Mandatory Provident Fund Quiz 22

Correct: The Net Asset Value (NAV) per unit is determined by taking the sum of the total market value of the fund’s underlying investments and its cash holdings, then subtracting any accrued administrative and management expenses. In this scenario, the calculation is (HKD 500 million + HKD 50 million – HKD 2 million) divided by 40 million units, which equals HKD 13.70 per unit.

**Incorrect:** The value of HKD 13.80 is incorrect because it erroneously adds the accrued expenses to the assets instead of deducting them. The figure of HKD 12.45 is wrong because it fails to include the cash holdings in the total valuation of the fund. The amount of HKD 13.75 is incorrect because it represents the gross asset value per unit without accounting for the mandatory deduction of accrued management and administrative fees.

**Takeaway:** For MPF constituent funds, the NAV per unit must reflect the net position of the fund, meaning all liabilities and accrued expenses must be subtracted from the total asset value (investments plus cash) before dividing by the number of units in issue.

Correct: Statements I, III, and IV are accurate according to the Mandatory Provident Fund Schemes Ordinance. The contribution day is legally extended to the next working day if it falls on a Saturday, public holiday, or during extreme weather (gale or black rainstorm warnings). Employers are also mandated to provide a monthly pay-record to employees within 7 working days of the contribution payment. For self-employed persons opting for an annual contribution cycle, the deadline is the financial year end of the specific MPF scheme.

**Incorrect:** Statement II is incorrect because the 60-day permitted period for enrolling an employee into an MPF scheme is a fixed duration. 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 extreme weather warnings.

**Takeaway:** It is vital to distinguish between the ‘permitted period’ for enrollment, which is a strict 60-day count, and the ‘contribution day,’ which allows for extensions when the deadline falls on a non-working day or during severe weather conditions in Hong Kong. Therefore, statements I, III and IV are correct.

Correct: Relevant income for a relevant employee includes all monetary payments such as wages, salary, leave pay, fees, commissions, bonuses, and allowances paid by an employer to an employee in respect of their employment. In this scenario, both the base salary and the sales commission are considered part of the relevant income because they are monetary rewards provided in consideration of the employee’s service to the firm.

**Incorrect:** Housing reimbursements are excluded from the definition of relevant income if they are actual reimbursements of housing expenses supported by evidence or the provision of a housing unit. Furthermore, statutory severance payments and long service payments made in accordance with the Employment Ordinance are specifically excluded from the calculation of relevant income for MPF purposes. Therefore, any combination that includes the housing reimbursement or the severance payment is inaccurate.

**Takeaway:** When determining the basis for MPF contributions, it is essential to include all performance-based pay and standard wages while excluding statutory compensation like severance pay and specific non-income benefits like housing reimbursements.

Correct: For an MPF Conservative Fund, the deduction of administrative expenses is strictly regulated to protect the interests of scheme members. These expenses can only be deducted if the investment return of the fund for a particular month exceeds the prescribed savings rate (which is based on the average interest rates offered by the three note-issuing banks in Hong Kong on savings accounts) as declared by the MPFA. If the return is lower than or equal to the prescribed savings rate, no administrative expenses can be charged for that period.

**Incorrect:** Simply achieving a positive return is not enough; the return must specifically outperform the prescribed savings rate. While the MPFA and SFC must approve the maximum levels of fees, they do not provide individual approvals for monthly fee deductions. Furthermore, the performance of equity indices like the Hang Seng Index is irrelevant to the fee-charging mechanism of an MPF Conservative Fund, which is designed as a capital preservation vehicle.

**Takeaway:** The MPF Conservative Fund is the only type of MPF fund where the charging of administrative fees is performance-linked, specifically requiring the fund to outperform the MPFA’s prescribed savings rate before such fees can be collected.

