Cynthia Chung, Partner and Head of Employment and Pensions; Bernie Ng, Associate, Deacons, put together all you need to know about the move to abolish the use of the accrued benefits of employers' mandatory contributions under the MPF system to offset statutory severance payment and long service payment (SP/LSP).
The Hong Kong Government published the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (Amendment Bill) on 11 February 2022 to implement the proposal to abolish the use of the accrued benefits of employers' mandatory contributions under the Mandatory Provident Fund (MPF) system to offset statutory severance payment and long service payment (SP/LSP) commonly known as the 'MPF Offsetting Arrangement. Here's what you need to know.
Abolition of the MPF Offsetting Arrangement
Employers are currently entitled to make use of the MPF Offsetting Arrangement to reduce the SP/LSP payable to their employees upon termination of employment. After the proposed amendments come into effect on a date to be appointed by after the enactment of the Amendment Bill (“Transition Date”), the MPF Offsetting Arrangement will be abolished and employers will no longer be able use MPF mandatory contributions to offset the SP/LSP entitlements in respect of their employees’ employment period starting from the Transition Date (but not before).
In essence, under the Amendment Bill, the SP/LSP payable to an employee whose employment ends on or after the Transition Date will be divided into two components:
- Pre-Transition SP/LSP – SP/LSP payable in respect of the period up to the day immediately preceding the Transition Date.
This portion of SP/LSP will not be affected by the Amendment Bill. Employers are entitled to use its mandatory contributions made before, on or after the Transition Date to offset Pre-Transition SP/LSP even after amendments come into effect.
- Post-Transition SP/LSP – SP/LSP payable in respect of the period from the Transition Date.
The MPF Offsetting Arrangement is not applicable to this portion of SP/LSP.
Despite the above, voluntary contributions which employers make in excess of the mandatory requirement (and the returns derived therefrom) can continue to be used to offset both Pre- and Post-Transition SP/LSP. Offsetting by using gratuities based on length of service is also likewise not affected by the Amendment Bill.
As for MPF-exempted occupational retirement schemes under the Occupational Retirement Schemes Ordinance, the offsetting arrangement will also be abolished with respect to “non-offsettable benefits”.
The calculation of SP/LSP will also be updated following the enactment of the Amendment Bill. Whilst the payment rate (i.e. 2/3 x monthly wages x years of service) and payment cap (i.e. HK$390,000) for monthly rated employees will remain unchanged, the monthly wages used to determine the Pre-Transition SP/LSP will generally be the monthly wages immediately preceding the Transition Date, whereas the monthly wages for calculating the Post-Transition SP/LSP will generally be the last monthly wages before the relevant date of termination. Where an employee has work for a long period such that his/her aggregate SP/LSP exceeds HK$390,000, the Post-Transition SP/LSP will be the remainder of HK$390,000 after first deducting the Pre-Transition SP/LSP.
Bearing in mind that the new regime would lead to additional financial burden being incurred by employers, the Government will put in place supporting measures to facilitate the transition. Based on the Legislative Council Brief issued on 8 October 2021, the current plan of the Government is to set up a 25-year subsidy scheme details of which are summarised as follows:
- For the first HK$500,000 of SP/LSP payable in a year, employers will only be required bear a specified share ratio of this portion of the SP/LSP and, for the first nine years from the Transition Date, will not be required to bear any amount exceeding a specified cap.
- For the remaining part of the SP/LSP payment obligations, employers will only be required to bear a specified share ratio of this portion of the SP/LSP for the first 12 years from the Transition Date. No subsidy will be provided from year 13 onwards for this portion of the SP/LSP.
The Government subsidy scheme will likely be implemented through a reimbursement approach whereby employers will have to first settle any SP/LSP that arises and the Government will calculate and disburse the subsidy upon subsequent application.
The Amendment Bill also seeks to amend the record-keeping provisions of the Employment Ordinance to require employers to keep wage and employment records of their employees covering the 12 months of the employees’ employment (or a shorter period for an employee who has worked for less than 12 months) immediately preceding the Transition Date.
In addition, and in connection with the Government subsidy scheme, the Government intends to introduce a Designated Saving Accounts (DSA) Scheme under which employers will be required to make mandatory contributions to designated accounts for meeting their future SP/LSP liabilities. Separate legislative amendments will be made.
What should employers do?
As evident from the above, the Amendment Bill contains technical amendments which may not be easy to follow in practice. As such, although it is expected that the amendments will not be implemented until at least 2025, it is advisable for employers to familiarise themselves with this new regime and seek professional advice where necessary to facilitate compliance.
Photos / Left to right, Cynthia Chung and Bernie Ng, supplied by Deacons