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Long Service Payment: abolition of MPF offsetting and employers’ accounting provisions

Employers are preparing for the implementation of the MPF offset abolition on 1 May 2025, with a focus on the new calculation of long service payments and the actuarial valuation for LSP liabilities.

Key developments

May 2025

To help employers adapt financially to the new arrangement, the Labour Department has launched the Subsidy Scheme for the Abolition of the MPF Offsetting Arrangement (“SSA”). Read the article regarding the application process.

January 2025

The Hong Kong Institute of Certified Public Accountants (“HKICPA”) issued a guidance relating to the accounting treatment for the Subsidy Scheme for the Abolition of the MPF Offsetting Arrangement (“SSA”).

November 2024

To help employers financially with the new LSP offsetting rules from 1 May 2025, the Government recently approved a subsidy scheme lasting 25 years at a cost of approximately HK$33.6 billion. The new subsidy scheme will also take effect from 1 May 2025. Employers will be required to pay the required SP/LSP in full to their departing employees, after which they may then seek reimbursement of the subsidy amount from the Government. The amount of the subsidy is a percentage of the total SP/LSP paid to an affected employee, with the percentage decreasing gradually over the next 25 years.

July 2023

Hong Kong Institute of Certified Public Accountants (HKICPA) issued guidance for making provision for the long service payment obligations in the company’s financial statements.

April 2023

The Government announced that the abolition of long service payment – MPF offsetting will be implemented on 1 May 2025.

February 2023

HKICPA published Financial Reporting Alert 44 to highlight the potential accounting treatment for LSP obligations due to the abolition of MPF offsetting.

June 2022

The Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 (the “Bill”) was passed by the Legislative Council on 9 June 2022. Use of the employer’s MPF mandatory contributions to offset long service payment (i.e. the MPF offsetting arrangement) will be abolished with an effective date in 2025.

MPF offsetting long service payment – what will change?

Long Service Payment (“LSP”) and Severance Payment (“SP”) are statutory benefits provided under the Employment Ordinance in Hong Kong for involuntary termination of service, including retirement. With the abolition of MPF offsetting effective 1 May 2025, employers will no longer be able to use the mandatory contributions in the MPF for offsetting the post-transition portion of SP/LSP, but they may continue to use MPF benefits for offsetting the pre-transition portion of SP/LSP, i.e. there is no retrospective impact of the new rules on the existing arrangement.

Examples of the new calculation of long service payment, including the effect of the abolition, have been published by the Labour Department.

A similar arrangement applies also to ORSO schemes, where a portion of benefits akin to the accrued benefits derived from their mandatory MPF contributions will be carved out (technically referred to as "carved-out benefits") for use in the calculation after 1 May 2025.

The Government will launch a 25-year subsidy scheme totaling $33.2 billion (based on 2021 figures) to help towards the additional employer cost of the post-transition portion of LSP. Details have been published by the Labour Department.

Accounting treatment for the employer’s long service payment obligation

Comprehensive guidance was published by the HKICPA in July 2023 regarding the accounting treatment for LSP. Employers are encouraged to engage their auditors well ahead of the financial year end, to develop an early understanding of the possible impact to their accounts, including the balance sheet and the income statement. If a material impact is expected, auditors will require companies to conduct an actuarial valuation (or "LSP valuation”), to determine the extent of the LSP liabilities. This will include the projection of employees’ future salary and service for the estimation of future LSP amounts, as well as making assumptions about the employees’ leaving service pattern so that the accounting provision for long service payment obligations are made in an appropriate manner in the context of HKAS 19 / IAS 19 standards.

How can WTW help with LSP valuations?

WTW have the largest team of qualified pension actuaries in Hong Kong. We have over 20 years of experience conducting LSP valuations including the effect of MPF offsetting. Since the passage of the Bill in 2022 confirming the abolition arrangement in 2025, we have conducted actuarial valuations for over 500 employers in relation to their accounting provisions for LSP liabilities. We work closely with many major audit firms and employers to agree on the approach and the assumptions for the determination of the LSP liability and annual cost impact.

ARTICLE
4 things you should know about the abolition of the MPF offsetting long service payment arrangement

Since the LSP offset Bill was passed in June 2022, we now have an implementation date of 1 May 2025 and guidelines issued by HKICPA for valuing the LSP liability. Details are given below.
ARTICLE
Magazine: Are you clear about the financial implications of the imminent LSP amendment?

