MPF UPDATES FOR INSURANCE INTERMEDIARIES

MPF UPDATESFORINSURANCE INTERMEDIARIES September 30, 2005

CONTENT • Change in the MPF Market • Basics for Employers and Employees • Basics for MPF Individual Intermediaries • Registration Issues Pertaining to MPF Intermediaries • Performance Presentation Standards for MPF Investment Funds • Cases Study

Change in the MPF Market 274 (‘000) 20 25 Source: The MPFA

Change in the MPF Market Source: The MPFA

Change in the MPF Market 119,936 HK$million Source: The MPFA

Change in MPF Market No. of Registered Intermediaries Source: The MPFA

Basics for Employers & Employees

Mandatory Contribution • Monthly Relevant Income • Minimum: HK$5,000 • Maximum: HK$20,000 • Contribution rate for employees • Employer: 5% Employee: 5% • Contribution rate for self - employed person • 5%

Example • Monthly Relevant Income: HK$4,000 • Employer’s Mandatory Contribution • Employee’s Mandatory Contribution HK$200 HK$0

Relevant Income • any items paid in monetary terms paid or payable by an employer to an employee in consideration of the employment contract • but exclude any housing allowance & housing benefits, any severance or long service payment

Permitted Period • The period within which an employer must enroll his employees in an MPF scheme, I.e. 60 days of their employment • for casual employee, the permitted period is the first 10 days regardless of the type of scheme in which he is enrolled

Contribution Day • Employers are required to pay mandatory contributions to the scheme’s trustee on or before the contribution day • for employees: • 10th day after the last day of a calendar month • for casual employees not members of an industry • 10th day after the last day of the relevant contribution period

Contribution Day • for causal employees in an industry scheme • the next working day (other than Saturday) immediately after the payment of relevant income for the relevant contribution period or • the 10th day after the last day of the relevant contribution period

Contribution Payment • Employer is required to make contribution for the employee from the first day of such employment • employee is not required to contribute for the first 30 days of employment and any wage period / calendar month commencing on or before the 30th day of employment

Contribution Documents • Remittance Statements • Monthly pay - record • the employee’s relevant income • mandatory & voluntary contribution amount by employer & employee respectively • date of contribution payment to the trustee

Example • Monthly Relevant Income: HK$30,000 • Employer’s Mandatory Contribution: • Employee’s Mandatory Contribution: HK$1,000 HK$1,000

Tax Allowance • Mandatory contribution by an employee are tax deductible, maximum of HK$12,000 per year • Mandatory contribution by an employer are tax deductible. • MC + VC / contribution to an ORSO scheme are deductible up to 15% of total yearly emoluments of the employees

Default Contribution • ===> Contribution surcharge: • at a flat rate of 5% of the amount of mandatory contribution in arrears • ===> Financial penalty • at the higher of HK$5,000 or 10% of the amount of mandatory contribution in arrears

Offences • For employers • A fine of HK$100,000 & to imprisonment of 6 months on the first occasion • each subsequent occasion, the fine is HK$200,000 & the imprisonment is 12 months

Offences • for self - employed person • a fine of HK$50,000 & to imprisonment for 6 months on the first occasion • each subsequent occasion, the fine is HK$100,000 & the imprisonment is 12 months

Benefits Withdrawal • attain the retirement age of 65 • early retirement after reaching the age of 60 • Permanent departure from Hong Kong • once in a person’s lifetime • Death • Total incapacity • Small balance account • >HK$5,000 & no mandatory contribution in the past 12 months

Long Service Payment / Severance Payment • The employer is entitled to offset the LSP / SP out of the accrued benefits derived from the contributions made by the employer in respect of the employee in the MPF scheme

Coverage • Employees • a person engaged by an employer under an employment contract & to whom the Employment Ordinance applies • have been employed for 60 days • location of work & number of hours worked are irrelevant. • both the employee & employer are required to contribute 5% of the employee’s relevant income

Coverage • Casual employees • any person employed in the selected industries by an employer on a day - to day basis or for a fixed period of less than 60 days • only catering & construction industries • for non - daily paid casual employees: • both the employee & employer are required to contribute 5% of the employee’s relevant income

Coverage • Casual employees • for daily - paid casual employees in an industry scheme • follow this table:

Coverage Scale of contribution for daily - paid casual employees in an industry scheme

Coverage • Self - employed person • any person whose relevant income (otherwise than in the capacity as an employee) is derived from his production of goods or services in Hong Kong, or his trade in goods or services in or from Hong Kong • example: sole proprietor or a partner of a partnership • make contribution regardless of whether they have filed tax returns or obtained business registration

