By Alex Liu

Hong Kong, 19 April 2022: The government’s proposal to abolish “offsetting”, the regulation that allows employers to use Mandatory Provident Fund (MPF) contributions to make severance and long service payments to workers, has generated much debate. The legislation – recently outlined in detail by my colleague Allison Lee – has been welcomed by trade unions and NGOs while generating concern among employer groups and business chambers.

Amid the diverse opinions, one aspect of the proposal is clear: employers, rather than the government, are expected to shoulder much of the cost. Abolition will, naturally, cause this to happen. Further, it will be accompanied by a new Designated Savings Accounts (DSA) Scheme for employers to make mandatory contributions to meet their future liabilities. The government’s pledge to provide support via a 25-year, $33 billion subsidy scheme, while welcome, appears destined to have limited effect.

As a consequence, even though abolition of offsetting is at least three years away – it will only happen after the long-awaited eMPF online administrative platform is launched – employers need to be aware of the financial implications and start preparing for it now.

Broadly, the MPF requires employees and employers to each make contributions of 5% of the employee’s income towards a personal retirement fund. Currently, employers can use their contributions to offset severance payment (SP) and long service payment (LSP). The existing rate for calculating SP/LSP is two-thirds of the last monthly wages, subject to a maximum of $22,500, for each year of service; and the maximum payment of SP/LSP is $390,000. The new legislation does not change these.

However, to illustrate how abolition will increase the financial burden for employers, here is a simple example. A firm has 10 employees, each earning $22,500 per month, and it dissolves after 10 years. In that time, the firm has contributed $1.35 million to the MPF and now it owes $1.5 million in SPs. After offsetting, the employer must bear the shortfall of $150,000.

Under the new regime, in addition to MPF contributions, the firm must further pay 1% of each employee’s income into the DSA Scheme. Thus, with 10 workers, a fund of $270,000 is accumulated in 10 years. This amount, plus $250,000 in government subsidies (calculated as 20% for the first $500,000, 15% thereafter), goes towards the $1.5 million in SPs. Therefore, the shortfall to be borne by the employer soars to $980,000.

On this basic analysis, the 1% DSA Scheme deposit and government contribution rates are clearly insufficient. Employers will need to make provision for each employee in each year, taking into account inflation and annual salary reviews, since the calculation of SP/LSP is based on the last month’s salary. With the existing cap on SP/LSP at $390,000 per employee, even small and medium-sized enterprises will face increased liabilities in the order of millions of dollars.

A further concern regarding the legislation is the potential for conflict between employer and employee. The former may be tempted to find ways to reduce or avoid SP/LSP obligations, the latter could even be inclined to seek dismissal to secure their payout. There are genuine fears that the new policy will not be conducive to cultivating good relationships between firms and their staff. The spirit of long service and concept of mutual loyalty could be undermined.

Who should bear the responsibility to provide for retirement benefits of citizens, whether the government or employers, is obviously a motion for debate. In a report 18 months ago entitled Hong Kong at a Crossroads – MPF, A Job Half Done, the Business and Professionals Federation of Hong Kong – a non-political, non-factional think tank focusing on socio-economic issues – advocated a raft of MPF reforms. These included a recommendation that the contribution rate should increase to 15% for all employees, with the government contributing an additional 5% of relevant income to MPF accounts, or 10% for those earning less than $7,100 per month.

While acknowledging concerns of worker groups, business owners have long argued that an open market environment that allows enterprises to thrive is vital to the success of a city. Hence, reduced room for operating a profitable business is undesirable. Nevertheless, the onus falls on them to comply with the new regulations. Employers are strongly advised to familiarise themselves with the new regime and factor in their increased financial obligations. As ever, we recommend seeking legal advice if clarity is required.

A Partner in BC&C since 2000, Alex Liu’s key areas of practice include commercial and corporate litigation, investigations by governmental bodies such as the SFC, ICAC and Commercial Crime Bureau, insolvency and debt restructuring, intellectual property, defamation, property and commercial contract drafting. He can be contacted at alex@boasecohencollins.com.