Long-awaited adjustment of the MPF offsetting arrangement

The offsetting arrangement, which allows a Hong Kong employer to recoup certain amounts payable to employees on dismissal from an employee’s retirement benefits, has been long debated and oft-criticised. This mechanism is to be curtailed. This will improve financial retirement protection for many employees. Details follow.

In June 2022, the Hong Kong government gazetted the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022 (the Amendment Ordinance). This will remove the current right of a Hong Kong employer to recoup statutory severance pay (SP) or statutory long service pay (LSP) by seeking reimbursement from the accumulated value of the employer’s mandatory MPF (mandatory provident fund) contributions, or the (equivalent) non-offsettable benefits (see below) in an occupational retirement scheme.

The change will take effect on a date to be appointed (the Transition Date), which is expected to be in 2025. The main effect is that an employee will be entitled to retain the mandatory employer contributions made during employment; the employer will no longer be able to use the value of these contributions to fund LSP/SP.

(There will be no change to the employer’s right to recoup SP and LSP from voluntary contributions, or any end-of-service gratuity.)

The following paragraphs summarise what employers need to know about the scheme and the upcoming change.

The current scheme - the offsetting arrangement

Employers in Hong Kong are required to make contributions to a retirement scheme, for most members of their workforces.

For an MPF scheme, the minimum contributions are calculated as 5% of an employee’s relevant income per month, capped at HK$1,500. Employers may, of course, contractually agree to make contributions greater than the 5% minimum, on a voluntary basis.

(Retirement schemes under the Occupational Retirement Schemes Ordinance (ORSO) are schemes set up voluntarily by employers; they are now less commonly used. Contributions can be made solely by the employer, or by both parties, depending on the terms. Unlike an MPF scheme, ORSO schemes do not differentiate between mandatory and voluntary contributions.)

The Employment Ordinance currently provides for an offsetting arrangement that allows employers to elect to recoup or offset the amount of LSP/SP payable to an employee on dismissal or retirement by the value of (1) accrued employer’s contributions to an MPF scheme (both mandatory and voluntary contributions); (2) vested occupational retirement scheme benefits attributable to employers’ contributions; and (3) gratuities based on an employee’s length of service. Many international employers do already choose, in our experience, not to exercise this right. Where an employer does elect to recoup or offset, in practice what usually happens is that the SP or LSP is made first and then the amount of that is, to the extent available, recouped from the value of contributions made by the employer. The effect is that the cost to an employer of SP or LSP payable to employees on redundancies or other dismissals is reduced, perhaps even to nil; and the employees, put simply, lose out.

Key changes and points to note

Following the amendments, the position will be as follows.

1. If employment ceases before the Transition Date, the existing arrangements of course continue to apply: SP/LSP may be recouped from the value of employers' (mandatory and voluntary) MPF contributions, or vested ORSO scheme benefits attributable to employers’ contributions.

2. If the employment period however straddles the Transition Date (ie begins before but ceases on or after the Transition Date), SP and LSP will be divided into pre-transition and post-transition portions, and dealt with as follows.

   (A) Pre-transition portion: (ie SP/LSP earned before the Transition Date)

   The SP/LSP calculation will be = 2/3 x last full month’s wages before the Transition Date (capped at HK$22,500) x years of service before the Transition Date, pro-rated as applicable

   The adjustment of the offsetting arrangement has no retrospective effect; in respect of the pre-transition portion, an employer may continue to recoup from the relevant accrued benefits derived from employers' contributions (irrespective of whether the contributions are made before, on or after the Transition Date, and whether contributions are mandatory or voluntary).

   (B) Post-transition portion: (ie SP/LSP earned on or after the Transition Date)

   The SP/LSP calculation will be = 2/3 x last full month’s wages before termination of employment (capped at HK$22,500) x years of service from the Transition Date to date of dismissal, pro-rated as applicable

   • MPF schemes

     The post-transition portion may be recouped from the value of the (voluntary) MPF contributions only.

   • ORSO schemes

     The benefits under an ORSO scheme do not differentiate between mandatory and voluntary portions, but a portion of non-offsettable benefits is carved out (akin to employers' mandatory MPF contributions). The post-transition portion may only be recouped from the employers' contributions to an ORSO scheme that are greater than the non-offsettable benefits (akin to employer’s voluntary MPF contributions).

3. When employment commences on or after the Transition Date:

   • MPF schemes

     The employer will no longer be permitted to recoup from employers’ mandatory MPF contributions, but can continue to recoup out of voluntary MPF contributions.

   • ORSO schemes

     The employer will be permitted to recoup only from the employer’s contributions which are greater than the non-offsettable benefits.

4. Gratuities due on cessation, if based on length of service, may continue in all cases to be used to offset the amount of LSP/SP (regardless of whether it is the pre-transition or post-transition portion).

Employers and payroll administrators should familiarise themselves with the changes, and monitor for an announcement of the confirmed Transition Date.