Correct: Statement I is correct because the Mandatory Provident Fund legislation requires a Statement of Investment Policy (SIP) for each constituent fund and Approved Pooled Investment Fund (APIF) to include the expected return of the overall portfolio to maintain high transparency. Statement II is correct because an APIF structured as an insurance policy must be a Class G policy (long-term insurance for retirement benefits with guarantees) and must be authorized by the SFC as a collective investment scheme under section 104 of the Securities and Futures Ordinance.

**Incorrect:** Statement III is incorrect because index-tracking funds are not restricted to full replication; they may track an index by investing in a representative sample of the constituent securities. Statement IV is incorrect because target date funds are designed to reduce risk as retirement approaches by decreasing equity exposure and increasing investments in conservative assets like bonds, rather than increasing equity exposure.

**Takeaway:** MPF regulations mandate specific disclosures in the Statement of Investment Policy, including risk and expected return, while defining the structural requirements for APIFs and the operational flexibility of index-tracking funds. Therefore, statements I and II are correct.

Correct: According to the Guidelines on Conduct Requirements for Registered Intermediaries (VI.2), if a client insists on a fund choice that does not match their assessed risk profile, the intermediary must explain the risk mismatch to the client and the reasons why the fund may not be suitable. If the client still wishes to proceed, the intermediary should document the warning provided and ensure the client acknowledges that they understand the risks involved before executing the instruction.

**Incorrect:** Refusing the instruction is incorrect because the guidelines do not empower the intermediary to block a client’s choice, provided the client has been properly warned of the risks. Automatically adjusting the portfolio to a medium-risk fund is inappropriate as it ignores the client’s specific instruction and fails to address the suitability gap through proper disclosure. Proceeding immediately without any warning or documentation is a breach of the conduct requirements regarding suitability assessments and risk matching, as the intermediary has a duty to ensure the client is informed of potential mismatches.

**Takeaway:** When a risk mismatch occurs between a client’s profile and their chosen MPF investment, the intermediary’s primary duty is to provide a clear warning, document the interaction, and ensure the client makes an informed decision to proceed.

Correct: For casual employees working in the construction or catering industries, the standard 60-day employment rule does not apply. These individuals are covered by the MPF system from their first day of employment. Furthermore, while Industry Schemes are specifically designed to handle the high labor mobility of these sectors, it is optional for employers to use them; they may choose to enroll their casual employees in a Master Trust Scheme instead.

**Incorrect:** The requirement for a continuous employment period of 60 days or more applies to most relevant employees but is explicitly waived for casual employees in the two designated industries (construction and catering). While Industry Schemes are tailored for these sectors to minimize administrative costs when workers change employers, they are not legally mandated, and employers retain the right to use other scheme types. Additionally, MPF coverage for relevant employees is determined by age and the existence of an employment contract, meaning the specific number of hours worked or the location of the work does not exempt an employee from the system.

**Takeaway:** Casual employees in the catering and construction industries are unique in the MPF system because they lack a minimum employment period for coverage, though their employers still have the discretion to choose between Industry Schemes and Master Trust Schemes.

Correct: Statement II is correct because the Guidelines on Conduct Requirements for Registered Intermediaries explicitly state that the three industry regulators (the Insurance Authority, Monetary Authority, and Securities and Futures Commission) will be guided by these Guidelines when performing their supervisory and investigatory functions. Statement III is also correct as the Guidelines are intended to be complementary to, and do not replace, any legislative provisions or codes issued by frontline regulators.

**Incorrect:** Statement I is incorrect because the Guidelines do not have the force of law and cannot override any provision of the law, including the MPFSO. Statement IV is incorrect because the Guidelines are not exhaustive; the MPFA may determine that acts or omissions not specifically mentioned in the Guidelines still constitute a breach of performance requirements.

**Takeaway:** The MPFA Guidelines provide a framework for minimum conduct standards and assist frontline regulators in supervision, but they are non-exhaustive and remain subordinate to statutory legislation. Therefore, statements II and III are correct.

