On 11 February 2022, the Hong Kong government published the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the Bill)¹ after years of consultation. The main feature of the Bill is that employers can no longer use the accrued benefits of their mandatory contributions under the Mandatory Provident Fund (MPF) scheme to offset any severance payment (SP) and long service payment (LSP) payable to employees. Whilst it is generally referred to as the MPF offsetting mechanism, the offsetting mechanism under the Bill also extends to occupational retirement scheme benefits derived from employers’ contributions.

Currently, employers are allowed to offset SP and LSP against employees’ MPF benefits derived from employers’ MPF contributions. This offsetting mechanism would often reduce or even entirely deplete the SP and LSP payable to employees. As a result, employees’ retirement protection is diminished.

To rectify this problem, the Bill proposes to abolish the MPF offsetting mechanism starting from a date to be appointed (the Transition Date). The proposed abolition will not have retrospective effect. This is to reduce the risk of large-scale dismissals before the Transition Date. A total of eight pieces of legislation and subsidiary legislation, including the Employment Ordinance (Cap. 57) and the Mandatory Provident Fund Schemes Ordinance (Cap. 485) will be amended by the Bill. In summary, the changes are:

• For employees who commence their employment on or after the Transition Date, employers will no longer be permitted to offset SP and LSP against employees’ MPF benefits derived from employers’ mandatory MPF contributions. However, employers can continue to offset SP and LSP against employers’ voluntary MPF contributions.
• For employees who commence their employment before the Transition Date and whose employment terminates after the Transition Date, their SP and LSP will be divided into two components, namely pre-transition portion (i.e. SP and LSP attributable to the employment period up to the day immediately preceding the Transition Date) and post-transition portion (i.e. SP and LSP attributable to the employment period after the Transition Date).
  • For the pre-transition portion, employers can still offset against MPF benefits derived from employers’ mandatory and voluntary MPF contributions.
  • For the post-transition portion, employers cannot offset against employees’ MPF benefits derived from employers’ mandatory MPF contributions but may still offset against employees’ MPF benefits derived from employers’ voluntary MPF contributions.
• The payment cap of SP and LSP will remain at HK$390,000. However, the formulae for calculating SP and LSP for the pre-transition portion and the post-transition portion will be amended as follows:
  • For the pre-transition portion: 2/3 x [the lesser amount of HK$22,500 or last full month’s wages preceding Transition Date] x years of service preceding Transition Date.
  • For the post-transition portion: 2/3 x [the lesser amount of HK$22,500 or last full month’s wages preceding the termination of employment] x years of service from Transition Date to the termination of employment.

• In addition to the requirement that employers shall keep wage and employment records of their employees in relation to the preceding 12 months, employers shall also keep wage records of their employees covering the 12-month period before the Transition Date.

In the rare 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 will cover the shortfall.

The government anticipates that these changes may cause financial difficulties to some employers. In the Chief Executive’s 2018 Policy Address, it was announced that the government would introduce a 25-year subsidiary scheme to help employers transition through these changes. Furthermore, the government will introduce a Designated Savings Accounts Scheme under which employers will be mandated to save up for meeting their future SP and LSP liabilities after the abolition of the offsetting mechanism. Further legislation will be enacted in this regard.

Whilst the abolition of the offsetting mechanism is only expected to be implemented by 2025, it is prudent for employers to familiarise themselves with the new regime and plan ahead to ensure that they comply with the new obligations.

1. Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022