Hong-Kong-Occupational-Retirement-Schemes-Bill-20190418

The Occupational Retirement Schemes (Amendment) Bill 2019 (“Amendment Bill”) was published in the Gazette on 4 April 2019. The Amendment Bill overhauls the regulatory regime of the Occupational Retirement Schemes Ordinance¹ (ORSO) and prevents misuse of the occupational retirement schemes. There is no definite timeline as to the implementation of the Amendment Bill (the “Effective Date”). However, the Amendment Bill will be introduced into the Legislative Council for First Reading on 17 April 2019.

Key proposed changes to the current ORSO are as follows:

1. New concept of “eligible persons” and interpretation of
“employment”

Concept of “eligible persons”

The Amendment Bill introduces the new employment-based terminology of “eligible persons”, and amends the existing definition of an “occupational retirement scheme” by expressly inserting this employment-based criterion.

Under the Amendment Bill, an “eligible person” in relation to an occupational retirement scheme shares similar definition with the existing definition of “member” under the ORSO (which will be repealed on the Effective Date). Both essentially mean an individual who is entitled or will be entitled to benefits under the scheme by virtue of his/her past/present employment by the relevant employer of the scheme.² However, because both “eligible person” and “member” also cover people who are not participants to an occupational retirement scheme, i.e. individuals who have an interest in the estate of a deceased individual who qualified as an “eligible person” or who is a deceased “member”, we are of the view that the use of the term “eligible person” rather than “member” may help avoid confusion.

The Amendment Bill introduces criminal liability on the part of an employer of an occupational retirement scheme registered as an ORSO scheme after the Effective Date should its membership be open to persons other than “eligible persons”.³ The directors and officers of such an offending employer will also be criminally liable if the employer committed the offence with their consent or the offence is attributable to their neglect.⁴ In addition, in those cases, while the scheme will continue to be a registered ORSO scheme, any term allowing membership to be open to persons other than “eligible persons” will be void and unenforceable.⁵

The Amendment Bill further prevents an employer from arguing that a scheme that is open to non-“eligible persons” is not strictly an “occupational retirement scheme” and, consequently, that ORSO would be inapplicable to both the employer and the scheme. To that end, the Amendment Bill provides that where a scheme is held out as an occupational retirement scheme and would be an occupational retirement scheme but for the fact that:

(i)	a term of the scheme allows non-“eligible persons” to be members, and/or
(ii)	not all members are “eligible persons”,

the requirements/duties imposed under ORSO on an employer apply to the person described as an employer in the terms of the scheme and any function that may be performed under ORSO in relation to an occupational retirement scheme may be performed in relation to such scheme.⁶

Interpretation of “employment”

The Amendment Bill provides statutory guidance for the interpretation of “employment” in the context of occupational retirement schemes.⁷ It clarifies that, for ORSO purposes, where a person provides service on a full-time basis to a business or other organisation in Hong Kong for more than 4 years in a way and subject to a degree of control that the person may reasonably be regarded as an integral part of the business or organisation:

(i)	the relationship is to be regarded as one of employment,
(ii)	the proprietor of the business or organisation would be regarded as employer, and
(iii)	the person providing services would be regarded as an employee of the proprietor of the business or organisation under a contract of employment or service.⁸

The introduction of the interpretation of “employment” removes the ambiguity of the existing section 3(5) of ORSO (which will be repealed on the Effective Date). The purpose of section 3(5) is confined in its application to existing section 3(1) (which is a restrictive provision essentially prohibiting employers from operating or participating in an occupational retirement scheme unless it is registered or exempted under ORSO). Also, while section 3(5) specifies that the proprietor of the organisation would be regarded as an employer, it does not clarify the status of the persons providing full-time services for more than 4 years.⁹

2. Employers’ obligations

The Amendment Bill imposes a requirement on employers to submit to the Mandatory Provident Fund Schemes Authority (ORSO Registrar) (the “Registrar”) an annual written statement as to whether at all times during the financial year the scheme, by its terms, limited membership to eligible persons and all members of the scheme are eligible persons.¹⁰

3. Trustees’ duties

The Amendment Bill imposes new duties on the trustees of a registered ORSO scheme, such as the:

(i)	duty to exercise a level of care, skill, diligence and prudence reasonably expected of a prudent person acting in a similar capacity and who is familiar with administration, management and maintenance of a registered scheme;
(ii)	duty to use all relevant knowledge and skill in the administration, management and maintenance of the scheme;
(iii)	duty to ensure that investment of assets are diversified;
(iv)	duty to put the interests of the members of the scheme before the trustee’s own interest; and
(v)	duty to act in accordance with the terms of the scheme.

