In Hong Kong, the Mandatory Provident Fund (MPF) system has become a hot potato issue from an economic, political as well as social perspective. In recent years, the Mandatory Provident Fund Schemes Authority (MPFA) has continued to launch various measures to optimise this retirement protection plan, such as the establishment of the Trustee Service Comparative Platform in order to provide information on the various services offered by the different MPF schemes as well as the start of the Employee Choice Arrangement which gives employees a high degree of autonomy in handling their MPF investment. The Authority has also enacted a Default Investment Strategy to tackle the twin problems of - 'high fees and the difficulty of making fund choices'. In the near future, the proposal to abolish the offsetting of severance payments or long-service payments with MPF contributions is set to become another controversial topic.

"With the latest developments in mind, human resources executives should pay close attention and take the initiative to assess the potential impact to their companies as well as their employees," says Dr. Gloria Siu, chief executive of the Gain Miles Group. "They also need to provide professional guidance on this issue to their top management." In operation in Hong Kong since 1980, Gain Miles is a well-established consultancy providing employee benefi t solutions for hundreds of fi rms across the Territory.

In fact, the Hong Kong Institute of Human Resource Management (HKIHRM) conducted an online survey last year polling more than 300 personnel executives responsible for developing and implementing the HR policy at their companies. The results found that 65% of respondents were in favour of eventually abolishing the MPF offsetting mechanism. For those HR personnel who supported the abolition, 92% cited 'better retirement protection for employees' as a major reason, followed by 69% who expressed that their organisations would be perceived as 'a caring and considerate employer', while another 69% felt that the abolition would 'offer more protection for redundant staff during layoffs'.

Law Chi-kwong, associate professor at the University of Hong Kong, says that now is the right time to abolish the offsetting mechanism because the Government will have huge reserves in the coming decade with which to support and subsidise employers.

Launched in December 2000, the MPF System is a mandatory, privately managed, fully funded contribution scheme regarded as the Pillar 2 system of old age protection based on the framework defi ned by the World Bank in its 1994 and 2005 reports. The aging population challenge in Hong Kong is becoming increasingly serious in view of low birth rates and increased life expectancies. By the year 2064, 36% of Hong Kong's population will be aged 65 or older. It's clear, therefore, that the working population will have a much larger number of retirees to support. In this context, the MPF System serves as an integral part of retirement protection with members contributing to their MPF throughout their average 40-year working life in order to provide for their basic retirement needs for the following 20 to 30 years. According to statistics from the MPFA, the net asset value of all MPF schemes passed the $600 billion mark last May. 73% of the employed population are covered under the MPF System and 12% are covered under other retirement schemes.

Chief Executive Takes a Step Forward to Fulfi ll his Election Promise
Other than the high management fees, the offsetting mechanism of the MPF System is another aspect frequently criticised by many labour unions, political parties, academicians, media members as well as employees. When Leung Chun-ying joined the Hong Kong Chief Executive race in 2012, his election manifesto included a line saying that he would seek to lower the proportion of withdrawals by employers for the offset mechanism. Despite this, there was no consultation, no study, and not even a mention in his Policy Address, until the latest one.

In the 2017 Policy Address, the Chief Executive proposed to progressively abolish the offsetting of severance payments or long-service payments with the accrued benefi ts derived from the employers' contributions made to the MPF scheme for the employees. The proposal contains three key elements. First, the abolition will have no retrospective validity. In other words, employers' MPF contributions before the implementation date of the proposal will be "grandfathered".

Second, the amount of severance payments or longservice payments for an employment period starting from the implementation date will be adjusted downwards from the existing entitlement of two thirds of one month's wages to half a month as compensation for each year of service. Third, the Government will share part of the expenses on severance payments or long-service payments of employers during the 10 years after the implementation date of the abolition in order to help employers, especially SMEs.

"The 10-year transitional period provides a very important cushion, and is necessary for employers to adjust to the new environment as well as allowing companies to re-orientate their own human resources policies if necessary," says Matthew Cheung Kin-chung, the Chief Secretary for Administration at a press conference concerning the Policy Address. "So, in effect we have balanced the entire equation, respecting the interests of employees on the one hand while at the same time creating a more affordable system for our many small- and medium-sized enterprises in Hong Kong."

The MPFA noted that it welcomes the Government's proposal and will actively cooperate any way it can. It also hopes that various stakeholders will participate in the discussions to help fi nd a mutually benefi cial solution.

Positive Views from Industry Providers and Academicians
"We tend to agree on the principles behind abolishing the offsetting mechanism progressively," says Gloria Siu from Gain Miles. "The severance payments and long-service payments are regarded as a kind of employment protection while the MPF is categorised under a retirement protection scheme. The latter may also encourage employees to continue working past retirement age in the future. The nature of these two individual systems is quite different."

Siu adds that in view of increasing staff contributions as well as higher recognition and greater concerns about the MPF System, the opposite attitude among employees on the offsetting scheme will only intensify if it continues to remain in place, eventually leading to an overall worsening work relationship.

"HR executives should, therefore, take steps to understand the proposal made in the Policy Address. In addition, they should understand their existing offsetting practice and retrieve related figures of three to five year if any in order to better assess the potential fi nancial impact on their companies," says Siu."

Siu also emphasises that once the offsetting mechanism is abolished, employees may show greater initiative and begin to place more focus on the performance of their MPF investments. That's why HR teams should ensure a suffi cient number of fund choices, along with flexibility as well as present the performance fi gures of different investment options in order to satisfy varying staff needs.

According to statistics from the MPFA, $1,586 million in severance payments and $1,373 million in long-service payments were offset in the fi rst three quarters of 2016.

No Serious Backlash Expected from Employers
Professor Law Chi-kwong has a favourable view towards the plan. "The labour side takes a generally positive stance on this issue, except for the downward adjustment of the amount of severance payments or long-service payments from the existing entitlement of two thirds to half a month's wages as compensation for each year of service."

Moreover, Law doesn't expect a serious backlash from employers with the governmental subsidy over the 10-year transitional period. He says that companies will have to make provisions for future severance payments or long-service payments. The percentage of the provisions may be higher for some fi rms in the retail or dining industries due to the higher number of employees and higher proportion of salaries and benefi ts out of the total cost. Though it is just an accounting matter, the provisions would lower the profi t before tax. This would then increase the price-earning ratio and may have a negative effect on stock prices for listed companies. It would also decrease the cash fl ow of many SMEs.

He emphasises that the Government must make greater in-depth studies to provide more solutions in order to help employers, including transforming the provisions into a tax credit over a period of time. This would help maintain a company's profi t after tax level and decrease the impact on the profit-earning ratio. Eventually this would weaken the resistance from the employer side against the abolition of the offsetting mechanism.