Hong Kong MPF updates: Abolition of the offsetting mechanism to take effect on 1 May 2025 and potential increase in mandatory contribution levels
03 May 2023
Over the past weeks, there have been some important news on the pension regime in Hong Kong that employers and employees should be mindful of.
Further to our last article published on 9 June 2022, the Hong Kong LegCo passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) on 9 June 2022 to abolish the MPF offsetting mechanism. Under the Bill, the MPF offsetting mechanism will be abolished starting from a date to be appointed (referred to as the “transition date” in the Bill).
On 28 April 2023, the Chief Executive of HKSAR, John Lee Ka-chiu, announced at a Labor Day reception that the abolition of the MPF offsetting mechanism will take effect on 1 May 2025. This means that with effect from 1 May 2025, employers will no longer be permitted to use the accrued benefits derived from their mandatory contributions to their employees’ MPF scheme to offset statutory severance payments (“SP”) or long service payments (“LSP”) payable to them.
The Hong Kong government is planning to launch a 25-year subsidy scheme that is worth approximately HK$33 billion to share employers' costs on SP and LSP. Based on the government's proposal, during the first 3 years of the subsidy scheme, an employer's SP/LSP liability will be capped at HK$3,000 per employee (provided that the total SP/LSP liability does not exceed HK$500,000 per year) with the government bearing the rest of the costs. From the fourth year onwards, the payment caps will gradually rise, and the government subsidy amount will be reduced progressively. We expect to receive further details from the government on this and will provide a further update.
2. Potential increase in mandatory contribution levels for MPF
According to recent press reports, the Hong Kong Mandatory Provident Fund Schemes Authority (the "MPFA") will soon conduct a review on the minimum and maximum relevant income levels for mandatory monthly MPF contributions.
Currently, under the Hong Kong Mandatory Provident Fund Schemes Ordinance, subject to limited exceptions, employees and employers are each required to contribute 5% of the employee’s relevant income into a MPF scheme. The relevant income levels are however subject to minimum and maximum limits. The minimum limit of relevant income is HK$7,100 per month. This means that if an employee's monthly relevant income is less than HK$7,100, the employee will not be required to make any mandatory MPF contributions (though the employer is still required to make 5% mandatory MPF contributions). The maximum limit of relevant income is HK$30,000 per month. This means that if an employee's monthly relevant income exceeds HK$30,000, the mandatory contributions for the employer and the employee will be capped at HK$1,500 each.
The previous adjustments of the minimum and maximum relevant income levels took place in 2013 and 2014 respectively. As the mandatory contribution levels have not been adjusted for about a decade, the business sector expects that the MPFA will likely propose to the Hong Kong government to increase the minimum and maximum relevant income levels, considering the overall increase in employees' income level over the past decade.
There have been concerns that the potential increase in mandatory MPF contribution levels may increase the financial burden on employees and employers, especially SMEs that had been severely impacted by COVID and are now struggling to recover. To alleviate any impact on the recovering economy, it is expected that any adjustments to the mandatory contribution levels will be implemented in stages, to give employers and employees some time to plan ahead.
We will provide an update once a formal proposal has been put forward by the MPFA.
Please reach out to Catherine Leung or David Kong if you wish to know more.
Abolishment of the MPF offsetting mechanism approved by Hong Kong's Legislative Council (the “LegCo”)09 June 2022
After years of extensive discussions and consultations, the Hong Kong LegCo has, on 9 June 2022, passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) to abolish the MPF offsetting mechanism.
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