The Mandatory Provident Fund (MPF), under which employers and employees are required by law to make monthly contributions, was established in Hong Kong in December 2000. Recently, local authorities informed that the Hong Kong Legislative Council has passed legislation abolishing the MPF offsetting mechanism, starting May 1, 2025.
From this date on, employers will no longer be permitted to use the accrued benefits derived from their mandatory contributions to their employees’ MPF scheme to offset statutory severance pay (SP) or long service payments (LSP).
In order to share employers’ costs on severance and long service payments, the government announced that it will launch a 25-year subsidy scheme, worth approximately HKD 33 billion. During the first 3 years, an employer’s severance and long service payment liability will be capped at HKD 3,000 per employee (provided that the total liability does not exceed HKD 500,000 per year) and the government will pay the rest of the costs.
From the fourth year onwards, the payment caps will gradually rise, and the subsidy amount will gradually decrease.
There will be no change to the employer’s right to recoup SP and LSP from voluntary contributions, or any end-of-service gratuity.
If employment ceases before the Transition Date, the existing arrangements continue to apply: SP/LSP may be recouped from the value of employers' (mandatory and voluntary) MPF contributions, or vested Occupational Retirement Schemes Ordinance (ORSO) scheme benefits attributable to employers’ contributions.
Unlike an MPF scheme, ORSO schemes do not differentiate between mandatory and voluntary contributions.
If the employment period straddles the Transition Date (ie begins before but ceases on or after the Transition Date), SP and LSP will be divided into pre-transition and post-transition portions, and dealt with as follows.
(A) Pre-transition portion: (ie SP/LSP earned before the Transition Date)
The SP/LSP calculation will be = 2/3 x last full month’s wages before the Transition Date (capped at HKD 22,500) x years of service before the Transition Date, pro-rated as applicable
The adjustment of the offsetting arrangement has no retrospective effect; in respect of the pre-transition portion, an employer may continue to recoup from the relevant accrued benefits derived from employers' contributions (irrespective of whether the contributions are made before, on or after the Transition Date, and whether contributions are mandatory or voluntary).
(B) Post-transition portion: (ie SP/LSP earned on or after the Transition Date)
The SP/LSP calculation will be = 2/3 x last full month’s wages before termination of employment (capped at HKD 22,500) x years of service from the Transition Date to date of dismissal, pro-rated as applicable
The monthly contributions to an MPF are based on the level of salary and the period of employment. These MPFs are managed by approved private organizations according to criteria set out by the government.
There are three types of MPF schemes:
Master Trust Schemes: the most common type of MPF scheme, open to the employees of participating employers, self-employed, and persons with accrued benefits to be transferred from other schemes.
Employer-sponsored Schemes: membership is limited to the employees of a single employer and its associated companies.
Industry Schemes: specially established for employees of the catering and construction industries, particularly casual employees (workers employed on a day-to-day basis or for a fixed period of less than 60 days).
According to recent press reports, there could be a potential increase in MPF contributions. The Hong Kong Mandatory Provident Fund Schemes Authority (the ‘MPFA’) is planning to evaluate the minimum and maximum relevant income levels for mandatory monthly contributions.
At the moment, employees and employers are each required to contribute 5% of the employee’s relevant income into an MPF scheme, dependent on limited exceptions.
The relevant income levels are subject to minimum and maximum limits. The minimum limit is HKD 7,100 per month, which means that if an employee’s monthly relevant income is less than HKD 7,100, the employee will not be required to make any mandatory MPF contributions (though the employer is still required to contribute 5%).
The maximum limit is HKD 30,000 per month. If an employee’s monthly relevant income exceeds HKD 30,000, the mandatory contributions for the employer and the employee will both be capped at HKD 1,500.
The minimum and maximum relevant income levels were adjusted in 2013 and 2014 respectively. Since these amounts have not been modified for about a decade, the business sector expects that the MPFA will likely propose that the government increase the minimum and maximum levels, to reflect the higher wages registered in the past few years.
Analysts fear that the potential increase in mandatory MPF contributions may raise the financial burden on employees and employers, especially for small and medium enterprises (SMEs) severely affected by COVID and now struggling to recover.
It is expected that any adjustments to the mandatory contribution levels will be implemented in stages to alleviate any impact on the recovering economy. This will give more time to employers and employees to plan.
Employers and payroll administrators should familiarize themselves with these changes. To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at email@example.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.