The government is looking into whether a proposed severance fund savings account for Hong Kong employers should be dropped as the current insolvency fund is a sufficient safety net for workers, the city’s labour minister has said.

Secretary for Labour and Welfare Chris Sun Yuk-han on Sunday said the government commissioned the review of the proposed scheme because the administration fee for running designated accounts for employers would be a hefty burden in the current economic climate. The report would be made public in the latter half of this year, he pledged.

“The key is to ensure that after the cancellation of ‘offsets’ for the Mandatory Provident Fund, employees’ severance payments and pension awards remain protected,” he said.

“On the off chance employers cannot pay the fees employees are entitled to, we have a ‘safety net’ measure in the current Protection of Wages on Insolvency Fund.”

Secretary for Labour and Welfare Chris Sun.

The insolvency fund is mainly financed by the HK$150 (US$19) annually levied on each business registration.

Sun was referring to the abolition of a mechanism that allowed bosses to dip into staff pensions to cover severance and long-service payments, an arrangement viewed as favourable to bosses. The government has announced the option will end on May 1, 2025.

The previous administration had suggested setting up designated savings accounts for employers to set aside funds for employees’ severance pay following the abolition of the mechanism.

The labour minister said on a television programme on Sunday the government-run insolvency fund, a last resort for employees to obtain their rightful severance pay if their employers default due to insufficient funds, would provide enough of a safety net for employees.

According to Sun, under current provisions, the fund would cover an initial amount of HK$100,000 of severance pay, while footing half of any remaining amount.

Operators of the fund would also arrange necessary legal help to speed up proceedings, rather than having claimants apply for legal aid first.

“We have to worry about companies closing down, and hence being unable to pay [severance] fees. The insolvency fund directly tackles this. So we should be looking at whether its protection has been boosted, which it has, as well as whether it has sufficient funds,” Sun said.

The government-run insolvency fund is a last resort for employees to obtain their rightful severance pay if their employers default due to insufficient funds.

The fund currently had HK$6.8 billion and was constantly bolstered by company registration fees, he added.

The minister expressed confidence most employers would set aside the required severance pay.

“The responsibility for employers to shoulder pensions and severance pay under the new law is like paying taxes,” he said. “This is a legal responsibility for employers, hence they have to think of a way to deal with it.”

Lawmaker Bill Tang Ka-piu of the Hong Kong Federation for Trade Unions said the labour sector was open to the government’s approach, but cautioned that the fund should only be used for companies served with bankruptcy notices.

“If there are new additions allowing employers who could still pay their debts to get money from the fund, this will cause problems to the financial status of the fund and betray its goal,” Tang said.

Retail sector lawmaker Peter Shiu Ka-fai welcomed the government’s review, describing the rethink as “better late than never”.

“Under such difficult circumstances, it is tough for employers to have to make another share of contribution. If this account is cancelled, employers can continue with their 5 per cent contributions [to the MPF] without an additional contribution,” Shiu said. “To business owners, there would be less pressure on cash flow.”

But Shiu cautioned that the insolvency fund’s healthy financial state was due to companies’ infrequent use and the additional burden of setting aside more cash for severance payments under the new arrangement could lead to firms drawing upon it more often.