Chief Executive Carrie Lam has a new idea to deal with the scrapping of the Mandatory Provident Fund (MPF) offsetting mechanism. 

Under the former Chief Executive Leung Chun Ying’s plan, the Government would set a cut-off date for scrapping the offsetting mechanism. The amount of severance or long service payments payable after the cut-off date would be adjusted downwards from the existing entitlement of two-thirds of the last month’s wages to half. In return, the Government was willing to offer HK$7.9 billion to subsidize employers for the first 10 years of implementation of the plan. Such proposal not only sparked strong opposition from employers, employee representatives were also disappointed that severance and long-service payments would be reduced. 

Latest Government Proposal 

At the meeting with the labour and employer representatives in late July 2017, a new proposal (with the following key elements) has been drawn up by the Government to abolish the MPF offsetting mechanism: 

  1. to cap the maximum amount of severance and long-service payments at a level less than the present HK$390,000;
  2. to keep the two-thirds formula i.e. to calculate the payments based on two-thirds of the employee’s last salary multiplied by the number of years in service;
  3. to provide employers with a subsidy of HK$7.9 billion to share the expenditure in both severance and long-service payments in the first 10 years after the abolition of the offsetting mechanism. 

The Government is also considering a mandatory saving scheme for employers to prepare them for the time when the Government ceases to provide financial subsidy. Tax exemption will be allowed for employers’ savings for severance and long-service payments. 

Comment 

Under the latest proposal, it remains uncertain at what level the maximum amount of severance and long-service payments would be capped. It is also unclear what amount of “savings” employers are required to make and, how frequent such savings will have to be made? The Government is expected to announce a final proposal by the end of this year. Regardless, the Government is determined to proceed with the scrapping of the offsetting mechanism, so employers should start to plan for this imminent change.