Why is the Hong Kong government’s MPF offsetting plan so controversial?

Sides still cannot agree on MPF changes that would come into effect in 2022

PUBLISHED : Wednesday, 04 April, 2018, 5:00pm
UPDATED : Thursday, 05 April, 2018, 1:56pm

Hong Kong officials have mapped out plans to scrap a controversial part of the city’s government-mandated pension fund.

The so-called offsetting mechanism of the Mandatory Provident Fund (MPF) lets employers take cash from the pot to offset long-service or severance payments to workers.

After an unsuccessful attempt by the previous administration to remove the mechanism, the government has pledged to double its subsidy to businesses, to at least HK$17.2 billion (US$2.2 billion), for employers’ payments for 12 years.

The government hopes the proposed bill will pass by 2020 and come into effect by 2022. Officials have lobbied business and labour leaders as they try to win support for the move. The business sector remains unconvinced, despite assurances from government officials that they have considered the affordability of the plan.

But why are business leaders so concerned, and what is offsetting really about? 

Why was the offsetting mechanism included in the MPF in the first place?

It was introduced in the late 1980s together with long-term service payments, long before the MPF was implemented in 2000.

Under the mechanism, employers can withdraw their contributions from pension funds to pay for long service payments and severance payment, when workers are dismissed or companies go out of business.

Its inclusion in the MPF was described as a “compromise” by many, including former MPF Scheme Authority chairwoman Anna Wu, to gain support from the business sector at that time.

How much of workers’ contributions are being offset?

Mandatory Provident Fund Schemes Authority said a record HK$3.85 billion was offset by employers in 2016, equivalent to 94 per cent of total employers’ contributions. Some 37,300 workers receive zero employers’ contributions from pension under the offsetting mechanism, accounting for 74 per cent of total claims.

A staggering total of HK$31.8 billion of contributions have been offset since the MPF came into place in 2000.

What is the government’s latest plan, in simple terms?

The government has pledged at least HK$17.2 billion to partially subsidise business to pay for originally offset payments, which employers are presently entitled to claim.

The subsidy, coined by many as a “complicated one”, will be a two-tier system. The government will first subside up to 50 per cent for employers’ payments for the first three years. The subsidy will thereafter be reduced by 5 percentage points annually until it falls to 5 per cent in the 12th year. After that, employers will be wholly responsible for all the payments.

The calculation of severance and long service payments will remain unchanged at two-thirds of an employee’s last month’s wages, multiplied by the number of years of service, capped at HK$390,000.

As the latest tweak to the plan, employers will need to set-up a savings account and contribute the equivalent of 1 per cent of employees’ wages for long service or severance payments. It would be capped at 15 per cent of a worker’s total wage, which also means employers would contribute for only 15 years per employee.

The government will provide a second layer subsidy, in case business’ contributions in the new savings account fail to cover the severance and long service payments.

Hong Kong business slams decision to scrap pension fund offset mechanism

Why is the business sector so reluctant to scrap the mechanism?

As the MPF system inherited the offsetting mechanism, the business sector has been vocal in arguing it would incur extra cost, especially to small and medium-sized businesses. It also boils down to a significant shift in MPF policy, which Dr Law Chi-kwong, the Secretary for Labour and Welfare, acknowledged in a blog post on Sunday.

Stephen Kwok Chun-pong, the president of the Small and Medium Enterprises Association, earlier quoted government figures which showed that even with the new savings fund, only 44 per cent of SMEs hiring fewer than 10 people would be able to cover the payments in the first 10 years. The remaining businesses would have to dig into their own pockets to top up the severance and long service payments. 

Kwok pointed to the two-tier profit tax and suggested the government further subside companies by matching 1 per cent of the employers contribution, and also extending the deal beyond the 12-year grace period.