On 11 February 2022, the Government of the HKSAR published the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) in the Gazette after years of consultation. The Bill is to abolish the use of the accrued benefits of employers’ mandatory contributions under the Mandatory Provident Fund (“MPF”) Scheme to offset statutory severance payment (“SP”) and long service payment (“LSP”) (the “Offsetting Arrangement”). The abolition is also applicable to other retirement schemes, notably the ORSO Scheme.  The eventual implementation of the Bill is said to be in 2025 at the earliest.

The Offsetting Arrangement will be abolished starting from a date to be appointed after the enactment of the Bill (the “Transition Date”). The proposed abolition will not have retrospective effect. After the Transition Date, employers can no longer use employers’ mandatory contributions to offset employees’ SP/LSP in respect of an employee’s employment period starting from the Transition Date. Typically, for employees who commence their employment before the Transition Date and whose employment is terminated on or after the Transition Date,  their SP/LSP will be divided into two portions:

1. Pre-transition portion (i.e. SP/LSP entitlement in respect of employment before the Transition Date) – employers may continue to use the accrued benefits derived from their mandatory and voluntary MPF contributions to offset employees’ SP/LSP entitlement;
2. Post-transition portion (i.e. SP/LSP entitlement in respect of employment on or after the Transition Date) – employers cannot offset employees’ SP/LSP entitlement with accrued benefits from employers’ mandatory MPF contributions, but may still offset the amount of SP/LSP with their voluntary MPF contributions and the returns derived therefrom.

The rate and maximum payment of SP and LSP will remain unchanged after the abolition of the Offsetting Arrangement, being 2/3 x (the last month’s wages  (or the average monthly wages of the preceding 12-month period) or HK$22,500, whichever is lesser) x years of services, subject to a cap of HK$390,000. The pre-transition portion would generally be calculated on the basis of the monthly wages immediately preceding the Transition Date whereas the post-transition portion would be calculated on the basis of the last monthly wages before the termination of employment.

While abolishing the Offsetting Arrangement would help improve employees’ retirement protection, the business sector, notably micro-, small- and medium-sized enterprises (“MSMEs“) remained highly concerned over the possible financial impact of the abolition. The Administration advised that supporting measures would be put in place to facilitate the transition and MSMEs would stand to benefit from, among others, the Government 25-year subsidy scheme totalling $33.2 billion at 2021 prices.

Employers are advised to get familiar with the changes introduced under the Bill and seek legal advice if necessary.

For further information, the Bill is available here.