Employers and employees in Hong Kong have options when it comes to retirement planning. In this article we compare the two main retirement schemes of ORSO and MPF.
The Occupational Retirement Schemes Ordinance (ORSO) and the Mandatory Provident Fund Scheme (MPF) are the two main retirement schemes in Hong Kong. ORSO is voluntary while MPF is mandatory for all employees aged 18 and 64.
Let’s talk about these two schemes in more detail, and see which one is the better option.
ORSO is a retirement schemes ordinance that was introduced in Hong Kong in 1993. It provides a framework for the operation of occupational retirement schemes and requires employers to make contributions to their employee’s retirement savings.
ORSO schemes can be either a defined contribution type or defined benefit type. A defined contribution scheme is similar to an MPF scheme in the sense that contributions made by the employer are managed by a trustee.
This is in contrast to the defined benefit scheme, where the employer is responsible for making the investment decisions for the employee, and so also bears the investment risk. The employer promises to pay a certain amount of benefits to employees when employees retire based on their years of service and salary.
Contributions made to ORSO schemes by employers are tax-deductible, up to a maximum of 15% of an employee’s salary. The contribution limit for employees is HK$1,500 per month (HK$18,000 per annum).
MPF is a retirement savings scheme that requires employers to contribute a portion of their employees’ salaries to an approved MPF scheme. Employees are also required to make contributions to their own MPF accounts.
The MPF scheme was introduced in 2000 and, as of the time of writing, is mandatory for employees aged between 18 and 64 who earn a monthly salary of HK$7,100 or more. The contributions are deducted from the employee’s salary before taxes are paid.
MPF covers regular and casual employees. Casual employees are defined here as employees in the catering or construction industries for less than 60 days or on a daily contractual basis. Regular employees are defined as having been in employment for more than 60 days contractually.
There are three types of MPF schemes: master trust, employer-sponsored, and industry scheme.
Master trust schemes are the most popular and are available to both employers and employees. There are three types of accounts that can be set under master trust schemes: contribution, personal, and TVC (tax-deductible voluntary contribution accounts).
Employer sponsored schemes are for employees of a specific employer and its associates or subsidiary companies. You cannot set a personal account under employer sponsored schemes.
Industry schemes are meant for casual and regular employees of the construction and catering industries. Under the industry scheme, you can set a contribution, personal, or TVC account.
The differences between ORSO and MPF are reflected in four main areas: contribution, investment portfolio, vesting scheme, and withdrawal.
Under ORSO, contributions are subject to trust deeds and governing rules. There is no defined contribution rate and the contribution amount is decided by the employer.
For MPF, the contributions are based on the employee’s relevant income. Relevant income includes salaries, wages, leave pay, allowances, bonuses, commissions, and gratuities.
Relevant income doesn’t include long service payments and non-monetary such as transportation subsidies.
The table above summarizes employer and employee contributions at various income levels.
For salaries of less than HK$7,100 per month, employers’ contribute 5% of their income and employees’ don’t have to contribute any amount.
For salaries between HK$7100 and HK$30,000 per month, the employer and employee contribute 5% of their income each. For salaries over HK$30,000 per month, the employer and employee contribution is capped at HK$1,500 each.
For daily contracted employees, their minimum income level per day is HK$280 and the maximum is HK$1,000. For wages that fall below the minimum (280 x number of days in the payment period), employers must contribute 5% of their own income to the employee’s MPF scheme.
For wages that fall between the minimum and maximum caps, both employee and employer contribute 5% of their income each. Wages of more than the maximum (1,000 x number of days), the contribution is capped at 5% of income.
For weekly paid employees, the minimum wage is HK$1,960 (280 x 7) and the maximum is HK$7,000 (1,000 x 7). For wages that fall below the minimum, the employer is required to contribute 5% of their income.
Weekly wages between HK$1,960 and HK$7,000, employee and employer contribute 5% each. Wages over HK$7,000, contributions from employer and employee should be 5% of HK$7,000.
MPF contributions can be made through various channels, including fax and email, and paid by cheque, direct credit or autopay. Here’s some best practices for paying through each method:
If depositing a cheque, confirm with the trustee first about MPF drop boxes locations and the cut-off time for drop boxes.
ORSO schemes offer a wide range of investment options. The final investment decisions here are decided by the employer and can be changed from time to time.
MPF schemes also offer a wide range of investment options to employees. MPF scheme members are given various funds available to select their preferred investment. If a member fails to select a fund choice, the trustee automatically invests the member’s contributions.
Automatic investments are possible thanks to DIS (Default Investment Strategy). DIS features include fee caps, risk diversification, and risk reduction.
MPF scheme members can change their investment portfolios by switching funds or rebalancing portfolios. Fund switching is where a member redeems a part or all of an MPF fund and invests in another MPF fund.
Rebalancing a portfolio means changing the balance of a mix of funds. This often means redeeming part of a fund and reinvesting it to reach a balanced selection.
ORSO’s vesting schedule depends on the type of scheme. Defined contribution schemes rely on a vesting scale that specifies the number of years of service required from employees before they are fully vested in the scheme.
For example, if the vesting scale is 3 years, an employee who has been with the company for 3 years or more will be fully vested in the scheme. If the employee leaves the company before 3 years, they are not entitled to the benefits of the scheme.
A defined benefit scheme uses a formula that takes into account the number of service years and final salary.
The MPF Scheme has no vesting period. This means that employees are fully vested in the scheme from the first day of employment. This doesn’t mean that the benefits can be withdrawn immediately.
Withdrawing ORSO benefits depends on the rules of the scheme. The employer determines the retirement age. Meaning that if an employee leaves before the designated retirement age, their benefits are calculated using a vesting scale or a predetermined formula.
MPF benefits are available for withdrawal at age 65, where scheme members have three options for handling their MPF funds: withdrawing a lump sum, withdrawing by installments, or remaining in the scheme.
To withdraw MPF funds, members need to send a complete form and an identity document to the scheme trustee.
Members can make withdrawals from their account before retirement, but only in certain circumstances such as early retirement at a minimum age of 60, permanent migration from Hong Kong, small balance, total incapacity, death, or terminal illness.
The requirement for early withdrawals are as follows.
The documents required for early withdrawal include identity documents, claim forms, statutory declaration forms, and medical certificates depending on the reason for early withdrawal.
ORSO and MPF are both viable retirement schemes for employees in Hong Kong. Their different contribution rates, investment options, vesting schedules, and withdrawal rules make it so employers have a range of choices when it comes to helping their employees invest.
Employers can decide whether to offer an ORSO scheme or an MPF scheme or both. Employees should take the time to understand the differences between the two schemes before making a decision on which one is right for them.