Correct: Relevant income is defined as any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, expressed in monetary terms, paid by an employer to an employee in consideration of employment. In this scenario, the basic salary, the commission for meeting targets, and the transport allowance all fall under this definition and must be included in the contribution calculation.

**Incorrect:** The Mandatory Provident Fund Schemes Ordinance specifically excludes severance payments and long service payments made under the Employment Ordinance from the definition of relevant income. Therefore, including the statutory long service payment is incorrect. Additionally, excluding the commission or the transport allowance would be incorrect as they are standard components of relevant income according to the statutory definition.

**Takeaway:** While most forms of monetary compensation and allowances are included in relevant income, statutory payments like long service or severance pay are specifically excluded from MPF contribution calculations.

Correct: Statement I is correct because the Mandatory Provident Fund (MPF) legislation sets a maximum relevant income level (currently HK$30,000 per month), which caps the 5% mandatory contribution at HK$1,500 for both the employer and the employee. Statement II is correct as the MPF Ordinance specifies that the rules for vesting, preservation, portability, and withdrawal of voluntary contributions are determined by the governing rules of the specific MPF scheme rather than the statutory requirements that apply to mandatory contributions. Statement III is correct because assets derived from voluntary contributions are required to be managed by the same approved trustees and investment managers as mandatory contributions and are similarly protected by indemnity insurance.

**Incorrect:** Statement IV is incorrect because voluntary contributions are explicitly exempt from the statutory preservation and withdrawal rules that apply to mandatory contributions. While mandatory contributions generally cannot be withdrawn until the member reaches age 65 (subject to specific exceptions), the withdrawal conditions for voluntary contributions are defined by the individual scheme’s governing rules.

**Takeaway:** Although voluntary contributions are managed under the same professional trust structure and insurance protections as mandatory contributions to ensure asset safety, they offer significantly more flexibility regarding vesting and withdrawal as these aspects are governed by scheme-specific rules rather than strict statutory preservation laws. I, II & III only. Therefore, statements I, II and III are correct.

Correct: Under the Mandatory Provident Fund Schemes Ordinance, both principal and subsidiary intermediaries are required to notify the MPFA in writing of specific changes, including changes to their address or contact details, within 7 working days of the occurrence. Failure to comply with this notification requirement without a reasonable excuse is a statutory offence that carries a maximum fine of $50,000.

**Incorrect:** Timeframes such as 7 calendar days, 14 working days, or one month do not align with the specific statutory reporting window for changes in contact information. While a one-month period is relevant for the payment of annual fees and the submission of annual returns, it does not apply to reporting changes in personal or business details. Furthermore, while the MPFA may suspend registration for administrative failures like non-payment of fees, the primary legal sanction for failing to report contact changes is a fixed maximum fine.

**Takeaway:** Registered intermediaries must be diligent in reporting changes to their contact details or regulatory status to the MPFA within the strict 7-working-day window to avoid a fine of $50,000.

Correct: Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), the MPFA must adhere to procedural fairness before imposing sanctions. This includes issuing a written notice of its preliminary view, detailing the reasons and the proposed disciplinary order, and granting the regulated person the right to make representations, either orally or in writing. If a final decision is made, the intermediary has a two-month period from the date of the notice to lodge an appeal with the Mandatory Provident Fund Schemes Appeal Board, which acts as an independent body for such grievances.

**Incorrect:** The assertion that disciplinary decisions are strictly confidential is inaccurate, as the MPFA is legally empowered to disclose disciplinary details (except for private reprimands) to the public, typically via press releases, and must record these orders in the Register of Intermediaries for five years. Additionally, while Frontline Regulators (FRs) conduct the investigations, they do not have the authority to impose the final disciplinary sanctions; that power rests solely with the MPFA. The timeframe for an appeal is specifically two months, making any shorter duration like 30 days legally incorrect.

