Key developments
MPF offsetting long service payment – what will change?
Long Service Payment (“LSP”) and Severance Payment (“SP”) are statutory benefits provided under the Employment Ordinance in Hong Kong for involuntary termination of service, including retirement. With the abolition of MPF offsetting effective 1 May 2025, employers will no longer be able to use the mandatory contributions in the MPF for offsetting the post-transition portion of SP/LSP, but they may continue to use MPF benefits for offsetting the pre-transition portion of SP/LSP, i.e. there is no retrospective impact of the new rules on the existing arrangement.
Examples of the new calculation of long service payment, including the effect of the abolition, have been published by the Labour Department.
A similar arrangement applies also to ORSO schemes, where a portion of benefits akin to the accrued benefits derived from their mandatory MPF contributions will be carved out (technically referred to as "carved-out benefits") for use in the calculation after 1 May 2025.
The Government will launch a 25-year subsidy scheme totaling $33.2 billion (based on 2021 figures) to help towards the additional employer cost of the post-transition portion of LSP. Details have been published by the Labour Department.
Accounting treatment for the employer’s long service payment obligation
Comprehensive guidance was published by the HKICPA in July 2023 regarding the accounting treatment for LSP. Employers are encouraged to engage their auditors well ahead of the financial year end, to develop an early understanding of the possible impact to their accounts, including the balance sheet and the income statement. If a material impact is expected, auditors will require companies to conduct an actuarial valuation (or "LSP valuation”), to determine the extent of the LSP liabilities. This will include the projection of employees’ future salary and service for the estimation of future LSP amounts, as well as making assumptions about the employees’ leaving service pattern so that the accounting provision for long service payment obligations are made in an appropriate manner in the context of HKAS 19 / IAS 19 standards.
How can WTW help with LSP valuations?
WTW have the largest team of qualified pension actuaries in Hong Kong. We have over 20 years of experience conducting LSP valuations including the effect of MPF offsetting. Since the passage of the Bill in 2022 confirming the abolition arrangement in 2025, we have conducted actuarial valuations for over 400 employers in relation to their accounting provisions for LSP liabilities. We work closely with many major audit firms and employers to agree on the approach and the assumptions for the determination of the LSP liability and annual cost impact.
