The heated debate of whether to scrap the Mandatory Provident Fund (“MPF”) offsetting mechanism has sparked controversies among employers, employees and politicians since the 2012 Hong Kong Chief Executive Election. The Government under the former Chief Executive’s administration proposed to abolish the set-off mechanism entirely and to set up a HK$7.9 billion public fund to cushion the effect of the abolition to employers, whereas the business sector has counter-proposed that the present offsetting arrangement should be preserved and they are willing to pay an extra 1% MPF contribution. For details of how these proposals would affect an employee’s entitlement upon his or her retirement, please refer to our previous article published in May 2017: The MPF Offset Controversy. This topic has remained unresolved after the new Government administration assumed its office on 1 July 2017.

The Present

Under the existing Employment Ordinance (Cap. 57) and subject to the HK$390,000 cap, an employer is obliged to pay a long service payment or a severance payment to a retiring or departing employee. Nevertheless, when an employee is laid off or resigns, the employer is allowed to use its 5% MPF contributions to offset the amount of the long service payment or the severance payment that it is required to pay under the Ordinance. In other words, an employer does not actually pay both the MPF and the long service payment or the severance payment as it can use its MPF contribution to set off the latter. By and large, the Government has also expressly acknowledged that there is a certain degree of overlap between the retirement protection functions of long service payment or the severance payment and of the MPF scheme.

The New Government Proposal

The latest Government’s proposals under the new Government administration are:

• To cap severance payment and long service payment from the current level of HK$390,000 to between HK$200,000 and HK$250,000 (the average amount of severance payments and long service payments claimed in 2016 was only HK$76,400);
• To offer HK$7.9 billion in the first 10 years after the abolition of the MPF offsetting mechanism to cushion the impact and relieve the employers’ financial burden; and
• To maintain the current formula of calculating the payments based on two-thirds of the employee’s last full month’s salary or HK$15,000, whichever is less.

However, the business community and the labour sector are not impressed with these proposals. One of the main controversial aspects of the Government’s proposal is the 10 years public funding. The current Chief Secretary for Administration, Mr. Matthew Cheung Kin-chung, also acknowledged the concerns of the business sector that after the 10-year support of the HK$7.9 billion from the Government, the SMEs might not be able to afford the substantial amount of severance payments and long service payments themselves. Some SMEs have suggested that this would impose hardship on the operation of their businesses and result in massive layoff of permanent employees and replacing them with contractual employees. On 15 August 2017, the five business chambers reaffirmed that the present offsetting arrangement should be preserved.

The Future

Though the Chief Secretary had indicated that the public might expect a concrete proposal would be put forward by the new Government administration for the next Policy Address by the end of 2017, it now remains uncertain as to how exactly the abolition and the relevant transition arrangements would be implemented. The Government has said that the future abolition of the MPF offsetting mechanism would not apply retroactively. Therefore, employers could continue to use their MPF contributions to offset their employees’ severance payment or long service payment for the time being.