Employer Action Code: Monitor
The Senate is considering a bill to establish a system of compulsory funded individual retirement accounts after it was passed overwhelmingly in the House of Representatives. The aims are to improve retirement savings through portable accounts as workers change employment and to facilitate development of capital markets. Currently, under Retirement Pay Law (RA 7641) employers must provide a defined benefit (DB) lump sum benefit at retirement — roughly one month’s final pay times years of service — for employees with five or more years of service. To meet this obligation, many employers (64% of those surveyed) offer tax-qualified retirement plans.
Key details
The bill introduces the following main changes (see our article Private retirement and pension reforms introduced for further background and detail):
- Funded and portable Employee Pension and Retirement Income (EPRI) accounts would be established for all new and existing employees in the private sector (with a few, very narrow exceptions). Both employers and employees would be responsible for creating EPRI accounts at the system’s launch. Once established, accounts would be “owned” by employees, who would be responsible for their management and for investment decisions. Each employee would have a single account for the duration of his or her working life, which would remain in place until death, disability or attainment of normal retirement age.
- EPRI accounts would be defined contribution (DC) arrangements; employers would contribute 4% of base pay and employees 1%, each subject to a maximum annual contribution of PHP 160,000 (to be adjusted every three years). No minimum benefit guarantees would apply to the EPRI account. Contribution rates would be reviewed at least once every three years; future rates may not exceed 5% (separately for employer and employee).
- Existing employees would have a one-time option to remain covered by RA 7641 or existing company retirement plan and would have one year from the effective date of the law to decide. If employees in a retirement plan opt for EPRI accounts, the employer would be required to transfer all contributions and related investment returns for the employees concerned to their EPRIs.
- Employer contributions would be tax-deductible; employee contributions would be after-tax, and investment returns and benefit payouts (in the form of a lump sum, life or fixed annuity) would be exempt from all taxes. The penalty for early withdrawal (i.e., prior to retirement) would be 50% of the amount withdrawn, excluding that portion consisting of employee contributions.
- Investment products for the accounts would include unit investment trust funds, mutual funds, annuity contracts, insurance, pre-need pension plans and stocks, bonds, and other securities listed and traded in a local exchange or as otherwise approved by regulators. The regulatory authorities would establish and define one or more default investment products.
- Qualified private service providers would handle administration, management and custody of EPRI accounts and their assets.
Employer implications
The EPRI accounts would likely improve retirement savings outcomes for the general employee population who may not have access to company retirement plans or for those with multiple employers over their career. For those employees who already have access to a company retirement plan (DB or DC), EPRI accounts would be less attractive in terms of the level of employer funding. EPRI accounts would be established (if they don’t already exist) for employees when joining a new company, suggesting existing plans could be closed to new members or offered as a supplement to EPRI accounts. Over time, the changes would also shift employers’ mandatory DB obligation to a more predictable DC basis. Once approved, as expected, the changes would be effective 15 days after publication of the new law in the official gazette, with the regulatory authorities issuing implementing regulations within six months from the effective date.
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