On 26 June this year the Occupational Retirement Schemes (Amendment) Ordinance (the "Amendment Ordinance") came into force.
The revised legislation will require any employer who has an "occupational retirement scheme" to confirm that it is only available to employees. It also extends the MPFA's (Mandatory Provident Fund Schemes Authority) powers in certain areas. Most of this makes sense as we have set out in our April 2019 Legal Update "Hong Kong Government Publishes Proposed Amendments to the Occupational Retirement Schemes Ordinance".
However, there are two concerns that were raised previously and which have not been addressed in the legislative process.
- The new, narrower, exemption provisions
Much of the criticism aimed at the Amendment Ordinance during its passage to law has focused on the substantial narrowing of the circumstances in which a retirement scheme can obtain exemption under ORSO. Such narrowing, it was suggested, could result in Hong Kong becoming a less popular jurisdiction for globally mobile executives to work. In turn it was envisaged that this could adversely impact Hong Kong as a regional hub for global organisations.
With a view to addressing some of this criticism the MPFA has shed some light on the operation of the exemption provisions that remain in ORSO after the passing of the Amendment Ordinance. In particular it has published the following documents:-
- "Additional Guidance Notes on Application for an Exemption Certificate under section 7(4)(a)", and
- "List of Authorities in a Country, Territory or Place outside Hong Kong for the purposes of section 7(4)(a)".
These two documents give some (but not much) clarity as to which overseas retirement schemes may be able to obtain ORSO exemption. However for those employers that have schemes set up in any jurisdiction not specified in the "List" referred to above (i.e., not regulated in Australia, Canada, Singapore, Taiwan, UK or USA) the position remains largely opaque.
- The new, defective, definition of "occupational retirement scheme"
Another issue which we raised in our prior legal updates was the proposed narrowing of the existing definition in ORSO of "occupational retirement scheme" by expressly excluding from such definition any scheme which could potentially include a non-employee (even if, in practice, the scheme was only ever used for employees). We pointed out that this change would mean that certain schemes could easily be structured to fall outside the definition of "occupational retirement scheme" which would then mean that they would no longer be subject to the structural and funding requirements which were designed to protect employees who were potential beneficiaries of the schemes.
ORSO was set up in the mid-1990s to do two primary things:-
- to create a formal registration and tax system for retirement schemes, and (the primary reason)
- to ensure that any retirement benefit schemes were properly funded and the assets backing such schemes were kept separate from those of the sponsoring employers (to avoid employees losing their benefits if an employer got into financial difficulties).
The new change to the definition of "occupational retirement scheme" which has been made by the Amendment Legislation enables any employer (relatively easily) to set up a scheme which provides retirement benefits for its employees but which is not an "occupational retirement scheme" and so it does not need to comply with the structural or funding obligations in ORSO.
For example: An employer enters into a contractual arrangement with its employees that it will pay each of them a month's salary for each year of service when they retire from working for the employer. The employer describes such arrangement in a standard booklet (or in a section of the Employee Handbook).
Prior to the passing of the Amendment Ordinance there is no doubt at all that such arrangement would be an "occupational retirement scheme". As such it would need to be registered or exempted under ORSO; it would also need to be funded appropriately in accordance with actuarial principles and structured under a trust or insurance arrangement.
However, with the "new" definition created by the Amendment Ordinance all that the employer needs to do is to expressly state in the description of the scheme (in the Handbook or whatever) that it reserves the right to include in the "scheme" individuals who are not employees. The inclusion of this simple provision will then mean that the scheme does not satisfy the definition of "occupational retirement scheme". This means that it cannot be registered or exempted under ORSO, but it also means that it does not need to be funded at all (let alone in accordance with actuarial principles) nor will it need to be set up under trust or insurance policy. In effect it would be entirely unregulated!
We are confident this could not have been the intention of the MPFA (as it materially reduces the protection for employees who are members of retirement schemes). However, given that this was expressly highlighted for them we are unclear why this issue has not been remedied in the legislative process.