WHY SET UP A RETIREMENT PROGRAM NOW?
Answers to Common Concerns

 

1. Why set up a formal retirement program?

Republic Act No. 7641 (R.A.) mandates companies to pay retirement benefits to employees who have attained the age of 60 and rendered at least 5 years of continuous service.  The minimum benefit is one-half month salary per year of service. One-half month salary is defined to be 15 days salary plus 1/12 of 13th month pay and 5 days of service incentive leaves.

While the law does not mandate setting up of a retirement program, putting up a program helps it ensure compliance and better still, gives the following advantages:

a. Tax advantages (under R.A. 4917):

• Retirement benefits are not subject to tax provided the retiree is at least 50 years old with at least 10 years of service.
• Contributions to the retirement fund are deductible expense for corporate income tax purposes.
• Income of the fund is not subject to tax.

b. Better appeal to employees

Does your company have a retirement plan? It seems a world apart between answering  "YES"  or  "NO", when in fact, because of the law, all companies covered effectively has  a retirement plan and the only difference between "YES" or "NO" is setting up a formal one.

A formal retirement program makes the company a little more competitive in the industry it is operating and could help it retain and attract good employees.

2. Why set up a retirement program NOW?

The earlier that a formal plan is set up, the earlier that the advantages mentioned above are enjoyed.

Moreover, the liabilities pertaining to past service rendered continue to grow each year. A huge past service liability may limit flexibility as to the benefits that could be included in the retirement program. Moreover, under PAS 19, vested benefits are immediately recognized while under PFRS for SMEs all past service costs are immediately recognized. A huge past service liability also causes funding problems.

Finally, the earnings of the fund help lessen the cost of the retirement program.

Thus, it is best to set up a retirement plan during the early years of the Company. If the Company was not able to do so, the best time to set it up is today. 

3. Concern: A retirement program is costly

No, it is not. If the retirement program only contains the benefits as provided by law, effectively there is no additional cost involved. Actually, taking into account the tax incentives, it is less costly to have a retirement plan than not having one.

Philippine Accounting Standards No. 19 (PAS 19) requires retirement cost to be accrued each year and actuarial valuations performed whether or not a company has a formal retirement program. If there is no retirement fund, there are no earnings to partially offset the cost, thus accruals are higher. Moreover, such accruals are not deductible expense for corporate income tax purposes.

For managing the retirement fund, trustee banks charge around 1% of the amount in the fund. The tax-free investment earnings, however, more than offset it.

The cost then is basically the minimal registration fee paid to BIR and the consultant's fee for assisting the company set up the formal retirement program.

What can be considered as additional cost are the benefits that a company may want to include which are not mandated like early retirement, resignation, death and disability benefits. They are usually included in the program to serve specific purposes but are not mandated.

Still, the early retirement, death and disability benefit costs, should the company decide to include them, may not be much.

4. Concern: Company does not have enough cash to for the initial and periodic contributions

While big banks require initial placement of P 1M or more to open a trust account, there are smaller banks or corporations that accept as low as P 100,000.

Also, BIR nor the law does not require a minimum contribution nor a minimum funding level. Subsequent contributions are thus up to the availability of cash or dependent on certain conditions, for example:

Contribute to the fund when the taxable income is huge, to lessen it; or
Suspend contributions when cash is needed for operation or expansion.

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