Close to 90 per cent of Hong Kong’s 340,000 small and medium-sized enterprises (SMEs) stand to benefit from new government subsidies aimed at doing away with a controversial loophole that allows employers to raid workers’ pensions to pay their severance.

Secretary for Labour and Welfare Law Chi-kwong said on Friday that the improved plan to abolish the so-called offsetting mechanism under the Mandatory Provident Fund would see SMEs forking out just a fraction of the severance and long-service payments owed to dismissed workers.

As long as the total amount of such payments owed to all dismissed workers in a single year did not exceed HK$500,000 (US$64,200), the employer would only be liable to pay them HK$3,000 each in the first three years of the new scheme, with the government footing the bill for the rest. After the first three years, the caps on payments will gradually rise over the next six, while the subsidies will be progressively reduced over the next 22.

“The most important part of this improved version is capping the amount of long service and severance payments for employees,” Law said, calling the cap “low enough to ensure the employer will be able to pay out of pocket”.

The controversial mechanism that the rule change would do away with has long allowed employers to take cash from workers’ pensions to offset their long-service and severance payments, drawing criticism that it was tantamount to robbing employees of their hard-earned money.

In her annual policy address on Wednesday, Chief Executive Carrie Lam Cheng Yuet-ngor said the government would submit a bill to abolish the mechanism in the next legislative year.

The government hopes to implement the measure from 2025, and has committed HK$32.9 billion over 25 years for the subsidies to help employers cover the payments.

Commissioner for Labour Chris Sun Yuk-han said the improved plan would simplify calculations for government subsidies for employers.

“Close to 90 per cent of SMEs will benefit from a higher subsidy within the HK$500,000 threshold,” he said.

The Mandatory Provident Fund covers 4.5 million workers and retirees in Hong Kong, who can choose where to invest their monthly contributions. The scheme requires employers and staff to each contribute the equivalent of 5 per cent of an employee’s monthly salary to the pension fund, capped at a combined HK$3,000.

Irons Sze Wing-wai, permanent honorary president of the Chinese Manufacturers’ Association, agreed the improved version would make calculating the government subsidy simple and straightforward.

“Unlike the previous calculation method, which was too complicated for businesses to comprehend, the latest version is more simple and enables employers to have a better estimate of how much they really need to shell out if they lay off staff,” he said.

Pro-labour lawmaker Michael Luk Chung-hung, of the Hong Kong Federation of Trade Unions, said he also supported the improved version as long as the government abolished the offsetting mechanism.

“This improved plan will ease the financial burden of employers and allow them to make a better budget estimate,” he said.