Hong Kong Pensions Update: Removal of MPF Offsetting Arrangements on the way

The long-awaited changes, which will abolish the current MPF offsetting arrangements against severance or long service payment, have been published, introduced and passed as one of the first bills for the 2022 legislative session. This article gives an overview of the changes and transitional arrangements.

Abolishing the offsetting arrangement

Currently, employers are permitted to offset severance payments or long service payments (SP/LSP) against their contributions under the Mandatory Provident Fund system (the MPF) or other occupational retirement schemes. This means that employees may not receive substantial compensation following redundancy or for long service.

After years of consultation, in February 2022 the Government published the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the Bill), which has been passed by the Legislative Council on 9 June 2022. The Bill seeks to abolish the arrangement that allows employers to offset SP/LSP against the employer’s mandatory MPF contributions. Employers will still be able to offset SP/LSP against employer’s voluntary MPF contributions and gratuities.

These amendments will take effect from a date to be set from around 2025 onwards (the Effective Date) as follows:

• SP/LSP accrued before the Effective Date is not affected by the amendments, i.e. SP/LSP payments can be offset against all of the employer’s MPF contributions and gratuities. The SP/LSP calculation will be based on the employee’s monthly wages immediately preceding the Effective Date; and
• SP/LSP accrued after the Effective Date can only be offset against the employer’s voluntary MPF contributions and gratuities. The SP/LSP calculation will be based on the employee’s monthly wages immediately preceding the date of termination of employment.

The arrangements under the Bill will also apply to other occupational retirement schemes.

Other amendments introduced by the Bill

Other notable proposed amendments include:

• amending the Inland Revenue Ordinance to make clear that SP/LSP will not be subject to salaries tax; and
• amending the Employment Ordinance to require that employers keep records of wages and employment 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.

Designated Savings Accounts scheme and a 25-year subsidy scheme

In connection with the Bill, the Hong Kong Government also intends to:

• permit employers to set up a Designated Saving Account (DSA) to save up for potential future SP/LSP liabilities. Employers will be required to contribute 1% of their employee’s monthly income (subject to a cap) to the DSA; and
• implement a two-tier subsidy scheme to share the employers’ SP/LSP expenses, in particular to alleviate the financial burden on micro, small and medium-sized enterprises (MSMEs), for 25 years after the Effective Date.

The Government indicated that the Effective Date will follow the full implementation of the eMPF Platform, which is being developed by the Mandatory Provident Fund Schemes Authority.

The amendments under the Bill will impact the employers’ float and SP/LSP liabilities. Employers will need to stay on top of the changes and put in place measures compliant with the amendments.

Key Contacts:

[show_profile name="Ben" surname="Harris" jobtitle="Executive Counsel, Sydney" phone="+61 2 9322 4929" witter="" linkedin="" email="ben.harris@hsf.com" link=]