The Occupational Retirement Schemes Ordinance (“ORSO”), effective 15 October 1993, is the governing legislation for the regulation of voluntary occupational retirement schemes operating in or from Hong Kong. Legislation specifies that employers have to either apply for registration or exemption with the government within three months of plan effective date. This ordinance does not force companies to set up retirement schemes – rather, the main objective of this legislation is to ensure that all retirement schemes are properly set up and managed so that pension benefits promised to the employees can be fulfilled when they leave the company. In short, there are four basic principles within this ordinance.

• Assets of retirement schemes must be separated from the assets of the employer and the administrator
• Each plan must designate at least one individual trustee for all plans with trust arrangements
• Investment must follow the guidelines and restrictions issued by the Registrar
• All plans must submit an annual filing together with the relevant audit reports to the Registrar

Effective 10 January 2000, the Mandatory Provident Fund Schemes Authority (“MPFA”) took up the role of the Registrar of Occupational Retirement Schemes. Under the Occupational Retirement Schemes Ordinance, the MPFA is empowered to:

• Ensure all occupational retirement schemes are registered under the ORSO
• Monitor all registered schemes through a thorough reporting process
• Liaise with related professional and industry bodies
• Monitor all MPF exempted ORSO schemes under the Mandatory Provident Fund Schemes (Exemption) Regulation

Retirement plans are usually divided into two main categories:

• Defined Contribution Plans such as provident funds; and
• Defined Benefit Plans

Defined Contribution Plans – these plans are usually more popular due to their simplicity of design and operation, as well as their easy planning because the employer's contributions can be budgeted for.

The employer and the employees (under the provision of the plan rules) contribute a fixed percentage of the employees' salary to the plan each month. These contributions are recorded separately and then invested according to the investment choices.

The employer may adopt a set of rules tailored specifically to meet the particular requirements of the company such as:

• The contribution rates for employer and employees
• The vesting schedule for accrued benefits
• The setting of normal retirement age
• The entitlement to accrued benefits upon death, permanent disability or ill health during employment

Defined Benefit Plans – in a Defined Benefit Plan, the employees’ retirement benefits are determined by a formula which multiplies the employees’ final salary and years of service. For example, it can be a certain percentage (factor) of the final salary for each year of completed services. These plans are called Defined Benefit Plans because the benefit rather than the contribution level is defined.

The employer’s contributions required to provide the defined benefit need to be actuarially determined and reviewed at least every three years and are subject to changes.

Employees’ contributions can also be made to a Defined Benefit Plan and withdrawal benefits are usually based on these contributions and interest plus either an additional vested benefit based on these contributions or a discounted proportion of the retirement benefits (based on actuarially determined formula).

The responsibility of ensuring sufficient funds for the benefits of the employees rests with the employer.

ORSO schemes established on or before 15 October 1995

MPF exempted ORSO schemes, governed by trust and established on or before 15 October 1995, applied to the Registrar of Occupational Retirement Schemes for registration on or before 15 January 1996 and exemption from the Mandatory Provident Fund Schemes Authority. These schemes may continue under the MPF regime and may accept new members after the MPF effective date.

Employers of the MPF exempted ORSO schemes should have offered all existing employees a one-time option between remaining in the ORSO scheme or joining an MPF scheme when the MPF Schemes Ordinance was implemented. New members (i.e. those employees joining an MPF exempted ORSO scheme on or after the MPF effective date) should also be offered a one-time option between joining the ORSO scheme or an MPF scheme. This option must also be provided again to members who have chosen the ORSO scheme in the event of reduction of future benefits level of the MPF exempted ORSO schemes.

ORSO schemes established after 15 October 1995

New ORSO schemes which are those ORSO schemes established after 15 October 1995, are treated differently from the above provisions and we refer these schemes (which are not qualified for MPF exemption) as new ORSO schemes.

For these new schemes, benefits accrued prior to the MPF effective date (i.e. 1 December 2000) are unaffected by MPF provisions. However, as no MPF exemption is allowed, members must be enrolled in MPF schemes and pay mandatory contribution after the MPF effective date. Any contributions paid to the new ORSO schemes are voluntary.

With the implementation of the Mandatory Provident Fund (“MPF”) system on 1 December 2000, accrued benefits of new members participating in an MPF exempted ORSO scheme is subject to the preservation, portability and withdrawal rules of “minimum MPF benefits”.

The “minimum MPF benefits” is the lesser of:

• The member's benefits accrued in respect of post MPF service*; and
• 1.2 x average monthly relevant income over the last 12 months (maximum: HK$20,000) x years of post MPF service*

Treatment of new members – employees who join the MPF exempted ORSO schemes after 1 December 2000 are called new members. There is no requirement to provide minimum vesting or contribution levels for these members, however, the accrued benefits withdrawn for these members upon cessation of employment are subject to portability, withdrawal and preservation rules of "minimum MPF benefits" (i.e. the portion of accrued benefits in excess of the minimum MPF benefits will be paid out to the member according to the governing rules of the scheme while the minimum MPF benefits will be transferred to the member's designated MPF account. This portion of accrued benefits will then be subject to the preservation, portability and withdrawal requirements of an MPF scheme).

Treatment of existing members – employees joining the MPF exempted ORSO schemes on or before 1 December 2000 are called existing members. Their benefits and rights remain unchanged and their accrued benefits are fully cashable upon termination of employment. There is no requirement to provide minimum vesting or contribution levels for existing members of these schemes. However, the amount of accrued benefits determined to be “minimum MPF benefits” cannot be forfeited upon summary dismissal of employment.

For further details, please refer to the Guidelines on MPF exempted ORSO schemes – Preservation of Benefits issued by the MPFA.

For employers – as long as the employer's contribution is less than or equal to 15% of the employees’ total yearly emoluments, the employer's contribution can be deducted from the company profits tax.

For employees – employee's contributions made to MPF exempted ORSO schemes on or after 1 December 2000 can be deducted from salaries tax. However, the amount deductible, subject to the maximum amount of HK$12,000 per year, is the lesser of the amount contributed to the ORSO scheme or the mandatory contribution the employee would have been required to pay if he/she was to join an MPF scheme.

Only the accrued benefits derived from the employer's contributions in respect of an employee can be used to offset long service and severance payment entitlements.