Speech at Panel on Commerce and Industry

Preliminary idea on abolishing the “offsetting” arrangement under the Mandatory Provident Fund System and the possible impact of the abolition on various industries

Two-tier subsidy

Mr CHAN Chun-ying said that he remained open to the Administration’s preliminary idea on abolishing the “offsetting” arrangement under the MPF System at this stage, and enquired about the basis of the Administration’s estimate that its proposed financial commitment of $17.2 billion (comprising $14.7 billion under the first-tier subsidy and $2.5 billion under the second-tier subsidy, in 2016 prices) would be sufficient to share the incident employers’ (i.e. employers who had initiated dismissals necessitating SP/LSP expenses) on a reimbursement basis. Mr CHAN was also keen to be briefed on the interplay between the maximum mandatory contribution level for MPF (now pitched at $1,500), which was anticipated to rise over time, and the current estimate of the Administration based on the above proposed financial commitment. In addition, he sought clarification on the Administration’s projected rate of investment return to support its assumption that accrued benefits derived from employers’ MPF contributions before the “Effective Date” (on which the abolition of the “offsetting” arrangement came into operation) would grow due to investment returns and might outgrow the “offsettable” SP/LSP before the effective date.

SLW advised that the proposed two-tier subsidy with duration extended to 12 years and the quantum increased to $17.2 billion to help share employers’ expenses on SP/LSP after the abolition of the MPF “offsetting” arrangement represented a remarkable increase in the Administration’s financial commitment from the previous-term Government’s proposed commitment of $7.9 billion for 10 years. Extending the first-tier subsidy for one or two years would involve disproportionate increase in the amount of financial commitment. Some employers suggested to slightly reduce the first-tier subsidy while enhancing the second-tier subsidy to strengthen the support for micro-sized enterprises. The Administration would explore the feasibility of enhancing the second-tier subsidy which would not involve much moral hazard as the second-tier subsidy would only kick in when employers’ saving in their designated saving accounts (“DSAs”) were not sufficient to clear the outstanding SP/LSP after netting the first-tier subsidy, and thus would be more focused in helping the micro-sized enterprises. SLW added that the current estimates were based on the figures collected in 2016 or earlier, and had not factored in the possible increase in the maximum relevant income level for MPF contribution over time. Nevertheless, such a factor was not expected to have a major bearing on the abolition of the “offsetting” arrangement under the MPF System. Currently, the accrued benefits derived from employers’ MPF contributions were insufficient to cover SP/LSP and many employers had to make top-up payment to clear their SP/LSP liability. In the longer term, there was a high probability that the accrued benefits derived from employers’ MPF contributions before the Effective Date would gradually outgrow the “offsettable” SP/LSP before the Effective Date which would be frozen at that point in time.