How to set up a retirement plan
There are essentially two phases in setting up a retirement plan: Plan Design and Plan Implementation.
Under Plan Design Phase, the following activities can be done:
Information Gathering and Advisory Phase
During this phase, the company's philosophy and objectives on benefits are discussed including its goals, rationale and parameters which needs to be considered in choosing a retirement plan design. During this phase, the company needs to understand the different types of retirement plans and their advantages/disadvantages, the procedures for implementing, maintaining and evaluating retirement plans, and an overview of cost components of retirement schemes. Project management and timeline, including the different teams to be involved in the setting up of the plan, are also discussed during this activity.
It is important for the company to know how its current retirement practices compare with the other companies in its target market group or even specifc peer groups that it would like its retirement plan to be benchmarked with. A side-by-side comparison of the different features of a retirement plan between the company and its peers will be important in determining an attractive and competitive retirement plan design. It would be good to get access to formal benefit surveys which provide this information. During this activity, the company's benefits philosophy and desired market positioning should be considered including emerging trends and any impending legislation. Based on the results of the Market Review, a high level plan design can already be drafted.
Under the Plan Implementation phase are the following activities:
Plan Design and Actuarial Costing
Using the results of the market review and taking into account the items discussed during the information gathering and advisory phase, a more detailed plan design can be formulated based on market practice of companies in its target market group and desired market positioning. Once a plan design is chosen, the plan can now be costed using actuarial methods.
The cost of a typical retirement plan will be a function of amount of contributions, the size and timing of the eventual benefit payments, actual investment returns (net of taxes and expenses) on fund assets, salary projections and other financial and demographic (e.g. attrition) assumptions. An actuarial analysis is required to take into account the specific characteristics of the employee group covered and company policies such as on the investments of the plan assets.
It is also important that such costings be prepared using a realistic set of actuarial assumptions so that the long-term cost of the plan is approximated in a reasonable manner. Calculations will be based on the current employee data and considers future hires together with an agreed set of financial and demographic assumptions. The different benefits of the retirement plan should be considered in the costing.
Based on the results of the costing, the company can either approve the plan design or make further changes in its plan features depending on its objectives such as the target level of benefits that the plan should achieve.
An actuarial valuation of the retirement program plan is performed based on Revised Philippine Accounting Standards 19 (PAS19R) to determine the financial impact. The valuation should consider the required liability to meet the minimum mandated benefit, particularly for the Defined Contribution (DC) plans. The actuarial valuation report is a requirement for application for tax qualification. An actuarial valuation of the plan should be performed periodically in order to investigate the plan’s financial position and to recommend a contribution rate to be paid prospectively.
Preparation of Plan Documents
After the company has decided on the benefit provisions to be adopted, a draft of the plan rules are prepared and is reviewed by the company and its legal counsel.
Application for Tax Qualification
Once the plan has been formally adopted, the next step is for the plan to be tax-qualified with the Bureau of Internal Revenue (BIR). The necessary documents must be compiled for submission to the BIR for its approval. When approved, the plan would enjoy the benefits of a tax-qualified retirement plan. Among the documents to be submitted include the plan rules, the actuarial valuation, the Trust Agreement and the Board Approval of the plan.
Investment Manager Selection
The choice of the investment manager is important to ensure that the plan assets are invested properly. A company usually requests for proposals from shortlisted fund managers who then present their capabilities which include information on criteria considered in choosing an investment manager include ownership profile, assets under management and market share, investment staff profile, Investment process, philosophy and strategy, past performance and fees. Critical success factors considered should include business, people and process.
In order for the employees to appreciate the plan, they must understand it. The company should implement an Employee Communication Plan especially if the retirment plan is being initially established. Communication materials typically include the announcement letter, employee handbook, illustrative benefit projections and the employee presentation itself.
WTW has assisted many companies in setting up their retirement programs. If you would like to get more details on how WTW can assist you, please email us.
