Understanding MPF Offsetting: Implications, Calculation Methods, and Changes to Long Service Payment

The Mandatory Provident Fund (MPF) offsetting mechanism has long been a crucial topic in Hong Kong's employee retirement protection. Following the government's announcement to officially abolish the MPF offsetting arrangement on May 1, 2025, the calculation of severance and long service payments for employees will change. This article will explore the meaning of MPF offsetting, its calculation methods, and the new arrangements post-cancellation, helping both employers and employees better understand this policy shift.

What is MPF Offsetting?

"MPF offsetting" refers to the ability of employers to use their accumulated MPF contributions to offset severance or long service payments owed to employees due to layoffs, business closures, or other reasons. Specifically, the employer’s monthly contribution of 5% (or a maximum of HK$1,500) can be used to offset these compensation costs. For example, if an employee is laid off and entitled to a severance payment of HK$60,000, but the employer's accumulated contributions in the MPF account amount to HK$45,000, the employer would only need to pay an additional HK$15,000, with the remainder deducted from the MPF. However, any mandatory or voluntary contributions made by the employee themselves do not apply to the offsetting mechanism. This arrangement has faced criticism in the past for undermining employees' retirement security, as part of their retirement funds are used to cover compensation for dismissals or layoffs.

Cancellation of MPF Offsetting in 2025

According to the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022, the government will officially abolish the MPF offsetting mechanism on May 1, 2025. Key changes under the new policy include:

1. Abolition of Mandatory Contribution Offsetting: Employers will no longer be able to use their mandatory MPF contributions to offset severance or long service payments.

2. Retention of Voluntary Contribution Offsetting: Employers may still use voluntary contributions to cover related expenses.

3. No Retrospective Effect: The new system will apply only to employment periods after the transition date; accrued benefits before this date can still be used for offsetting.

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Additionally, the government will launch a funding scheme totaling HK$3.32 billion over 25 years to assist employers with the additional costs incurred from the cancellation of offsetting.

Calculation Method for MPF Offsetting

Under the old system, severance and long service payments could be calculated using the following formula:

Severance/Long Service Payment = (Average Monthly Salary × Two-Thirds) × Years of Service

Here are two examples of calculations:

Example 1: Accumulated Benefits Exceed Payment Amount

Severance/Long Service Payment: HK$50,000

Employer's Accumulated Contributions in MPF: HK$90,000

Amount Employer Needs to Pay After Offsetting: HK$0

Final Amount Received by Employee: HK$50,000

Example 2: Accumulated Benefits Less Than Payment Amount

Severance/Long Service Payment: HK$50,000

Employer's Accumulated Contributions in MPF: HK$40,000

Amount Employer Needs to Pay After Offsetting: HK$10,000

Final Amount Received by Employee: HK$50,000

New Calculation Method After Cancellation of MPF Offsetting

Under the new system, severance and long service payments will no longer utilize mandatory contribution benefits for offsetting. For example:

Before Transition: Severance/Long Service Payment = (HK$22,500 × Two-Thirds) × Years of Service (e.g., 2 years)

After Transition: Severance/Long Service Payment = (HK$22,500 × Two-Thirds) × Years of Service (e.g., 3 years)

In the new system, the total compensation received by the employee will include the full severance/long service payment without any offset, along with the retained mandatory contributions.

Impacts of Cancelling MPF Offsetting

The cancellation of MPF offsetting will have significant implications for both employers and employees, particularly regarding how severance and long service payments are handled.

Impact on Employees

• Enhanced Retirement Security: With the cancellation of offsetting, employers can no longer use MPF contributions to offset severance or long service payments, ensuring that employees’ MPF accumulations remain intact until retirement, thus improving their quality of life post-retirement.

• Full Compensation: Employees will receive the full amount of severance or long service payments without any deductions due to offsetting.

Impact on Employers

1. Increased Operational Costs: Employers will need to pay the full severance amounts when terminating employees, as they can no longer offset these costs with MPF contributions, creating pressure on their human resources budget.

2. Need for Financial Planning: Companies are advised to review their internal compensation policies and set aside sufficient reserves to manage severance or long service payment liabilities.

3. Updates to Contracts and HR Policies: Human resources departments will need to revise employment contracts, employee handbooks, and internal procedures to ensure compliance with the latest regulations.

   
   

The abolition of the MPF offsetting mechanism in 2025 represents a significant reform that not only enhances employee retirement security but also fosters fairness in employer-employee relations. However, this new system may impose cost pressures on employers. In light of these changes, businesses can leverage the Merit Entrepreneur intelligent HR system to improve management efficiency and reduce potential costs, better adapting to the evolving policy landscape.