June 10, 2022

Hong Kong Finally Passes Bill Abolishing "Offsetting Mechanism" of the Mandatory Provident Fund Scheme

Author:

Jennifer C. W. Tam

After years of discussion, the Hong Kong Legislative Council finally passed the Employment & Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (Bill) on 9 June 2022 that will eventually abolish the statutory right of an employer to reduce its long service pay or severance pay (LSP/SSP) payable to an employee by drawing on its contributions to the mandatory provident fund scheme (MPF Scheme).

While the long-awaited law has been passed, it is envisaged that it will not come into effect until 2025 at the earliest.

In the meantime, the Hong Kong government has also announced it will press ahead with other arrangements in relation to the abolition of the MPF offsetting mechanism. The government has pledged HK$33.2 billion to help employers bear the increased operational costs by way of a subsidy scheme, over a period of 25 years. Please see our previous Legal Update for details on the subsidy scheme.

The government will also introduce a new bill called the 'Designated Savings Accounts for Severance Payment and Long Service Payment Bill' in the next legislative session, of which the objective is to impose requirements on employers to set up savings accounts for their contingent LSP/SSP obligations. We will provide an update on the new bill when more details are available. A summary of the removal of the offsetting arrangement as passed under the Bill is set out below:

A. Current Offsetting Arrangement

The Employment Ordinance (EO) provides for an offsetting arrangement that allows employers to reduce the amount of LSP/SSP payable to an employee by the value of benefits paid to an employee derived from the employer's contributions to:

an MPF Scheme, whether mandatory contributions or voluntary contributions (Mandatory ER MPF Benefits or Voluntary ER MPF Benefits);
an occupational retirement scheme (ORSO Scheme).

The current mandatory contributions which an employer is required to make to a MPF Scheme is 5 percent of an employee’s relevant income per month, capped at a maximum of HK$1,500.

B. Removal of the Offsetting Arrangement as Passed under the Bill

The Mandatory ER MPF Benefits and certain portions of the ORSO Scheme benefits will no longer be capable of being used to offset against the LSP/SSP payable to an employee. Below is a summary of the abolition:

The offsetting arrangement will be abolished starting from a date to be determined (Transition Date).
After the Transition Date:
1. an employer can no longer use any part of the Mandatory ER MPF Benefits to reduce the LSP/SSP payable to an employee;
2. the MPF/ORSO Scheme benefits which an employer may use to reduce the LSP/SSP payable to an employee are:
  1. Voluntary ER MPF Benefits; and
  2. employer's contributions to an ORSO Scheme in excess of the "reference amount". The "reference amount" is calculated in accordance with the following formula:
    
    A = B x C x 5% x 12
    
    where:
    
    "A" is the reference amount;
    "B" is the employee's final average monthly relevant income (currently capped at HK$30,000); and
    "C" is the employee's years of service (pro rata for incomplete year) to which the MPF-exempted ORSO Scheme benefits are attributable.
    
    The above formula is modelled on the calculation of the minimum MPF benefits under the MPFS (Exemption) Regulation, i.e. the amount derived from the employer's contribution to the MPF-exempted ORSO Scheme which must be transferred from the employees' account when they change from an MPF-exempted ORSO Scheme to an MPF Scheme.
  3. The removal of the offsetting arrangement will not have retrospective effect. In other words, where an employee's employment commenced before the Transition Date, the employer can continue to use the payments listed under Section A to offset the LSP/SSP earned before Transition Date. Specifically, an employer may use the Mandatory ER MPF Benefits (irrespective of whether the contributions are made before, on or after the Transition Date) to reduce the LSP/SSP earned before the Transition Date.
  4. For monthly-rated employees:
    1. LSP/SSP earned before the Transition Date would be calculated based on the employee's monthly wages immediately before the Transition Date and years of service before the Transition date (i.e. 2/3 x monthly wages immediately before the Transition Date (capped at HK$22,500) x years of service before the Transition Date).
    2. LSP/SSP earned on or after the Transition Date would be calculated on the basis of the employee's last monthly wages before the termination of employment and the years of service after the Transition Date (i.e. 2/3 x last monthly wages before the termination (capped at HK$22,500) x years of service before the Transition Date).
    The aggregate amount of LSP/SSP earned before and after the Transition Date is capped at HK$390,000.
  5. Any employer will still be able to use the amount of any contractual gratuity paid to an employee to reduce the amount of LSP/SSP, as is the case now.

C. Miscellaneous Amendments under the Bill

The Bill also amends the Inland Revenue Ordinance (Cap. 112) to make it clear that LSP/SSP paid in accordance with the EO is not chargeable to salaries tax. Any payments paid to an employee that are calculated based on the employee's length of service in excess of the statutory LSP/SSP payable, i.e. contractual long service pay, are income and therefore chargeable to salaries tax.

Corresponding amendments will be made to the Mandatory Provident Fund Schemes Ordinance, Occupational Retirement Schemes Ordinance, Protection of Wages on Insolvency Ordinance to align with the upcoming changes to the offsetting arrangement.

Comments

While the abolition will inevitably increase the costs of operation, it is good news for employers that the abolition arrangement will not have any retrospective effect. Employers can still use the Mandatory ER MPF Benefits to reduce the LSP/SSP earned by the employees before the Transition Date, which also addresses the employees' concern over any large-scale dismissals before the Transition Date. The HK$33.2 billion subsidy scheme to be introduced by the government will also help employers transition to the new arrangement.

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