End of the MPF Offset for Long Service Payments and Severance Payments

Introduced in February, 2022, the MPF Offset Bill aims to enhance retirement protection for employees by abolishing the arrangement under which employers can offset mandatory contributions made by them for the account of employees to Mandatory Provident Fund (“MPF”) schemes or similar contributions to MPF-exempted Occupational Retirement (“ORSO”) schemes against severance payments and long service payments payable to employees under the Employment Ordinance upon termination of employment.

Timetable

The MPF Offset Bill has not yet been passed into law. Once the bill comes in force, it is not expected to be implemented until 2025 at the earliest. As proposed, the offsetting arrangement will be abolished starting from a date (“Transition Date”) to be appointed after the enactment of the MPF Offset Bill.

Current MPF Offset

Severance or Long Service Payment

The Employment Ordinance establishes separate schemes for severance payment and long service payment. These schemes entitle employees to receive a severance payment or a long service payment upon termination of employment if certain conditions are met. Employees who have worked for an employer for 2 or more years at the time of the termination of their employment and who are dismissed by reason of redundancy may, for example, be eligible for a severance payment.

For an eligible employee paid on a monthly basis, the amount of a severance payment or long service payment is equal to two-thirds of the employee’s last monthly wages (or, if the employee so elects, the monthly average wages in the 12 months preceding the termination) multiplied by the reckonable years of service. The monthly wage figure is subject to a cap of HK$22,500 and the total payment is capped at HK$390,000.

Contributions to Retirement Protection Schemes

In 1998, the Hong Kong Government introduced mandatory provident fund scheme legislation with the idea of establishing a formal system of providing for the finances of an aging work population. As proposed, the arrangement required employers not only to contribute a portion of an employee’s salary to a provident fund scheme but also to top-up that contribution with the employer’s own funds. To gain consensus from employers to the requirement for them to top-up their employee’s contributions to the provident fund schemes of their employees, the Hong Kong Government struck a compromise. Under the compromise, employers could offset those top-up contributions against any severance payment or long service payment due under the Employment Ordinance.

As a result of this compromise, the Mandatory Provident Fund Schemes Ordinance (“MPFSO”) did introduce a mandatory employer top-up, providing that an employer, unless exempted:

• must enroll an employee who has been employed for a continuous period of not less than 60 days in an MPF scheme; and

• must, in addition to deducting a portion of the employee’s salary to contribute to the MPF scheme, make a mandatory contribution (equal to 5% of the employee’s monthly relevant income) to the employee’s account with that MPF scheme (but subject to a contribution cap of HK$1,500) for each contribution period (generally meaning the wage period).

Offsetting Arrangement

To give effect to the compromise, the Employment Ordinance currently permits an employer to use the accrued benefits attributable to the employer’s top-up contributions (whether mandatory or voluntary) to MPF schemes (“employer-funded MPFS benefits”) for the account of an employee to offset severance payments and long service payments payable to the employee. In this regard, “accrued benefits” means the amount of beneficial interest of the employee in the MPF scheme, including the contributions and any income or loss arising from investments of the contributions.

Removal of MPF Offset: Mechanics

The MPF Offset Bill revokes the compromise. In essence, from the Transition Date, an employer can no longer offset the employer-funded MPFS benefits of an employee against the portion of severance payment or long service payment due to such employee accrued in respect of the post-transition employment period (“Post-Transition Severance Amount”).

Effect on Existing Employees

The abolishment of the MPF offset has no retrospective effect. In the case of an employee who began employment before the Transition Date and whose termination of employment occurs on or after the Transition Date, the employer may continue to take advantage of the current offsetting arrangement in respect of the portion of severance payment or long service payment accrued in respect of the pre-transition employment period (“Pre-Transition Severance Amount”). This is so irrespective of whether the contributions are made before, on or after the Transition Date, and irrespective of whether the contributions are mandatory or voluntary.

The Pre-Transition Severance Amount will be calculated on the basis of the last monthly wages (or monthly average wages of the 12 months) preceding the Transition Date, rather than the actual date of termination of employment.

This grandfathering arrangement serves to disincentivize the dismissal of employees (especially those with long years of service) by employers before the Transition Date.

Should any employee become worse off due to the abolishment of the offsetting arrangement, the Hong Kong Government has undertaken to make up for the shortfall by way of an administrative scheme.

Voluntary Contributions and Gratuities

The MPF Offset Bill has no effect on MPF benefits attributable to voluntary contributions made by employers or gratuities based on length of service. These can continue to be used to offset any severance payment or long service payment due to an employee upon termination of employment.

Extended Effect on ORSO Schemes

Employers may set up retirement schemes under the Occupational Retirement Scheme Ordinance (“ORSO”) rather than under the MPFSO. In this case, consistent with the compromise struck between the Hong Kong Government and employers, the Employment Ordinance presently permits an employer to use the accrued benefits attributable to the employer’s own contributions to ORSO schemes (“employer-funded ORSO benefits”) to offset any severance payment or long service payment payable to the employee.

The abolition of the offsetting arrangement as proposed will apply equally to MPF-exempted ORSO schemes. However, since an employer’s contributions under such schemes are not differentiated into mandatory and voluntary contributions, the MPF Offset Bill introduces a formula to calculate a non-offsettable portion of the employer-funded ORSO benefits, which is akin to the mandatory contributions required to be made by employers to MPF schemes.

Consistent with the arrangements in respect of MPF schemes, under the MPF Offset Bill, an employer can no longer offset the non-offsettable amount of employer-funded ORSO benefits against any Post-Transition Severance Amount.

Supporting Measures for Employers

Considering the abolishment of the offsetting arrangement may add financial burden on employers, the Hong Kong Government will firstly introduce a 25-year subsidy scheme totalling HK$33.2 billion at 2021 prices to provide targeted assistance to employers, especially micro, small and medium-sized enterprises, in the initial years after the abolition.

Furthermore, a Designated Savings Accounts Scheme will be implemented by a separate bill (to be introduced into the Legislative Council in Q2 of 2022) to mandate employers to save up for meeting their future liabilities for severance payments and long service payments after the abolition.