Hong Kong abolishes MPF Offsetting Scheme to bolster employee safeguards

Beginning in 2025, employers are prohibited from deducting long service and severance payments from their Mandatory Provident Fund contributions.

For years, Hong Kong’s Mandatory Provident Fund Offsetting Scheme has sparked controversy, criticized for allowing employers to dip into employees’ retirement savings to cover severance and long service payments, thus depriving workers of their rightful benefits.

However, this contentious practice is set to come to an end in 2025 as the government moves forward with plans to abolish the scheme.

The Employment and Retirement Schemes Legislation (Offsetting Arrangement) Bill 2022 will bring significant changes, preventing employers from using accrued benefits from mandatory pension contributions to offset statutory severance and long service payments owed to employees.

Discussing the legal implications of this proposed amendment, Tess Lumsdaine, a partner at Baker McKenzie’s Employment & Compensation Practice in Hong Kong, provided insights in an interview with Hong Kong Business.

“Under the Employment Ordinance (EO), employees with a minimum of 24 months’ continuous service are entitled to statutory severance payments (SP) if they face redundancy,” explained Lumsdaine. These payments serve as financial assistance during transitions to new employment.

She further elucidated on the provision for long service payments (LSP), stating, “Employees with at least five years’ continuous service are entitled to statutory long service payments if their employment contract is terminated for reasons other than redundancy or summary dismissal.”

Lumsdaine emphasized exceptional circumstances where an employee may still qualify for a long service payment, such as when “certified by a registered medical practitioner as permanently unfit for the job and resigns on such grounds.”

Both SP and LSP are calculated similarly. For monthly-rated employees, the calculation involves 2/3 of the last full month’s wages (capped at $22,500 or US$2,876) multiplied by years of service, pro rata for any incomplete year of service.

Regarding Mandatory Provident Fund (MPF) contributions, employees earning at least $7,100 (US$907) per month, along with their employers, must make mandatory contributions to the employee’s MPF, amounting to 5% of the employee’s relevant income, capped at $1,500 (US$192) each for employer and employee.

“Employers and employees may also make voluntary contributions, subject to the governing rules of the relevant scheme,” noted Lumsdaine.

She added, “Currently, there is an offsetting mechanism under the existing arrangements where employers can use the accrued benefits derived from the employer’s (not the employee’s) MPF contributions to reduce the employee’s statutory SP or LSP entitlements.”

Employers must adapt to the changes

“To mitigate the risk of significant dismissals before the Transition Date, a grandfathering arrangement has been implemented,” stated Lumsdaine.

The Labour Department outlined its support, stating, “To aid employers, particularly micro, small, and medium-sized enterprises, in adjusting to the policy shift, the Government is proceeding with the implementation of a 25-year Government Subsidy Scheme to assist in covering employers’ SP and LSP costs post-abolition.”

“The Labour Department will continue extensive public outreach efforts to ensure both employers and employees comprehend the abolition arrangements and the Government Subsidy Scheme,” it added.

Lumsdaine clarified the arrangements for the pre-transition date period, stating, “Employers can continue utilizing the accrued benefits from the employer’s MPF contributions to offset SP and LSP entitlements before the Transition Date, regardless of whether the employer contributions are voluntary or mandatory.”

The calculation for both SP and LSP during this period will be: 2/3 x last full month’s wages preceding the Transition Date (capped at $2,500 or US$319) x years of service before the Transition Date.

For the post-transition date period, Lumsdaine explained, “Employers are prohibited from utilizing accrued benefits from the employer’s mandatory MPF contributions to offset SP or LSP entitlements.

The formula for calculating SP or LSP during this period is: 2/3 x last full month’s wages preceding the date of termination of employment (capped at $22,500 or US$2,876) x years of service starting from the Transition Date.”

The maximum SP/LSP amount (the total of pre-Transition Date and post-Transition Date portions) is capped at $390,000 (US$49,868). If an employee’s SP/LSP surpasses this amount, the excess will be deducted from the Post-Transition Date portion.

Balancing labour welfare

“With the elimination of the offsetting arrangement, Hong Kong has taken a significant stride towards enhancing employee protection. Employees’ benefits in their MPF/ORSO schemes will remain unaffected after the Effective Date, even in cases of dismissal or layoff,” remarked Rosanna Chu, managing partner for EY Hong Kong firm, LC Lawyers, in a report.

“While the abolition is expected to raise operational costs, it’s reassuring for employers that the abolition arrangement will not have any retrospective effect,” Chu emphasized.

The amendment also mandates that employers maintain wage records of their employees for the preceding 12 months of employment.

“As per the Amendment Ordinance, employers are now obligated to maintain employee wage records spanning the 12-month period immediately preceding the Transition Date.

It’s crucial for employers to ensure compliance with their record-keeping obligations,” noted Lumsdaine.

Employers should also consider the accounting implications of this change, including the Hong Kong Accounting Standard 19 (HKAS 19), which requires companies to provision for defined benefit plans by reporting defined benefit obligations and related expenses in their financial statements.

As outlined in the July 2023 guidance by the Hong Kong Institute of Certified Public Accountants (HKICPA), SP has historically been treated as a defined benefit plan for accounting purposes.

However, Lumsdaine pointed out that “many companies may have accounted for the anticipated MPF offset as a reduction of the LSP liability, and the net position may have been immaterial for financial statement purposes.”

“In the future, the liability for LSP may no longer be immaterial, and the HKICPA has proposed two accounting approaches to address the offsetting mechanism,” she added.

Since the Amendment Ordinance took effect in June 2022, it could impact financial statements starting from that date. Therefore, employers are advised to seek guidance from their auditors to understand their obligations in this regard.

Ultimately, the Labour Department will enforce the Employment Ordinance provisions concerning SP and LSP payment obligations and wage record-keeping obligations, concluded Lumsdaine.