Draft legislation to remove the offsetting mechanism that allows employers to offset their contributions to the Mandatory Provident Fund (MPF) or similar statutory retirement plans — such as MPF-exempt Occupational Retirement Schemes Ordinance (ORSO) plans —against long-service payment (LSP) or severance payment (SP) obligations under the Employment Ordinance has been presented to the Legislative Council.
The ability to offset mandatory employer MPF contributions against LSP/SPs would be abolished for LSP/SP entitlements accrued after the “transition date,” which is unlikely to be before 2025; however, all employer MPF contributions (both before and after the transition date) could still be used to meet LSP/SP entitlements for service before the transition date, and all voluntary employer MPF contributions (if any) could still be used to meet LSP/SP entitlements for service after the transition date. Similar arrangements will be put in place for ORSO plans.
Earlier proposals to reduce the covered earnings used to calculate LSP/SP benefits and the payment cap on the benefits have been dropped. The covered earnings used to determine pre-transition date service benefit entitlement would be frozen, using the monthly wages immediately prior to the transition date, while the earnings for post-transition date service would be the employee’s last monthly wages prior to the date of termination.
Employers would be required to make mandatory contributions into a new Designated Saving Accounts (DSA) Scheme to meet their future LSP/SP liabilities after the transition date. Full details on the DSA Scheme, including the contribution rate, are to come when further draft legislation is introduced to the Legislative Council in the second quarter of 2022.
To further ease the employers’ additional financial burden, the government intends to subsidize a portion of the employer cost for LSP/SP for 25 years after the transition date (at an estimated cost of around 33.2 billion Hong Kong dollars).
The Inland Revenue Ordinance would be amended to make it clear that LSP/SP paid in accordance with the Employment Ordinance will continue not being treated as salary subject to income tax.
Employers would need to make additional contributions to the DSA Scheme. Employers with significant historical LSP/SP payouts may wish to conduct an actuarial costing in advance to assess the potential accounting impact.
Most companies surveyed by WTW utilize the offset against severance or long-service payments as a matter of policy (around 60%) or determine whether to do so on a case-by-case basis (18%). It is hoped that the decision to grandfather the pre-transition date service benefit entitlement will reduce the risk of dismissals of employees with particularly long service records by employers trying to reduce their LSP/SP liabilities before the abolition of offsetting comes into force.