Hong Kong is often promoted as one of the world’s most business-friendly cities, earning 4^th place in the World Bank’s 2019 Report for the easiest place to conduct business and ranking 1^st as the world’s freest economy for its 25^th consecutive year.[1] A large part of the ease of operating a business in Hong Kong is attributable to its pro-employer market complimented by its liberal employment regulations.  However, the Chief Executive’s pledge to abolish the ‘offsetting’ arrangement under the Mandatory Provident Fund Scheme (“MPF”) could significantly increase the financial burden on Hong Kong’s businesses.[2]  

Under the current scheme, it is a mandatory obligation for employers in Hong Kong to contribute to their employees’ MPF.[3] However, under section 12A of the Mandatory Provident Fund Schemes Ordinance (Cap. 485), employers can offset any severance payments (“SP”) and/or long service payments (“LSP”) that an employee may be entitled to against the accrued benefits derived from the employer’s contribution to the MPF. The offsetting arrangement is an integral mechanism which ensures that employers are not financially overburdened upon an employee’s departure.

During the latest Government Policy Address, Carrie Lam adopted an unwavering stance to enhance employees’ retirement protection and proposed to abolish the ‘loophole’ which allows the offsetting practice under the present framework. Taking into account the protracted public consultations, she put forward an enhanced subsidy package and promised to increase the Government’s financial commitment to support employers during the post abolition period.

To allay fears from the business sectors, the Government has promised to increase its total financial commitment to $29.3 billion in comparison to $17.2 billion. It has also proposed to assist businesses by setting up designated savings accounts (“DSA”) to encourage employers to start saving up early to meet their potential SP and LSP expenses and implementing a two-tier subsidy scheme.[4] Under the first-tier, the Government would undertake to pay 50% of an employee’s SP/LSP in the first 3 years after abolition of the offsetting arrangement. Thereafter, the Government’s contribution will decrease progressively by 5% each year until its contribution is diminished to 5% in the 12^th year. The second-tier subsidy would only be engaged where the employer’s accrued balance in its DSA is insufficient to pay the remaining SP/LSP after discounting the first-tier subsidy.  Under the second-tier mechanism, the Government will share the outstanding amount at the same rate as the first-tier subsidy in the relevant year for a period of 25 years.

As retirement protection and labour welfare tops the policy agenda of the current-term Government, businesses fear that abolishing the offsetting arrangement will have dire consequences on their growth, survival and competitiveness. In particular, micro and small-medium enterprises would struggle the most to sustain these additional financial liabilities.

The proposed two-tier subsidy scheme aims to alleviate a portion of the financial pressure that businesses in Hong Kong would face upon the abolition of the offsetting arrangement, however, such assistance will only be available in the short-term. The long-term effects of abolishing the offsetting arrangement may still have an unpredictable and detrimental implications to the competitiveness of Hong Kong’s business sector.

The Government has announced its target to secure the passage of the enabling legislation through LegCo within the current term of the Government (i.e.2022) and implement the same two years thereafter (i.e. 2024). It has been clarified that the future abolition of the offsetting arrangement will not apply retrospectively, therefore, employers can continue to offset LSP/SP for the time being.

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