The Hong Kong government has officially announced that it will abolish the long-implemented MPF offsetting arrangement on May 1, 2025. This major reform directly affects the retirement protection of employees across Hong Kong, particularly the method of calculating severance payment. Are you concerned that your rights may be affected under the new legislation? Or as an employer, are you confused about the new Labour Department guidelines on severance payment? Do not worry. This article consolidates all key information for you and provides an in-depth analysis of the specific impact following the abolition of MPF offsetting in the clearest manner, together with detailed calculation steps and examples, enabling you to fully understand the differences between the old and new systems and the corresponding response strategies in one go.
Before understanding the new method for calculating severance payment, it is necessary to first understand the previous rules. The so-called “MPF offsetting”, also known as MPF offsetting, has long been a controversial mechanism directly related to your retirement savings.
Under the previous legislation, when an employer was required to pay severance payment or long service payment to an employee, the employer could withdraw the accrued benefits derived from the “employer contribution” portion in the employee’s MPF account to offset the payment. In simple terms, the employer effectively “recovered” part of the MPF contributions already made to pay severance costs that should have been borne by the company.
Under the previous legislation, when an employer was required to pay severance payment or long service payment to an employee, the employer could offset that amount by withdrawing the accrued benefits derived from the “employer’s contributions” in the employee’s MPF account, that is, to “offset” the payment. In simple terms, the employer effectively “recovered” part of the MPF contributions already made and used them to pay severance costs that should have been borne by the company.
The impact on employees was significant:
This practice had long been criticized as “eroding employees’ hard-earned money” and failing to truly fulfill the retirement protection function of the MPF system.
After years of social discussion and advocacy, the government has finally decided to abolish the MPF offsetting mechanism. The core objective of this reform is clear: to strengthen the retirement protection framework for employees. After the abolition of offsetting, employers will no longer be allowed to use their mandatory provident fund contributions made for employees to offset severance payment or long service payment. This means:
This reform is regarded as a major advancement in Hong Kong labor rights, ensuring that when employees are unfortunately laid off, they can receive both immediate financial support (in the form of severance payment) and long-term retirement savings (in the form of MPF).
To accurately calculate severance payment after the abolition of MPF offsetting, the key lies in understanding a core concept: the “transition date”. The government has clearly designated May 1, 2025 as the “transition date”, using this date as the dividing line to split an employee’s length of service into two parts for calculation purposes.
In simple terms, your total length of service will be divided into two segments:
Therefore, for senior employees who leave employment after the transition date, the final amount they receive will be the sum of the amounts calculated for both the “pre-transition” and “post-transition” periods.
Whether it is severance payment or long service payment, the calculation formula itself has not changed. What has changed is the right of offsetting. The calculation formula is as follows:
(Last month’s wages × 2/3) × Years of service
Important Caps to Note:
[Case Analysis]
Assume Mr. Chan earns a monthly salary of HK$30,000. He commenced employment on May 1, 2020 and was dismissed due to redundancy on April 30, 2028, with a total service period of 8 years.
Many people confuse severance payment and long service payment. Their calculation method and caps are exactly the same, but the triggering conditions differ, and an employee cannot receive both simultaneously.
In simple terms, severance payment is specifically for “redundancy” while long service payment covers various other qualifying termination circumstances.
The abolition of MPF offsetting undoubtedly increases the potential financial burden on employers. In response, the government has introduced corresponding support measures to assist enterprises (especially small and medium enterprises) in achieving a smooth transition.
The government has established a 25-year scheme with a total funding amount of tens of billions, known as the “Designated Savings Account Scheme”, to subsidize employers in paying severance payment and long service payment after the abolition of offsetting. The subsidy amount will decrease gradually over the years, with a higher subsidy ratio in the early stage to encourage employers to plan ahead.
Employers should closely monitor the application details and procedures issued by the Labour Department to ensure that they can make full use of this resource when necessary.
This is a sensitive but realistic question. In theory, dismissals occurring before the “transition date” of May 1, 2025 will be handled entirely under the old system, and employers may still carry out MPF offsetting. However, if an employer intends to circumvent the long-term financial responsibility under the new legislation through large-scale “early dismissals”, the following risks may arise:
Prudent employers should adopt proactive planning measures, such as making provisions and understanding the government subsidy scheme, rather than engaging in short-sighted avoidance behavior.
A: Not entirely. The key lies in the “transition date” (May 1, 2025). For severance payment or long service payment arising from an employee’s service years before the transition date, the employer may still use the accrued benefits derived from MPF contributions to offset the payment. However, for service years after the transition date, offsetting is absolutely prohibited.
A: Your severance payment will be calculated in two parts. The first part is based on your service years before May 1, 2025, and this portion may be offset. The second part is based on your service years after that date, and this portion cannot be offset. Ultimately, you will receive the total of these two parts, but the employer is only required to pay cash separately for the second part.
A: To facilitate estimation for employers and employees, the government has launched an official online calculation tool. You can visit the Abolition of “Offsetting” website to access this practical calculator. Simply enter the relevant information to obtain an estimate of severance payment, long service payment, and the government subsidy amount.
A: Under the current “Employment Ordinance”, regardless of your wage level or length of service, the maximum amount of severance payment or long service payment is capped at HK$390,000. This cap applies to both pre-transition and post-transition calculations.
In summary, the abolition of MPF offsetting marks a significant step forward in safeguarding labor rights in Hong Kong, as it rectifies the previous system loophole that eroded employees’ retirement savings. Whether you are an employee or an employer, you must thoroughly understand the new severance payment calculation method, especially the principle of division before and after the “transition date”. Remember the key date of May 1, 2025, and make good use of the Labour Department’s official resources and calculator on severance payment to accurately plan for and safeguard your rights. In the face of this major reform, clear understanding and adequate preparation are the best responses.
