Hong Kong – Abolition of MPF Offsetting Arrangement

The Legislative Council made a decision on June 9, 2022, to change the law regarding how employers can use money from their workers’ retirement savings (called Mandatory Provident Fund or MPF) to pay severance and long-service benefits. They decided to stop allowing this practice, called the MPF offsetting arrangement. This change will officially start on May 1, 2025.

Here are the main points of this change:

1. After the change happens, employers won’t be allowed to use money from their mandatory MPF contributions to cover severance or long-service payments for their employees.
2. However, money from employers’ voluntary MPF contributions and other payments based on how long someone has worked can still be used for these payments.
3. To make sure that workers who were already employed before the change don’t lose out, there will be special rules to protect the part of their severance and long-service payments that they’ve already earned before the change takes place.

Here are the main points of the “grandfathering” arrangement, which only applies to employees who were already employed before the transition date:

1. Employees’ severance (SP) and long-service payments (LSP) will be split into two parts: pre-transition and post-transition portions. The pre-transition portion covers the period before the transition date, while the post-transition portion covers the period after the transition date.
2. The pre-transition portion will be calculated based on the monthly wages just before the transition date and the years of service before that date. The post-transition portion will be calculated based on the last monthly wages before termination of employment and the years of service from the transition date.
3. The maximum total amount of SP/LSP, including both pre-transition and post-transition portions, remains capped at $390,000. If an employee’s total SP/LSP exceeds this amount, the excess will be subtracted from the post-transition portion.
4. Employers can still use money from their MPF contributions, regardless of when they were made (before, on, or after the transition date), and whether they are mandatory or voluntary, to cover the pre-transition portion of SP/LSP. However, they cannot use these contributions to cover the post-transition portion.

After getting rid of the MPF offsetting rule, here’s how we figure out how much severance and long-service pay a monthly-rated employee should get:

(1) Employment period before the transition date

Employee’s last full month’s wages immediately preceding the transition date × 2/3 × years of service before the transition date.

(2) Employment period starting from the transition date

Employee’s last full month’s wages before termination of employment × 2/3 × years of service starting from the transition date.

(3) The ceiling on the monthly wages for calculating SP/LSP is $22,500 and the maximum SP/LSP amount is $390,000. These ceilings remain unchanged.

The abolition of MPF offsetting arrangement is also applicable to occupational retirement schemes that are granted exemption under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), the two school provident funds under the Grant Schools Provident Fund Rules (Cap. 279C) and Subsidized Schools Provident Fund Rules (Cap. 279D) and overseas occupational retirement schemes joined by employees from outside Hong Kong which are exempted from the MPF System.

The abolition of MPF offsetting arrangement is not applicable to employees who are currently not covered by the MPF System or other statutory retirement schemes (including foreign and local domestic helpers, and employees aged less than 18 or more than 65 or above). Their SP/LSP, if applicable, will continue to be calculated on the basis of the last monthly wages or 12-month average wages before the termination of employment in accordance with the existing provisions of the Employment Ordinance.