Hong Kong's labor rights are undergoing a major change! The long-disputedAbolition of MPF hedging" has been formally implemented on May 1, 2025 (the conversion date).The policy aims to enhance retirement protection for employees. This policy aims to enhance employees' retirement protection, but at the same time, it also brings new financial planning considerations to employers. As your professional HR and MPF partner, M & N will provide you with a clear understanding of the details of the elimination of hedging, the transition arrangements between the old and new systems, and the actual impact on both parties in this article, so as to help you get a head start in coping with the situation.
What is the MPF "hedging" mechanism? A simple example
To understand "elimination of offsetting", it is first necessary to understand what "offsetting" is. Under the current system, when an employee is eligible for severance payment or long service payment, the employer has the right to offset (i.e. "hedge") part or all of the amount payable by using the employer's Mandatory Provident Fund ("MPF") mandatory contributions and its investment income (i.e. the "accrued benefits") on behalf of the employee.
Analysis of the pros and cons of this mechanism:
- For the employer: It reduces the financial pressure of paying large sums of money on the spot.
- For employees: retirement savings will be directly eroded, and the amount of MPF accounts will be "shrunken", thus weakening retirement protection in the long run.
Key Arrangements for the "Conversion Day" in 2025: How will the old and new seniority be delineated?
The abolition of the offsetting arrangement is not an across-the-board approach, but rather, it is important to use May 1, 2025 as a watershed date to differentiate the years of service of employees:
New years of service after the "Conversion Date" (calculated from May 1, 2025)
- Total ban on hedging: Employers can no longer use the accrued benefits of mandatory contributions to hedge against severance/long service payments accrued after this date.
- Direct benefit to the employee: the employee receives the full amount of this payment while retaining the employer's mandatory contributions for that period intact, double protection for retirement savings.
Years of prior service prior to the "Conversion Date" (accrued on or before April 30, 2025)
- Status quo: Employers can continue to use the MPF mandatory contribution accrued benefits to offset the severance/long service payments arising from this portion of years of service.
Application of the Arrangement
This arrangement does not apply to employees who are not covered by the MPF System or other statutory retirement schemes (e.g. domestic helpers and employees who are under the age of 18 at the time of leaving employment or 65 or above at the time of joining the MPF System). As employers are not required to make MPF mandatory contributions on behalf of these employees, these employees will not be affected by the abolition of the "offsetting" arrangement and their severance payment/long service payment will continue to be calculated on the basis of the last month's wages or the 12-month average wage prior to the termination of their employment.
3 Practical Benefits of Eliminating Hedging for Employees
Total equity increased significantly:
In particular, employees with long years of service will be able to receive full severance/long service payments and retain the employer's contributions in their MPF accounts, and the total benefits they will receive will far exceed the existing system.
More robust retirement protection:
The function of the MPF as the "first pillar" of retirement savings has been strengthened so that employees no longer need to worry about the loss of their hard-earned pensions as a result of leaving their jobs.
Coverage is not compromised:
Even for employees whose benefits have reached the ceiling before the date of conversion, the total amount of their income will never be less than that under the existing system.
V. Frequently Asked Questions: Do all employees benefit?
Applicable objects:
- Employees participating in MPF schemes.
- Employees participating in an exempted Occupational Retirement Scheme (ORSO).
- Teachers of the Provident Fund Scheme in some schools.
- Eligible expatriate employees (whose Overseas Retirement Schemes (ORSs) need to follow similar arrangements).
Not applicable to:
- Domestic helpers
- Employees under the age of 18 or aged 65 or above
Reason: These employees are not covered by the MPF in the first place, so their severance/long service payments will continue to be calculated in accordance with the original provisions of the Employment Ordinance.
VI. M & N's Practical Advice to Employers: How to Deploy in Advance?
- Eliminating the hedge means that employers will need to build up a dedicated reserve for severance/long service payments incurred after the "conversion date" M & N recommends that you act now:
- Conduct a financial assessment: Estimate the company's potential long service payment obligations and begin to develop a savings or insurance plan.
- Review the HR system: Ensure that the system can clearly and accurately differentiate the length of service of employees before and after the conversion date.
- Sorting out compensation packages: understanding the role of voluntary contributions and seniority bonuses in the future.
- Enhance internal communication: clearly explain the new arrangement to management and staff to enhance transparency and avoid labor-management misunderstanding.
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Conclusion
The abolition of MPF offsetting in 2025 is an important milestone in the protection of labor rights in Hong Kong. Both employers and employees should grasp the details of the new system as soon as possible and make full preparations.
M & N has extensive experience in MPF and HR management. For detailed assessment, planning or consultation on the de-hedging arrangement, please do not hesitate to contact us atM & N Professional TeamLet us help you make a smooth transition and protect your rights.
References：
- Labor Department, Brief Introduction of Hedging Cancellation, 2025
https://www.tcsp.cr.gov.hk/tcspls/indexLabor Department, Calculator of the MPF Hedging Cancellation arrangement, 2025
