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Following is the speech by the Secretary for the Civil Service, Mr Joseph W P Wong, at the Seminar of the Hong Kong Retirement Schemes Association today (May 4) :

Chairman, fellow speakers, Ladies and Gentlemen,

I am very honoured to speak to a distinguished group of experts in retirement benefits on the new approach which the Government will adopt to provide retirement protection for the civil service. I would focus on why we wish to introduce the Civil Service Provident Fund Scheme, or CSPF Scheme in short; what we wish to achieve; how we intend to proceed; and the impact on the civil service and the community in general as we see it.

Existing system

Before I go into the details of the new CSPF Scheme, let me spend a few minutes to outline very briefly the existing retirement protection arrangements for the civil service. At present, retirement protection for civil servants takes the form of either pension or Mandatory Provident Fund (MPF), depending on the terms of appointment of the officers concerned.

Pension Schemes

Currently, over 90% of civil servants are covered by the pension system. The two prevailing pension schemes are the Old Pension Scheme (OPS), which applies to civil servants appointed before July 1, 1987, and the New Pension Scheme (NPS), which applies to those appointed on or after that date. There are about 20 000 and 150 000 serving officers under the OPS and the NPS respectively. The rules governing the pensions schemes are set out in legislation.

Some notable features of the pension schemes are that no contribution is required from staff; and upon retirement, an officer receives a lump sum plus a monthly pension calculated according to a pre-determined formula based on the highest monthly salary earned by the officer. The monthly pension is payable until the retired officer passes away. As a reference, in year 2001-02, the Government pays about $12 billion on pension benefits to retired civil servants.

To help staff better prepare themselves for retirement, we publish a 'Guide to Retirement' and organize pre-retirement seminars on a regular basis for officers who are due to retire. The seminars provide information on retirement benefits, basic financial planning and investment concepts, experience sharing by retirees, etc. We also operate a Resource Centre for retired civil servants in which a small library with books, video tapes, magazines, daily newspapers and access to the Internet are available for use.

MPF for certain employees

Apart from those officers who are on pensionable terms, there are about 34 000 employees in various Government departments who are appointed on either agreement terms or on a short term basis to meet specific operational needs of individual departments. These employees are not covered by the pension system. In accordance with the requirement of the MPF Schemes Ordinance, the Government has been making mandatory MPF contributions for these employees. The amount of mandatory MPF contributions for these employees is estimated at about $150 million per annum.

The new CSPF Scheme - Why, When and How

All these seem nice and tidy, so why do we want to change the existing system? Indeed, some skeptics have perceived the new CSPF Scheme as no more than a means to cut Government expenditure. I would not shy away from admitting that there will be savings for the public purse in the long run. However, the CSPF Scheme is introduced for other more important objectives.

Objectives of the Scheme

The CSPF Scheme was one of the proposals put forward in the Civil Service Reform back in 1999. The main objective of the Civil Service Reform is to make our civil service system more open, flexible and equitable to facilitate intake of talents at all levels; create an enabling and motivating environment for civil servants; establish a proactive, accountable and responsive culture within the civil service; and to streamline the procedures for removal of non-performers or discipline cases. We have since introduced new entry terms for the civil service to replace the current permanent and pensionable terms of appointment and institute a more competitive appointments system to fill posts at supervisory ranks.

In contemplating ways to facilitate exchange of talents between the private and the public sector, we take a critical look at our pension system to see whether it will complement or frustrate our efforts. We conclude that the very design of the pension system favours those who join at basic ranks at a young age and rise through the ranks with full security of tenure. While it helps maintain the stability of the civil service, it lacks sufficient flexibility and may increase the opportunity cost of outside talents from joining the civil service. To complement our efforts on other fronts in injecting more flexible entry and exit arrangements at various levels of the civil service, we consider it appropriate to replace the existing pension system with a provident fund system.

This would make civil service retirement mechanism compatible with that offered by private sector employers and allow for portability of retirement benefits when a person switches jobs between the private sector and the civil service. In this way, talents from the private sector would not be discouraged to join the civil service mid career.

Besides, a provident fund system with defined contribution would be more in line with the modern trend of providing retirement protection, both locally and internationally. Employees could also take a more active role in the financial planning for their own retirement benefits.

