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Enabling legislation to abolish the MPF offsetting mechanism

By Elaine Hwang | July 14, 2021

The government has recently reiterated its intentions to abolish the offsetting arrangement. Here’s a summary of the proposals.

The government has recently reiterated its intentions to abolish the offsetting arrangement whereby employers are permitted to “offset” their severance payment (“SP”) or long service payment (“LSP”) obligations against their contributions to the MPF schemes

This anomaly of the system has been discussed in Hong Kong over many years, but remains outstanding to date. According to information from the MPFA, about HK$5.8 billion of members’ MPF benefits were used to offset SP or LSP between October 2019 and September 2020 - a considerable amount of money otherwise destined to be used towards retirement savings.

Target implementation by 2025

The Chief Executive promised to start the corresponding legislative process during the current term of office. According to the latest news, the government plans to submit the bill as soon as possible in 2021 or 2022, and to complete the legislation process before the end of the term of the current government. The goal is to implement it simultaneously with the introduction of the eMPF platform by 2025.

A new arrangement for services rendered after the implementation

According to the previously announced proposals, when the new arrangements are implemented, the employee’s service will be divided into two portions, pre- and post- the effective date. The existing MPF offset mechanism will continue to apply in respect of benefits accrued and employer contributions made before the effective date, whilst new rules (no offsetting) will apply for service after the effective date.

For example, consider an employee who has worked for 7 years in total (5 years before and 2 years after the effective date) and has a monthly salary of $15,000 per month, the SP or LSP on termination would be $105,000. The pre-effective date portion is HK$75,000, which may continue to be offset by the employer’s pre-effective date MPF contributions. The remaining HK$30,000 in respect of the post-effective date period may not be offset, and must be paid in full.

In order to help employers plan for the financial impact of the proposed changes, employers will be required to set up a “special savings account” within the eMPF platform, with the aim of building a reserve to help fund future potential SP or LSP. As such, employers will be required to make regular contributions to this account based on 1% of employee's monthly income, until the account reaches 15% of all employees’ annual income.

Two-tier funding eases employers’ financial burden

In addition to the above employer funding, the government indicated that it will also take up part of the financial responsibility, by providing employers with a subsidy, amounting to an estimated HK$29.3 billion. The subsidy will have 2 levels: the first level of subsidy will last for 12 years, and the second level for 25 years. The first-tier subsidy means that the government will subsidize 50% of SP or LSP for the first 3 years, with the percentage being reduced by 5% for each year thereafter. This is expected to trigger Government expenditure of HK$14.7 billion. The second-tier of funding targets small and medium-sized enterprises, whose “special savings account” may not be sufficient to pay out the SP or LSP. The funding period for tier 2 is 25 years. Again, the Government will subsidize 50% for the first 3 years, after which the subsidy reduces by 5% every three years. From the 22nd year onwards, the subsidy will be reduced by 5% every two years.

It should be noted that the above details were a part of the proposal put forward by the Government in 2018. Since this time, labor and employer representatives have continued to have discussions with relevant government departments, so the final proposals may be different from those described above. The legislative process for abolishing the MPF offsetting mechanism will soon start to regain momentum. However, we will have to wait for the government to make further announcements before knowing the final details and timing.

This article in English and Chinese is available for download.


Senior Director & Business Development Lead, Greater China

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