Chief Executive Carrie Lam recently delivered her second Policy Address at the Legislative Council. Among many of the labour and welfare policies being put forward, the abolition of the “offsetting” arrangement for Severance Payment (SP) and Long Service Payment (LSP) is attracting the most attention amongst stakeholders. In the Policy Address, the Government significantly increased its financial commitment to help bridge the gap in cost for businesses, while leaving some areas open for further clarification.
Recap of key Elements of the Government’s Proposal*
- The formula for calculating the SP/LSP remains unchanged and continues to be two-thirds of an employee’s monthly earnings (capped at HK$22,500) times years of service.
- Each employer needs to set up a designated saving account (DSA) to which the employer must contribute 1% of their employees’ monthly income, until reaching 15% of employees’ annual income. The balance in the DSA is to be used to make SP/LSP payments.
- To ease the financial burden on employers, the Government will provide a two-tier subsidy arrangement to help share part of the cost of providing SP/LSP in future. Under the first-tier subsidy, a maximum of 50% of the SP/LSP will be subsidised by the Government in the first 3 years. The percentage gradually reduces to 0 after 12 years. The second-tier subsidy kicks in when the DSA is insufficient to pay the balance. This subsidy has been extended to apply for 25 years. As a result, the Government’s financial commitment will increase significantly from HK$7.9 billion (as proposed by the previous-term Government) to HK$29.3 billion.
- The offsetting arrangement in respect of pre-implementation service will be “grandfathered” on the basis that the salary for SP/LSP calculation will be frozen at the implementation date while both pre and post implementation MPF account balance can be used to offset such obligation.
- While the abolishment focuses on the 5% mandatory employer contributions, employer voluntary contributions to MPF/ORSO can still be used to offset the LSP/SP obligations.
* Reference to the Chief Executive’s 2018 Policy Address and the discussion paper issued by the HKSAR Government dated 15 May 2018.
While it may still be some time before the proposal is finalised and implemented by 2024, there are a number of details which require clarification before we are able to understand the whole picture, including the likely financial impact. For now, we have the following comments / observations:
- The available investment options for the DSA is not clear while we notice that the Government is expecting a 1% return above inflation in its cost estimates.
- It is not clear who will administer the DSA and how the fees and charges will be made.
- The Government proposes that for employers who make voluntary contributions to MPF/ORSO in excess of 1% of income, it is possible that they do not need to contribute to DSA.
- For employers who do not currently offset SP/LSP, further clarification is needed on how the DSA and subsidy will apply.
How Willis Towers Watson can help
Employers may wish to know more about how the changes will impact their organisation, in particular the financial impact, which can be complicated to estimate.
Willis Towers Watson can assist you to:
- undertake actuarial projections of the financial implications of the proposal under different scenarios, including risk assessment
- review your retirement plan strategy more holistically
- advise in the areas of scheme governance and compliance
- advise on and assist with the additional administration requirements following implementation
We are the leading provider of retirement consulting and actuarial services to local and to international organisations based in Hong Kong. We have extensive knowledge of the Hong Kong retirement scheme landscape and we have deep experience of local market practice.
We would be happy to arrange a meeting to discuss the implications of the proposed changes to your organisation. Please contact your Willis Towers Watson consultant or Elaine Hwang on +852 2195 5828 for further information.