Our fundamental considerations

In designing the CSPF Scheme, we have a number of fundamental considerations. First, the Scheme, as part of the total package of offer, should be sufficiently attractive to enable the Government to recruit, motivate and retain quality staff at all levels. Some critics may say that the salary of the civil service is already very respectable under current economic situation and query whether we still need to offer attractive retirement benefits. To these critics, I wish to point out that the CSPF Scheme is a long-term scheme applicable not just in the coming years, but many years down the road. We must therefore design a scheme whose attractiveness and retention ability could withstand competition for talents from the private sector when the economy picks up.

The second objective is that we need to make sure that those with proven standard of performance and potential will continue to find a career in the civil service to be rewarding and are prepared to pursue it as a life-long career. This is important in maintaining the overall stability and continuity of the civil service for delivery of quality service to the public. Last, but certainly not the least, we must continue to maintain a high standard of integrity and probity of the civil service in response to the expectation and requirement of the community. We strongly believe that the design of the CSPF Scheme must fulfill these fundamental principles.

In April last year, my colleague Anissa Wong shared with you the findings of the first stage of a consultancy study on the design options of the CSPF Scheme. I should perhaps update you on where we are from that point onwards.

Implementation Date

Taking into account views received from the public consultation exercise which lasted from January to April last year, the Government has decided on the design principles of the CSPF Scheme in July 2001. The CSPF Scheme will be applicable to those who are appointed on or after June 1, 2000 and when they progress onto permanent terms of appointment. As the first batch of officers appointed on or after that date will pass their 3-year probation and become eligible to join the CSPF Scheme starting from mid 2003, our target is to have the Scheme in operation by mid 2003, in time for offer to these eligible officers.

Legal framework and Mode of operation

There has been discussion during the public consultation on the legal framework and the mode of operation of the Scheme. The majority of the working population in Hong Kong is now covered by provident fund schemes set up under the MPF Schemes Ordinance. To show our support for the Ordinance and in line with our thinking to make the CSPF Scheme compatible with the prevailing system in the private sector, we consider it appropriate for the CSPF Scheme to be set up under the MPF Schemes Ordinance as well. This means that the CSPF Scheme will be subject to the same set of regulations and enjoy the same level of protection applicable to the majority of provident fund schemes in Hong Kong.

As for the mode of operation, there are essentially two options : either we acquire services from Master Trust Schemes (MTS) available in the market, or we set up an Employer Sponsored Scheme (ESS) of our own. After careful consideration, we are inclined to choose the former route. There are a number of arguments in support of this. First, the rather small number of civil servants to be covered by the CSPF Scheme in the initial years may not justify the high set up and administration cost, as well as the long lead-time entailed in the ESS approach. Second, the ESS approach would require heavy involvement of the employer in terms of both lining up service providers and in determining the investment policy and portfolio. These are something which fall outside the core competency of the civil service.

Since there are available expertise in the market, we believe we should tap into these ready expertise, instead of duplicating efforts and resources in setting up an ESS of our own. To this end, our plan is to select three Master Trust Schemes for an initial period of three years. We shall follow standard Government procedures to conduct a tender exercise for selection of Master Trust Schemes. In terms of timing, we have just invited tender yesterday and the closing date of the tender is mid June. Our target is to complete the tender exercise and award contracts to the selected scheme trustees in October in order to allow the selected scheme trustees sufficient time to complete necessary preparatory work.

Transfer Option

Given a more than 180 000 strong civil service, you may wonder why I said earlier that the initial number of scheme members would be too small to justify for an ESS. This relates to another design principle of ours. That is, the CSPF Scheme will only apply to those officers who are appointed under the new entry terms on or after 1 June 2000. Serving officers who are eligible for pension benefits and existing pensioners will not be allowed to transfer to the CSPF Scheme. The reason is that the pension system and the CSPF Scheme are fundamentally different in terms of both design principles and logic. If we allow a transfer option, it would lead to a whole series of financial, administrative and legal issues to be resolved. In particular, the settlement of a mutually agreed transfer value of accrued retirement benefits from a pension system to a provident fund system will be exceedingly problematic.

We conclude that instead of diverting our attention to resolving such arguments, we should focus our effort to set up the CSPF Scheme by not allowing serving officers a transfer option. This arrangement is consistent with other changes introduced under the Civil Service Reform, whereby changes to the appointment terms and fringe benefits are only applicable to new recruits. As a result, the number of scheme members in the initial years will be small. To give you an idea, the number would be less than 600 in the first year of implementation. However, the number of scheme members will grow over time and will eventually cover all civil servants when the serving pensionable officers retire in the long run.

