Understanding the Mandatory Provident Fund (MPF)
In Hong Kong, the Mandatory Provident Fund (MPF) system is a compulsory retirement savings scheme. Under current regulations, employers must contribute an amount equivalent to 5% of each employee’s relevant monthly income, up to a maximum of HKD 1,500. These are known as Employer’s Mandatory Contributions (ERMC).
Two major changes are reshaping the MPF landscape: the abolition of the MPF offsetting mechanism and the rollout of the new eMPF Platform. These reforms signal a move towards a more equitable and efficient retirement system in Hong Kong.
The Abolition of the MPF Offsetting Mechanism
What Is MPF Offsetting and Why Is It Ending?
Since the MPF system was launched in 2000, employers have been able to use their mandatory MPF contributions to reduce the amount payable to employees as severance payment (SP) or long service payment (LSP). This has long been viewed as unfair, effectively allowing employers to dip into employees’ retirement savings to fulfil statutory obligations.
After years of public concern and policy debate, the Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022. As a result, the offsetting mechanism will officially be abolished starting 1 May 2025.
Why Is This Reform Happening Now?
Critics of the mechanism have likened it to withholding employees’ rightful pension entitlements. Although previous governments attempted to remove the practice, strong opposition from the business sector delayed reform. It wasn’t until 2021 that momentum resumed, and the current administration succeeded in pushing through the legislation.
What Changes Will Occur After 1 May 2025?
Once the new regulation is in effect, employers will no longer be able to use mandatory contributions to offset SP or LSP. However, benefits arising from voluntary employer contributions and contractual gratuities based on length of service may still be applied for this purpose.
To ease this shift and reduce the risk of pre-transition terminations, a “grandfathering” arrangement has been introduced. This ensures a fair transition for employers and employees who are already in an employment relationship before the effective date.
Grandfathering Arrangement: How Will It Work?
The new rule divides severance or long service payments into two segments: before and after the transition date of 1 May 2025.
For the employment period before the transition:
- Employers may still offset SP/LSP using both mandatory and voluntary contributions.
- SP/LSP is calculated based on the employee’s last full month’s wages before the transition date (capped at HKD 22,500), using the formula: Monthly Wage x 2/3 x Years of Service before 1 May 2025.
For the period after the transition:
- Only voluntary contributions can be used to offset SP/LSP.
- Calculations are based on the last month’s wages before termination (capped at HKD 22,500), using: Monthly Wage x 2/3 x Years of Service after 1 May 2025.
Note: The total combined cap for SP/LSP payments remains at HKD 390,000.
Example: An employee has worked 4 years before the transition and 3 years after. Their monthly wage was HKD 15,000 before the transition and HKD 18,000 at dismissal.
- Pre-transition SP/LSP: HKD 15,000 x 2/3 x 4 = HKD 40,000
- Post-transition SP/LSP: HKD 18,000 x 2/3 x 3 = HKD 36,000
- Total SP/LSP: HKD 76,000
- If total ERMC over 7 years is HKD 69,150, only HKD 40,000 may be offset
- ERMC retained in MPF account = HKD 29,150
- Total benefit for employee = HKD 76,000 (SP/LSP) + HKD 29,150 (MPF) = HKD 105,150
These reforms also extend to other statutory retirement schemes like occupational retirement schemes under MPF Ordinance (Cap. 485), school provident funds, and exempt overseas retirement schemes. The changes, however, do not apply to domestic helpers or those outside the MPF system (under 18 or over 65).
Reference: https://www.labour.gov.hk/common/public/pdf/opd/FAQs_aoa_en.pdf
Employer Action Plan: Preparing for the End of MPF Offsetting
To ensure smooth compliance and avoid any penalties, employers should:
- Update employment contracts: Remove or revise clauses relating to MPF offsetting.
- Review payroll systems: Confirm correct calculations for LSP/SP and final salary.
- Set financial plans: Start budgeting for full LSP/SP payouts.
- Communicate proactively: Inform staff early about how the changes may affect them.
- Provide training: Ensure HR teams understand the new calculation methods and obligations.
Additionally, the government is providing a HKD 33.2 billion subsidy over 25 years to help especially small and medium enterprises cope with the new requirements. Employers may also consider setting up Designated Savings Accounts to prepare for future LSP/SP liabilities.
The eMPF Platform: A Digital Transformation of MPF Administration
What Is the eMPF Platform?
Launched in June 2024, the eMPF Platform is a government-backed initiative aimed at simplifying and modernising the administration of MPF schemes. It standardises procedures across all MPF trustees and introduces automation to reduce errors and processing times.
The platform will eventually connect all 12 MPF trustees, more than 350,000 employers, and over 4.7 million scheme members.
Current Progress
YF Life Trustees and China Life Trustees were the first to onboard in June and July 2024, respectively. Remaining trustees will be integrated according to the size of assets they manage.
Benefits for Users
- Centralised access to manage MPF accounts across all schemes
- Real-time contributions tracking
- Enhanced accuracy through automation
- Reduced administrative burden for employers
By consolidating multiple accounts into a single dashboard, the platform enhances transparency, minimises paperwork, and empowers users to manage their retirement planning more effectively.
The removal of MPF offsetting and the implementation of the eMPF Platform mark a significant evolution in Hong Kong’s retirement landscape. These initiatives are designed to protect employee benefits, improve administrative efficiency, and promote a fairer system.
For employers, the message is clear: preparation is key. By understanding the changes, updating internal systems, and training staff, businesses can ensure compliance and continue supporting their workforce through this transition.
Need help navigating these reforms? Contact us today to ensure you’re ready for the transition and your business stays compliant.