The impact of the Covid-19 pandemic on Hong Kong underlines the importance of scrapping the territory’s offsetting mechanism against retirement savings as quickly as possible, argue investment industry experts.  

Employers and employees in Hong Kong are both required to contribute 5% of the employee's relevant income into a mandatory provide fund (MPF) scheme each month (capped at HK$1,500). The mechanism means that when an employer fires an employee or makes them redundant they can deduct the retirement savings they have already paid from any long-service and severance payment costs.

The government introduced the mechanism when launching the MPF scheme in 2000 as a way of convincing the business sector to accept the scheme. But calls have long been growing to scrap the mechanism, which is seen as being too favourable to employers over employees. In her 2018 Policy Address Hong Kong chief executive Carrie Lam said the arrangement would be abolished by 2024 at the latest.  

Companies have saved fairly large amounts by using the offsetting mechanism. Between July 2001 and September 20019, businesses conducted offsetting claims of HK$44.38 billion ($5.73 billion), according to figures by MPFA. The retirement system’s total assets stood at HK$970 billion end of last year.

These figures are likely to have soared in 2020. Statistics on offsetting claim payments since the beginning of the year are not yet available, but the lockdowns conducted to prevent the spread of coronavirus have severely hit industries including retail, tourism and airlines. Hong Kong entered a recession in late 2019 due to widespread anti-government protests, and its first quarter GDP figures were the worst on record, with GDP falling 8.9% year on year.

The city's unemployment rate rose to 5.2% in the three months to April 30, the highest level in over a decade, according to the Census and Statistics Department. Law Chi-kwong, secretary for labour and welfare, also warned that the labour market would deteriorate further.

A lot of these newly unemployed are likely to have had their former employers minimise the costs of letting them go via the offsetting mechanism. That will have left them without as much pension savings for the future.  

The Hong Kong government still intends to scrap the mechanism by 2024, a spokesman at the Labour Department said in an emailed reply to questions from AsianInvestor. Relevant government bureaus and departments are working on the preparatory work to do so, which includes thrashing out the implementation details of various supporting measures and preparing the enabling bill.

The government will then seek to introduce the enabling bill into the Legislative Council at the end of 2020, with a view to securing its passage by 2022 and implementing it in 2024, at the same time as the Mandatory Provident Fund Schemes Authority (MPFA) gets its eMPF platform fully up and running, the spokesman added.

The MPFA told AsianInvestor that it would continue to render necessary support to the government on the abolition of the MPF offsetting mechanism.

ULTIMATE ELIMINATION

There are arguments to be made both ways over whether the elimination of the mechanism should be accelerated.

Janet Li, Mercer

Businesses have long argued that eliminating it would impose too onerous costs on small and medium-sized enterprises. And Janet Li, wealth business leader for Asia at Mercer, said smaller companies are particularly struggling due to the impact of the coronavirus. Abolishing the offsetting mechanism without proper transition would put further financial stress on them and potentially lead to more layoffs, she noted.

That said, lower income workers have been the worst affected by Covid-19, as they face both layoff and a reduction in their retirement savings.

Li told AsianInvestor she believes that, on balance, the Hong Kong government should focus on abolishing the mechanism after a transition period so that MPF can fulfil its purpose to build up the long-term retirement savings for workers in the city. A combination of insufficient retirement savings and the offsetting mechanism are leaving many retirees without adequate funds, and the problem is likely to grow, given the long life expectancy of Hong Kong people.

The government has already indicated a willingness to help with a transition phase. Lam said the government would contribute HK$29.3 billion to support firms’ long-service and severance payments for a transition period of 25 years. The subsidy scheme will come in two tiers, with HK$17.2 billion to be committed in the 12-year first phase.

Moving this up faster, perhaps as part of the government’s broader fiscal efforts to stimulate the Hong Kong economy, would be one way to help support the needs of businesses, plus laid-off employees.

Sally Wong, HKIFA

Eliminating the offsetting mechanism is particularly important if Hong Kong is to reduce the retirement problems building up in the city, added Sally Wong, chief executive of the Hong Kong Investment Funds Association. The mechanism particularly hurts low income earners, who will most need this basic protection of retirement savings, she told AsianInvestor.

There are many potential ways to solve the mechanism issue, each with different pros and cons, she added. The most important factor is that the government has the resolve to address the problem.

“The removal has been under discussion for a long time, and hopefully the removal will be implemented in 2024 without further ado,” added Li.