Government's Contribution Rates

As regards our financial commitment for the Scheme, our decision is that Government's overall financial commitment, including both the mandatory and all types of voluntary contributions, should be kept within 18% of the salary costs of scheme members. Working within this financial ceiling and having regard to our policy objectives and human resources management considerations, we decide to adopt a progressive contribution rate starting from 5% of the basic salary of a scheme member and increasing up to a maximum of 25%, when the member has completed 30 years of services or more.

These contribution rates are comparable to the best provident fund scheme offered by private sector employers. We consider this level justifiable having regard to the need to attract and retain quality staff, as well as the high standard of integrity required of the civil service. In working out the contribution rates schedule, we have provided a steeper increase in contribution rate in the earlier stage, say the first 10 to 15 years of an officer's career. This is to meet our desire to retain good staff after they have benefited from our intensive investment on training to build up their necessary professional knowledge and experience. The incremental rate will level off towards the latter part of an officer's career.

Vesting arrangement

There is general consensus that 10 years is a reasonable time limit for full vesting of CSPF benefits attributable to Government's voluntary contributions, although views are divergent on whether partial vesting should be allowed for services which are less than 10 years. Taking into account our intention to provide a long-term career for civil servants with proven performance and potential, we decide to adopt a 10-year cliff vesting, with no partial vesting in the interim.

Disciplined Services

Due to the stringent requirement of physical fitness on operational grounds, disciplined service officers are required to retire earlier. The majority of them are required to retire at 55, five years earlier than their civilian counterparts. In recognition of their shorter career time span to accrue benefits under the CSPF Scheme, we would provide them with an additional Special Disciplined Services Contribution at 2.5% of the basic salary. This amount, when paid over the career of a typical disciplined service officer, would accumulate to a value which is roughly equivalent to five years of CSPF contributions from age 55 to 59, after allowing for investment return for the same period. The Special Disciplined Services Contribution will be fully vested when the officer reaches the prescribed retirement age, with no vesting in the interim.

Penalty provisions

I would like to highlight one special feature in the CSPF Scheme - penalty provisions. To help maintain a high standard of integrity and probity of the civil service, we would include provisions in the scheme rules to enable the Government to forfeit accrued benefits attributable to Government's voluntary contributions on disciplinary grounds, and withhold such benefits when in doubt. We consider such provisions necessary as a deterrent against misconduct. We would work out the detailed procedures in consultation with staff to ensure fairness.

Impact on Government's financial management

The introduction of the CSPF Scheme would also result in changes to Government's financial management regarding provision of civil service retirement benefits. Under the pension system, payments of retirement benefits of the current day civil servants are deferred to future generations. On the other hand, payment under the CSPF Scheme will be made upfront throughout an officer's active service at a pre-determined rate. As a result, Government's financial commitment for retirement benefits will become much more predictable and transparent as compared with the pension system. This is an improvement from the financial management point of view.

Impact on the community

Being the largest employer in Hong Kong, a change in its retirement protection approach for its employees would inevitably have impact on the community as a whole. As we intend to set up the CSPF Scheme as a MPF scheme and to acquire service from existing master trust schemes in the market, we believe we could add impetus to the development of the provision of retirement benefits in Hong Kong. Although the Scheme will have a modest start, the number of scheme members and accordingly the fund size will grow with time. This would also stimulate the demand for, and hence the supply of, long term financial instruments to match the maturity structure of the CSPF liabilities corresponding to the retirement benefit pay-outs. In addition, we expect an increase in the demand for a wide range of professional support services such as fund managers, credit analysts, investment advisers, etc in the long run.

Way Forward

We are now mapping out the detailed design of the Scheme, as well as all relevant implementation work. Our target is to launch the Scheme in mid 2003, in time for offer to the first batch of officers who would become eligible for joining the Scheme.

Conclusion

The CSPF Scheme is a major attempt to modernise the civil service. Today's seminar has given us a valuable opportunity to share thoughts and experience. I look forward to hearing your comments and ideas, and I would be happy to answer any questions which you may have.

End/Saturday, May 4, 2002

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