The End of MPF Offsetting

Hong Kong’s employment landscape is set for a major shift as the Mandatory Provident Fund (MPF) offsetting mechanism will be abolished on 1 May 2025. Following the passage of the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022, employers will no longer be able to use their mandatory MPF contributions to offset severance payments (SP) or long service payments (LSP). Here’s what you need to know about the upcoming changes.

Key Changes at a Glance

1.     Mandatory MPF Contributions Can No Longer Be Used for Offsetting

Starting from 1 May 2025 (the transition date), employers cannot deduct SP/LSP from employees’ accrued benefits under mandatory MPF contributions.

However, offsetting remains permissible for:

-       Voluntary employer MPF contributions

-       Service-based gratuities

2.     "Grandfathering" Rule Protects Existing Employees

To prevent mass layoffs before the transition date, a "grandfathering" arrangement applies to employees hired before 1 May 2025.

How It Works:

Pre-transition portion (service before 1 May 2025):

-       Calculated using the last full month’s wage before the transition date and years of service up to that point.

-       Employers may still offset this portion using both mandatory and voluntary MPF contributions.

Post-transition portion (service from 1 May 2025 onwards)

-       Based on the final wage before termination and years of service after the transition.

-       No MPF offsetting allowed for this portion.

The overall SP/LSP cap remains at $390,000. If the total exceeds this limit, the excess is deducted from the post-transition portion.

3. New SP/LSP Calculation Method

For monthly-paid employees, the revised formula is:

-       Pre-transition portion: Final wage before 1 May 2025 × ⅔ × years of service before transition

-       Post-transition portion: Final wage before termination × ⅔ × years of service after transition

Key limits remain unchanged:

-       Maximum wage for calculation: $22,500/month

-       Total SP/LSP cap: $390,000

Preparing for the Change: Next Steps for Employers

With the 1 May 2025 deadline approaching, businesses should:

✔ Audit payroll and termination policies to ensure compliance.

✔ Assess financial exposure, particularly for long-serving staff.

✔ Communicate changes clearly to employees to avoid disputes.

A Balanced Reform? The Pros and Cons of MPF Offsetting

The MPF offsetting mechanism has long been a contentious issue. Supporters argue it provided employers with financial flexibility, preventing excessive termination costs that could deter hiring. However, critics contend it eroded employees’ retirement savings, leaving many with diminished MPF balances upon job loss.

The abolition aims to strengthen retirement security, ensuring workers retain their full MPF benefits. However, some businesses—particularly SMEs—may face higher severance costs, potentially impacting hiring decisions. The government’s "grandfathering" clause seeks to ease the transition, but employers should still prepare for the long-term financial implications.