Simon McConnell, partner and Michelle Lai, associate in Clyde & Co’s Hong Kong office give an update on the Hong Kong Government’s controversial plan to abolish MPF offsetting arrangements.

The 2014 Policy Address of the Hong Kong Government has confirmed that there is no immediate upcoming plan to abolish the current offsetting arrangement embedded  in the Hong Kong employment-based mandatory retirement protection system, the Mandatory Provident Fund Scheme (MPF Scheme). This is good news for employers, although since consultation on the question of phased abolition of the offsetting arrangement is ongoing, it might not be the end of the story.

Under the MPF Scheme, employers and employees are each required to contribute 5% of the employee’s salary, up to a combined total of HKD 2,500, into an MPF fund privately managed by trustees approved by the government. An employee cannot normally withdraw the accrued benefits before reaching the age of 65 unless they satisfy one of the five specific circumstances required by law. Employers, however, are entitled to claw back any accrued benefits derived from the employer’s contributions in the MPF Scheme to satisfy part or all of their legal obligation to make severance or long service payments.

This article provides an update to our previous article published in the September 2013 International Newsletter.

The long-established offsetting arrangement

At present, where an employer becomes liable to make severance payments or long service payments to a departing or retiring employee under the Employment Ordinance (Cap. 57), employers may offset such  payments against the accrued benefits derived from the employer’s contributions made to an MPF Scheme. This offsetting mechanism is popular with employers as it can significantly reduce and, in many cases, eliminate the cost of making severance or long service payments.

Prior to the launching of the MPF Scheme, the Employment Ordinance already allowed employers to offset severance payments or long service payments against their voluntary contributions to the employees’ retirement schemes. The same arrangement was extended to the MPF Scheme when the government made it a compulsory requirement for an employer to enrol its employees into an MPF Scheme in December 2000. At that time, the government agreed to include the offsetting mechanism to ensure employers’ agreement to the new fund arrangements.

Proposed amendments or abolition of the offsetting arrangement

Opinion has been divided on whether the current offsetting arrangement should be amended/abolished, as one would expect.

On one hand, the proposals were well-received by the labour unions, other social welfare organisations and the working community in Hong Kong. The labour unions, in particular, have been a long-standing advocate for greater retirement protection and have pledged against the offsetting arrangement due to its erosive impact on employees’ retirement benefits.

On the other hand, negative reaction to the proposed abolition was seen from the business community. Many worried that such a proposed abolition may have forced companies to employ workers on shorter contract terms and/or would have increased the cost of both hiring and dismissal of staff – this will have the biggest impact on small to medium sized enterprises in particular.

2014 Policy Address

Despite the long-heated debate in the Legislative Council that generated public interest in this topic, the proposed amendments were not addressed in the latest 2014 Policy Address of the Hong Kong Government. Retirement protection was only briefly discussed in the context of poverty alleviation; a consultancy team was established to assess various retirement protection schemes to make recommendations on the way forward.

Leung Chun-ying, the Chief Executive of Hong Kong, noted that alternative measures to progressively reduce the portion of accrued benefits that can be offset by the employers will be considered as the consultation continues. Similarly, Prof KC Chan, Secretary for Financial Services & the Treasury, commented that the taking of a phased-abolition of the offsetting arrangement must only come after careful examination of the issues due to the potentially significant impact it has on the community.

Conclusion

To the disappointment of some and the relief of others, the 2014 Policy Address has put to an end some of the uncertainty since it seems unlikely that there will be any legislative amendments or changes to the existing system in the near future.