The offsetting arrangement could be expected to be formally abolished in 2025. The government will provide a subsidy of HK$33.2bn for employers.
A decade-long debate over the controversial abolishment of the Mandatory Provident Fund (MPF) offsetting mechanism has finally seen the light at the end of the tunnel.
Hong Kong’s Legislative Council (LegCo) passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022. The bill will prohibit employers to use workers’ pensions to make severance payment (SP) and long service payment (LSP).
Chief Executive Carrie Lam said the passage is a significant milestone in enhancing retirement protection of employees, and thanked employers and employees for striving to build a consensus on abolishing the "offsetting" arrangement over the years.
Here are three highlights:
- Starting from a date to be appointed (the transition date), employers can no longer use the accrued benefits of employers' mandatory contributions (ERMC) to offset employees’ SP/LSP.
- 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 from before or after the transition date.
- The Bill has no retrospective effect.
- If an employee's employment commenced before the transition date, the employer can continue to use the accrued benefits of the MPF contributions (irrespective of whether the contributions are made before, on or after the transition date, and irrespective of whether the contributions are mandatory or voluntary) to offset the employee’s SP/LSP in respect of the employment before the transition date (pre-transition portion of SP/LSP).
The abolition of the offsetting arrangement will also be applicable to:
- Occupational retirement schemes under the Occupational Retirement Schemes Ordinance (Cap. 426);
- The two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidised Schools Provident Fund Rules (Cap. 279D);
- Overseas occupational retirement schemes of employees from outside Hong Kong which are exempted from the MPF System.
After abolishing the offsetting arrangement, the provisions related to the Termination of Contracts of Employment, the eligibility for SP/LSP, the Part on Employment Protection under the Employment Ordinance will remain unchanged.
The bill also amends the Inland Revenue Ordinance (Cap. 112) to make it clear that SP and LSP paid in accordance with the Employment Ordinance is not chargeable to salaries tax.
Consequential technical amendments are also made to the Protection of Wages on Insolvency Ordinance (Cap. 380) in respect of provisions on the subrogation rights of the Protection of Wages on Insolvency Fund and calculation of ex-gratia payment for SP in cases involving wage reduction.
A 25-year subsidy scheme totalling HK$33.2bn will be introduced for employers to adapt to the new arrangement with a focus on supporting micro, small and medium-sized enterprises (MSMEs).
It's worth noting that the bill will not come into effective immediately. Lam said the government will press ahead with the ancillary arrangements for abolishing the "offsetting" arrangement, including setting up the government funding programme, following up in the next legislative session on a Designated Savings Accounts Scheme for employers to cope with future financial needs, and conducting extensive publicity with easy-to-understand information to help employers grasp the abolition of the "offsetting" arrangement and related ancillary measures.
The "offsetting" arrangement could be expected to be formally abolished in 2025 following the full implementation of the eMPF Platform, which is being developed by the Mandatory Provident Fund Schemes Authority.
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