Do you currently employ staff in Hong Kong? Or are you considering hiring employees for your newly established Hong Kong company? As an employer in Hong Kong, you are obligated to make monthly contributions towards a designated Mandatory Provident Fund (“MPF”) scheme registered under your employee’s name. The MPF operates as a compulsory savings scheme, providing retirement protection for Hong Kong’s workforce. The amount of contribution is calculated at five per cent of the employee’s income, subject to a cap of HKD 1,500 per month for each employee.
To gain a detailed understanding of how the MPF works, consult our comprehensive guide.
On 9 June 2022, Hong Kong’s Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill (“the Amendment Bill”) to abolish the MPF offsetting mechanism. As a result, you will no longer be able to use the mandatory contributions you have paid into employees’ MPF schemes to offset against severance or long service payments.
This article provides a summary of the main legislative changes and details the government’s proposed measures to tide over businesses during the transition period. In addition, we will outline the new method for calculating severance and long service payments after the abolition comes into force on 1 May 2025.
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Background: How does the MPF offsetting mechanism work under the current scheme?
Under the existing system, you can use the contributions – whether they are mandatory or voluntary (in excess of the compulsory five per cent) – paid into your employee’s MPF scheme to offset against severance or long service payments. In other words, the offsetting mechanism lowers the amount of severance or long service payment payable to an employee. It effectively allows you to discharge your statutory obligations upon termination of employment without having to make substantial pay-outs. As an employer, it is within your statutory right to apply the offsetting mechanism, in accordance with the original section 12A of the Mandatory Provident Fund Schemes Ordinance (Cap. 485) (“MPFSO”) as well as sections 31I and 31Y of the Employment Ordinance prior to their amendment.
This offsetting arrangement is a protective mechanism designed to ensure that employers do not fall into financial hardship when an employee leaves. It has been a longstanding feature of the MPF’s operation since its inception in 2000. This arrangement, however, places employees at a significant financial disadvantage, which prompted calls to scrap it altogether. After employers perform the offsetting exercise, employees’ severance or long service payments are often significantly decreased or entirely depleted. According to the MPF Schemes Authority, the offsetting mechanism has resulted in the gradual erosion of MPF assets over time, thereby compromising the effectiveness of the MPF as a safety net upon retirement. With the elimination of the offsetting mechanism, along with other enhancements to the MPF system, the level of retirement protection for the working population would see a marked improvement.
What are severance and long service payments?
The concept of severance payment is simpler to understand than that of long service payment. It refers to a sum that is payable to an employee who has been employed for a continuous period of no less than 24 months but is made redundant.
Long service payment, on the other hand, refers to a sum that is payable to an employee who has been employed for a continuous period of at least five years and meets any one of the following criteria:
- The employee is dismissed but not as a result of redundancy or serious misconduct.
- The employee resigns on the grounds of ill health.
- The employee resigns after reaching the age of 65 or above.
- The employee passes away.
- If it is a fixed-term employment contract, it lapses without being renewed by the employer.
The implication is that, supposing an employer prescribes a retirement age of 63 years old, and the employee is asked to retire, it is highly unlikely that the employee will leave of his or her own accord. In this case, the employer must terminate the employment contract, which is deemed a dismissal. As the employee’s dismissal is not due to redundancy or serious misconduct, the employee will be eligible to receive long service payment.
What are the key changes introduced in the Amendment Bill?
From the implementation date, i.e., 1 May 2025 onwards, you will no longer be allowed to use accrued benefits derived from mandatory contributions made to an MPF scheme to offset against severance or long service payments. Accrued benefits include any sums deposited in the registered scheme as well as the income or profits generated from any investments made with the sums. This also takes into account any potential losses incurred from the investments.
The abolition of the offsetting mechanism does not affect your right to use accrued benefits derived from voluntary contributions and gratuities based on the length of service. These can continue to be used to offset against severance or long service payments payable upon an employee’s departure.
- For employees who begin and leave their employment before the implementation date
Given that the changes do not apply retrospectively, the offsetting mechanism will continue to be in operation until the implementation date.
- For employees who begin their employment before the implementation date and leave their employment after the implementation date
Such employees’ severance or long service payments will be divided into two portions – the pre-transition portion and the post-transition portion.
- The pre-transition portion refers to the severance or long service payments related to the employment period up to the day before the abolition takes effect. You will still be able to apply the offsetting mechanism with mandatory contributions (and any other accrued benefits arising therefrom) to the pre-transition portion.
- The post-transition portion refers to the severance or long service payments related to the employment period after the abolition takes effect. You will not be able to apply the offsetting mechanism with mandatory contributions (and any other accrued benefits arising therefrom) to the post-transition portion, although you may continue to do so in respect of voluntary contributions and gratuities.
- For employees who begin their employment on or after the implementation date
You will not be permitted to use accrued benefits derived from mandatory contributions to offset against severance or long service payments. However, deductions can still be made from voluntary contributions and gratuities.
