Abolition of MPF Offsetting Arrangement in Hong Kong

Under the current regime, employers may use accrued benefits of employers’ mandatory contributions under the Mandatory Provident Fund (“MPF”) system to offset severance payments (“SP”) and long service payments (“LSP”) (“the Offsetting Arrangement”). With a view to enhance employees’ retirement protection, the Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) Bill to abolish the Offsetting Arrangement on 9 June 2022. The abolishment of the Offsetting Arrangement (“the Abolition”) is scheduled to be implemented on 1 May 2025 (“Transition Date”).

Existing Regime

According to the MPF Schemes Ordinance in Hong Kong, except for exempted persons, employees and self-employed persons aged 18 to 64 are required to join an MPF scheme.  

For regular employees, it is mandatory for both employers and employees to make contributions of 5% of the employee’s relevant income into the MPF account of the employee, taking into account the minimum and maximum income levels. Currently, for employees with monthly relevant income of more than HKD 30,000, both the employer’s and employee’s contributions are capped at HKD 1,500.

Employers have to pay mandatory contributions for their employees out of their own funds. As for employee’s contributions, employers must also deduct these from the employee’s relevant income for each contribution period.

Key Developments

After the Transition Date, employers will be prohibited from using employers’ mandatory contributions to offset SP and LSP (as the case may be), in respect of an employee’s employment period commencing from the Transition Date. 

It is important to note that the Abolition does not apply retrospectively. As such, employers can continue to use the Offsetting Arrangement in respect of employment prior to the Transition Date. This is the position regardless of whether contributions are made before, on or after the Transition Date, and regardless of whether the contributions are mandatory or voluntary.  

The pre-Transition Date portion of SP or LSP will be assessed based on monthly wages immediately before the Transition Date and the years of service prior to the Transition Date. For example, where an employee is employed on 1st December 2022, which is prior to the Transition Date, the Offsetting Arrangement only applies to the employment period prior to the Transition Date (i.e. between 1st December 2022 – 30th April 2025). 

Think twice before dismissing existing employees and engaging new ones 

Some employers might think that they could save on SP and LSP, by terminating existing employees and hiring new ones.

However, this is not the case. In fact, the portion of an existing employee’s SP or LSP prior to the Transition Date is assessed based on their wages immediately before the Transition Date and the years of service prior to the Transition Date. As such, the amount of SP and LSP an employee may be entitled to remains the same, notwithstanding any increase in salary or length of employment after the Transition Date. 

In contrast, an employer will incur a higher amount of SP/LSP if he/she dismisses an employee before the Transition Date and employs a new one, because the accrued benefits derived from an employer’s contributions for the whole employment period, could be used to offset the portion of pre-transition SP/LSP. Continuing to hire the same employee would allow such accrued benefits to increase.

Does the Abolition of the MPF Offsetting Arrangement apply to all employees?

The MPF Offsetting Arrangement does not apply to employees currently not covered by the MPF system or other statutory retirement schemes (including foreign and local domestic helpers and employees under 18 or over 65). Where the MPF Offsetting Arrangement does not apply to an  employee, SP or LSP will continue to be calculated based on their last monthly wages or the 12-month average wages before termination of employment, as provided for under the relevant provisions of the Employment Ordinance.

Employers to receive Government assistance under the subsidy scheme for the Abolition of MPF Offsetting Arrangement (“Subsidy Scheme”)

In order to support employers through this transition, the Hong Kong Government will introduce a 25-year subsidy scheme totalling approximately $33.2 billion to share out their expenses on SP or LSP after the Transition Date.

The Subsidy Scheme is two-tiered: 

1. where an employer’s total expenses of SP and LSP in a year does not exceed HK$500,000 (“first tier”) 
2. where an employer’s total expenses for SP and LSP exceeds HK$500,000 (“second tier”). 

Where an employer falls within the first tier, a maximum amount of SP or LSP payable by the employer applies per case for the first nine years. Where the amount payable by an employer exceeds the maximum amount, the employer is only responsible for paying that maximum amount and the remainder is to be subsidised by the Government.  

For employers falling within the second tier, the amount of SP or LSP payable is assessed against a share ratio instead of a maximum amount. The employer will be responsible to pay the share ratio, and the remainder will be subsidised by the Government. 

It is anticipated that micro, small and medium-sized businesses will benefit greatly from this subsidy scheme, as most of these businesses spend less than HK$500,000 on SP and LSP each year.

Future Supporting Measures – Designated Saving Accounts (“DSA”) Scheme

Employers should look out for a new bill, namely the Designated Savings Accounts for SP and LSP Bill, which will be presented to the Legislative Council in due course. Under this bill, employers will be mandated to set up DSAs to save up for their future SPs and LSP liabilities once the Abolition takes effect. Under the DSA scheme, employers are set to put aside 1% of their employees’ monthly income until the DSA balance reaches 15% of the annual income of all employees.  The funds saved in the DSAs are to be used for the sole purpose of making SP and LSP.