Trustees should be familiar with the above duties which are found in common law and equity (i.e. common law duty of care and fiduciary duty). In addition, such duties track the duties that already apply to an MPF exempted ORSO scheme. Notably, the above duties only apply to trustees of registered ORSO schemes and not the insurers of the registered ORSO schemes in the form of insurance policies.

4. Expanded powers of the Registrar

The Amendment Bill provides the Registrar additional powers, including:

(i)	Inspection powers: At any reasonable time during ordinary business hours, the Registrar may enter premises at which the Registrar reasonably believes that the affairs of a scheme are being conducted or any information or document relating to a scheme is being kept to ascertain ORSO compliance.¹¹
(ii)	Investigative powers: The Registrar may investigate (or appoint an investigator to investigate) any matter if the Registrar has reasonable cause to believe that, in relation to a scheme, a person may have contravened the provisions of ORSO or circumstances may exist which could prejudice the interests of the members of the scheme. The investigator may by written notice require a person to: (a) produce any record or document that is or may be relevant to any matter under investigation and within the person’s possession or control; (b) attend before the investigator and answer questions; (c) respond to written questions raised by the investigator relating to any matter under investigation; or (d) give any assistance in connection with the investigation.¹²
(iii)	Power to disclose to other regulators: The Registrar may disclose information to the Insurance Authority, the Monetary Authority, the Securities and Futures Commission and the Ombudsman or the Financial Reporting Council if, in the opinion of the Registrar: (a) the disclosure is in the interests of the members of the scheme concerned; (b) the disclosure is in the public interest; or (c) the disclosure enables the performance of a function conferred by law.¹³

Failure to comply with an investigation request without reasonable excuse,¹⁴or with intent to defraud, is a criminal offence.¹⁵ In addition, it is a criminal offence for a person to give false or misleading information in purported compliance with an investigation requirement, knowing or being reckless as to whether such information is false or misleading in a material respect,¹⁶ or with the intent to defraud.¹⁷ An officer or employee of a company who, with an intent to defraud, causes or allows the company to commit the above offence(s) will be equally criminally liable.¹⁸

5. “Reportable event”

The Amendment Bill sets out a list of “reportable events”, the occurrence of which on or after the Effective Date requires the relevant employer or administrator of a registered scheme to:

(i)	no later than the seventh working day after becoming aware of the event, give written notice to the Registrar setting out the particulars of the event;
(ii)	keep a record of the particulars of the event;
(iii)	permit the Registrar to inspect the record at any reasonable time during ordinary business hours; and
(iv)	give written notice to the Registrar setting out such further or better particulars of the event as the Registrar requires as soon as practicable after the Registrar makes the requirement.¹⁹

Reportable events, for the purposes of ORSO are:²⁰

(a)	any non-compliance of the requirements as provided under various sections of ORSO;
(b)	any term of the scheme allowing a person other than an “eligible person” to be a member of the scheme; or
(c)	not all members of the scheme being “eligible persons”. This self-reporting obligation aligns with the reporting obligation under the MPF regime for MPF schemes.²¹ An employer who, without reasonable excuse, fails to comply with such reporting obligation commits an offence.²²

6. Transfer of benefits

The Amendment Bill expressly prohibits transfer-in payments to registered or exempted schemes unless either of the following circumstances applies:²³

(i)	Circumstance 1: The transferring scheme is a registered scheme or exempted scheme, and-
	•	the transfer is made in accordance with an agreement between the relevant employer of the receiving scheme and that of the transferring scheme;
	•	the benefits are payable to a member of the receiving scheme who was a member of the transferring scheme; and
	•	the benefits are held in an account in the member’s name under the transferring scheme before the transfer and in an account in the member’s name under the receiving scheme after the transfer; OR
(ii)	Circumstance 2: the transferring scheme is not a registered scheme or an exempted scheme, but is a provident pension retirement or superannuation scheme (however described) established outside Hong Kong, and-
	•	the transfer is made directly from the transferring scheme to the receiving scheme;
	•	the benefits are attributable solely to payments to the transferring scheme due to the previous employment of a member by the employer of that scheme, and held in an account in the sole name of the member under that scheme before the transfer;
	•	that member is a member of the receiving scheme; and
	•	the benefits are held in an account in the same name of the member under the receiving scheme after the transfer.²⁴

The proposed prohibition could help prevent persons from taking advantage of the relatively relaxed investment restrictions under ORSO,²⁵ limiting the ability of such persons to transfer assets that are unrelated to participation in any provident fund scheme into an occupational retirement scheme and claim tax benefits.

