Practical ways to make the MPF scheme work better
Ho Lok-sang outlines some sensible ways to make Hong Kong’s old-age pension system more effective and fairer — in particular how to resolve the MPF long-service payment offset issue
Early this year I wrote an article in this column, “Making life better for HK’s workers” (Jan 16, 2016). In this article I made three pleas. One was for a law on maximum working hours instead of standard working hours; another for a universal pension plan controversy. The last was for the MPF offset mechanism; I proposed that the government should simply pay workers what had been offset with a longservice payment.
The MPF long-service payment offset refers to permission for employers to give employees the cumulative Mandatory Provident Fund contributions so as to honor their long-service payment obligations. As a result, those employees who are affected will have smaller MPF payments to collect when they retire. Obviously, this will undermine the protection the MPF is supposed to offer employees.
Although it may not sound right, this arrangement was promised by the government to employers when the MPF was proposed. At the time, it reduced employers’ resistance to the MPF scheme because of their added contributions. It therefore made it possible for the scheme to be launched in 2000.
There is no official account of how the government is going to tackle the MPF offset issue. But according to some reports, it will stop allowing MPF offsets from a certain date. After this date, the government will offer some relief to employers who will have to set aside extra funds to meet the severance payments. This relief will gradually be phased out. According to these reports, the formula to calculate longservice payments will be amended; employers will need to pay 1/2 instead of 2/3 of an employee’s final month’s salary, multiplied by the number of years of service. The long-service payment applies if someone has been in continuous employment with the same employer for five years or more. It also applies if someone is made redundant, dies, or is forced to leave because of health reasons or the expiry of their work contract.
While I welcome the government’s The author is dean of business at Chu Hai College of Higher Education. initiative in partially “picking up the tab” I am disappointed that the proposal is inadequate and has some unpleasant implications for both workers and employers. The plan is obviously designed to reduce the burden on the public coffers, but the benefits are not worth the social cost. This is because of its unfairness, arbitrariness, and the erosion of trust. The formula which will be used to calculate longservice payments will be detrimental to the interests of workers.
The government may think this is acceptable to workers, because it is better than having the MPF savings “washed out” in order to collect longservice payments. It may also believe that the partial subsidy offered by the government to reduce the burden of employers and the phasing out of a subsidy over perhaps as long as 10 years will make it acceptable to employers.
I would argue that the benefits in terms of savings to the government are small and unnecessary while the cost is also considerable. The effect will be socially divisive. If the government bears the costs completely, and seeks to finance it through other means, this will please employees and employers. We would therefore have more social harmony.
But the current proposal is divisive because the arbitrary cut-off date will disappoint many workers. The system for long-service payment has been in use since 1986, when it was introduced under the Employment Ordinance. Because of its 30-year history, watering it down just to get the approval of employers is unacceptable. This is because people expect that things will get better — not worse. In any case most of the people who receive longservice payments are less fortunate workers. Hong Kong should give such people more support, especially when they have proven to be good workers and have stayed with the same employer for five years or more.
According to the MPF Schemes Authority, from July 2001 to the end of 2015, about HK$28 billion of MPF funds has been “washed away” by the offset mechanism. Moreover, those with monthly salaries of less than HK$7,100 do not make contributions and are left only with the contributions of their employers. Therefore, when employers’ contributions are “washed away” these workers will end up with nothing.
The cumulative amount of HK$28 billion over the years is only a fraction of the money given away by the government in a single year recently. It is true that with all our new commitments we need to be careful about our fiscal spending. But the government has promised employers that they were allowed to offset long-service payments with MPF contributions. Keeping this promise will build trust in the community. But most of us agree that the offset mechanism is socially damaging to workers. They should be allow to keep payments that they deserve. I think that the government is morally bound to bear the full cost instead of haggling about things. It is time to allow society to move forward.
While I welcome the government’s initiative in partially ‘picking up the tab’ I am disappointed that the proposal is inadequate and has some unpleasant implications for both workers and employers. The plan is obviously designed to reduce the burden on the public coffers, but the benefits are not worth the social cost.”