- Retaining wage records
Under the Employment Ordinance, you are required, as an employer, to retain wage and employment records for each employee that cover the previous 12 months. These records must be kept for an additional six months following the employee’s departure.
To facilitate the calculation of the pre-transition portion (if applicable), an additional requirement has been imposed. You must now also retain wage and employment records for each employee – spanning the 12-month period before the implementation date until six months after the employee’s departure. Where the period of employment is less than 12 months before the implementation date, you are, nonetheless, required to retain records for that shorter period.
What is the applicable scope of these changes?
The Amendment Bill applies to accrued benefits derived from mandatory contributions under the MPF system.
While it is commonly referred to as the abolition of the MPF offsetting mechanism, it is important to note that the Amendment Bill also applies to accrued benefits derived from contributions made to the following occupational retirement schemes:
- Those that qualify for exemption under the MPFSO
- Provident funds regulated by the Grant School Provident Fund Rules (Cap. 279C) and the Subsidised Schools Provident Fund Rules (Cap. 279D)
- Non-local occupational retirement schemes of employees based outside Hong Kong that fall outside the purview of the MPF system
The amendments do not extend to employees who are not registered under the MPF system or not enrolled on any other statutory retirement schemes, as the offsetting mechanism is not applicable. This includes foreign and local domestic helpers as well as employees under the age of 18 and over the age of 65. The method for calculating their severance and long service payments will remain unchanged.
What is the method for calculating severance and long service payments?
- For employees who begin their employment before the implementation date and leave their employment after the implementation date
To calculate the pre-transition portion of severance or long service payment:
(Last full month’s wages before the implementation date x 2/3) x years of service before the implementation date
To calculate the post-transition portion of severance or long service payment:
(Last full month’s wages before the termination of employment x 2/3) x years of service starting from the implementation date
- For employees who begin their employment on or after the implementation date
(Last full month’s wages before the termination of employment x 2/3) x years of service
Under the Employment Ordinance, the amount of severance or long service payment payable in respect of each employee is capped at HKD 390,000. The abolition of the offsetting mechanism shall have no effect on this upper ceiling.
Is there government support available to ease the financial burden?
- “Grandfathering” arrangement
As stated above, the Amendment Bill has no retrospective effect. This means that you can continue to use accrued benefits from mandatory contributions, regardless of the timing of contributions, to offset against severance and long service payments for the employment period before the implementation date, i.e., the pre-transition portion. This “grandfathering” or transitional arrangement allays worries among employers, who fear a retroactive law would lead to an exponential rise in costs.
Moreover, the arrangement reduces the likelihood of significant layoffs prior to the abolition taking effect. By introducing the bipartite pre- and post-transition calculation method, as detailed further above, the government makes it clear that employers will not gain a financial advantage by dismissing employees before the implementation date and subsequently recruiting new ones. Conversely, employers would have to shoulder the entirety of newly hired employees’ severance or long service payments, which can no longer be offset by accrued benefits from mandatory contributions. On the other hand, in respect of staff employed before the implementation date, employers would still have recourse to offsetable accrued benefits when calculating the pre-transition portion.
- Subsidy scheme
To help employers adjust to the significant shift in policy, the government has introduced a 25-year subsidy scheme to the tune of HKD 33.2 billion. The aim is to help employers, especially micro-, small, and medium-sized businesses, bear a portion of their employees’ severance and long service payments during the initial period following the abolition of the offsetting mechanism.
According to the government’s plans, an employer’s maximum liability for severance and long service payments shall be limited to HK 3,000 per employee, as long as the total liability is no more than HKD 500,000 per year. The government will cover the remaining costs. Starting from the fourth year, however, there will be an incremental rise in payment caps, while the subsidised amount will gradually decrease.
The implementation of the subsidy scheme will follow a reimbursement approach. Employers are required to first settle their severance and long service payment obligations. After that, they will need to submit an application along with the necessary supporting documents. Upon approval, the government will then disburse the subsidies to employers.
- Designated Savings Accounts scheme
There have been proposals to introduce a separate bill to establish a Designated Savings Accounts Scheme, which will require employers to set aside funds to meet their future severance and long service payment obligations. However, the government said in May 2023 that it was assessing the necessity of the proposed scheme, given that the existing insolvency fund already served as a robust safety net for the workforce.
For more information, visit the Labour Department’s designated website.
What can CW do for you?
At CW, we understand the importance of helping you smoothly navigate through different kinds of transitions. The abolition of the MPF offsetting mechanism represents a watershed in labour policy. The significant change is likely to lead to an increased administrative and compliance workload, including recalculating employees’ entitlements and preparing additional paperwork. While the implementation date is still some time away, we recognise the potentially far-reaching impact of the Amendment Bill. With over 30 years’ experience, our team of seasoned professionals can assist you in assessing the implications that the changes may have on your business, enabling you to plan ahead prior to the implementation date.
Contact us to find out how we can help.