Coverage • Exempted person • employees & self - employed persons who at the date the MPF system is implemented , I.e. Dec. 1, 2000 have attained the age of 64. • Domestic Helper • Self - employed licensed hawker

Coverage • Exempted person • people covered by statutory pension & provident fund schemes, e.g. civil servants & subsidized or grant school teachers • people from overseas who enter Hong Kong for employment for 13 months or less • people from overseas & are covered by overseas retirement schemes

Coverage • Exempted person • employees of the European Union Office of the European Commission in Hong Kong • members of an MPF exempted ORSO schemes

Employers • any person who has entered into a contract of employment to employ another person as his employee • are required to enroll their employees who have been employed for 60 calendar days to an MPF scheme • display the certificate issued by the MPFA at the premises

Employers • Enroll causal employees in the catering & construction industries in an MPF scheme regardless of the duration of employment

Types of MPF Schemes • Employer Sponsored Scheme • open only to the relevant employees of a single employer & its associates • high setup cost • only cost effective for large companies • more control on choice of service providers & funds

Types of MPF Schemes • Master Trust Scheme • open to the relevant employees of different employers, self - employed persons & deferred members • high degree of efficiency from economies of scale

Types of MPF Schemes • Industry Scheme • specially designed for industries with high labor mobility & daily wage practice • for catering & construction industries • optional for employers in these 2 industries to enroll their employees in such a scheme

Basics for MPF Intermediaries

MPF Intermediary • selling MPF schemes • advising clients on constituent funds or underlying approved pooled investment funds of MPF schemes • corporate intermediary • individual intermediary • not include a professional whose act of giving advice is wholly incidental to the practice of his profession, e.g. lawyer

Regulatory Framework • Objectives • minimizing the risks of mis - selling • maximizing protection for scheme members • uses decentralized & coordinated approach • relying on the following regulators: • the Monetary Authority • the Securities and Futures Commission • the Insurance Authority & the 3 self - regulatory organizations

Regulatory Framework • 3 SROs: • The Hong Kong Federation of Insurers • The Hong Kong Confederation of Insurance Brokers • The Professional Insurance Brokers Association Limited • The MPFA • the leading regulator • registering & monitoring MPF intermediaries

Fit & Proper Criteria • A person is not fit & proper if he: • has been found by a court to have acted fraudulently or dishonestly, has been convicted of a criminal offence • bankrupt • has been denied membership or registration of any professional or regulatory body • cannot fulfill the CPD requirement

Role of MPF Intermediaries • Prospecting • identify himself • provide information of the corporation he represents • explanation • Understand the client’s needs

Role of MPF Intermediaries • Selling / Advising • explain the key features • give offering documents, e.g. Principle Brochure & marketing materials to the client • clearly explains details of any guaranteed funds • give advice only if relevant license is valid, I.e. insurance or security • ensure information is not deceptive • avoid conflict of interest

Role of MPF Intermediaries • make sure the client make all payment to the trustee • do not accept cash • After sales services • handling enquiries & complaints

Registration Issues Pertaining to MPF Intermediaries • Effective October 1, 2005 • the MPFA will issue MPF Intermediary Certificate instead of the MPF Card • MPF individual intermediaries must identify himself by showing business cards bearing the MPF registration number • waiving return of expired & outdated MPF Cards / Certificates

Registration Issues Pertaining to MPF Intermediaries • Alignment of expiry date of corporate and individual intermediaries • compliance with Continuing Professional Development (CPD) requirement • one of the criteria in assessing the fitness & properness of applicants & registrants

Performance Presentation Standards for MPF Investment Funds • To specify methods for presenting: • fund performance information • fund risk indicators • fund descriptor • To present scheme members with actual, historical information on the performance of MPF funds.

Performance Presentation Standards for MPF Investment Funds • The period since launch • 1 year, 5 year & 10 year • No return figures for the period since launch if track record < 6 months. • No return figures for the period since launch if the period of since launch > 10 years. • Rate of return < 1 year, NO annualized figures.

Performance Presentation Standards for MPF Investment Funds • Guaranteed Fund • the following information must be disclosed in the fund fact sheet: • guarantor • guaranteed rate • conditions for the guarantee (if applicable)

Performance Presentation Standards for MPF Investment Funds • Calculation of fund performance • a fixed formula • use Net Asset Value • Calculation of fund risk indicators • use Annualized Standard Deviation • based on the monthly rate of return of the fund over the past 3 years. • Not applicable for guaranteed fund.

Performance Presentation Standards for MPF Investment Funds • Standards for Fund Descriptor • types of assets • types of non - cash assets • the maximum exposure to equity • geographical region

MPF UPDATES FOR INSURANCE INTERMEDIARIES