With a view to enhance the retirement protection of employees and strengthen the retirement reserves, the Legislative Council passed the Employment and Retirement Schemes (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022. The Ordinance seeks to abolish the use of the accrued benefits derived from employers’ mandatory contributions under the Mandatory Provident Fund (“MPF”) System to offset severance payment (“SP”) and long service payment (“LSP”). The Government has announced that the implementation of the abolition of MPF offsetting arrangement will take effect on 1 May 2025 (the transition date). Moreover, the Legislative Council approved the funding to help employers adapt to the new mechanism and cope with financial needs.
What is the abolition of the offsetting arrangement under the Mandatory Provident Fund (MPF) Scheme?
Under the current regime, employees may be entitled to SP or LSP payable by employers. Upon termination of employment, employers can offset SP/LSP payable to employees against the MPF derived from employer mandatory and voluntary contributions.
After the abolition comes into effect on the transition date, employers can no longer use the accrued benefits derived from employers’ MPF mandatory contributions to offset employees’ SP/LSP in respect of the years of service. On the other hand, the accrued benefits derived from employers’ MPF voluntary contributions and gratuities based on employees’ years of service can continue to offset employees’ SP/LSP, regardless of the years of service before or after the transition date.
The abolition of the MPF offsetting arrangement will be applicable to occupational retirement schemes under the Occupational Retirement Schemes Ordinance (Cap. 426), the two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidized Schools Provident Fund Rules (Cap. 279D) and overseas occupational retirement schemes joined by employees from outside Hong Kong which are exempted from the MPF System.
What is the difference in the calculation of severance payment / long service payment after the abolition of the MPF offsetting arrangement?
According to the existing Employment Ordinance (“EO”), the calculation of SP/LSP for monthly rated employees is two-thirds of the last monthly wages before termination of employment, subject to a monthly wage ceiling of $22,500 for each year of service, and the maximum of total payment of SP/LSP is $390,000. These ceilings of SP/LSP will remain unchanged after abolishing the MPF offsetting mechanism. The calculation of daily-oriented/ piece-rated employee is any 18 days’ wages chosen by the employee out of their last 30 normal working days before termination of employment for each year of service, and the sum shall not exceed 2/3 of $22,500. The employee can also choose to use their average wages in the 12 months before termination of employment.
Scenario 1: If an employee’s employment commences after the transition date, their SP/LSP will be calculated according to the existing Employment Ordinance. The calculation remains unchanged.
Scenario 2: If an employee’s employment commences before the transition date, their SP/LSP will be comprised of two portions – pre-transition portion and post-transition portion.
- Pre-transition portion: The last full month’s wages immediately preceding the transition date x 2/3 x years of services before the transition date
- Post-transition portion: The last full month’s wages before termination of employment x 2/3 x years of service starting from the transition date
Example:
Assumptions –
- Years of service before the transition date: 20 years
- Years of service starting from the transition date: 10 years
- Last month’s wages immediately preceding the transition date: $22,500
- Last month’s wages before termination of employment: $30,000
(*The ceiling of the monthly wages for calculating SP/LSP is $22,500.)
Calculation of SP/LSP:
Which types of employees are not applicable to the abolition of MPF offsetting arrangement?
Employees who are not covered by the MPF system or other statutory requirements, including domestic helpers and employees aged less than 18 or over 65 are not affected by the abolition of the offsetting arrangement as employers are not required to make MPF mandatory contribution for them. The SP/LSP of such employees will continue to be calculated on the basis of the last month’s wages or the average wages in the 12 months immediately preceding the termination of employment in accordance with the existing provisions under the Employment Ordinance.
Subsidy scheme for the abolition of the MPF offsetting arrangement
The Government will launch a 25-year subsidy scheme totaling HK$33.5 billion to share out the LSP/SP expenses of employers after the abolition of the offsetting arrangement. For the method of subsidy, the Government will disburse the subsidy to employers on a reimbursement basis. Employers should pay LSP/SP to employees in accordance with the provisions under the Employment Ordinance and then submit applications for disbursement of Government subsidy. Employers submit their applications along with related supporting documents to facilitate approval of applications and disbursement of subsidies as soon as possible.
Key points of the 25-year subsidy scheme
There will be a specific share ratio regarding the amount of SL/LSP payable to an employee by an employer each year. The threshold for an employer’s annual total expenses of SP/LSP is set at $500,000. Specified share ratios or “capped amounts” are set for cases falling within and beyond the threshold respectively.
For cases where the accumulated expenses of SP/LSP fall within $500,000:
- There will be a “capped amount” per case regarding the SP/LSP payable by an employer for the initial nine years.
- If the shared amount payable by an employer calculated according to the share ratio exceeds the “capped amount”, the employer only needs to pay the “capped amount”. The remaining amount of SP/LSP will be subsidized by the Government.
For cases where the accumulated expenses of SP/LSP go beyond $500,000:
- The amount payable by an employer is calculated according to the share ratio with no “capped amount”. The remaining amount of SP/LSP will be subsidized by the Government.
Employers’ share ratio in respect of post-transition portion of SP/LSP
What should employers do to ensure smooth transit before the transition date?
- Keep wage records of employees
Employers must keep the wage and the employment records of each employee covering the period of their employment during the preceding 12 months to facilitate calculation of pre-transition of SP/LSP, and apply for the subsidy scheme.
- Limited expenses in the initial years after the abolition
On a long-term basis, employers’ expenses of the post-transition portion of SP/LSP may increase, employers should estimate the costs and get prepared early.
- Accounting for the offsetting mechanism
Employers are required to assess their actuarial valuation of LSP liability with the current accounting standards. The Hong Kong Institute of Certified Public Accountants (“HKICPA”) has issued guidance outlining two acceptable approaches to accounting for the offsetting arrangement and the impact of the abolition on the recognition of LSP liabilities, you can click here to learn more.
- Communicate with key stakeholders i.e. the HR and Finance department
C-suites should actively engage the key stakeholders including the HR department, the Finance department, and the Compliance department to ensure their company can navigate the transition smoothly and be well-prepared for the future.
Reference: The Labour Department
