Hong Kong’s Chief Executive, CY Leung, has issued his final annual policy address and gave important news to employers. He outlined a proposal to change Hong Kong’s employment termination payments and the pension offset mechanism that allows employers to reduce payments to outgoing staff.

Background

Mandatory Provident Fund (MPF) was introduced in 2000 as a compulsory contribution scheme for all Hong Kong employees, with a few narrow exceptions. It requires the employee and employer to make contributions of 5% of relevant income into a recognised MPF scheme, up to a maximum of HK$1,500 each for the employer and employee. It is possible to make additional voluntary contributions, but many contribute only the mandatory amount and so it is not a particularly generous pension arrangement.

Whilst in most countries employee pension funds are highly protected from reduction or interference, it has not been so in Hong Kong. In certain circumstances on termination, an employee may be entitled to a statutory Severance Payment (SP) on redundancy, or Long Service Payment (LSP) on dismissal with more than 5 years’ service, in accordance with the Employment Ordinance (EO).

By law, employers have had the right to offset the SP/LSP against the accrued MPF benefits that derive from the employer’s contributions to the employee’s fund. Having had to explain this concept to many non-Hong Kong clients, it is generally received with amazement; the typical reaction goes something like this: “you mean we can take money out of the employee’s pension fund to pay for their redundancy payment…?!”. It is estimated that in 2015 alone, HK$3.3 billion was offset.

The offset has long been the subject of debate between trade unions and employee rights groups vs. employer groups and the general business community in Hong Kong, the former lobbying for abolishment and the latter for retention.

The Proposal

The Government has clearly sought to strike a balance. On the one hand, the employee groups have won: the right to offset will gradually be abolished. It will not, however, take full effect for some time. On the other hand, SP and LSP will be reduced, a change which employers will welcome.

There were three key points to the Chief Executive’s proposal:

  • the abolition of the right to reduce SP and LSP will have no retrospective effect. In other words, employers' MPF contributions before the implementation date of the proposal will be "grandfathered" and available to reduce SP and LSP
  • the formula for calculating SP and LSP will be amended so that the payments are reduced from the implementation date. Currently the employee is entitled to two-thirds of one month's wages for each year of service up to a capped amount; this will go down to one half a month's wages
  • there will be a rebate scheme from the Government over a 10 year period as a transitional arrangement in order help employers and share part of the expenses

Like any such change, the devil is in the details and we look forward to following the LegCo debates and analysing the draft legislation in due course.

If the change does not have retrospective effect for all previous MPF contributions, there is concern that some employers will dismiss employees before the implementation date in order to ensure that the full offset is available to them. Whilst it is disappointing for employees that their statutory SP and LSP pay-outs may be less than under the current law, if the proposal is enacted, at least they will have the right to keep both their pay-out and their pension for the first time.