme’s governing rules.

**Takeaway:** Employer contributions to an MPF scheme, whether mandatory or voluntary, are tax-deductible up to 15% of the employees’ annual emoluments, and voluntary contributions are subject to the same investment safeguards and compensation protections as mandatory ones.

Correct: The Mandatory Provident Fund (MPF) System is designed as an employment-based retirement protection framework, meaning it is linked to the employment relationship between employers and employees. It is a fully-funded system where contributions are specifically earmarked and invested for each individual member, and it is privately-managed by approved trustees from the private sector rather than being a government-run social security pool.

**Incorrect:** The MPF System is a defined contribution scheme, not a defined benefit scheme. In a defined benefit scheme, the retirement payout is typically calculated using a fixed formula based on years of service and salary. Under the MPF System, the final benefits are not guaranteed but are instead determined by the total amount of contributions made and the investment returns (or losses) generated by those contributions.

**Takeaway:** The three key pillars of the MPF System’s design are that it is employment-based, fully-funded, and privately-managed, which collectively distinguish it from pay-as-you-go or defined benefit pension models. Therefore, the correct combination is (i), (ii) and (iii) only.

Correct: Statements I, II, and III are accurate according to the Employee Choice Arrangement (ECA) regulations. Statement I is correct because employees are permitted to transfer their own mandatory contributions from their current employment to a personal account of their choice once per calendar year. Statement II is correct because the ECA does not extend transfer rights to the employer’s portion of mandatory contributions for the current employment; these must remain in the original scheme. Statement III is correct because mandatory contributions from former employment or self-employment that have been consolidated into a current contribution account retain full portability and can be moved to a personal account or another contribution account at any time.

**Incorrect:** Statement IV is incorrect because the ECA specifically stipulates that employee mandatory contributions from current employment can only be transferred to a personal account. They are not permitted to be transferred into a contribution account (which is an account receiving active contributions from a current employer). Only benefits derived from former employment or self-employment have the flexibility to be transferred into either a personal account or a contribution account.

**Takeaway:** The Employee Choice Arrangement (ECA) provides employees with the right to transfer their own current mandatory contributions to a personal account once a year, while employer contributions for current employment remain restricted, making the correct combination I, II & III only. Therefore, statements I, II and III are correct.

Correct: Statements I, III, and IV accurately reflect the regulatory requirements for MPF contributions. Under the Mandatory Provident Fund Schemes Ordinance, if a contribution day falls on a Saturday, a public holiday, or a day with a gale or black rainstorm warning, the deadline is extended to the next following day that does not meet those criteria. For self-employed persons (SEPs) opting for a monthly contribution cycle, the contribution day is defined as the last day of the relevant contribution period.

**Incorrect:** Statement II is incorrect because the 60-day permitted period for enrolling an employee is a fixed statutory timeframe. Unlike the contribution day, the permitted period ends exactly on the 60th day of employment, regardless of whether that day is a Saturday, public holiday, or subject to severe weather warnings.

**Takeaway:** It is vital to distinguish between the ‘permitted period’ for enrollment, which has no holiday extensions, and the ‘contribution day’ for payment submissions, which is legally extended if it falls on a non-working day or during specific weather warnings. Therefore, statements I, III and IV are correct.

Correct: While the general deadline for applying for an MPF exemption for an ORSO scheme was 3 May 2000, the regulations provide an exception for successor schemes. A successor scheme can be granted MPF exemption after this deadline if it is established due to a genuine business transaction, such as a corporate restructuring or merger. In such cases, employees who were already “existing members” of the original exempted scheme can retain that status in the successor scheme, meaning they remain exempt from the “minimum MPF benefits” preservation and portability requirements that apply to new members.

**Incorrect:** The assertion that the 3 May 2000 deadline is absolute and allows no exceptions is incorrect because the law specifically accommodates successor schemes. The suggestion that exemption is automatically transferred is also false, as a formal application must still be made and approved by the MPFA. Finally, the claim that all members must follow the “minimum MPF benefits” rules in a successor scheme is inaccurate, as the law allows “existing members” to maintain their original status and benefits structure.