7. Exempted ORSO schemes

The Amendment Bill abolishes the granting of exemption certificates in respect of occupational retirement schemes from the Effective Date unless the scheme is an offshore scheme approved by a regulatory authority outside Hong Kong performing functions generally similar to those of the ORSO Registrar. Under the existing regime, exempted schemes are susceptible to misuse as general investment vehicles given the low threshold for qualifying for the exempted scheme status. Coupled with the enhanced powers of the Registrar to withdraw exemptions, this proposal strikes at the heart of the issue of misuse of ORSO schemes.

8. What’s next?

The proposed overhaul of the regime plugs the loophole in the ORSO environment that has allowed abuses of the ORSO schemes.

Given the magnitude of changes and the ramifications for failure to comply, in order to ensure continued compliance with ORSO, employers and service providers operating ORSO schemes should revisit the schemes’ operations and terms to see whether changes need to be made as soon as possible.

¹	Occupational Retirement Schemes Ordinance (Cap. 426).
²	Section 2A(1)(a), ibid.
³	Section 20B(3), ibid.
⁴	Section 82(1), ibid., which provides: “Where an offence under [ORSO] is committed by a corporation and is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, any director, manager, secretary, or other similar officer of the corporation (and whether so called or not), or any person who was purporting to act in any such capacity, he as well as the corporation, shall be guilty of the offence and shall be liable to be proceeded against and punished accordingly.”
⁵	Section 20B(1) and (2), ibid.
⁶	Section 85, ibid.
⁷	Section 2B, ibid.
⁸	New section 2B mirrors the existing section 3(5) (which will be repealed) on the description of such a person.
⁹	Section 3(1), ibid., provides that: “Subject to subsection (2), an employer shall not operate, contribute to (whether on his own behalf or on behalf of any other person) or otherwise participate in an occupational retirement scheme or enter into a contract with his employees under which membership of an occupational retirement scheme is provided unless – (a) the scheme is a registered scheme; (aa) the scheme is a registered scheme within the meaning of section 2 of the Mandatory Provident Fund Schemes Ordinance (Cap. 485); (b) the scheme is contained in or otherwise established by any Ordinance; (c) the scheme is an exempted scheme; or (d) an application has been made in respect of the scheme under section 7(1) or 15 and has not been finally disposed of.”
	Section 3(5) , ibid., provides that: “For the purposes of subsection (1), where any person providing service on a full-time basis to a business or other organization in Hong Kong for a period of more than 4 years in such manner and subject to such degree of control that he may reasonably be regarded as an integral part of the organization is a member of an occupational retirement scheme, the proprietor of the organization shall be regarded as participating in the scheme as an employer whether or not there is a contract of employment between such persons and him.”
¹⁰	Sections 10(1)(b), 30(2), 67(2)(ga)(ii) and 67(2)(gab), ibid.
¹¹	Section 66B, ibid.
¹²	Sections 66C and 66D , ibid.
¹³	Section 78(1)(eb), ibid.
¹⁴	Section 66E(1), ibid.
¹⁵	Section 66E(2), ibid.
¹⁶	Section 66F(1), ibid.
¹⁷	Section 66F(2), ibid.
¹⁸	Sections 66E(3) and 66F(3), ibid.
¹⁹	Section 33A(2), ibid.
²⁰	Section 33A(1), ibid.
²¹	Section 62 of the Mandatory Provident Fund Schemes (General) Regulation.
²²	Section 33A(3) of the Occupational Retirement Schemes Ordinance (Cap. 426).
²³	Section 70B(1), ibid.
²⁴	Section 70B(2), ibid.
²⁵	Section 27.

Hong Kong: The Occupational Retirement Schemes (Amendment) Bill 2019

1. New concept of “eligible persons” and interpretation of “employment”