The Employment and Retirement Schemes Legislation Bill 2022 is passed on 9 June 2022. Here are our perspectives about the changes.

Frequently asked questions

A: Employers may wish to (1) understand the details about the calculation of long service payment; (2) plan for any required system changes for keeping the wage records of employees, for the calculation under the new formula and for obtaining the Government subsidy when details become available; and (3) understand the financial implications to annual staff cost, including making appropriate accounting provisions in the company’s financial statements in accordance with HKAS 19 or IAS 19 standards.

A: Employers are encouraged to start planning as soon as possible. In particular, the assessment of an appropriate accounting provision for long service payment has the potential to affect a company’s financial statements from 9 June 2022 onwards (i.e. the enactment date of the Bill), not from 2025. Following the issuance of a Guidance for “Accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong” by Hong Kong Institute of Certified Public Accountants (HKICPA) in July 2023, employers are encouraged to engage their auditors well ahead of the financial year end, so as to develop an early understanding of the possible impact to their accounts, including the balance sheet and income statement.
A: Please refer to the official website of the Labour Department: Abolition of MPF Offsetting Arrangement for more information.
A: The Government will implement a subsidy scheme to help support employers with the change for a period of 25 years. Please refer to Subsidy Scheme for Abolition of MPF Offsetting Arrangement (“SSA”) for more information.
A: The Guidance provided in “Accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong” issued by Hong Kong Institute of Certified Public Accountants (HKICPA) in July 2023 specifies the need to use the “Projected Unit Credit” method specified under HKAS 19 for the assessment of accounting provisions for LSP obligations. Given the Guidance, the in-house estimation approach is inconsistent with the new requirements. Therefore, you are encouraged to discuss with your auditor the need to conduct an LSP actuarial valuation.

A: Currently, it is not a statutory requirement to appoint a qualified actuary to conduct an LSP valuation. However, considering the computational complexity of the Projected Unit Credit method required by HKAS 19, a LSP valuation conducted by a firm of actuaries is likely to be strongly preferred by your auditor, in return for saving your time and resources.

Actuaries are professionals who specialize in performing actuarial valuations which involve forward-looking assumptions. In the context of LSP valuations, actuaries perform projections involving employees’ future salary and service for estimating future LSP amounts, as well as making assumptions about the employees’ leaving service pattern so that the obligations are made in an appropriate manner in the context of HKAS 19 / IAS 19 standards.

A: Although this is a possible outcome, companies need to be aware that LSP obligations may arise in respect of a small group of individual employees, for example a group of employees who may not be eligible for voluntary MPF or ORSO scheme benefits, or long serving employees who are close to retirement age, etc. We suggest you discuss with WTW consultants for further details.
A: For employers whose employees have relatively long service prior to 1 May 2025, a higher investment return is likely to result in a lower calculated accounting provision and P&L expense, all other things being equal. The opposite is likely to be the case for lower investment returns. Note that there are a number of other factors affecting the amount of the accounting provision and the P&L expense such as headcount, future salary increases, the voluntary MPF contribution policy, etc. At WTW, we have access to extensive research into MPF performance, including comparisons amongst the different providers in the market. For further details, we recommend you speak to a WTW consultant.
A: Employee data including age, service and salary, as well as historical resignation and retirement rates will be required. The exact data requirements may vary from one company to another. We suggest you discuss data requirements with a WTW consultant.

Suggested next steps for employers before the abolition of MPF offsetting

Finance

  • Ensure the accounting provisions for LSP obligations and the accrual of P&L expense are consistent with the latest accounting requirements such as the guideline issued by HKICPA in July 2023.
  • Discuss with your auditor the accounting treatment of the Subsidy Scheme for Abolition of MPF Offsetting Arrangement (“SSA”), and agree an appropriate approach with your auditor for the assessment of of such expected subsidies. We also suggest you speak to a WTW consultant to understand more.

HR

  • Review the company’s long service payment policy on involuntary termination and retirement, and communicate to your employees any impact on the company’s policy due to the legislative changes effective 1 May 2025.
  • Ensure that you are familiar with the correct calculation methodology for LSP calculations after the effective date, and that you have stored the necessary wage information for the 12 month period to 30 April 2025.
  • Become familiar with the eligibility and claims procedures in connection with the Subsidy Scheme for Abolition of MPF Offsetting Arrangement (“SSA”), when such details are available.

Useful resources

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