**Takeaway:** The MPF exemption framework allows for business continuity through successor schemes, ensuring that genuine corporate restructurings do not unfairly penalize employers or employees who have maintained exempted ORSO arrangements since the system’s inception.

Correct: According to the Mandatory Provident Fund Schemes Ordinance, “relevant income” encompasses all monetary payments paid by an employer to an employee, including wages, salary, leave pay, fees, commissions, bonuses, gratuities, perquisites, or allowances. Service charges collected by the employer (including those added to credit card bills) and subsequently distributed to staff are considered tips collected via the employer and are classified as relevant income. Additionally, commissions based on the number of transactions or project-based results are explicitly included in the definition of relevant income.

**Incorrect:** Tips that are paid directly by customers to employees (such as cash left on a table) and shared among staff without any intervention or collection by the employer are excluded from the definition of relevant income. Furthermore, payments made to an employee for significant personal events, such as a marriage gift, are not considered part of the regular employment remuneration and are excluded from relevant income calculations.

**Takeaway:** For MPF purposes, the distinction for tips and gratuities depends on whether the employer acts as an intermediary in the collection and distribution process; only those handled by the employer are considered relevant income. Personal event gifts and direct customer-to-employee tips are excluded. Therefore, statements I and IV are correct.

Correct: Under the Employee Choice Arrangement (ECA), scheme members are entitled to transfer the accrued benefits derived from their own mandatory contributions made during their current employment to an MPF scheme of their choice at least once every calendar year. A fundamental protection for members is that no fees or financial penalties may be imposed for any transfer of accrued benefits, regardless of the frequency or type, except for necessary transaction costs (such as brokerage or stamp duty) incurred in the buying and selling of investments that are payable to a third party other than the trustee.

**Incorrect:** The suggestion that employer mandatory contributions from current employment can be transferred under the ECA is incorrect, as these must generally remain in the employer-selected scheme until the employment relationship terminates. The claim that a trustee can charge a percentage-based exit fee is false, as the regulations strictly prohibit administrative fees or penalties for transfers. Finally, there is no regulatory requirement for an employee to obtain formal consent from their employer to exercise their statutory right to transfer their own contribution portion under the ECA.

**Takeaway:** MPF regulations ensure the portability of benefits by allowing employees to transfer their own mandatory contributions once a year under the ECA and by prohibiting trustees from charging administrative fees for any benefit transfers.

Correct: Statement I is accurate as the Mandatory Provident Fund Schemes Ordinance requires employers to notify the trustee of an employee’s cessation of employment by the 10th day of the month following the month in which the employee left. Statement II is correct because employers are mandated to provide a monthly pay-record to employees within 7 working days after the last contribution payment of the month. Statement III is correct because if no election is made by the employee within 3 months of the trustee receiving the termination notice, the benefits are automatically transferred to a personal account within the same scheme.

**Incorrect:** Statement IV is incorrect because the Non-Compliant Employer and Officer Records (NCEOR) is a public database. It was established by the MPFA specifically to increase transparency and provide a deterrent effect by allowing the public to search for records of criminal convictions and civil awards/judgments against non-compliant employers and officers.

**Takeaway:** Employers must strictly follow administrative timelines for reporting employment changes and providing records to staff, as failure to comply can lead to public disclosure of their non-compliance through the NCEOR. I, II & III only. Therefore, statements I, II and III are correct.

The primary driver for the implementation of the MPF system is the significant demographic shift in Hong Kong, characterized by an ageing population. As the proportion of residents aged 65 and over is projected to increase substantially—reaching over one-third of the population by 2064—the traditional reliance on family-based support becomes less sustainable. A mandatory system ensures that the working population accumulates dedicated savings to mitigate the risk of old age poverty, as the ratio of workers to retirees declines and life expectancy increases. While social welfare programs exist, the MPF is designed as a pillar of retirement protection to complement, rather than replace, government-funded safety nets. It is also incorrect to suggest that family support is legally restricted; rather, the system acknowledges that families may lack the necessary resources or members to provide adequate care. Additionally, the system was introduced precisely because many individuals lack the inherent awareness or financial capacity to save sufficiently for retirement on their own, contradicting the idea that private savings were already adequate.

