Subsequent to the earlier pledges of the Chief Executive to abolish the Mandatory Provident Fund (“MPF”) offsetting mechanism as soon as possible, the Government has on 28 March 2018 put forward its latest proposal to representatives of both employers and employees for their consideration.

Under the latest proposal:

  • The Government will offer a subsidy of HK$17.2 billion to help businesses make severance and long-service payments (“SP/LSP”) in the first 12 years after the abolition of the offsetting mechanism in 2022.
  • The formula for calculating SP/LSP will remain unchanged at two-thirds of an employee’s last month’s wages multiplied by the number of years of service, subject to an upper ceiling of HK$390,000.
  • Employers will need to set up a designated savings account (“Account”) and contribute the equivalent of one percent of the employees’ wages into the Account to cover SP/LSP in the long term until the accumulated amount in the Account reaches 15 per cent of the total staff wages.
  • The Government’s subsidy scheme will be a two-tiered subsidy system:

(1) The Government will shoulder 50 per cent of the SP/LSP costs for the first three years with the amount of subsidy to be reduced by 5 per cent each year from the fourth year onwards until the end of the 12th year.

(2) Additional funds will be provided to employers if their savings in the Account and the Government subsidy are insufficient to cover the full payment cost.

For example, assuming that the employer is required to make SP/LSP during the first three years and the payment involves HK$500,000, the Government will subsidize HK$250,000, and the remaining HK$250,000 will be paid out of the Account. If the amount in the Account is insufficient to cover the remaining $250,000, the second tier of the subsidy mechanism will be triggered. Suppose there is only a balance of HK$100,000 left in the Account, the Government will subsidize 50 per cent of the shortfall of HK$150,000 i.e. HK$75,000. The employer will have to fork out the remaining balance of HK$75,000 for the SP/LSP.

  • The Government subsidy will cease from the 13th year onwards.

Although the proposal is still preliminary and subject to change, the Government is determined to obtain the approval of the Executive Council by the end of this year and the approval of the Legislative Council by 2020, with the aim for the proposal to be implemented in 2022. While the labour side generally welcomes the proposal, the scrapping of the offsetting mechanism will certainly have a great impact on the business sector. Employers oppose the proposal as they will be fully responsible for SP/LSP from the 13th year in addition to the MPF contributions.

Small and medium enterprises (“SMEs”) criticise the proposal for imposing additional financial burden on them as they usually have lower profit margins with staff salaries taking up the bulk of their overheads. SMEs also have little reserves, and are unlikely to be able to afford SP/LSP after the Government subsidy ceases with the consequence that they may well be forced to close down and suffer the risk of criminal prosecution under the relevant laws if they fail to make SP/LSP.

In fear of such consequences, the new proposal may trigger a flood of lay-offs by those employers who may not be able to afford the additional costs. Employers might also replace their existing staff with new ones or break up long term employment contracts into a series of short contracts with a short break in between each contract so as to preclude the Employment Ordinance’s protection. Retail prices may be consequently increased to make up for the rise in overheads.

While the latest shift in MPF policy remains controversial, the Government is determined to scrap the MPF offsetting mechanism by 2022. Employers, particularly SMEs, will need to keep watch on further changes to the proposal and plan ahead accordingly. The subsidy scheme is complicated and administrative resources will be required to manage the Account and the scheme. Some employers may also need to review their top up arrangements and/or existing voluntary ORSO retirement schemes in light of the proposal.