Abolition of the MPF Offsetting Arrangement takes effect on 1 May 2025

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The Labour Department reminds employers that dismissing employees before the abolition will not save severance payment/long service payment.

Hong Kong’s Abolition of the MPF Offsetting Arrangement will take effect on 1 May 2025. As such, the Labour Department (LD) has reminded employers that expenses in the initial years after the abolition will be limited. Dismissing employees before the “transition date” will not help employers save on severance payment (SP) and long service payment (LSP) expenses.

The LD explains that the pre-transition portion of SP/LSP of existing employees is calculated on the basis of the wages and years of service as at the “transition date”. Therefore, regardless of any salary increase afterwards or the length of employment after the “transition date”, the amount of the pre-transition portion of SP/LSP will not increase.

Employers may continue to use the accrued benefits derived from their MPF contributions – whether mandatory or voluntary contributions – throughout the whole employment period of existing employees to offset the pre-transition portion of SP/LSP. Thus, retaining existing employees allows the accrued benefits derived from employers’ MPF contributions to grow, which can be used to offset employees’ pre-transition portion of SP/LSP in the future.

However, if employers dismiss employees before the “transition date” and employ new ones, the SP/LSP of new employees will build up afresh to a maximum of HK$390,000. The whole amount cannot be offset by employers’ MPF mandatory contributions, resulting in higher amount of SP/LSP expenses in general circumstances.

Employers should note that, irrespective of pre-transition or post-transition portion, employer’s voluntary MPF contributions (ERVC), as well as gratuities based on employee’s years of service, can continue be used for offsetting employee’s SP/LSP.

The LD says, in the long run, employers’ expenses of the post-transition portion of SP/LSP may increase. Enterprises are required to assess their potential LSP liabilities according to their circumstances in line with the current accounting standards in Hong Kong, and get prepared early.

To assist employers to adapt to the policy change, the HKSAR Government will implement a 25-year subsidy scheme on the same date to share out employers’ expenses of the post-transition portion of SP/LSP.

The LD also reminds employers to keep employees’ wage records covering the employment period during the 12 months immediately preceding the “transition date”. This will facilitate the calculation of pre-transition portion of SP/LSP where necessary.

Moreover, employers must keep the wage and employment records of each employee covering the period of their employment during the preceding 12 months.

These records must be kept until six months after the employee ceases to be employed. Failure to keep employees’ employment and wage records could result in prosecution, and upon conviction, employers may face a fine of HK$10,000 under the Employment Ordinance.

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