11th HR Learning EBSetting Up Retirement Benefit by Ms. Anabel Valencia 1
THE INSPIRATION BEHIND CSQC s EMPLOYEES RETIREMENT PLAN 1. The urgency of the need -‐ when in few years time, many of our personnel would start retiring; 2. We had bigger dreams -‐ We were not limited by what the law required; 3. We had the mind of David undaunted by the possibility of having a match with Goliath -‐ We wanted to make provision just like the leading industries/ companies did; 4. We were confronted by our own limitations -‐ Limited funds for another retirement beneﬁt -‐ Fulﬁlling the expectations of our employees -‐ Sustainability of the proposed beneﬁts 5. We accepted the challenge -‐ GO FOR IT!!!
LESSONS TO LEARN FROM CLARET SCHOOL s RETIREMENT PROGRAM 1) Any endeavor should start with a vision. 2) Unconsciously, in those years of the 1980 s, we did what is now the popular term, benchmarking 3) We did periodic evaluation to see the sustainability of the program vis-‐à-‐vis the Salary Scale of the Claret School. 4) We made the program self-‐sustaining through its own capacity to create wealth to earn through investments and other programs, while assisting its own members. 5) For the maintenance of the retirement plan, we do actuarial revaluation where we hire the services of a certiﬁed actuarian (accredited by the Insurance Commission). 6) Lastly, we continue to be sensitive to the needs of our personnel. We take care of their future as they do their share in caring for the future of the school.
SO WHERE DO WE START?
A. What is the minimum requirement of RA 7641? The RA requires: ½ month per year of service = equivalent to 15 days 1/12 of the 13th month = equivalent to 2.5 days (30 days divide by 12) 5 days Service Incentive Leave = equivalent to 5 days Total = 22.5 days *One of Claret School s retirement programs pays This much, computed at 22.5 days over 30 days = 75%
B. Who are covered? This beneﬁt applies to all employees except: 1) government employees; 2) employees of retail, service and agricultural establishments/operations regularly employing not more than ten (10) employees.
C. Are employers required to put up a retirement plan? It is mandatory to pay the retirement beneﬁt, but not to formally put up a retirement plan. In 1992, Republic Act 7641 was enacted by Congress requiring all employers to provide for retirement pay to qualiﬁed private sector employees in the absence of any retirement plan in the establishment. The law, however, requires for payment once it becomes due and payable, according to any existing CBA or other agreement, when the employee reach his retirement age of 60 years or more, but not beyond 65 years which is the compulsory age, and has served the company for at least 5 years. It is not mandatory, however, that the Employer puts up a formal retirement plan).
2) Know the beneﬁts of formally putting up a retirement plan or program While it is true that employers are not formally required to set up a retirement plan, it would be to the advantage of both employee and employer if such is put up early enough and gets the accreditation of the BIR:
On the Part of the employee: Tax-‐exempt retirement beneﬁts. -‐Once, a retirement plan is accredited by the BIR, an employee retiring at age 50, and with at least 10 years of service will be entitle to a tax free retirement pay, even if it is greater than the minimum requirement of the law. (RA 4917-‐ BIR Reasonable Private Plan
-‐ A reasonable private beneﬁt plan is one wherein contributions are made by the employer for its employees, for the purpose of distribution of the principal and the earnings of the fund (Sec 32 (B) (6) NIRC. At any time, no part of the fund shall be diverted to, use for, other than for the exclusive beneﬁts of its oﬃcials and employees. -‐Whereas, without an established Retirement Plan, (BIR accredited) the beneﬁts of a retiring employee is only tax-‐exempt upon reaching the age of 60, and has been in the service for at least ﬁve (5) years (RA 7641);
Security of Beneﬁts Funding enhances the security of the beneﬁt rights of the employees. Absence of funding would make the employees completely dependent upon the employer s future willingness and ability to fulﬁll his obligations. The temptation to use the fund for other purposes will be avoided on the part of the employer if the fund is segregated.
On the Part of the employer: C. Tax deductible expense on the part of the employer Contributions to the retirement fund may be considered as a tax deductible expense, including the amortization of past service beneﬁts. D. Tax-‐free investments of the retirement fund Generally interests from savings deposits and investments are subjected to withholding taxes, but earnings from Investments of an accredited retirement plan is tax-‐exempt;
E. Cost aﬀordability Looking at cost aﬀordability, it may be good to start early even when your company is small or relatively young. You will be able to spread your costs over a longer period of time, than deferring it in the future when most of your employees would be nearing retirement. Besides, companies may not be ready for a big cash outlay when an employee retires;
F. Flexibility in ﬁnancing Once the performance of the plan is good, the required contribution may decrease or may even be temporarily suspended in case the plan is already fully funded. Putting up a retirement plan, if you are just starting may strain your company s resources, depending on your size, and the proﬁle of your personnel. If you have more personnel nearing retirement, then this may require the company to put up upfront a substantial amount, unlike if your employees are relatively young. This is also one reason why companies would refuse to hire employees nearing retirement.