**Takeaway:** The disciplinary framework for MPF intermediaries ensures transparency and fairness by requiring preliminary notices and representation opportunities, providing a two-month appeal window to an independent board, and allowing for public disclosure of most sanctions.

Correct: Participation in the Mandatory Provident Fund (MPF) system is a statutory requirement for all relevant employees in Hong Kong, whereas Occupational Retirement Schemes Ordinance (ORSO) schemes are voluntary retirement protection arrangements established at the employer’s discretion. Regarding vesting, MPF mandatory contributions are subject to 100% immediate vesting by law, while ORSO schemes allow for vesting scales to be determined by the scheme’s specific governing rules. Additionally, both standard MPF schemes and MPF-exempted ORSO registered schemes are required to appoint an approved trustee to ensure proper oversight and management of scheme assets.

**Incorrect:** The assertion that MPF schemes have the flexibility to be defined benefit structures is incorrect; the MPF Ordinance mandates that all MPF schemes must be defined contribution schemes. In contrast, ORSO schemes have the flexibility to be structured as either defined contribution or defined benefit plans. Therefore, any statement suggesting that MPF can be defined benefit or that ORSO is strictly limited to defined contribution is factually inaccurate.

**Takeaway:** Key differences between MPF and ORSO registered schemes include the mandatory nature of MPF versus the voluntary nature of ORSO, the immediate vesting of MPF mandatory contributions versus rule-based vesting in ORSO, and the fact that only ORSO schemes can be structured as defined benefit plans. I, II, and III only.

Correct: The Mandatory Provident Fund Schemes Authority (MPFA) is granted a comprehensive suite of powers to address non-compliance by approved trustees. These powers include the authority to direct a trustee to take remedial actions, initiate formal investigations, and impose financial penalties that are scaled to the gravity of the breach. Furthermore, the MPFA has the power to suspend a trustee from their administrative duties and appoint a temporary substitute to ensure the scheme remains operational and protected.

**Incorrect:** Any combination that excludes one or more of these powers is incorrect because the MPF legislation provides the MPFA with all these tools simultaneously. The authority is not restricted to just financial penalties or just investigations; it can employ a mix of corrective, investigative, and protective measures (like suspension) depending on the specific circumstances of the breach.

**Takeaway:** To maintain the integrity of the MPF system, the MPFA can exercise various sanctions ranging from remedial orders and financial penalties to the suspension or termination of a trustee’s role in scheme administration.

Correct: The Mandatory Provident Fund Schemes Authority (MPFA) is vested with various powers to address breaches by approved trustees. These include administrative directions such as ordering remedial actions to rectify non-compliance (I) and conducting formal investigations to gather evidence (II). For more severe cases, the MPFA can suspend a trustee’s administration and appoint a temporary replacement (III), or even terminate their role, revoke their approval, and initiate criminal prosecution (IV).

**Incorrect:** All the statements provided accurately reflect the regulatory powers of the MPFA as outlined in the sanctions and penalties framework. There are no incorrect statements in this selection, as they all represent valid enforcement actions available to the Authority depending on the severity of the breach.

**Takeaway:** The MPFA’s enforcement regime is designed to be proportionate, allowing for a range of actions from corrective measures and investigations to the total revocation of a trustee’s status and criminal proceedings. I, II, III & IV only. Therefore, statements I, II, III and IV are correct.

Correct: Statement II is accurate because the Guidelines explicitly state that the three industry regulators (the Insurance Authority, Monetary Authority, and Securities and Futures Commission) will be guided by these standards when performing their supervisory and investigatory functions. Statement III is also correct as the Guidelines are not intended to be an exhaustive description of compliance; the MPFA may determine that acts or omissions not specifically mentioned still constitute a breach of performance requirements.

**Incorrect:** Statement I is incorrect because the Guidelines do not have the force of law and are not permitted to override any legislative provisions. Statement IV is incorrect because the Guidelines are designed to be complementary to, and do not replace, any codes or guidelines issued by frontline regulators in respect of regulated persons.

