On 29 March 2018, Secretary for Labour and Welfare Law Chi-kwong announced that the Government had put forward, in closed-door meetings with business and labour representatives, a preliminary proposal (the "Proposal") on how the abolition of the MPF offsetting arrangement will be implemented. Under the current offsetting arrangement, an employer can offset a statutory severance payment or long service payment made in respect of an employee against accrued benefits attributable to the employer's contributions pursuant to section 12A of the Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong).

1. What is the timeline?

The Government intends to implement the abolition of the offsetting arrangement in 2022 if the Legislative Council can approve the Proposal by 2020.

While the statutory severance payments or long service payments attributable to the period before the effective date of the relevant legislative amendments (the Effective Date) can still be offset against the accrued benefits under the MPF scheme attributable to employer's contributions, employers can no longer effect such offset in respect of those payments attributable to the period after the Effective Date.

2. What will an employer need to do?

An employer will have to set up a savings account (unless the employer makes voluntary MPF contributions at the rate of 1% or more), into which the equivalent of 1% of employee wages has to be contributed until the accumulated amount has reached 15% of the total employee wages. Funds saved in the savings account will be applied to cover future statutory severance and long service payments.

3. What will the Government do?

The Government will offer a subsidy of HK$17.2 billion for a 12-year period in assisting employers in meeting severance or long service payments obligations.

The subsidy will be in form of a two-tiered progressive sharing mechanism:

  • the first tier: the Government will subsidize 50% of an employer's statutory severance and long service payments in the first three years from the Effective Date, and then starting from the fourth year this subsidy percentage will decrease by 5% each year such that it is reduced to 5% in the twelfth year, and nil from the thirteenth year onwards;
  • the second tier: this subsidy comes into play when the funds in the employer's savings account is not enough to cover the statutory payments - in this case, the Government will subsidize the shortfall by the applicable subsidy percentage for that year (i.e. applicable subsidy percentage of the shortfall).

4. What next?

The Government's current proposal is only preliminary and there will likely be further amendments after the Government consults with various stakeholders. In particular, it is not clear at this point:

  • how the 1% from the employers will be invested;
  • for those employers who make voluntary contributions and therefore will be exempted from having a savings account, whether any control or limitation will be imposed on how such voluntary contributions can be invested;
  • whether the 1% from employers will be calculated by wages that are subject to a cap, as with the case of MPF contributions; and
  • whether the proposal will apply to ORSO schemes, which currently also have the offsetting mechanism, and if so, how will it be applied.

5. Getting yourself prepared

  • If you are an MPF / ORSO service provider, you should review your systems, constitutive and offering documents and policies and procedures to ensure that you are able to cater for the Proposal, in particular, where necessary, the savings accounts and the different treatments in respect of the accrued benefits due to employer's contributions before and after the Effective Date;
  • If you are an employer, it may be necessary to review your employment contracts or handbooks to reflect the new regime – that any current offsetting arrangements will be discontinued.

If you have any questions on the topics covered or need further clarification on any particular issue, please do not hesitate to get in touch with your usual contact at Baker McKenzie, or the lawyers listed above.

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