Hong Kong Government Passes Amendment Bill on Abolishing MPF Offsetting Arrangement

On 9 June 2022, the Hong Kong Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (Bill), which, when it comes into effect, will abolish the longstanding arrangement which allows employers to offset statutory severance or long service payment against the value of employer’s mandatory provident fund (MPF) scheme contributions.

The Chief Executive referred to the passage of the Bill as “a significant milestone in enhancing retirement protection of employees”. The Government currently expects that the existing offsetting arrangement will be formally abolished in 2025.

Key changes introduced by the Bill

A summary of the key changes introduced by the Bill is set out below.

1. For any employee who is covered by a MPF scheme and whose employment commenced before the effective date of the changes introduced by the Bill (Transition Date¹), if the employee’s employment ceases before the Transition Date, the existing arrangement will apply. This means that the employer can offset any statutory severance or long service payment payable against the value of employer’s MPF contributions.
   
   On the other hand, if the employee’s employment ceases on or after the Transition Date, the employee’s statutory severance or long service payment (as applicable) will be divided into 2 portions, namely, the pre-transition portion and the post-transition portion.
   
   Pre-transition portion
   
   Calculation of statutory severance / long service entitlement: This portion is calculated based on the following formula:
   
   2/3 x Last full month’s wages before the Transition Date^2,3, (Capped at HK$22,500) x Period of service before the Transition Date
   
   Ability to offset: The changes introduced by the Bill will not apply to this portion. This means that the employer can offset this portion against the value of employer’s mandatory and/or voluntary MPF contributions, irrespective of whether the contributions are made before, on or after the Transition Date, so long as they are not used to offset the post-transition portion.
   
   Post-transition portion
   
   Calculation of statutory severance / long service entitlement: This portion is calculated based on the following formula:
   
   2/3 x Last full month’s wages for the whole employment period⁴ (Capped at HK$22,500) x Period of service from the Transition Date
   
   Ability to offset: This portion can only be offset against the value of employer’s voluntary MPF contributions (to the extent that they are not used to offset the pre-transition portion).


2. For any employee who is covered by a MPF scheme and whose employment commenced on or after the Transition Date, any statutory severance or long service entitlement can only be offset against the value of employer’s voluntary MPF contributions.


3. Abolition of the offsetting arrangement will also apply to occupational retirement schemes under the Occupational Retirement Schemes Ordinance.


4. Employers who engage any employee whose employment commenced before the Transition Date are required to keep and maintain such employee’s wage records for the period of 12 months immediately preceding the Transition Date (or if the employee’s employment period falling before the Transition Date is less than 12 months, that employment period or the first month of the employee’s whole employment period, whichever is longer).

It is important to note that employers’ ability to use gratuities calculated based on length of service to offset employees’ statutory severance or long service entitlement remains unaffected by the changes introduced by the Bill.

Next steps

The Government has indicated that it will (i) take steps to set up a government funding programme to subsidise employers during a transition period (currently anticipated to last for 25 years); (ii) introduce a Designated Savings Accounts Scheme for employers to make mandatory contributions to meet their future statutory severance or long service pay liabilities; and (iii) publish easy-to-understand information to help employers understand the relevant changes and related ancillary measures. We will continue to monitor any new developments and provide further updates in due course.

¹ There is as yet no indication of when this will be.
² If the employee’s employment period falling before the Transition Date is less than a month, this shall be the employee’s first full month’s wages for the whole employment period.
³ If elected by the employee, this can be calculated with reference to the employee’s average monthly wages during the period of 12 months immediately preceding the Transition Date (or if the employee’s employment period falling before the Transition Date is less than 12 months, that employment period).
⁴ If elected by the employee, this can be calculated with reference to the employee’s average monthly wages during the period of 12 months immediately preceding the last day of employment (or if the employee’s employment is terminated by making a payment in lieu of notice, the date up to which such payment is calculated).