%20(1).avif)
Summary. Hong Kong will abolish its MPF Offsetting Scheme on 1 May 2025, preventing employers from using their Mandatory Provident Fund contributions to offset severance and long service payments. Under the new system, employers must pay these benefits in full while maintaining complete employee retirement funds. The government will provide a 25-year subsidy scheme to help businesses transition, with annual subsidies capped at HK$500,000 per employer. For employees hired before the transition date, payments will be calculated in two portions: pre-transition based on April 2025 salary and post-transition based on final salary.
The Mandatory Provident Fund (MPF) is a compulsory pension scheme created by the Hong Kong government to help employees save for retirement. Both employers and employees must make regular contributions to the employee’s MPF account, which is managed by a trustee chosen by the employer.
However, under the MPF Offsetting Scheme, employers have been allowed to use their contributions to offset the cost of severance payments or long-term service payments when an employee leaves the company. This means that instead of paying these benefits entirely out of pocket, employers can deduct the amount from the employee’s MPF savings.
While the scheme was originally introduced to ease financial pressure on businesses, it has been widely criticized for reducing employees’ retirement savings. Therefore, on 1 May 2025, the Hong Kong government will eliminate the MPF Offsetting Mechanism, guaranteeing that workers receive their entire severance payment or long service payment without having any money taken out of their MPF accounts. This article provides updates on the major legal changes and what employers should know to prepare for this change.
What is the MPF Offsetting Scheme?
As mentioned, Hong Kong’s Mandatory Provident Fund (MPF) offset scheme is a mechanism that allows employers to deduct any severance payment (SP) or long service payment (LSP) that they must give an employee upon leaving their job by using the contributions they have made to the employee's MPF account.
When an employee is entitled to SP or LSP, this could be due to redundancy or long service, the employer calculates the total amount owed. The employer can then deduct the total amount of their own MPF contributions (plus any accrued benefits attributable to those contributions) from the SP or LSP. The employee receives the balance, if any, after this offsetting.
For example, if an employee is entitled to HK$100,000 in severance pay and the employer has contributed HK$40,000 to the employee’s MPF account, the employer only needs to pay HK$60,000 out of pocket (HK$100,000 - HK$40,000).
The MPF offset was introduced as part of the MPF system in 2000 as a way to address the concerns from employers about the financial burden of severance and long-term service payments. By allowing employers to use their MPF contributions to offset these payments, the government aimed to:
- Encourage employer participation: Make the scheme more acceptable to employers by reducing their additional financial liabilities.
- Balance interests: Strike a balance between protecting employees’ retirement savings and addressing employers’ concerns about increased costs.
- Economic considerations: The offsetting arrangement was seen as a way to reduce the financial burden on businesses, particularly small and medium-sized enterprises (SMEs), while still providing some level of retirement protection for employees.
What are the latest MPF updates for 2025?
However, the MPF offset scheme had its drawbacks, as employees often saw their retirement savings reduced when employers used MPF contributions to cover severance payments or long service payments. This practice undermined MPF's original purpose of ensuring workers had adequate financial security in retirement.
A new bill was introduced, the Employment and Retirement Schemes Legislation (Offsetting Arrangement) Bill 2022, which was passed in June 2022 to abolish the offsetting schemes.
The Hong Kong government plans to abolish the MPF offset mechanism on 1 May 2025. Employers will no longer be able to take SP or LSP out of workers' MPF accounts moving forward, guaranteeing that workers will keep all of their retirement funds.
What are the key legal changes to consider?
After the abolishment, employers can no longer use MPF contributions to offset SP and LSP. They will also need to bear the full cost of SP and LSP. However, the government will provide a subsidy fund that will help small and medium-sized enterprises (SMEs) transition to the new system.
The Employment Ordinance (EO) in Hong Kong outlines the statutory severance and long service payment entitlements for employees.
Under this law, employees with at least 24 months of continuous service under a redundancy or dismissal (except for serious misconduct) qualify for severance payment, while those with at least 5 years of service qualify for long service payment.
