Hong Kong passes long-awaited labour bill to scrap MPF offsetting mechanism, protecting workers’ pensions

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Hong Kong’s legislature has passed a long-awaited labour bill that will stop bosses from dipping into staff pensions to cover severance and long-service payments, ensuring the city’s workers have better retirement protection.

The Legislative Council on Thursday voted 72-5 to approve the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill that will abolish the so-called offsetting mechanism under the Mandatory Provident Fund (MPF), ending a decade-long debate between employers and workers’ unions over the issue.

“The passage of the bill … is a historic moment and an important milestone in improving the retirement protection of employees,” Secretary for Labour and Welfare Law Chi-kwong said on the sidelines of the Legco meeting.

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Excluding the Legco president, who only votes on motions in exceptional cases, 12 out of the 90 lawmakers abstained from casting their ballots.

Three legislators from the pro-business Liberal Party were among those who opposed the bill, while the 12 who abstained included representatives from the industrial, real estate, legal, tourism and the Election Committee sectors.

Why the Hong Kong government is scrapping the MPF offsetting mechanism

The MPF Authority, insurance firms such as Manulife Hong Kong, as well as outgoing leader Carrie Lam Cheng Yuet-ngor welcomed the passage of the bill.

“Given the rapid ageing of Hong Kong’s population, the issue of retirement protection has become more imminent. As early as when I served as the chief secretary … I championed the need to strengthen the MPF,” Lam said.

The present mechanism allows employers to use money earmarked for pension funds to offset severance and long-service payments, or when staff are sacked or the company has closed down, an arrangement seen to favour bosses.

Under the new legislation, which will take effect in 2025 and do away with the offsetting mechanism, the government will offer HK$33.2 billion (US$4.2 billion) in subsidies over 25 years to help employers cover the payments. The mechanism will be abolished starting from a date to be appointed, known as the transition mark, after which employers can no longer deduct severance or long-service payments from their portion of MPF contributions.

While the labour sector has called the move a victory for employees, with unions having branded the mechanism as tantamount to robbing workers of their hard-earned money, the business sector has cried foul over the additional financial burden.

Lam urges lawmakers to pass overdue bill to scrap MPF offsetting mechanism

The Federation of Hong Kong Industries said in a statement it was disappointed with the development. It said the business sector had suffered a “severe downturn” during the Covid-19 pandemic and amid uncertainties in the global economy.

“The government’s proposed bill has not only created unnecessary conflicts between employers and employees, but also added tremendous financial burden and stress to [small and medium-sized enterprises],” it said. “It is [the federation’s] deep regret that the bill has been passed where the industry has no alternative but to bear the consequences of the legislation.”

Some business lawmakers on Wednesday were adamant that the bill would impose an additional financial burden on operators, especially owners of small and medium-sized enterprises already hard hit by the Covid-19 pandemic.

“I am worried that the new law will aggravate labour relations as employees may deliberately do something to prompt their bosses to sack them,” said Liberal Party chairman and lawmaker Peter Shiu Ka-fai, representing the wholesale and retail sector.

“For employers, they may sack staff before the end of their five-year-long service employment to evade payments.”

Secretary for Labour and Welfare Law Chi-kwong. Photo: Jonathan Wong
Secretary for Labour and Welfare Law Chi-kwong. Photo: Jonathan Wong

Yet, unionist lawmaker Michael Luk Chung-hung of the Federation of Trade Unions, said the offsetting mechanism was unfair to employees and abolishing it was long overdue.

“Under this offsetting mechanism, it seems that employees are using their own money to sack themselves. The new arrangement can restore the severance payment by offering laid-off staff emergency funds to ride out the difficulty,” he said.

Law noted authorities would press ahead with setting up the 25-year government funding programme and would follow up in the 2022-23 legislative year on a Designated Savings Accounts Scheme for employers to cope with future financial needs, as well as conducting a publicity campaign to help employers understand the abolition of the offsetting arrangement.

Official data showed that from July 2001 until the end of September last year, a total of HK$56.7 billion was offset in employees’ pension funds in the city. Last year, this amount was more than HK$6.6 billion, up 16.6 per cent from HK$5.7 billion in 2020.

MPF faces ‘extreme volatility’, members lose HK$16,600 each in first quarter

The MPF covers more than 2.8 million workers in Hong Kong, who can choose where to invest their monthly contributions. The scheme requires employers and staff to each contribute the equivalent of 5 per cent of a worker’s monthly salary to the pension fund, capped at a combined HK$3,000.

The abolition of the offsetting arrangement will have no retroactive effect. If a worker’s employment commenced before the transition date but the individual is laid off after that, the employer can still claw back contributions to the staff member’s pension funds to cover severance payments based on the number of years worked before the date in question.

Authorities said such an arrangement would help reduce the risk of large-scale dismissals before the transition date.

The calculation of the severance or long-service payments will remain unchanged at two-thirds of the last monthly wages, subject to a maximum of HK$22,500, for each year of service, capped at HK$390,000.

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