Mandatory Provident Fund

Views split over plans to scrap Hong Kong’s Mandatory Provident Fund offset mechanism

Government is expected to announce plans to progressively abolish the MPF offset mechanism by the end of June – a move which would be welcomed by trades unions and the public, but is contested by many employers

PUBLISHED : Friday, 05 May, 2017, 12:16pm
UPDATED : Friday, 05 May, 2017, 5:33pm

The government is due to announce details of its plan to abolish the MPF offset mechanism by the end of June – but views concerning the proposal are divided.

Under Hong Kong’s employment ordinance, an employee is entitled to a severance payment if he or she is made redundant or laid off and has been under a continuous contract with their employer for 24 months or more; and those who have worked for an employer for five years or more are eligible for a long-service payment if they are made redundant or laid off.

However, by law, employers have so far been able to offset such payments to an employee using the accrued benefits from its MPF contributions.

In 2015 alone, the offset amount of severance and long-service payments totalled HK$3.354 billion. This amount involved 14,400 employers and 45,300 employees.

The offset mechanism has drawn criticism from labour unions ever since the scheme was launched in December 2000. The main argument against the mechanism is that the MPF is intended to provide employees with some financial security following their retirement. If severance and long-service payments are deducted from MPF contributions, this can seriously reduce the funds available to the employee on reaching retirement. This affects low-income employees in particular because they are required to make low or even zero MPF contributions. If the employer’s portion of the contributions is used to offset severance payments, low-income employees are left with little protection after retirement.

In response to the call to scrap the offset mechanism, outgoing Chief Executive Leung Chun-ying announced in his policy address in January that the government would progressively abolish the system.

Leung added that the proposal would have no retroactive effect; that the government would help employers by sharing part of the expense of making severance or long-service payments during the first 10 years following abolition of the offset mechanism; and that for severance or long-service payment functions that overlap those of the MPF system, the amount of such payments due would be adjusted from two-thirds of a month’s salary (as at present) to half a month’s salary as compensation for each year of service.

Leung said a decision concerning whether or not to implement the proposal would be made by the end of June.

The proposal has been welcomed by trades unions and the public, but has been rejected by employer groups.

In a statement released after the announcement, the Federation of Hong Kong Industries – together with the Chinese Manufacturers’ Association of Hong Kong, the Hong Kong General Chamber of Commerce, the Hong Kong Chinese General Chamber of Commerce and the Hong Kong Employers Federation – said it was concerned that the proposal would be introduced without the consensus of the stakeholders.

The federation argued that the proposal contradicted the original purpose of the MPF scheme; the offset mechanism was originally included to relieve employers of the need to make duplicate contributions due to overlaps between severance payment functions and the MPF.

It added that abolition of the offset would impose a heavy financial burden on businesses, especially small- to medium-sized enterprises, and – despite proposed government subsidies – employers will have to pay twice towards their employees’ retirement protection through severance payments and MPF contributions.

Meanwhile, according to a survey conducted by the Hong Kong Institute of Human Resource Management (HKIHRM), about the same number of employers support the abolition of the MPF offset mechanism as oppose it, while almost two-thirds of human resource practitioners support the abolition.

The survey was conducted between January 21 and February 26, and polled 338 HKIHRM members who are HR practitioners responsible for developing and implementing the HR policies of their organisations.

The survey found that 20 per cent of employers support and 23 per cent oppose abolishing the MPF offset mechanism, while 56 per cent hold no particular view on the issue.

Of those companies that support abolishing the offset mechanism, the top three reasons given were: the desire to provide staff with better retirement protection (85 per cent); the wish to be perceived as caring and considerate employers (75 per cent); and the desire to provide redundant staff with better protection (72 per cent).

Those companies that oppose abolishing the offsetting mechanism did so because of increased costs associated with redundancy (78 per cent), the obligation on the employers part to make double payments (73 per cent), and a belief that employers might be forced to hire staff on short-term contracts (30 per cent).

Meanwhile, the HKIHRM survey showed that nearly two-thirds (65 per cent) of HR practitioners supported abolishing the MPF offset mechanism, while 23 per cent are against it.