Abolition of the MPF Offsetting Long Service Payment Arrangement

In June 2022, the Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022¹ to abolish the use of the employers’ MPF mandatory contributions to offset severance payment (“SP”) and long service payment (“LSP”).

1. Arrangements of Abolition of SP & LSP Offsetting

In April 2023, the Government announced that the abolition will take effect on 1 May 2025 (the “Transition Date”). Employers can no longer use the accrued benefits of employers’ mandatory contributions under MPF scheme to offset severance payment (“SP”) and long service payment (“LSP”) arising from service rendered on or after the Transition Date.

• No Retrospective Effect – For employees who are employed before the Transition Date, the employer can continue to use  MPF scheme, ORSO benefit, and gratuity to offset SP and LSP earned before the Transition Date.
• Government Subsidy – The Government has indicated that a scheme to subsidise employers for 25 years after the Transition Date will be launched.
• No Change to Employers’ Voluntary MPF Contributions – Accrued benefits derived from employers’ voluntary MPF contribution and gratuity can continue to be used to offset SP & LSP.

2. Implications for Employers

With current offsetting mechanism, LSP liability is usually immaterial after accounting for the offset of employers’ MPF contribution amount, thus most companies do not hold liabilities for LSP liability currently. Such amount may no longer be immaterial for majority of the companies in Hong Kong.

• Accounting Implications – As per the guideline, Accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong², issued by HKICPA in July 2023, the ‘year of enactment of the Amendment Ordinance’ is the financial year that includes June 2022. The amount could potentially be material, and auditors may require employers to assess the LSP liability.
• Long-term Financial Implications – Subject to the demographics and employee benefit design, some employers may face higher costs, which may be alleviated by the government subsidy.
• Operation Implications - To facilitate calculation of pre-transition portion of SP & LSP, employers are required to keep wage and employment records of the employees covering the 12 months of the employees’ employment immediately preceding the Transition Date (or shorter period if the employee worked less than 12 months).

3. How Deloitte could support you

The valuation of the LSP liability is typically conducted by actuaries, for budget management and strategy planning. Understanding of the accounting treatment and employee benefit design would be key for holistic strategy planning.

• LSP Liability Valuation – Actuarial valuation of LSP liability, including providing support on setting key assumptions and working with audit experts to align on accounting approach.
• Employee Benefit Design Reassessment – Review of overall employee benefits, including forecasting and budgeting for benefit costs.

¹ https://www.labour.gov.hk/eng/news/aoa.htm

² https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/gMPFLSP.pdf

Contacts

Patrick Au | Partner, Actuarial | patrickau@deloitte.com.hk

Aaron Lai | Manager, Actuarial | aalai@deloitte.com.hk