For those fortunate enough to have accumulated bonus payments from a large bank or been made a beneficiary of their company's retirement or stock option plan, the term "vesting period" will be a familiar one. It is the mechanism through which an employer seeks to incentivise and reward employees who remain employed for a designated period of time. The way that this mechanism is actually structured can be simple or more complicated.
The most basic form is called a "cliff vesting period". In this case, the employer stipulates that the employee must work with the company for a given period – say, three years – or they lose any funds contributed to the plan by the employer. When the given period has elapsed, all of the benefits of the fund become payable (vested) but you receive nothing if you cease your employment prior to that date.
A more complicated form is known as "graded" or "graduated" vesting. In this case, there is no all or nothing cliff edge. Instead employees gain a certain percentage of irrevocable rights over employer contributions made to the employee's retirement or stock option plan account each year until such time as the employee is fully vested. Typically the payment itself is not made until the final length of service goal is attained or the employment curtailed.
Hong Kong Occupational Retirement Schemes, also known as ORSO schemes, are retirement schemes set up voluntarily by employers to provide retirement benefits for their employees. Since they are not mandatory, individual employers draw up scheme rules and provisions, including the amount of contributions, whether employees have to contribute and the investment choices.
Since the implementation of the Mandatory Provident Fund (MPF) system in 2000, ORSO schemes are permitted to apply for MPF exemption. Under an MPF scheme, the monthly mandatory contributions made by the employer are vested fully and immediately in the employee, regardless of the years of service. However for ORSO schemes that have been granted MPF exemption there is a vesting scale, meaning the amount of accrued benefits derived from the employer's contributions that can be vested in the employee, is based on the years of service of the employee.
In an age of ever increasing career mobility, employers can pay elevated starting salaries and give healthy year-on-year pay increases in order to attract and retain the best talent, but this represents a permanent cash cost to the business. If however, an employer sets up a corporate pension scheme with a vesting scale, then they are able to make greater contributions safe in the knowledge that they will be able to recoup a percentage of that outlay should the staff member leave prematurely.
With employees from most backgrounds now considering occupational retirement provision to be a key part of their remuneration package, a Hong Kong ORSO scheme will therefore benefit both employers and employees by offering substantial benefits to both.
Hong Kong incentivises pension provision for employees – income tax relief may be available at the time of investment, accumulated interest is not taxed and withdrawal is also tax-free. Hong Kong also has a growing network of tax treaties that can assist in avoiding pension-related tax liabilities in the employee's home country. As a result the Hong Kong pensions market has grown rapidly and occupational pensions schemes have become a significant tool for employee retention.
Sovereign has extensive experience in designing and operating occupational pension schemes all over the world. 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.
Sovereign offers trust-based occupational pension schemes. This ensures the legal separation of the plan's assets from those of the sponsoring employer and provides an additional layer of comfort to employees by protecting the plan from any party seeking to lay claim to the assets of the business. Sovereign consultants will liaise with the sponsoring employer in drafting the trust deed and rules for the plan, including eligibility, contribution levels and investment options. The trustee of the plan will be Sovereign's registered professional trust company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.