**Takeaway:** The Guidelines on Conduct Requirements for Registered Intermediaries provide a non-statutory framework for minimum conduct standards that assists both intermediaries in compliance and frontline regulators in supervision, without replacing existing laws or industry-specific codes. Therefore, statements II and III are correct.

Correct: According to the MPF legislation and the Code on MPF Investment Funds, the Statement of Investment Policy (SIP) is a mandatory document designed to ensure transparency for scheme members. It must explicitly cover several key areas, including the investment objectives, the types of assets the fund may invest in, the balance between different asset classes, the risk and expected return of the portfolio, and specific policies regarding securities lending and the use of financial futures and options contracts.

**Incorrect:** Requiring a daily list of every individual transaction would be operationally impractical and is not a requirement for a high-level policy statement. While transparency is key, the professional biographies of the investment manager’s shareholders are not relevant to the fund’s investment strategy or risk profile. Furthermore, unless a fund is specifically structured as a guaranteed fund with an authorized insurer, providing a binding guarantee against negative returns is not a standard requirement of a Statement of Investment Policy and could be misleading for most fund types.

**Takeaway:** The Statement of Investment Policy (SIP) must provide a clear framework of the fund’s strategy, including its expected returns and its approach to using derivatives like futures and options, to ensure members are fully informed about how their contributions are managed.

Correct: According to the MPFA Guidelines on Conduct, a registered intermediary must ensure that any form intended for a client’s signature is fully completed in all material respects beforehand. If any changes are made to the form after completion, they must be initialed by the client or otherwise authenticated to confirm the client’s instructions. Furthermore, the client must be provided with a copy of the form as soon as reasonably practicable, and the principal intermediary is mandated to retain a copy for at least seven years, which can be stored electronically as long as it remains accessible for inspection.

**Incorrect:** It is a violation of conduct requirements to ask a client to sign a blank or incomplete form, as this creates a risk of unauthorized information being added later. Similarly, an intermediary cannot unilaterally alter a form without the client’s explicit authentication (usually via initials), and failing to provide a copy to the client or failing to maintain records for the statutory seven-year period would constitute a regulatory breach.

**Takeaway:** To ensure transparency and protect client interests, MPF intermediaries must follow strict protocols regarding document execution, including pre-completion, authentication of alterations, prompt delivery of copies to clients, and a seven-year record retention period. Therefore, all of the above statements are correct.

Correct: According to the Mandatory Provident Fund Schemes Ordinance (MPFSO), before the Mandatory Provident Fund Schemes Authority (MPFA) imposes a disciplinary sanction, it must provide the regulated person with a written notice of its preliminary view. This notice must include the reasons for the view and the particulars of the proposed order. Crucially, the MPFA must grant the individual an opportunity to make either oral or written representations to ensure procedural fairness before a final decision is reached.

**Incorrect:** While Frontline Regulators (FRs) are responsible for conducting the actual investigation into potential misconduct, they do not have the power to impose disciplinary sanctions under the MPFSO; the MPFA is the sole authority for that function. Appeals against MPFA decisions are handled by the Mandatory Provident Fund Schemes Appeal Board, not the Court of First Instance, and the statutory timeframe for lodging such an appeal is two months, not 30 days. Additionally, the MPFA is empowered to disclose disciplinary details to the public (except for private reprimands) via press releases and the Register of Intermediaries to ensure transparency, rather than keeping all actions confidential.

**Takeaway:** The disciplinary process for MPF intermediaries involves a clear separation of roles where Frontline Regulators investigate, but the MPFA adjudicates, provided that the intermediary is given a fair opportunity to contest the preliminary findings through representations.

Correct: Offering a physical gift like an electronic tablet as an inducement to transfer benefits is a violation of the guidelines. Registered intermediaries are prohibited from offering any rebates, gifts, or incentives to encourage clients to become members or transfer benefits, unless the incentive falls under specific exemptions such as fee discounts credited to the account or approved membership programs.

