Verification of the Funding Status of Retirement Benefit Schemes in Sponsor Due Diligence

The SFC’s 2025 thematic review of sponsor due diligence has placed a renewed focus on the verification of retirement benefit scheme funding, a previously under-scrutinised area of pre-listing checks. This shift follows a series of enforcement actions where deficiencies in verifying employee benefit obligations materially affected the financial disclosures of listing applicants, particularly those from jurisdictions with mandatory provident fund or social insurance regimes. For sponsors holding Type 6 (advising on corporate finance) and Type 6A licences, the implications are immediate: the SFC now expects documented, independent verification of the funded status of all material retirement benefit schemes as part of the sponsor’s reasonable grounds belief under the Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct), paragraph 17.6. The 2025 review specifically flagged cases where sponsors accepted management representations without cross-referencing against independent actuarial reports or statutory contribution records, leading to restatements post-listing. This article examines the regulatory framework, the specific verification steps required, and the practical challenges sponsors face in meeting this standard, drawing on recent SFC circulars and HKEX listing decisions.

The Regulatory Basis for Verification

The obligation to verify retirement benefit scheme funding status is not a standalone rule but is embedded within the broader sponsor duty to exercise reasonable care and due diligence. The SFC’s Code of Conduct, paragraph 17.6(b), requires a sponsor to be satisfied, on reasonable grounds, that the listing applicant’s prospectus contains all information necessary to enable an investor to make an informed assessment of the applicant’s financial condition. This encompasses the adequacy of provisions for employee benefit obligations, including retirement schemes.

The SFC’s 2025 Thematic Review Findings

The SFC’s 2025 thematic review, published in Q1 2025, identified that 23% of sponsor due diligence files reviewed lacked any independent verification of retirement benefit scheme funding status. In 12% of these cases, the sponsor relied solely on a management representation letter stating that all contributions were up to date, without cross-referencing against bank statements, statutory contribution records, or actuarial reports. The review further noted that in 8% of cases, the sponsor’s due diligence did not even identify the specific retirement benefit schemes to which the applicant was obligated, including mandatory provident fund (MPF) schemes in Hong Kong and social insurance schemes in the PRC.

The SFC’s enforcement division has since issued two warning letters to sponsors where the deficiency was considered material. In one case, the applicant’s PRC subsidiary had underpaid social insurance contributions by approximately HKD 12.3 million over three financial years, a liability that was not reflected in the prospectus financial statements. The sponsor had not obtained confirmation from the local social insurance bureau or verified the contribution records against the applicant’s payroll data.

HKEX Listing Decisions and Guidance

HKEX Listing Decision HKEX-LD145-2024 provides further guidance. In that decision, the Listing Committee refused a listing application where the sponsor’s due diligence on the applicant’s PRC social insurance obligations was deemed inadequate. The applicant’s PRC subsidiary had a history of late contributions, and the sponsor had accepted a legal opinion stating that the subsidiary was in compliance, without verifying the actual contribution records or the subsidiary’s current funding status. The Listing Committee held that the sponsor had failed to meet the standard of care required under Rule 3A.03 of the Main Board Listing Rules, which requires a sponsor to exercise reasonable skill, care, and diligence in performing its duties.

Verification Methodology: What the Regulator Expects

The SFC’s 2025 review and subsequent guidance outline a specific methodology for verifying retirement benefit scheme funding status. This methodology is not prescriptive in every detail but establishes a clear standard of independent, documented verification.

Step 1: Identify All Material Schemes

The first step is to identify all retirement benefit schemes to which the listing applicant and its subsidiaries are obligated. This includes not only the primary scheme in the applicant’s jurisdiction of incorporation but also any schemes in jurisdictions where the group operates. For a Hong Kong listing applicant with PRC subsidiaries, this would include the Hong Kong MPF scheme and the PRC’s basic pension insurance, medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance (the “five social insurances and one housing fund”). The sponsor must obtain a complete list from the applicant, cross-referenced against payroll records and the group’s corporate structure.

Step 2: Obtain Independent Evidence of Funding Status

The sponsor must obtain independent evidence of the funding status of each material scheme. This evidence should be obtained directly from the scheme administrator, the relevant government authority, or an independent actuary. For MPF schemes, this would include a statement from the MPF trustee confirming that all contributions due up to the latest reporting date have been received. For PRC social insurance schemes, this would include a confirmation from the local social insurance bureau or a certified copy of the contribution records stamped by the bureau.

