The new bill HB 9343 entitled An Act Expanding the Capital Market by Developing a Robust Institutional Investor Base, Strengthening the Regulatory Environment, and Promoting Financial Literacy which shall be known as the Capital Market Development Act, seeks to expand the capital market by establishing a private retirement and pension system that is fully funded, portable, and actuarially fair and stable, thus enhancing the current system, by promoting financial literacy and encouraging prudent investing. The proposed Capital Market Development Act has been passed in the House of Representatives but still for consideration of the Senate and for action by the President before passing into law.
Employer Action Code: Monitor
The Capital Market Development Act aims to develop a pension system to help employees achieve retirement readiness and security through a fully funded and portable program while enhancing the depth and liquidity of domestic capital market and increasing the supply of capital available to the financial sector to stimulate the country’s economic growth. This also aims to implement a comprehensive and globally-benchmarked investor education program as a means for the promotion of financial inclusion and encourage savings and prudential investments on the part of employees.
The bill includes the following key provisions:
- Objective: To establish a mandatory, fully funded, and portable Employee Pension and Retirement Income (EPRI) account that is permanent until retirement and shall be owned, held, and maintained under the name of employee.
- Coverage: Employees and employers are compulsorily covered except employees of national government and its political subdivisions, domestic workers, overseas Filipino workers, self-employed, professionals, employees of a microenterprise with less than 3 years’ service, and those specifically excluded under the implementing rules. Employees who are not covered may opt for voluntary coverage.
- Contribution Rates: Both employers and employees are obliged to contribute to the EPRI Account. The initially set contribution rates are 4% and 1% of monthly basic salary for employers and employees, respectively. However, employees earning lower than the minimum wage are exempted from contributing the employee share. Each of the party's contribution rates may then be subsequently increased subject to a maximum contribution of 5%, or annual contribution amount of Php 160,000, separately applicable for each party. The maximum amount may be adjusted for inflation every three years while the increase in contribution rates may be reviewed at least once every three years.
- Investment: The EPRI owner, the employee, may appoint an investment manager but makes all investment decisions, within the allowable investment products determined by regulatory authorities. Allowable investment products include unit investment trust funds, mutual funds, annuity contracts, insurance, pre-need pension plans, stocks, bonds, and other securities listed in a local exchange or as otherwise approved by regulatory authorities. In the absence of an investment choice, the default investment product will be automatically prescribed.
- Benefits: Upon reaching age 60 or later but not beyond age 65, the covered employee is entitled to all the assets in his/her EPRI account. The benefit is payable in either lump sum or pension payments. No minimum benefit guarantees would apply. Early withdrawals are subject to penalties except for payments due to disability, death of EPRI owner, and other reasons to be provided in the implementing rules. The penalty for early withdrawal is 50% of amount withdrawn excluding that portion consisting of employee contributions.
- Transition: Employees shall be given a one-time option to stay under the coverage of R.A. 7641 or under an existing retirement plan within one year from the effectivity of the bill. In case employee opts to be covered by this bill, the employer is mandated to transfer to the EPRI account all contributions made, including all income accrued at the time of transfer.
- Vesting: There shall be no required minimum benefits to be vested to the employee at the time of vesting or retirement except for employees opting to be covered by R.A. 7641 or existing retirement plan.
- Taxation: Employer’s contributions to the EPRI account shall be allowed as a deductible expense of the employer. On the other hand, employee’s contributions shall be considered part of the employee’s compensation subject to income tax. All income earned by the EPRI, including interest and gains from investment, shall be exempt from all taxes. All benefits received by the employee at the time of retirement shall be exempt from all taxes. EPRI accounts shall not be subject to VAT or business tax.
- Implementation: Administration, management, and custody of the EPRI account and its assets shall be undertaken by qualified and accredited private companies.
While the objectives and key provisions of the bill have been clearly stipulated, further clarity on the implementation of the provisions of this bill can be obtained upon issuance of the implementing regulations. Meanwhile, employers should assess the impact of this bill in administering their existing retirement plan or otherwise, retirement benefits in accordance with R.A. 7641. Among its key provisions is the establishment of a mandatory defined contribution scheme that replaces R.A 7641 or the existing retirement plan for those employees who will opt to be covered by this bill and those new employees entering the workforce for the first time. Approaches to comply with this bill may vary across existing plans depending on the type of plan, design of the plan, funded status, and employee population profile. Options to reduce long-term costs may also be explored once implementing regulations are clear. Employers should also initiate awareness of this bill and prepare an appropriate communication plan to their employees to manage their reasonable expectations given the one-time option that they can exercise.
Exact Text of HB 9343 filed in Congress (file may need to be rotated).
This article was prepared for information and discussion only. It is solely based on our understanding of the bill and may not be suitable for use in any other context or for any other purpose and we accept no responsibility for any such use.