The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the Bill) in June 2022 to abolish the use of the employers’ MPF mandatory contributions to offset severance payment (SP) and long service payment (LSP). Please read our previous article on the changes introduced by the Bill.
The implementation date set at 1 May 2025
In April 2023, the Chief Executive Mr. John Lee announced that the abolition of the MPF offsetting arrangement will take effect on 1 May 2025.
Accounting implications of LSP
Historically, many companies’ LSP liability after offsetting employers’ MPF contributions was immaterial. With the abolition of the offsetting arrangement, the impact on the profit & loss and the balance sheet for LSP may not now be immaterial, and should therefore be reflected in a company’s financial statements.
In July 2023, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued a Guideline for “Accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong” outlining acceptable approaches to account for the LSP liability in accordance with Hong Kong Accounting Standard 19 – Employee Benefits (HKAS 19). Such reporting should start in a company’s financial year that includes 9 June 2022 (i.e., the enactment date of the Bill), not 2025. We understand that most auditors require employers to assess the LSP liability now.
The determination of the LSP liability requires actuarial calculations because it involves the projection of LSP benefits at retirement or upon termination of service in the future. Key assumptions for the calculations are employee turnover rates; the increase rate for the statutory LSP salary cap and dollar limit; the MPF or ORSO investment return; the discount rate; and the salary increase rate, etc. Employers are advised to start to determine the financial impact of the change to the offsetting arrangement as early as possible to avoid the rush at the end of the financial year.
Government webpage available to provide comprehensive information
To help employers and employees understand the changes, the Labour Department has set up a designated webpage on the abolition of the MPF offsetting arrangement. This webpage contains detailed information about the calculations of long service payment and severance payment, illustrative examples, an LSP/SP calculator, the Government’s subsidy scheme, FAQs, Government publications, an enquiry hotline and e-mail address.
No-go for Designated Savings Accounts (DSA)
The Government previously proposed that employers need to contribute to a DSA to fund future LSP/SP. At a recent meeting with the Legislative Council in July 2023, the Government announced that it had decided not to proceed with this proposal.
We can help
We have the largest team of qualified pension actuaries in Hong Kong, and we have already helped many employers conduct actuarial valuations in relation to their LSP liabilities. In particular, we work closely with many audit firms in Hong Kong to agree on the approach and the assumptions for the determination of the LSP liability. Please reach out to us for a discussion on how we can help you.
