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An employer guide to the abolishing of the MPF offsetting mechanism

Latest Update

June 17, 2022

The Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (“the Bill”) was passed in the Legislative Council on 9 June 2022.

Effective year 2025 (the transition date, to be confirmed), employers will no longer be able to use the mandatory contributions in the Mandatory Provident Fund (MPF) schemes and the equivalent in the Occupational Retirement Schemes Ordinance (ORSO) schemes to offset severance payment (SP) and long service payment (LSP) arise from service rendered after the transition date.

Key impact of the Bill to employers with MPF schemes

The pre- and post- transition arrangements are different in two main areas:

For service rendered before the transition date (pre-transition)

  • SP / LSP is calculated as 2/3 x years of service up to the transition date x monthly wages immediately preceding the transition date
  • SP / LSP can be offset by the employer portion of MPF accrued balance in respect of both mandatory and voluntary contributions*

For service rendered on or after the transition date (post-transition)

  • SP / LSP is calculated as 2/3 x years of service commencing the transition date x monthly wages before termination of employment
  • SP / LSP can be offset by the employer portion of MPF accrued balance in respect voluntary contributions* only. In other words, MPF accrued balance in respect of mandatory contributions* cannot be used to offset post-transition SP / LSP

* include contributions made before, on, and after the transition date

Key impact of the Bill to employers with MPF-exempted ORSO schemes

A proxy will be used to estimate the mandatory contributions under the MPF schemes, also known as the “non-offsettable benefits”. The formula is final average monthly Relevant Income* × years of service × 5% × 12

The “non-offsettable benefits” cannot be used for the offsetting of post-transition SP / LSP. Any benefits in excess of “non-offsettable benefits” can be used for such offsetting.

* According to the MPFSO, Relevant Income is defined as the total cash income of an employee, currently capped at HK$30,000 per month

SP / LSP Calculation

The Bill will not change the maximum wages (HK$22,500 monthly) and maximum payment (HK$390,000) of SP / LSP.

For an employee who has worked for a long period such that the aggregate SP / LSP exceeds HK$390,000, the post-transition portion will be the remainder of HK$390,000 after first deducting the pre-transition portion.

Other Details of the Bill

  • Employers are required to keep record of wages and employment for the 12 months preceding the transition (or shorter period if the employee worked less than 12 months)
  • An amendment to the Inland Revenue Ordinance will be made to clarify SP / LSP not being subject to salaries tax
  • The details of the Designated Savings Account (DSA), where employers are required to make additional 1% contributions into the MPF system for future SP / LSP, subject to further announcement by the Government in the next legislative session. The DSA will ride on the eMPF platform being developed by the Mandatory Provident Fund Schemes Authority.

Government subsidy scheme (in LegCo brief in October 2021)

To ease the potential increase of financial burden on employers in respect of the change in SP / LSP offsetting, a 25-year subsidy scheme has been refined to provide targeted assistance to employers, especially those micro, small and medium sized enterprises, totalling HK$33.2 billion.

There are 2 tiers of subsidies:

  • First tier: For the first HK$500,000 of all SP / LSP payable in a year, the employer will only bear 50%, which gradually becomes 100% by the end of 25th year, of SP and LSP. In addition, for the first 9 years, the employer is only required to bear amounts up to specified caps, which gradually increase from HK$3,000 to HK$50,000.
  • Second tier: For the in-excess SP / LSP payable during the same year, the employer will only bear 50%, which gradually becomes 100% by the end of 12th year, of SP and LSP. In other words, there will be no second tier subsidy starting from the 13th year.

Actions to be taken by the employers

Albeit the Bill will become effective in 2025, employers shall understand and familiarize with the changes that it brings along, and assess the impact to the business and operation system. WTW will be able to share more insight to keep you up to speed.

For employers who are currently conducting annual HKAS 19 valuations for their SP / LSP obligation, although the Bill will not have retrospective effect, it has an impact on the HKAS 19 liability, and such impact varies depending on multiple factors. Please feel free to contact your WTW consultants and understand more.


Senior Director & Business Development Lead, Greater China

Head of Retirement, Hong Kong & Macau

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