Employers may no longer use MPF to set off long service and severance liability

Under current Hong Kong law, the accrued benefits derived from employers' contributions under the Mandatory Provident Fund ("MPF") Scheme can be used to offset long service payments ("LSP") and severance payments ("SP"). This mechanism has long been criticised and it has been said that such a set-off arrangement will defeat the purpose of the MPF scheme which is to provide employees with retirement protection. Also, the set-off arrangement means that employees who are entitled to LSP or SP upon termination of employment often receive a very small amount of LSP or SP after deduction of employers' MPF contributions which further undermines employee protection.

A lot of people may wonder why there is such an offsetting arrangement at the beginning. It is actually due to historical reasons. Before MPF, Hong Kong did not have a mandatory system for providing retirement benefits. In order to induce employers to set up voluntary retirement schemes, the government needed to give the employers "sweetener" and thus proposed this set-off arrangement. This may make sense when running voluntary retirement schemes but there is now loud voice against this as the system becomes mandatory.

On 9 January 2013, some Legislative Council members moved the motion "Comprehensively reviewing the MPF Scheme" and urged the government to abolish the set-off arrangement and retain employees' rights to SP or LSP under the relevant provisions of the Employment Ordinance so as to provide employees with better retirement protection. This is particularly so if the MPF system is to move towards a full employee choice arrangement whereby employees will be given the choice to choose their own service provider not just on their employee's contributions but also employer's contributions.

It was not surprising that the motion was not carried as the cost of labour will significantly increase for employers. However some Legislative Council members and the MPFA will be pushing for this mechanism to be removed and so employers will need to be aware of this possible change in the future.

Key Contacts

Cynthia Chung

Partner | Corporate Commercial | Employment and Pensions

Email or call +852 2825 9297