3) Know your goals and objectives Putting up a retirement plan, for some companies, is not just mere compliance with the requirement of the law. It is often created by companies for employees as a means of recruiting the best candidates for employment, rewarding their employees for their years of service and invaluable contribution to the company, as an incentive to retain the best ones, and ﬁnally as a retirement money so a separated member would be able to secure his future when he starts new stage of his life..
Traditionally, this was the intention of any retirement program, until such time that the retirement beneﬁt was prescribed by law for employers to comply with, hence the giving of retirement as part of a compensation package is no longer a privilege given to employees, but it is a right due to them upon reaching the retirement age. But knowing your objectives in putting up a retirement plan would help you decide on the beneﬁts you may want to include, other than the minimum.
4) Know your competitors After assessing your goals and objectives, and especially if the Retirement Program is part of your company s strategy for recruitment, it is best to know who your competitors are and how much do they oﬀer. Prospective recruits who will be the potential leaders and managers of your business put premium on retirement beneﬁts.
5) Know your company s capacity to pay It is important that you consider the sustainability of the beneﬁts proposed considering your company s resources, its ability to pay the amortizations, and other beneﬁts you may want to include on top of what is mandated by law. Your ﬁnance department should be able to prepare their projections and calculations, if not, you may consult a ﬁnancial adviser who may be able to analyze your company s performance, as well as make an external analysis of your environment/market competitor.
6) Know the various tax legislations and implications on your proposed plan There are diﬀerent kinds of retirement plan, but some of these may not be able to enjoy certain tax beneﬁts. It will be proper that when you discuss with some providers like insurance, pensions, or other pre-‐need companies, tax implications should be discussed. You would always want tax savings or tax deductibility for any investment and expenses your company would incur.
In the case of CSQC, we adopted a trusteed plan with a deﬁned/pre-‐established beneﬁt which is a tax exempt plan. Mere provisions or accruals of retirement contributions during the year by the employer, without a BIR accredited plan are not deductible for tax purposes.
SETTING UP FORMALLY YOUR RETIREMENT PLAN 1. DRAFTING OF THE RETIREMENT PLAN RULES AND REGULATIONS -‐ In the case of CSQC, the formal set up started with drafting our own document where we laid out some provisions collated as a result of our meetings and discussions with our personnel and management. -‐ We had a prototype plan so it was easier to prepare the draft.
Vital issues you may need to decide: A. Eligibility for Membership -‐ How long does an employee need to wait before he becomes eligible for the plan? Some plans may oﬀer immediate entry, upon permanency, or after satisfaction of a certain number of years. -‐ Who are covered by the plan? Again, consult what is mandated by law. Although, full-‐time and part-‐time employees, if they are regularly employed are supposed to be covered. B. Beneﬁt options -‐ Early, Normal and Late Retirement -‐ Resignation Beneﬁt
1. CONSULT AN ACTUARIAN -‐ To do Computation of costs of current contribution and past service liabilities the Actuarial Valuation to the retirement fund considering factors like: salary rates increase, rate of investment returns, employee withdrawals from the fund. -‐ To do the ﬁnal draft of the plan
The following data will be needed for actuarial valuation: 1) Name of employees 2) Birthdate and age 3) Gender 4) Date Hired 5) Salaries and Salary increase rates 6) Estimated rate of return on Investments 7) Initial funding (if any)
3. COMPANY APPROVAL Approval of the Board of Trustees accompanied by a Secretary Certiﬁcate. 4. SELECT A TRUSTEE Appointment of a Trustee is necessary who may be an individual or group of individualS (Retirement Board of Trustees) or a corporation with a trust license – banks, investment house, insurance companies and the like. The Retirement Board of Trustees may be any oﬃcer or employee of the company or even one who is not related to the company. 5. FILE FOR BIR ACCREDITATION
FILE YOUR RETIREMENT PLAN FOR ACCREDITATION WITH THE BIR The ultimate reason of formally putting up a retirement plan is mainly due to tax and cost beneﬁts that go with it, hence do not forget to ﬁle for the accreditation of your document with the Bureau of Internal Revenue. All of the documentations, legal requirements, calculations on contributions required and projected amortizations are part of the services that you can avail from actuarial companies you hire to do it for you.
Finally, let me share with you my thoughts about re4rement: RETIREMENT is not just about saving money; it is also about saving friendships and memories, and leaving the legacy of a life well-‐lived. It is sowing good seeds, and allowing others to reap – but the joy of it all, its fullness you reap.
My prayer May our lives be like a blazing torch, shining in glorious splendour through the passing of years; strong in character, ﬁlled with virtues and good deeds; and above all motivated by love.