Abolishment of MPF Offsetting Mechanism: is it finally here?

The long-awaited legislative changes, which will eventually abolish the current MPF offsetting mechanisms for severance payments (“SPs”) and long service payments (“LSPs”), were passed by the legislative council (“LegCo”) on 9 June 2022.

While this is great news for employees – prior to the abolishment, employers could use the accrued benefits of their mandatory contributions to offset the cost of SPs and LSPs – it will not come into effect until 2025. And even then, the benefit for employees is not as great as it may first appear.

The Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) will prohibit employers to use mandatory MPF contributions to set-off SPs and LSPs from a transition date (to be confirmed) from 2025 (the “Effective Date”). The Government hopes to implement the measure and an “eMPF Platform”, which is currently being developed by the Mandatory Provident Fund Schemes Authority (“MPFA”) from 2025 and has committed approximately HK$33.2 billion over 25 years for the subsidies to help employers cover the payments.

What is this offsetting mechanism?

In short, the offsetting mechanism has been part of the MPF scheme since it was introduced in December 2000. According to the MPFA, the MPF scheme covers more than 2.6 million employees and 232,000 self-employed people with assets worth HK$1.12 trillion (US$143 billion) as of 31 March 2022.

Under the current MPF scheme, employers and employees each contribute 5% of the employee’s salary up to a combined maximum of HK$3,000 a month.

The controversial offsetting mechanism, which has drawn heavy criticism from employees and unions, allows employers to take cash from their MPF contributions to offset their SPs and LSPs obligations.

According to the SCMP, over HK$6.6 billion was offset in the employees’ pension funds, up 16% from HK$5.7 billion in 2020.

In 2017 in his last year in office, former chief executive Leung Chun-ying attempted to push forward a proposal to abolish the offsetting mechanism, but to no avail due to strong resistance from the business sector. In her policy address in 2021, Chief Executive Carrie Lam Cheng Yuet-ngor announced her administration would submit a bill to abolish the mechanism in 2022.

What was passed by LegCo?

1. From the Effective Date, employers can no longer use the accrued benefits of employers’ mandatory contributions to offset employees’ SP/LSP that accrues after the Effective Date.
2. Employers can continue to use their voluntary contributions and the returns derived therefrom and gratuities based on employees’ length of service to offset SP/LSP that accrues before the Effective Date.
3. Since the Amendment has no retrospective effect, where an employee’s employment commenced before the Effective Date, but terminates afterwards, the employer can continue to use the accrued benefits of their MPF contributions (irrespective of whether the contributions are made before, on or after the Effective Date, and irrespective of whether the contributions are mandatory or voluntary) to offset the employee’s SPs/LSPs in respect of the employment before the Effective Date (pre-transition portion of SPs/LSPs).
4. The post-transition portion of SPs/LSPs (i.e. from the Effective Date to actual termination date), can still be offset against any employer’s voluntary MPF contributions.
5. The calculation of SPs or LSPs will remain unchanged at two-thirds of the last monthly wages (with monthly wages being subject to a maximum of HK$22,500), for each year of service, capped at HK$390,000.

Any Miscellaneous Amendments?

1. The Bill amends the Inland Revenue Ordinance (Cap. 112) to make it clear that SPs and LSPs paid in accordance with the Employment Ordinance is not chargeable to salaries tax.
2. The Bill also amends the Employment Ordinance to require that employers retain records of wages and employment of employees for the 12 months preceding the Effective Date, or, if the employee has been employed for less than 12 months preceding the Effective Date, for the whole employment period.

What next?

In addition to the government funding programme to subsidise employers during a transition period, the Government intend to introduce a Designated Savings Accounts Scheme for employers to make mandatory contributions to meet their future SP or LSP liabilities. The Government also intend to publish simplified guidelines to assist employers in understanding the relevant legislative changes and related measures.

 

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This article is for information purposes only.  Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.