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About the Abolition of the Arrangement of Using MPF to Offset Long Service Payments and Severance Payments

The Legislative Council passed the "Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022" in June 2022 to abolish the arrangement for employers using the accrued benefits of MPF mandatory contribution made for employees to offset severance payments (SP) / long service payments (LSP) under the Employment Ordinance ("offsetting arrangement"), in order to further enhance the MPF's retirement protection function.

What is meant by the MPF offsetting arrangement?
Under the Employment Ordinance, employees may be entitled to SP/LSP payable by their employers. Employers can offset the SP/LSP payable to employees under the Employment Ordinance against the MPF derived from the employer’s mandatory and voluntary contributions.

When will the abolition of the MPF offsetting arrangement be implemented?
The abolition of the offsetting arrangement will be implemented in tandem with the full implementation of the eMPF Platform of the Mandatory Provident Fund Schemes Authority. The eMPF Platform is expected to be in full operation by 2025. After the effective day (transition date) for the abolition of the “offsetting arrangement”, employers can no longer use accrued benefits of MPF mandatory contributions made for their employees to offset employees’ SP/LSP for the employment period starting from that day.

Does the abolition have retrospective effect?
The abolition has no retrospective effect. Employers may continue to use the accrued benefits derived from their MPF contributions (irrespective of whether the contributions are made before, on or after the transition date, and irrespective of whether the contributions are mandatory or voluntary) to offset an employee’s SP/LSP entitlement in respect of the employment before the transition date.

LSP P2 eng

Existing Practice (Before the Eventual Implementation of the Abolition of the MPF Offsetting Arrangement in 2025)

New Practice When the Abolition of the MPF Offsetting Arrangement is in Force

Existing Practice (Before the Eventual Implementation of the Abolition of the MPF Offsetting Arrangement in 2025)

Currently, employers could use the accrued benefits of their mandatory contributions under the MPF System to offset the expenses for SP and LSP.

Offsetting SP/LSP against MPF
Employers and employees should note that the offsetting sequence is:
1. Vested balance of employer voluntary contributions (if any)
2. Employer mandatory contributions unless the relevant participation agreement specifies otherwise

To proceed, following forms have to be submitted to us for handling. We will notify the employer by writing if the balance amount mentioned above cannot fully cover the entitled SP/ LSP for the employer to make the outstanding balance direct to the employee concerned.

- “Employee Termination Notice”: to be filled in and signed by the employer
- “Long Service Payment / Severance Payment to Employee Directly (for employee claim)”: to be filled in and signed by both the employer and the employee

Example illustrating how SP/LSP is offset against MPF and relevant calculation

	Situation 1：If the amount of MPF derived from the employer’s contributions exceeds the amount of SP/LSP, the remaining balance after offsetting has to be retained in the employee’s account and is vested in the employee.	Situation 2：If the amount of MPF derived from the employer’s contributions is insufficient to fully offset the amount of SP/LSP, the employer is required to pay the outstanding balance to the employee.
MPF (from the employer’s contributions) in the employee’s account	$100,000	$40,000
Offset amount against MPF (from the employer’s contributions)	$60,000	$60,000
Under the offsetting arrangement：
Balance of MPF (from the employer’s contributions) in the employee’s account	$40,000 (being $100,000 - $60,000)	$0 ($40,000 is fully used to do offsetting against MPF)
Additional amount paid by the employer to the employee for SP/LSP	$0	$20,000 (being $60,000 - $40,000)

Remarks:

Eligibility and calculation for severance payment and long service payment
Under the Employment Ordinance, an employee is eligible for severance payment or long service payment subject to the following conditions.

	Severance payment	Long service payment
Qualifying period of employment	employed under a continuous contract for not less than 24 months	employed under a continuous contract for not less than 5 years
Conditions/ Requirements	the employee is dismissed by reason of redundancy *	the employee is dismissed but : he is not summarily dismissed due to his serious misconduct his dismissal is not by reason of redundancy
	his fixed term employment contract expires without being renewed due to redundancy *	his fixed term employment contract expires without being renewed *
	he is laid off	he dies during employment
		has been issued a certificate in a specified form by a registered medical practitioner or a registered Chinese medicine practitioner, certifying that he is permanently unfit for his present job and he resigns
		he is aged 65 or above and resigns on ground of old age

*If not less than 7 days before the date of dismissal/ expiry of the fixed term contract in case of severance payment, and not less than 7 days before the expiry of the fixed term contract in case of long service payment, the employer has offered in writing to renew the contract of employment or re-engage him under a new contract but the employee has unreasonably refused the offer, the employee is not eligible for the entitlements.

NOTE: An employee will not be simultaneously entitled to both severance payment and long service payment.

