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Major changes to Hong Kong separation payments in the pipeline

  • Hong Kong
  • Employment law - Business and human rights

23-02-2022

Hong Kong employers will be familiar with their right to reduce some termination payments by offsetting the payments against certain pension benefits. This offsetting mechanism often reduces the employee’s final payment significantly. On 11 February 2022, the Hong Kong government published its proposal to abolish this under the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (“Amendment Bill”).

Background to the Amendment Bill

Currently, employers are entitled to make use of the offsetting mechanism to reduce the statutory severance and long service payments (“SP” and “LSP” respectively) payable to their employees upon termination of employment. This applies to benefits derived from employers’ contributions to both Mandatory Provident Fund (“MPF”) retirement schemes as well as schemes under the Occupational Retirement Scheme Ordinance (“ORSO”).

The Amendment Bill follows years of consultation, negotiations and revisions. The government has not confirmed when the proposed amendments will come into effect, but will appoint a date (“Transition Date”) in the future. After the Transition Date, the offsetting mechanism will be abolished and employers will no longer be able to use their mandatory pension contributions to offset employees’ SP/LSP entitlements from that date forward, but will be able to use the offsetting mechanism in relation to the employee’s period of service prior to the Transition Date. In other words, the amendments will not have retrospective effect. The benefit derived from voluntary contributions (i.e. an employer’s contributions to an employee’s pension that are above the mandatory minimum) may continue to be used to offset the SP/LSP regardless of the period of service it relates to.

Implications of the Amendment Bill

1) Applicable to MPF schemes - All MPF contributions (both pre and post- transition) may be used to settle pre-transition SP/LSP. The Amendment Bill will only affect employees who are currently covered by a MPF scheme or by one of the schemes mentioned in point 4 below. Those who are not so covered (such as domestic helpers), or those who are under other statutory retirement schemes, will generally not be affected by the offsetting arrangements.

2) Calculation of SP/LSP - The Amendment Bill will not change the rate and maximum payable amount of SP/LSP. The pre-Transition Date portion of SP/LSP would be calculated on the basis of the last monthly wages immediately prior to the Transition Date and the years of service before the Transition Date. The post-Transition Date portion of SP/LSP would be calculated on the basis of the last monthly wages before the employment was terminated and the years of service at that time. To calculate pre-transition SP/LSP, employers need to keep payroll records for the 12 months pre-transition (or a shorter period if the employee has worked less than 12 months) immediately prior to the Transition Date, in accordance with the Employment Ordinance. This means that employers have to keep the payroll records for the pre-transition 12 months for as many years as the employees remain in their employment.

3) Adverse impact on employees - There will be rare cases where employees will be adversely affected by the change, in which case the government will cover the shortfall for the employees.

4) Application beyond MPF schemes – In addition to MPF schemes, ORSO schemes and exempted (overseas) schemes will also be affected by the offsetting arrangement. Since employers’ contributions under ORSO schemes and ORSO scheme benefits are not distinguished between mandatory and voluntary contributions, arrangements will be put in place to calculate and carve out a portion of “non-offsettable benefits”, which cannot be used to offset post-Transition Date SP/LSP.

5) Government subsidy and savings account - The government plans to provide financial support to facilitate the transition for employers in the form of a 25-year subsidy scheme, as well as a Designated Savings Account (DSA) Scheme where employers will be required to make contributions to specific accounts for meet their future SP/LSP obligations. The details of these schemes will be provided in a separate legislation.

The Legislative Council Brief for the Amendment Bill stated that although the amendments would incur additional costs on employers, it will have positive sustainability implications overall in that it can help preserve the accrued benefits in the MPF Scheme for the retired population of Hong Kong, safeguarding employees’ financial status and wellbeing after retirement. It is also expected to alleviate burden for families facing financial difficulties during unemployment, as in the case of dismissals, the affected employees would receive their entitled SP/LSP at the prevailing rates without offsetting.

Next steps for employers

As mentioned above, if the Amendment Bill is enacted, employers will need to keep wage and employment records of their employees for up to 12 months immediately prior to the Transition Date, and for as many years as the employees remain in their employment.

Although the amendments are not expected to come into force until some time in 2025, employers should keep track of latest legislative developments to prepare for the eventual abolition of the offsetting mechanism.