How will the scheme work during the transition period?
Right now, employers can use money from their mandatory and voluntary MPF contributions and gratuities to reduce the amount they need to pay for an employee’s severance payment or long service payment.
Starting 1 May 2025, employers can no longer use mandatory MPF contributions to reduce SP and LSP for work done after this date. However, if an employee started work before 1 May 2025, employers can still use MPF contributions (both mandatory and voluntary) to cover SP and LSP for the work done before the transition date.
This rule only applies moving forward, so any SP and LSP earned before 1 May 2025 can still be used for MPF offset.
Additionally, the calculation of severance payment and long-term payment remains the same. It is based on two-thirds of the last full month's wages, multiplied by the years of service, with a wage cap of HK$22,500 per month and a maximum payout of HK$390,000.
Hence the formula: SP and LSP = 2/3 × Last Full Month’s Wages × Years of Service
For employees hired on or after 1 May 2025:
SP and LSP will be calculated using their last full month's salary before they leave the job.
For employees hired before 1 May 2025:
SP and LSP will be divided into two parts: the pre-transition portion, calculated using the salary as of April 2025, and the post-transition portion, based on the salary at the time of termination.
This approach ensures that payments are fair and the existing wage cap and maximum payout are maintained.
Read next: Hong Kong Minimum Wage Guide for Employers
What is the available government support for employers?
To assist employers with the upcoming changes to the MPF offset system, the Hong Kong government is implementing a 25-year subsidy scheme to help cover costs associated with severance payments and long service payments.
The government will share a portion of the MPF service expenses with employers. The exact percentage will decrease over the 25-year period.
However, there's a limit placed on the SP and LSP expenses eligible for subsidy. This limit spans over the 25-year period.
There's also an annual limit (threshold) for employers. For example, each employer can only receive government subsidies for SP and LSP up to HK$500,000 per year. If an employer needs to pay more than HK$500,000 in a year, they will have to cover the extra costs on their own.
How does this impact employers?
Increased operational cost
After the transition, employers will no longer be able to deduct severance and long service payments from their mandatory MPF contributions. This means they must budget for the full amount of these payments, increasing financial strain, especially for small and medium-sized businesses.
With higher employment costs, businesses may become more cautious about hiring new employees or offering long-term contracts. Some employers might also explore alternative workforce strategies, such as outsourcing or contract-based employment, to manage costs more effectively.
Legal requirements for record-keeping
Under the MPF offset scheme, employers are required to keep wage records for each employee covering the preceding 12 months of their employment and retain them for six months after the employee leaves, as per existing regulations.
After the MPF offsetting abolition, employers must also keep wage records for employees hired before the transition date, specifically covering the 12 months before 1 May 2025, until six months after the employee leaves. This ensures accurate calculation of the pre-transition portion of SP and LSP when needed.
Learn more: Checklist and Guide for Maintaining Employee Records
Accounting impacts
With the abolition of the MPF offset scheme, companies now need to recognize the full liability for LSP and SP in their financial statements. This will require a reassessment of their obligations and may lead to a significant increase in reported liabilities.
How does this affect employee welfare?
Employees can keep all their MPF funds, as employers can no longer deduct severance or long service payments from them. This provides better financial security for workers, especially those with long service.
Employees will receive their full SP and LSP entitlements in cases of redundancy or layoffs, without deductions from their MPF accounts. This ensures that workers do not lose part of their pension benefits when they leave a job
Creating a Stronger Future with Omni
Stay ahead of Hong Kong’s 2025 MPF offset updates while streamlining your HR processes with the right HR tools.
Omni’s comprehensive platform simplifies MPF contributions and offset calculations with real-time processing and localized currency support. Easily calculate severance and long-term service payments, ensuring employee records are secure and centralized. Generate accurate payroll reports instantly, ensuring that your organization stays compliant and future-ready for the MPF offset changes.
With plans starting from USD$3 per month per employee, discover how Omni’s all-in-one HR software can transform your MPF management while ensuring compliance with regulations.