The following formula applies to the calculation of both severance payment and long service payment:

Monthly-paid employee	（last full month’s wages** X 2/3）^# × reckonable years of service
Daily-rated/piece-rated employee	（any 18 days' wages** chosen by the employee out of his last 30 normal working days）^# × reckonable years of service

**An employee may also elect to use his average wages in the 12 months immediately preceding the termination of employment contract for the calculation. (Where the employee's employment contract is terminated by payment in lieu of notice, the employee may elect to use his average wages in the 12 months immediately preceding the date up to which the payment in lieu of notice is calculated.)

^# The sum should not exceed 2/3 of $22,500 (i.e. $15,000).

Any maximum limit for severance payment/long service payment?
If the relevant date of termination of employment occurs on or after 1 October 2003, the maximum amount of severance payment or long service payment is $390,000.

New Practice When the Abolition of the MPF Offsetting Arrangement is in Force

The Government will put in place two supporting measures to facilitate the transition. First, to assist employers to adapt to the policy change, the Government will introduce a 25-year refined subsidy scheme totalling $33.2 billion. Another supporting measure is the introduction of a Designated Savings Accounts (DSA) Scheme under which employers will be mandated to save up for meeting their future SP/LSP liabilities after the abolition.

Employers’ share ratio details under the refined subsidy scheme are proposed.

For the first $500,000 of the total amount of SP/LSP payable by an employer in a year:

There is a share ratio payable by an employer per employee for each year; and
For the initial nine years, the maximum amount of SP/LSP (i.e. the “capped amount”) payable by an employer per employee is capped. If the shared amount payable by an employer exceeds the “capped amount”, the employer only needs to pay the “capped amount”. The rest of the amount of SP/LSP will be subsidised by the Government.

For the total amount of SP/LSP beyond the first $500,000:

There is a share ratio payable by an employer per employee for each year from Year 1 to Year 12. No subsidy will be provided from Year 13 onwards.

Year after the abolition	Employer’s share per employee (as % of SP/LSP payable)
	First $500,000 of all SP/LSP paid by an employer in a year	Beyond the first $500,000 of all SP/LSP paid by an employer in a year
1-3	50%, capped at $3,000	50%
4	55%, capped at $25,000	55%
5	60%, capped at $25,000	60%
6	65%, capped at $25,000	65%
7	70%, capped at $50,000	70%
8	75%, capped at $50,000	75%
9	80%, capped at $50,000	80%
10	80%	85%
11	80%	90%
12	85%	95%
13	85%	100%
14-19	90%	100%
20-25	95%	100%

What is DSA Scheme?
It is a compulsory and dedicated saving scheme to assist employers to save up to meet their future SP/LSP obligations after the abolition of the MPF offsetting arrangement. Employers are required to set up DSAs under their own name and contribute an amount equivalent to 1% of their employees’ monthly relevant income. Employers may stop making contributions to their own DSAs when the savings in their DSAs have reached 15% of the annual relevant income of all their employees.

As to whether an employer can decide on which fund to invest for the 1% contribution under DSA, and the future arrangement when full portability of MPF benefits is in force (employees can transfer all the accrued benefits of MPF mandatory contribution by their employers and themselves to the MPF scheme of their own choice), details are yet to be announced by the Government.

Can employers be exempted from making DSA contributions for certain employees?
In order not to discourage employers from making voluntary MPF contributions for their employees, employers making voluntary MPF contributions at 1% or above of the employees’ relevant income in addition to the 5% mandatory MPF contributions would be exempted from making DSA contributions. Besides, employers whose employees are currently not covered by the MPF System, including persons covered by statutory retirement schemes or provident fund schemes (e.g. civil servants or teachers of grant/subsidized schools), members enrolled in occupational retirement schemes with MPF exemption certificate, domestic employees, employees aged under 18 or aged 65 or above, etc. would also be exempted.

Are there any more details regarding the DSA Scheme?
The Government will submit another bill in the next legislative session with a view to the implementation of the DSA Scheme which aims to assist employers to save up to meet their SP/LSP obligations. The Mandatory Provident Fund Schemes Authority has built the related functionalities on the eMPF Platform to support the DSA Scheme for the Labour Department to set up DSAs for employers to handle work related to the abolition of offsetting arrangement.

Is the offsetting arrangement applicable to members of an occupational retirement scheme?

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Since the benefits under the above schemes are not differentiated into mandatory and voluntary portions, a portion of “non-offsettable” benefits* will be carved out from the ORS benefits. Calculation formula is as follows:

Final average monthly relevant income × Years of service with ORS benefits × 5% × 12

Remaining benefits after carving out the “non-offsettable” benefits (akin to employers’ voluntary MPF contributions) can offset the pre- and/or post-transition portions of SP/LSP.

*“Non-offsettable” benefits – akin to employers’ mandatory MPF contributions and can only be used to offset the pre-transition portion of SP/LSP

As to other FAQs such as the difference in the calculation of SP and LSP after the abolition of the offsetting arrangement and whether all accrued benefits derived from employers’ mandatory MPF contributions can no longer be used to offset an employee’s SP/LSP, please visit Labour Department’s official website for more details.