If you’re working a regular job, your employer may have told you that part of your salary goes into a provident fund. You might be asking, “What is a provident fund? Is this different from my government-mandated contributions? “
Background of provident funds
In the Philippines, companies are required by law to provide benefits for employees who reach retirement age and have worked for them for at least 5 years. To do this, employers get the help of a bank or an asset management company to establish and manage a fund. Depending on the arrangement, this fund can also be invested in different assets so it can grow.
Retirement benefits usually fall into two categories: defined benefit and defined contribution.
Defined benefit is where the employer pays a fixed benefit amount using a pre-determined factor multiplied against the employee’s salary at the time of retirement.
Defined contribution is where the employer pays a benefit based on a monthly contribution set aside for an employee, including all the income earned from investing these contributions. More commonly known as a provident plan, it is popular because employers can offer the option to allow the employee to participate in the fund by having them set aside some of their income as “forced” savings.
Let’s say Company XYZ has a provident plan in which 3% of its employees’ salaries is set aside every month. Employees can also contribute P2,000 more per month, with the company matching the additional amount.
Joel Cruz, an employee with a monthly salary of P80,000, signed up to contribute the additional P2,000 monthly.
Joel joined the company at 55 years old and retired at 60. The company’s retirement policy entitles employees to receive 100% of all retirement benefits if they leave the company at 60 with at least 5 years of service. Assuming all things constant, Joel will receive the following:
Year |
Employer’s contribution(3% of salary x 12 months) |
Joel’s voluntary contribution(P2,000 x 12 months) |
Company’s matching contribution(P2,000 x 12 months) |
|
Year 1 |
P28,800 |
P24,000 |
P24,000 |
|
Year 2 |
P28,800 |
P24,000 |
P24,000 |
|
Year 3 |
P28,800 |
P24,000 |
P24,000 |
|
Year 4 |
P28,800 |
P24,000 |
P24,000 |
|
Year 5 |
P28,800 |
P24,000 |
P24,000 |
|
TOTAL |
P144,000 |
P120,000 |
P120,000 |
Joel will leave with P264,000 in retirement benefits plus his P120,000 in forced savings over the last 5 years. He will also be entitled to his share of the fund’s income from its growth.
However, if Joel leaves the company before retirement, he will only get his voluntary contributions back. He will not be entitled to the contributions his employer has set aside for him.
Provident funds vs SSS/GSIS
A provident fund does not replace the Social Security Service (SSS) or Government Service Insurance System (GSIS).
SSS and GSIS are state-sponsored provident funds. For government employees, participation in the GSIS is mandatory. Membership in the SSS, on the other hand, is required for all regular employees in the private sector. Self-employed individuals can also choose to participate in the SSS.
Unlike savings though, neither provident fund nor pension fund contributions can be easily withdrawn. Some will allow you to loan money (in which case you will have to pay interest). So, even if you have a provident fund or a pension fund, it’s still important to have an emergency fund.
Another fact about provident funds is that while they are growing, most employees don’t get a say in how they are invested. So, if you have a goal you want to achieve by a certain time before your retirement, you’ll have to do it yourself. For example, if you want to buy a house before you retire, then you might want invest on your own.
Still, knowing provident funds and other retirement plans are important considerations when choosing an employer. If you’re scouting for a job, make sure you look at these.