**Incorrect:** Discounts on the intermediary’s own fees are permitted because they represent a direct reduction in the cost of service to the client. Crediting bonus units to the MPF account is an allowed form of fee rebate. Providing benefits through a membership privilege program approved by the trustee or sponsor is also a recognized exception to the gift prohibition.

**Takeaway:** To maintain professional integrity and ensure clients choose schemes based on merit, the MPFA restricts the use of external gifts and vouchers as marketing tools, allowing only specific fee-related or trustee-approved incentives.

Correct: Statements I, II, and III accurately reflect the regulatory framework governing low-risk MPF products. MPF Conservative Funds are strictly prohibited from investing in equities or commodities to maintain a low-risk profile. Furthermore, to protect member interests, administrative fees can only be deducted from an MPF Conservative Fund if its monthly investment performance outperforms the prescribed savings rate published by the MPFA. Regarding Guaranteed Funds, a “soft” guarantee is conditional, meaning the guarantee only applies if the member satisfies specific criteria, such as reaching the age of 65 or other statutory qualifying events.

**Incorrect:** Statement IV is incorrect because the regulations specifically prohibit the imposition of initial fees, redemption charges, and bid-offer spreads on MPF Conservative Funds. These safeguards are in place to ensure that the fund remains a cost-effective vehicle for members seeking capital preservation, particularly during periods of low interest rates.

**Takeaway:** While both MPF Conservative Funds and Guaranteed Funds target risk-averse members, the former relies on strict investment limits and fee restrictions, whereas the latter provides security through contractual guarantees that are often contingent upon meeting specific qualifying conditions. Therefore, statements I, II and III are correct.

Format your explanation in THREE separate paragraphs with an empty line between each: Correct: Hong Kong’s demographic landscape is characterized by an ageing population resulting from increased life expectancy and a downward trend in fertility rates. These factors lead to smaller average household sizes, which diminishes the reliability of traditional family support for the elderly. To address this, the MPF System was implemented as a second-pillar system under the World Bank framework, meaning it is mandatory, privately-managed, employment-based, and fully-funded.

**Incorrect:** Fertility rates in Hong Kong are decreasing, not rising, and the MPF is not a publicly-financed safety net (which describes Pillar One or Pillar Zero). Life expectancy is projected to increase significantly, not decrease, which heightens the need for retirement savings. Furthermore, household sizes have been shrinking since 1981 rather than remaining stable, and the MPF is a contributory system rather than a non-contributory one.

**Takeaway:** The MPF System serves as the second pillar of the World Bank’s retirement protection framework, specifically designed to provide a mandatory, privately-managed, and fully-funded solution to the challenges posed by an ageing population and shrinking family support structures.

Correct: Under the Occupational Retirement Schemes Ordinance (ORSO), schemes are primarily classified by the nature of the benefits they provide. While defined contribution schemes rely solely on accumulated contributions and investment returns, defined benefit schemes use formulas often involving salary and years of service. Regulatory guidelines specify that any hybrid scheme incorporating features of both defined contribution and defined benefit structures must be classified as a defined benefit scheme. This ensures that the scheme is subject to the necessary actuarial valuations required for benefit-based obligations.

**Incorrect:** Classifying the arrangement as a defined contribution scheme is incorrect because the inclusion of formula-based benefits introduces funding complexities that exceed the scope of a simple contribution-based plan. There is no regulatory designation known as a “segregated dual-purpose scheme” for these types of arrangements; they must fall into one of the two primary benefit categories. Describing it as a discretionary exempted scheme is also inaccurate, as exemption status relates to the scheme’s registration requirements (such as being an offshore scheme) rather than its internal benefit structure.

**Takeaway:** For the purposes of ORSO classification, any retirement scheme that contains elements of a defined benefit structure—even if it also includes defined contribution elements—is legally treated as a defined benefit scheme.