**Takeaway:** The MPF system serves as a structural response to Hong Kong’s ageing population and the diminishing capacity of traditional family units to provide comprehensive financial security for retirees.

Correct: The regulatory framework for MPF products involves a division of labor where the Mandatory Provident Fund Schemes Authority (MPFA) is responsible for the overall administration and registration of schemes and funds under the MPF Ordinance, focusing on operational and investment compliance. Conversely, the Securities and Futures Commission (SFC) is responsible for authorizing the products for public offering, vetting the disclosure in offering documents and marketing materials, and licensing the investment managers.

**Incorrect:** The claim that the SFC handles the registration of schemes under the MPF Ordinance is inaccurate, as registration is the statutory duty of the MPFA. Similarly, the MPFA does not vet advertisements or marketing materials for public distribution; this function is performed by the SFC to ensure investor protection through proper disclosure. It is also incorrect to suggest that the MPFA is the sole body responsible for licensing investment managers, as this falls under the SFC’s regulatory remit.

**Takeaway:** Understanding the complementary roles of the MPFA and SFC is essential; the MPFA focuses on the structural registration and investment rules of the MPF System, while the SFC focuses on product authorization, disclosure quality, and the conduct of investment managers.

Correct: According to the MPF Guidelines (specifically III.60 under Guidelines VI.2), a principal intermediary is required to maintain an up-to-date list of all subsidiary intermediaries acting on its behalf. Furthermore, if the principal intermediary decides to withdraw its consent for a subsidiary intermediary to act, it must notify the Mandatory Provident Fund Schemes Authority (MPFA) as soon as practicable to ensure the register remains accurate.

Correct: Statements II, III, and IV are accurate. Under the Mandatory Provident Fund (MPF) framework, voluntary contributions are managed by the same approved trustees, investment managers, and custodians as mandatory contributions to ensure professional oversight. They are also protected by the same indemnity insurance. Furthermore, the MPF legislation specifies that the rules regarding vesting, preservation, portability, and withdrawal for voluntary contributions are determined by the governing rules of the specific MPF scheme, rather than the strict statutory requirements that apply to mandatory contributions.

**Incorrect:** Statement I is incorrect because voluntary contributions are explicitly exempt from the statutory preservation and withdrawal provisions that apply to mandatory contributions. While mandatory contributions generally cannot be withdrawn until age 65 (with specific exceptions), the withdrawal of voluntary contributions is subject to the flexibility allowed by the individual scheme’s rules.

**Takeaway:** Although voluntary contributions share the same institutional management and insurance protections as mandatory contributions, their specific terms regarding vesting and withdrawal are governed by the scheme’s rules rather than the MPF Ordinance’s statutory restrictions. Therefore, statements II, III and IV are correct.

Correct: All four statements accurately reflect the division of regulatory responsibilities in the Hong Kong MPF system. The Securities and Futures Commission (SFC) is indeed responsible for licensing investment managers who handle MPF portfolios. The Mandatory Provident Fund Schemes Authority (MPFA) holds the mandate to establish rules and guidelines for the administration of contributions. The Insurance Authority (IA) and the Monetary Authority (MA) are responsible for the supervision and investigation of registered MPF intermediaries whose core businesses are insurance and banking, respectively, while the MA specifically ensures the financial soundness of banks acting as custodians.

**Incorrect:** There are no incorrect statements in this set. Misunderstandings in this area typically arise from confusing the SFC’s role in vetting marketing materials and offering documents with the MPFA’s role in the overall registration of schemes, or failing to recognize that the MA and IA retain supervisory authority over intermediaries based on their primary industry sector.

**Takeaway:** The MPF regulatory framework is a multi-agency model where the MPFA acts as the lead regulator, while the SFC, IA, and MA provide specialized oversight of products, service providers, and intermediaries within their respective jurisdictions of securities, insurance, and banking. Therefore, all of the above statements are correct.