The SFC’s 2025 review specifically criticised sponsors that accepted contribution records prepared by the applicant’s finance department without independent verification. In one case, the applicant’s finance department had incorrectly reported contribution amounts, understating the liability by HKD 4.7 million.

Step 3: Reconcile Against Payroll and Financial Records

The sponsor must reconcile the contribution records obtained from independent sources against the applicant’s payroll data and financial statements. This reconciliation should cover at least the three most recent financial years and the stub period up to the latest practicable date before the prospectus is issued. Any discrepancies must be investigated and explained. The sponsor should also assess whether the applicant’s financial statements contain an adequate provision for any unfunded obligations.

Step 4: Assess the Impact of Any Underfunding

If the sponsor identifies any underfunding, it must assess the materiality of the underfunding to the applicant’s financial condition and the prospectus disclosures. The SFC expects the sponsor to quantify the underfunding and to consider whether the applicant has a plan to remedy the shortfall. In some cases, the underfunding may be material enough to require a specific risk factor in the prospectus or an adjustment to the applicant’s net asset value.

Practical Challenges and Mitigation Strategies

Sponsors face several practical challenges in implementing the verification methodology described above. These challenges are particularly acute for applicants with complex group structures or operations in jurisdictions where independent verification is difficult to obtain.

Challenge 1: Obtaining Independent Evidence from PRC Social Insurance Bureaux

Obtaining independent confirmation from PRC social insurance bureaux can be time-consuming and, in some cases, impossible. Many local bureaux do not provide written confirmations to third parties, and some will only provide records to the employer itself. In such cases, the sponsor may need to rely on alternative evidence, such as a certified copy of the contribution records obtained by the applicant and stamped by the bureau, combined with a legal opinion confirming the applicant’s compliance with local regulations.

The SFC’s 2025 review acknowledged this difficulty but stated that the sponsor must still take reasonable steps to verify the records. This may include sending a representative to the bureau to view the records in person, or obtaining a confirmation from the applicant’s independent auditor that the auditor has verified the contribution records against the bureau’s records.

Challenge 2: Verifying Schemes in Multiple Jurisdictions

For applicants with operations in multiple jurisdictions, the sponsor must verify the funding status of retirement benefit schemes in each jurisdiction. This requires knowledge of the regulatory framework in each jurisdiction and the ability to obtain independent evidence. The sponsor may need to engage local legal counsel or a benefits consultant to assist with the verification process.

Challenge 3: Timing and Cost Constraints

The verification process described above can be time-consuming and costly, particularly for applicants with large workforces or complex benefit structures. The sponsor must plan the due diligence timeline accordingly and allocate sufficient resources to the task. In some cases, the sponsor may need to negotiate with the applicant to obtain the necessary evidence in a timely manner.

The SFC’s 2025 review noted that some sponsors had attempted to shortcut the process by relying on management representations or by limiting the scope of the verification to the most recent financial year. The review made clear that such shortcuts are not acceptable.

Actionable Takeaways for Sponsors

Based on the regulatory framework, the SFC’s 2025 thematic review, and the practical challenges identified, sponsors should implement the following specific measures:

1. Update due diligence checklists to include a dedicated section for retirement benefit scheme verification, requiring independent evidence from scheme administrators or government authorities for each material scheme across all jurisdictions where the applicant operates.

2. Engage an independent actuary or benefits consultant for any defined benefit scheme or any scheme where the funding status is not readily determinable from contribution records alone, and document the actuary’s opinion in the sponsor’s working papers.

3. Obtain a legal opinion from local counsel in each jurisdiction where the applicant operates, confirming the applicant’s compliance with all statutory retirement benefit obligations and the consequences of any non-compliance.

4. Perform a reconciliation of contribution records against payroll data for at least three financial years and the stub period, and document any discrepancies with management’s explanation and the sponsor’s assessment of materiality.

5. Include a specific risk factor in the prospectus if any material underfunding is identified, and ensure that the applicant’s financial statements contain an adequate provision for the underfunding, with the sponsor’s rationale for the provision amount documented in the due diligence report.