The Mandatory Provident Fund (“MPF”) system in Hong Kong will undergo a significant change with the abolition of the MPF offsetting mechanism, effective 1 May 2025, leaving considerable implications for both employers and employees in Hong Kong. This eNews aims to provide clarity on this important development and guide businesses through the transition.
Understanding the MPF System and the Offsetting Mechanism
Established in 2000, Hong Kong’s MPF system is a mandatory retirement savings scheme for the majority of the workforce. Both employers and employees are required to make regular contributions to provide financial security for retirement. Historically, the MPF system included an offsetting mechanism that allowed employers to use accrued benefits from their mandatory contributions to offset severance payments (“SP”) and long service payments (“LSP”) upon terminating employment. This typically involved the employer paying the SP or LSP and then withdrawing the equivalent amount from the employer’s mandatory contribution portion of the employee’s MPF account.
Key Changes Effective 1 May 2025
The abolition of the MPF offsetting mechanism took effect on 1 May 2025. From this date forward, employers can no longer use accrued benefits from their mandatory MPF contributions to offset an employee’s SP or LSP for any period of employment on or after 1 May 2025. This applies to employees whose employment ends on or after this date.
Transitional Arrangements for Existing Employees
For employees whose employment began before 1 May 2025, and terminates on or after this date, transitional arrangements are in place. The calculation of their SP / LSP will be divided into two parts :-
- Pre-transition portion : This covers employment before 1 May 2025. For this period, employers can still use accrued benefits from all their MPF contributions (both mandatory and voluntary) to offset the SP / LSP. The calculation will be based on the employee’s last full month’s wages immediately preceding 1 May 2025.
- Post-transition portion : This covers employment on or after 1 May 2025. For this period, employers cannot use accrued benefits from their mandatory MPF contributions to offset the SP / LSP. The calculation will be based on the employee’s last full month’s wages before the termination date.
The maximum total entitlement for SP / LSP, including both portions, remains capped at HK$390,000. If the combined amount exceeds this limit, the excess will be deducted from the post-transition portion.
Impact on SP’s and LSP’s
While the funding of SP and LSP has changed, the calculation methods remain largely the same. The standard formula is two-thirds of the employee’s last full month’s wages (capped at HK$22,500 per month) multiplied by the years of service. Eligibility criteria are as follows :-
- SP : Minimum 24 months of continuous service, termination due to redundancy, non-renewal of a fixed-term contract due to redundancy, or lay-off.
- LSP : Minimum five years of continuous service, dismissal for reasons other than serious misconduct or redundancy, non-renewal of a fixed-term contract, death in service, resignation due to ill health, or resignation at age 65 or above.
An employee is entitled to either SP or LSP, but not both. For employees hired on or after 1 May 2025, SP and LSP will be calculated based on their last full month’s salary before termination, and employers must pay the full amount without offsetting against mandatory MPF contributions.
Treatment of Voluntary MPF Contributions
Employers can still use accrued benefits from their voluntary MPF contributions to offset both SP and LSP, regardless of whether the service period is before or after 1 May 2025. This provides continued flexibility for employers in managing termination-related liabilities.
Government Subsidy Scheme for Employers
To help employers adapt to the increased financial burden, the government has introduced a 25-year subsidy scheme. The “Subsidy Scheme for Abolition of MPF Offsetting Arrangement,” administered by the Labour Department, will share employers’ expenses for SP and LSP related to the post-transition period. The subsidy level will gradually decrease over the 25 years.
In the initial three years (1 May 2025 – 30 April 2028), an employer’s liability for the post-transition portion of SP / LSP will be capped at HK$3,000 per employee, provided the total accumulated post-transition SP / LSP payable by the employer to all eligible employees during the same subsidy year does not exceed HK$500,000. The subsidy scheme includes specific ratios and caps for subsequent years as well. Employers will need to pay the SP / LSP first and then apply to the government for reimbursement of the subsidized portion.
Practical Implications and Action Points for Employers
Employers should take proactive steps to ensure a smooth transition including :-
- Review and update HR systems : Align internal policies, employment handbooks, and contracts with the new regulations.
- Maintain proper records : Keep detailed wage records for employees hired before 1 May 2025, for at least six months after their last day of employment. Failure to do so can result in penalties.
- Apply for government subsidy: Familiarize yourself with the application process and submit applications for eligible subsidies.
- Communicate with employees : Proactively inform employees about the changes.
- Review termination letters : Update templates to reflect the new SP and LSP rules.
- Update payroll systems : Ensure payroll systems can accurately calculate pre- and post-transition portions of SP and LSP.
Conclusion
The abolition of the MPF offsetting mechanism on 1 May 2025 marks a significant change in Hong Kong’s employment law landscape. Employers must proactively prepare for the increased financial and legal responsibilities associated with severance and long service payments for service periods commencing on or after this date. For employees, this reform provides enhanced retirement security. Our firm’s Employment team is committed to assisting clients in navigating these changes and ensuring compliance. If you would like to find out more about this, please contact us.
