On 23 June 2017, Hong Kong's Executive Council affirmed the Government's proposal to progressively abolish the "offsetting" of severance payments (SP) and long service payments (LSP) with the Mandatory Provident Fund (MPF), which was put forward in its January 2017 Policy Address. The decision followed three months of consultation with employer and employee groups, including businesses, trade unions and the Labour Advisory Board.

In summary, the Government’s proposal to abolish the current MPF offsetting mechanism, which currently allows employers to offset SP and LSP payments to employees against the benefits attributable to employers' MPF contributions, comprises the following key elements:

  • The proposals will apply from a prospective date (the Effective Date), with "grandfathering" arrangements put in place to enable accrued benefits from benefits attributable to employer's mandatory contributions before the Effective Date to be used for "offsetting." The proposals will not apply retrospectively.
  • The amount of SP/LSP payable for the employment period after the Effective Date will be adjusted downwards, from the existing entitlement of two-thirds of the employee's last month’s wages to half of the last month’s wages as compensation for each year of service.
  • The Government will share part of the SP/LSP expenditure of employers in the ten years from the Effective Date, to help employers adjust to the abolition of the "offsetting" arrangement and prepare for the SP/LSP expenditure in the future. SP and LSP will be fully borne by employers from the 11th year onwards. The Government considers that the grandfathering arrangements and ten-year government subsidy provide a sufficiently long buffer period for employers to adapt to the policy change.

Notwithstanding resistance from various business sectors and unionists to the proposals, the Government's view is that they are the 'most optimal' options put forth so far and represent a balanced solution whereby employers, employees and the Government are each required to make some concession. As employers will be held individually accountable for their own dismissal costs, the Government also expects this will deter irresponsible dismissal behavior while ensuring the majority of employers will be unaffected by the costs.

It is uncertain when the proposals will be implemented. It is also unclear at this stage whether the proposals will extend to ORSO (Occupational Retirement Schemes Ordinance) schemes. With the current Government's term coming to an end on 30 June 2017, it will be up to the next-term Government to take the proposals forward.

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