As Hong Kong nears the implementation of a landmark change to its Mandatory Provident Fund (MPF) system, businesses and employees alike are bracing for the shift. While the abolition of the MPF offsetting mechanism has been in the works since the law was passed in 2022, the change will take effect in just a few months, on May 1. This policy shift marks a pivotal moment in Hong Kong’s labor landscape, with immediate and long-term implications for employers, employees, and the broader economy.
Under the current system, employers have had the ability to use their contributions to the MPF — specifically, the employer’s portion of the mandatory and voluntary contributions — to offset an employee’s entitlement to long-service payments (LSPs) or severance payments (SPs) upon termination of employment. In practice, this meant that many workers’ retirement savings were used to cover these termination benefits, creating a conflict between their long-term financial security and short-term job-related protections. With the upcoming change, that practice will come to an end.
The decision to abolish the MPF offsetting mechanism reflects the government’s commitment to improving retirement security and ensuring that workers’ pension funds remain intact for their future. For years, experts and labor rights advocates have raised concerns about the erosion of retirement savings because of this offsetting system. They argued that it undermined the original purpose of the MPF — a retirement protection program — by diverting funds meant for an employee’s future into covering employment termination payments.
The reform is timely. Over the past two decades, Hong Kong’s labor market has undergone significant changes, and the economy has evolved. With more workers facing nontraditional employment arrangements and job security concerns, the need for robust protection against termination has become more urgent. At the same time, a growing number of workers are becoming aware of the importance of safeguarding their MPF savings for retirement.
By eliminating the offsetting mechanism, the government is taking a proactive step to ensure that the funds workers have accumulated in their MPF accounts remain protected for retirement, rather than being diverted to other purposes. In essence, the reform is about giving workers the security they deserve while helping them build a better future.
While the reform may place some short-term financial pressure on employers, particularly SMEs, the government’s subsidy program is a thoughtful response to these concerns. It strikes a balance between protecting workers’ rights and providing businesses with the support they need to adapt to the new system
The key change to the MPF system will take effect in May. From that point forward, employers will no longer be allowed to use their MPF contributions to offset an employee’s entitlement to LSPs or SPs. For those who may not be familiar with the terminology, LSPs and SPs are statutory payments owed to workers when their employment is terminated under certain conditions — including redundancy, long-term incapacity, or when they reach retirement age. LSPs are available for employees who have worked for the same employer for five years or more, while SPs are given to workers who are laid off.
Employers will now be responsible for paying these termination benefits directly from their own funds, without the ability to dip into the MPF contributions that they have made on behalf of the employee. This change will likely place an additional financial burden on employers, particularly small and medium-sized enterprises (SMEs), which have previously relied on the offset mechanism to reduce costs.
However, the government of the special administrative region has anticipated this challenge and put in place measures to alleviate the pressure on employers. Specifically, the government will roll out a 25-year subsidy program worth HK$33.2 billion ($4.27 billion), aimed at easing the financial burden of LSPs and SPs. Under this arrangement, employers will be able to apply for partial reimbursement after paying the required termination benefits, with caps in place during the first three years. For the first three years, the amount of reimbursement will be capped at HK$3,000 per employee, with reductions from the fourth year onward.
One of the most important aspects of the reform is the transitional arrangement for employees who started their employment before May 1, 2025. For these employees, the law allows employers to continue using the employer’s accrued MPF contributions to offset SPs and LSPs for the period of employment before the law takes effect. This provision provides businesses with a degree of relief by preventing them from shouldering the full financial burden of the reform immediately. Employers will be required to cover only the gap between what their MPF contributions can cover and the total amount of LSPs or SPs owed.
This arrangement helps alleviate concerns that the new law might lead to large-scale dismissals in the run-up to its implementation. By allowing employers to continue using accrued MPF contributions for employees who were hired before May 1, 2025, the reform reduces the risk of sudden layoffs as businesses adjust to the changes.
The abolition of the MPF offsetting mechanism is, without question, a win for workers. By preserving the integrity of the MPF system, the government is taking a critical step toward enhancing retirement security for the workforce. Workers will no longer have to worry about their termination benefits depleting their retirement savings, ensuring that they can retire with dignity when the time comes.
Additionally, the transition to a more straightforward system of direct payment of LSPs and SPs eliminates the complex offsetting process that has been in place. This will make it easier for workers to understand their rights and for employers to fulfill their obligations. The enhanced transparency and predictability of the new system should help create a fairer labor market overall.
While the reform may place some short-term financial pressure on employers, particularly SMEs, the government’s subsidy program is a thoughtful response to these concerns. It strikes a balance between protecting workers’ rights and providing businesses with the support they need to adapt to the new system.
Moreover, by gradually phasing in the changes, the government has ensured that businesses have time to adjust. The transitional arrangements and subsidies are likely to mitigate the risk of large-scale layoffs or disruptions in the workforce.
In the coming months, as the implementation date draws closer, the abolition of the MPF offsetting mechanism will become a defining moment in Hong Kong’s labor market evolution. This reform reflects a forward-thinking approach to worker protection, ensuring that employees’ retirement savings are preserved for the future. While challenges remain for businesses, the government’s comprehensive support package will ease the transition. Ultimately, the reform promises to strengthen Hong Kong’s social safety net, providing workers with the security they need to face the future with confidence.
The author is chairman of the Asia MarTech Society and sits on the advisory boards of several professional organizations, including two universities.
The views do not necessarily reflect those of China Daily.
