The ‘ORSO’ – The jewel in the Hong Kong pensions’ crown
The success of any company is dependent on its ability to attract and retain a skilled, motivated and committed workforce. Companies undertaking specialist activities or operating from certain regions such as Asia invariably recruit a high proportion of their employees from overseas. The relocation, orientation and training of expatriate employees requires considerable investment, making staff retention all the more important.
Over and above salary, a comprehensive employee benefit package is a vital tool for any employer that wishes to attract and retain top talent; and one of the principal elements of any employee benefit package is an occupational pension or savings provision.
What is an ORSO?
Hong Kong’s Occupation Retirement Scheme Ordinance (ORSO) applies to all retirement schemes set up voluntarily in Hong Kong by an employer for providing benefits to its employees, irrespective of where the company is established or trades, or where its employees are based.
An ORSO scheme must be employment-based and all members under the ORSO scheme must be eligible persons. An ORSO can run in parallel with, or in addition to, Hong Kong’s Mandatory Provident Fund (MPF), which is a compulsory scheme established by the government that applies to all employers in Hong Kong.
An ORSO scheme is generally registered with and regulated by the Mandatory Provident Fund Schemes Authority (MPFA), but companies that operate ORSO retirement schemes can also apply to the MPFA for exemption if the scheme has been registered with or approved by a recognised overseas authority.
How an ORSO works
An ORSO is typically governed by a trust deed, which means that the trustees own the pension assets on behalf of the employees who are the beneficiaries. This arrangement means that the assets in the ORSO account are kept separate and distinct from those of the employer company, which offers an additional layer of comfort to employees and protects the plan from any party seeking to lay claim to the assets of the business.
The trust deed is accompanied by a set of scheme rules that is usually developed by the chief financial officer of the employer company together with the trustee and contains details of how the ORSO is to be funded, the vesting schedule and investment options. A fund manager is normally appointed to manage the funds, which can be invested in a variety of underlying investments including stocks, bonds and listed equities.
An ORSO is different from a personal private pension fund because it allows direct funding from the employer. An ORSO scheme has to be established by an employer and cannot be offered to the public at large, so a genuine employer/employee relationship must exist.
A ‘vesting scale’, which specifies the minimum period that employees must work before they become entitled to the employer’s contributions, can be varied. For example, if the minimum period of service stated in the vesting scale is three years and the employee has served less than three years, he or she will not be entitled to any part of the employer’s contributions upon termination of employment.
The ORSO is a relatively easy to implement as an incentive scheme that can serve as a useful tool to attract and retain top-talent. Employees are rewarded for long term service to the company and are thus encouraged to stay for longer. The ORSO legislation permits employers to nominate a retirement age of their choosing.
Benefits in Hong Kong are paid out as lump sum, so members are not required to annuitise their capital. Contributions made to an MPF exempted ORSO scheme are tax-deductible up to a maximum of HKD18,000 a year for employees and for an employer, contributions up to 15% of employees total emolument made to an MPF-exempted ORSO scheme are tax-deductible. Investment income and benefits are tax-exempt, which can offer significant tax advantages to expatriate staff who intend to return to any country in Hong Kong’s growing network of tax treaties.
The ORSO can also be beneficial for employers using Hong Kong as a platform for regional retirement schemes because companies that are part of the same group may apply to become ‘Participating Employers’. This extends the potential membership to all the eligible employees and directors of these group companies. This can be particularly important for employees based in less politically stable countries.
ORSO exempted schemes offer further advantages over MPF schemes, including no legal requirement for contribution (ORSO schemes can either be Defined Benefit or Defined Contribution schemes), flexible benefit withdrawal and increased diversification of investment portfolios. The choice of underlying investments is a lot broader than are available under a standard MPF scheme, but the ordinance does offer some protection by limiting the ability to invest into certain, risker assets classes.
For start-ups that depend on a small number of team members for success, vesting is a highly effective way to protect the business and increase sustainability while at the same time incentivising employees. By providing a vesting schedule, team members can ensure loyalty and long-term security. It is also beneficial for the employer as it allows a company time to establish itself before contributions to the pension scheme need to begin.
Hong Kong provides an established, straightforward, low tax system that attracts legitimate and transparent pension planning for both local and international clients.
It is possible to build a bespoke scheme from just one employee upwards and Sovereign can assist with designing, building and operating a scheme that is appropriate for the both the business and employee’s needs, regardless of the size of company. Our clients range from large international businesses to smaller firms just starting out. Sovereign also offers individual portable pension arrangements for internationally mobile employees and senior staff.