Hong Kong government tables bill to abolish Mandatory Provident Fund offsetting mechanism to the Legislative Council
07 March 2022
There is finally visibility on how the government proposes to sunset the controversial Mandatory Provident Fund (“MPF”) offsetting mechanism as the long-awaited Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill (“Bill”) was tabled to the Legislative Council on 23 February 2022. The government hopes that the law will be finalised within the current government office term and expects the mechanism to be abolished by 2025. This article provides a summary of the key changes and some key takeaways for employers.
Background
The Hong Kong government announced the proposal to abolish the MPF offsetting mechanism in as early as 2018 but the question of how to balance the interests of employers and employees has been a subject of long debate and so it was not until recently that the government announced that it has finally completed the drafting of the Bill.
The MPF offsetting mechanism allows employers to offset statutory long service payment (“LSP”) or severance payment (“SP”) against employees’ MPF benefits derived from employers’ MPF contributions. This offsetting mechanism, which has been in place since the inception of MPF, essentially allows employers to dip into employees’ retirement funds in order to discharge their statutory financial obligations to make LSP / SP upon termination of employment. Often, where the offset is applied by employers, employees’ LSP / SP will be substantially reduced or even completely diminished.
The Bill will amend 8 pieces of existing legislation, including the Employment Ordinance and the Mandatory Provident Fund Schemes Ordinance. The Bill proposes to abolish the MPF offsetting mechanism without retrospective effect. This means that from a date to be determined (“Transition Date”), employers will no longer be able to apply the offset.
However, the Bill provides for a transitional arrangement whereby an employer could continue to apply the offset against employer derived MPF benefits attributable to the period of employment before the Transition Date.
It is worth noting that although generally referred to as the MPF offsetting mechanism, the offsetting mechanism extends to occupational retirement scheme (“ORS”) benefits derived from employer’s contributions as well. The Bill seeks to abolish the offsetting mechanism against employer derived MPF benefits as well as employer derived ORS benefits. However, this article focuses on the changes in relation to MPF.
Summary of changes
Some of the main changes proposed by the Bill are summarised below:
| Current position | Proposed change |
| Employers are currently entitled to offset LSP / SP against employees’ MPF benefits derived from employers’ mandatory and voluntary MPF contributions. | From the Transition Date, employers will no longer be permitted to offset LSP / SP against employees’ MPF benefits derived from employers’ mandatory MPF contributions. Employers may however continue to offset LSP / SP against employees’ MPF benefits derived from employers’ voluntary MPF contributions. This change in itself, is mainly relevant to employees who commence employment on or after the Transition Date. For employees who commenced employment before the Transition Date, a transitional arrangement will apply (see below). |
| Employers are currently entitled to offset LSP / SP in relation to the whole employment period. | For employees who commenced employment before the Transition Date and whose employment terminates after the Transition Date, their LSP / SP upon termination of employment will be split into two components: 1. LSP / SP attributable to the period of employment up to the day immediately preceding the Transition Date (“Pre-Transition Portion”): Employers can continue to offset this portion of LSP / SP against MPF benefits derived from employers’ mandatory and voluntary MPF contributions. This is regardless of whether or not the contributions were made before or after the Transition Date. 2. LSP / SP attributable to the period of employment from the Transition Date (“Post-Transition Portion”): From the Transition Date, employers will no longer be permitted to offset LSP / SP against employees’ MPF benefits derived from employers’ mandatory MPF contributions but may continue to offset LSP / SP against employees’ MPF benefits derived from employers’ voluntary MPF contributions. |
| The formula for calculating LSP / SP is currently as follows: (2/3 x [the lesser of HK$22,500 or last full month’s wages preceding Termination of Employment] x years of service as at Termination of Employment) LSP / SP is subject to a payment cap of HK$390,000. |
The payment cap will remain at HK$390,000. However, the calculation of LSP / SP will be revised in the following manner to cater for calculating the Pre-Transition Portion and Post-Transition Portion of LSP / SP: 1. Calculation of Pre-Transition Portion of the LSP / SP (2/3 x [the lesser of HK$22,500 or last full month’s wages preceding Transition Date] x years of service preceding Transition Date) 2. Calculation of Post-Transition Portion of the LSP / SP (2/3 x [the lesser of HK$22,500 or last full month’s wages preceding Termination of Employment] x years of service from the Transition Date as at Termination of Employment) |
| Every employer is required to keep wage and employment records of their employees in relation to the preceding 12 months. | There is no change to this requirement. However, the Bill proposes to add a further requirement whereby in relation to employees who have commenced employment before the Transition Date, employers would be required to keep wage records of their employees covering the 12-month period immediately preceding the Transition Date. |
Recognising that abolishing the offsetting mechanism could increase the financial burden of employers, the government plans to provide subsidies to help employers transition the change but the finer details are still being discussed. It is likely that the discussions will continue in tandem with the review of the Bill and that a concrete plan for the subsidy scheme would only be available nearer to the changes proposed by the Bill being finalised.
Also, in the event that the abolition of the offsetting mechanism results in an employee receiving less than what he / she would have received under the existing rules, the government plans to make up the difference. It is expected however that this situation will be rare.
Key takeaways
- A primary concern for employers has been that the abolishment of the offsetting arrangement would place a heavy financial burden on employers. However, as the current proposal suggests a transitional approach to abolishing the offsetting arrangement and it is likely that the government will provide subsidies to help employers transition the change, it is expected that this should help alleviate some of the financial burden on employers.
- When the changes come into effect, employers will need to update their payroll system to facilitate calculation of the Pre-Transition Portion and Post-Transition Portion of LSP / SP. However, the proposed changes effecting the abolition of the offsetting mechanism are not expected to come into force until 2025, so this gives employers some time to plan ahead.
How we can help
While the changes proposed are still subject to change depending on the outcome of the legislative process, if you have any questions about the changes proposed, we would be pleased to provide further information and partner with you to navigate the transition.
Please reach out to us if you wish to know more.