Why a Provident or Pension Fund?

Why Retirement Funding?The need for a provident or pension fund 

Moral obligation

In a world which is moving from a strictly legalistic, hands-off environment to an equity-based socially responsible setting, the pension or provident fund becomes a primary tool in the manifestation of the company’s social contract.

The employer cannot abdicate responsibility for its employee’s well-being and needs to have a cohesive, functional and appropriate plan in place as confirmation of this. A provident and /or a medical funding scheme are the most appropriate means of delivering such a plan.

Competitive advantage

Attracting and retaining skilled staff, especially in an expanding economy is difficult enough. Prospective and current employees often evaluate their remuneration package not only on the “take-home” pay but also on the structuring of their package.

Contemporary human resource management needs to find new as well as established methods of appealing to its workforce. Provision for retirement, death, disability and funeral costs are often not only a requirement but a most appropriate way of satisfying basic human needs.

What is an umbrella fund?

An umbrella fund is a retirement fund which can be either a pension or provident fund. Umbrella funds are generally created for the benefit of the employees of different companies/employers who have no relationship with one another.

Companies who join these umbrella funds on behalf of their employees are called participating employers. Umbrella funds can only be administered by professional administrators who are registered with and approved by the Financial Services Board (FSB).

In terms of FSB Board Notice 36, an umbrella fund can be defined as follows: “A fund in which – more than one employer participates the assets and liabilities in respect of the members employed by each participating employer are maintained separately from those in respect of the members employed by other participating employers the financial position is determined separately in respect of the members employed by each participating employer”

Although each participating employer along with their employees enjoys the economies of scale and benefits of a large fund, each employer and their respective members are effectively administered on an individual basis.

Despite the overall “pooling” of participating employers, it is important to note that assets are held in a separate account for each participating employer, and funds held on behalf of members of a participating employer shall not be used to enhance the benefits of members/former members of other participating employers.

Other benefits of a Pension or Provident Fund

In addition to basic retirement savings, life cover benefits, and lump sum disability benefits can also be provided through a pension or provident fund. In addition to the above, Disability Income Benefits (also known as PHI & Income Security) can be provided as a rider to the Pension or Provident Fund.

Although not technically part of the benefits provided by the fund, Disability Income Benefits are often provided seamlessly as part of the total employee benefits offering.

Other Benefits Available:

  • Funeral Benefits
  • Dread Disease (Severe Illness) Benefits
  • Temporary and/or Total disability Cover
  • Accidental Death cover

Free cover limits

The insurer generally allows a member to join a fund subject to medical evidence of health only above the threshold set at the outset and no evidence of health is required on sums insured below this set level.

This is of course of particular importance to employees with some or other health problem that precludes them from purchasing unloaded insurance within the free market. Not only is this insurance available, but also competitively priced, and in most cases is the only cover that employees have, to provide some financial comfort to their families.

Appropriate benefits

  1. Appropriate pension provision
    • Appropriate pension fund provision is the most important aspect of a Retirement fund, and due consideration must be given this aspect of a fund. Adequate funding needs to be provided if any tangible benefit is to be derived by the employee.
  2. Appropriate risk benefits
    • There are the traditional risk benefits available, such as life cover, disability cover, income protection and funeral benefits, but also new and innovative add on products such as dread disease benefits and education providers for children on the death of a parent.
  3. Reasonable costs
    • Costs are uppermost on the financial manager’s mind, and also on that of the employee. To this end, we ensure that you receive cost-effective, value for money purchase schemes, and we constantly monitor the markets to ensure that these are appropriate. Costs relate to taxation, administration and fund management.

Fund Management

Pension and provident funds generally provide an adequate menu of funds to satisfy most risk appetites. One can follow an appropriate risk profiled strategy that caters for differentiated age groups, or allow strategy: it can be accommodated within the ambit of a pension/provident fund.

A further advantage is that fund management becomes available at wholesale pricing to individuals who could not access this individually.

Options on the withdrawal of Investment – Pension and Provident Fund

Withdrawal of the accumulated investment portion of your pension or provident fund is only permissible under the following circumstances:

  1. Resignation or dismissal
  2. Retirement
  3. An insured event (death/disability)

At this point, you need to make an informed decision as to what you wish to do with the funds:

  1. Withdraw the cash, or
  2. Preserve the accumulated benefit

Please note that both instances, your tax affairs must be in order.

Pension and Provident Funds Explained
What About Withdrawing Retirement Funds?
Tax on Employee Contributions to Retirement Funds