After years of extensive discussions and consultations, the Hong Kong LegCo has, on 9 June 2022, passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) to abolish the MPF offsetting mechanism.

Under the Bill, the MPF offsetting mechanism will be abolished starting from a date to be appointed (referred to as the “transition date” in the Bill), which is expected to be in 2025. With effect from the transition date, employers will no longer be permitted to use the accrued benefits derived from their mandatory contributions to their employees’ MPF scheme to offset statutory severance payments (“SP”) or long service payments (“LSP”) payable to their employees. Employers may however continue to use the accrued benefits derived from their voluntary contributions (i.e. contributions made in excess of the statutory minimum requirements) to offset SP/LSP from before or after the transition date.

The other highlights of the Bill are as follows:-

(i)  the abolishment of the MPF offsetting mechanism will not have retrospective effect. This means that if an employee’s employment commenced before the transition date, the employer could still apply MPF offset against the SP/LSP payable to him/her in respect of employment before the transition date (i.e. the pre-transition portion of SP/LSP), regardless of whether the contributions are made before, on or after the transition date, and whether the contributions are mandatory or voluntary;

(ii) the Bill will not change the rate and maximum payment of SP/LSP, which is currently calculated as 2/3 of the employee’s last monthly wages (capped at HK$22,500), and subject to the maximum limit of HK$390,000. Further:-

  1. the pre-transition portion of SP/LSP (which, as explained above, could still be subject to MPF offset) would be calculated on the basis of the monthly wages immediately preceding the transition date and the years of service before the transition date; and
  2. the post-transition portion of SP/LSP (which would no longer be subject to MPF offset) would be calculated on the basis of the last monthly wages before the termination of employment and the years of service at that time;

(The purpose of (i) and (ii) above is to reduce the risk of employers deliberately dismissing their employees before the transition date.)

(iii) if, for any reason, an employee ends up worse off even after the abolishment of the MPF offsetting mechanism, the Hong Kong government will make up the difference through administrative means to make sure that the employee will not receive less SP/LSP than what he/she would have been entitled to at present;

(iv) the abolishment of the MPF offsetting mechanism will also be applicable to occupational retirement schemes under the Occupational Retirement Schemes Ordinance; and

(v) SP/LSP paid in accordance with the Employment Ordinance will remain not chargeable to salaries tax.

The approval of the Bill is a milestone in the improvement of employees’ retirement protection. Before the Bill comes into effect, employers are recommended to keep abreast of any latest developments.