The Hong Kong MPF offsetting mechanism has been a controversial debate for decades, but it will soon come to an end. On 9 June 2022, the Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022, which abolishes the use of the accrued benefits of employers’ mandatory contributions under the Mandatory Provident Fund (MPF) System to offset severance payment (SP) and long service payment (LSP). The Government has announced that the abolition of MPF offsetting arrangement will come into effect on 1 May 2025.
So, what does it mean for employers? Let us take a closer look.
What is the Mandatory Provident Fund (MPF)?
Under Hong Kong’s current MPF scheme, an employer is required to make mandatory contributions equivalent to 5% of an employee’s relevant income per month, capped at HKD 1,500 per month (employer’s mandatory contributions, or ERMC). There has been an MPF offsetting mechanism under the scheme since it was introduced in 2000, in which employers can use the benefits derived from the employers’ MPF contributions to reduce the employees’ statutory severance pay (SP) or long service payment (LSP) entitlements.
What prompted the government to act?
This controversial offsetting mechanism has drawn criticism over the years, as it is tantamount to robbing employees of their hard-earned money when employers are allowed to take cash from their pensions to offset long-service and severance payments.
In 2017, former Chief Executive CY Leung attempted to push forward a proposal to abolish the mechanism, but to no avail due to strong resistance from the business sector. The government did not take further actions until 2021, when former Chief Executive Carrie Lam’s administration submitted a bill to abolish the mechanism.
What will happen after the abolition of MPF Offsetting?
Once the abolition of the offsetting arrangement takes effect (the transition date), employers can no longer use the accrued benefits derived from their mandatory MPF contributions to offset employee’s SP or LSP, while any accrued benefits derived from employers’ voluntary contributions (ERVC) or gratuities based on length of service can still be used to offset employees’ SP or LSP. Additionally, to reduce the risk of large-scale dismissals before the MPF offsetting takes effect, the “grandfathering” arrangement will be put in place for the pre-transition portion of SP/LSP of employees who are already in employment before the transition date.
We get into the details of the “grandfathering” arrangement below.
What Happens Before and After the Transition Date?
Since the changes have no retrospective effect, as to reduce the risk of large-scale dismissals before the transition date, the Hong Kong Government will be introducing a “grandfathering” arrangement for the pre-transition portion of SP or LSP of employees who are already in employment before the transition date.
The table below shows how it works:
For the employment period before the transition date
|Employers can continue to use the accrued benefits derived from both the employer’s mandatory and voluntary MPF contributions to offset an employee’s SP or LSP entitlements before the transition date.|
The calculation of SP or LSP payable to a monthly-rated employee*
= Employee’s last full month’s wages immediately preceding the transition date (capped at HK$22,500) x2/3 x years of service before transition date
For the employment period on and after the transition date
|Employers can only use the accrued benefits derived from their voluntary MPF contributions for offsetting the employees’ SP or LSP entitlements.|
The calculation of SP or LSP payable to a monthly-rated employee *
= Employee’s last full month’s wages before termination of employment (capped at HK$22,500) x 2/3 x years of service after transition date *
* The cap of the total SP or LSP payment (pre-transition portion + post-transition portion) remains at HK$390,000.
For example, if an employer has employed an employee with four years of service before the transition date and continues to employ the employee for three years after the transition date. The employee’s last monthly wages are HK$15,000 preceding the transition date and HK$18,000 at the time of dismissal.
The table below shows the calculation and offsetting arrangement of the employee’s SP or LSP:
|SP or LSP of the employee||(1) Pre-transition portion of SP or LSP|
HK$15,000 x 2/3 x 4 years = HK$40,000
(2) Post-transition portion of SP or LSP (cannot be offset by ERMC)
HK$18,000 x 2/3 x 3 years = HK$36,000
|ERMC in respect of the 7-year employment|
(assuming the employee has been given only one wage increase, which takes effect on the transition date and ERMC have no profit or loss)
|ERMC retained in the employee’s MPF account after offsetting||HK$69,150 – HK$40,000 (Pre-transition portion)|
|Total amount of benefits of the employee||HK$76,000 (SP/LSP) + HK$29,150 (ERMC retained in the employee’s MPF account)|
Total = HK$105,150
The abolition of the MPF offsetting arrangement will also be applicable to occupational retirement schemes under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), the two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidized Schools Provident Fund Rules (Cap. 279D) and overseas occupational retirement schemes joined by employees from outside Hong Kong which are exempted from the MPF System. However, it will not be applicable to employees who are currently not covered by the MPF System or other statutory retirement schemes (this includes foreign and local domestic helpers, and employees aged less than 18 years or more than 65 years). Their SP or LSP will continue to be calculated based on the last monthly wages before the termination of employment.
What does it mean to employers?
The government would introduce a 25-year subsidy scheme totalling HK$33.2 billion for employers, especially micro, small, and medium-sized enterprises, to adapt to the new Hong Kong pension offsetting arrangement. Employers are encouraged to set up Designated Savings Accounts, where they have to make mandatory contributions for meeting their potential SP or LSP liabilities after the abolition of the MPF offsetting arrangement. But most importantly, employers should be aware of the new arrangement and ensure compliance with the new regime.
*Please note that all the information provided above is to be used as a general guideline. For more detailed information on the Abolition of MPF Offsetting Arrangement in Hong Kong, please visit the official governmental websites: https://www.labour.gov.hk/eng/news/aoa.htm.