 "Is your superannuation fund regulated?")
Recently, the Pension Fund Regulatory and Development Authority (PFRDA), proposed bringing unregulated pension funds under its ambit. This largely refers to superannuation funds that are offered by employers and managed by private trusts. These funds are legal because they follow Income Tax Laws with regard to formation of the trust and investments. But while rules are in place, often there is not enough transparency about how they operate and the returns generated, say experts.
Earlier manufacturing companies used to offer superannuation benefits to their employees. Some multi-national companies too used to offer superannuation benefits. But it became unpopular when Fringe Benefit Tax was introduced. Today, there are very few superannuation trusts, says Anil Lobo, India Business Leader (Retirement), Mercer.
Superannuation benefits are of two kinds: defined contribution or super defined benefit. In case of defined contribution, up to 15% of the employee’s basic salary goes towards superannuation benefits. The tax benefit was capped at Rs 1 lakh. In case of super defined benefit, the superannuation amount was calculated based on the last drawn salary of the employee.
While in case of self-managed trusts, trustees are supposed to give annual statement to employees, it is unlikely that this happens at the ground level, admits Lobo. “Ideally, superannuation is part of the Cost To Company and the employer should disclose how much money goes to the fund, returns generated, etc. And since employees can also contribute an additional amount to the fund, they must ask for details of the investments,’’ he said.
It is not a big concern if the superannuation fund is not regulated by one authority, since these funds are governed by income tax rules. But logically they must be regulated by PFRDA since it is the pension regulator, he adds.
Today, companies are more focused on benefits that address current needs rather than retirement, such as healthcare, leave allowance, etc. This has taken away the focus from retirement benefits like superannuation, says Sudip Mukhopadhyay, managing partner, VantageHealth and Benefits Consulting.
To judge the performance of your superannuation fund, check if returns match current EPF rates. As per rules governing investment, superannuation funds can invest only in safe instruments, mostly debt, he adds.
According to I-T rules, the investment pattern for superannuation funds is as follows: government securities-minimum 45% and maximum 50%, debt securities and term deposits of banks- minimum 35% and maximum 45%, money market instruments- up to 5%, equity and equity related instruments-minimum 5% and up to 15% (this also includes exchange traded funds, index funds and derivatives) and asset backed securities, units of real estate/ infrastructure investment trusts-up to 5% limit.
Due to the lack of transparency regarding superannuation funds, and because employees don’t ask for details, a lot of times management and trustees may not be very proactive in investing and the fund may fail to generate optimum returns.
Or employers may not make the contribution on a regular basis, especially if cash flow or profits have been low in a particular year. The only way to know this is to ask for annual statements from your company about the fund.
“While so far there have been no cases of fraud where money is not paid to the superannuation fund, there have been cases where the record administration is not clear and individual allocation is not disclosed. Employees who face such problems can approach the Labour Court. That is the only recourse,’’ says Lobo.
Earlier manufacturing companies used to offer superannuation benefits to their employees. Some multi-national companies too used to offer superannuation benefits. But it became unpopular when Fringe Benefit Tax was introduced. Today, there are very few superannuation trusts, says Anil Lobo, India Business Leader (Retirement), Mercer.
Superannuation benefits are of two kinds: defined contribution or super defined benefit. In case of defined contribution, up to 15% of the employee’s basic salary goes towards superannuation benefits. The tax benefit was capped at Rs 1 lakh. In case of super defined benefit, the superannuation amount was calculated based on the last drawn salary of the employee.
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Superannuation funds can be also be either self-managed trusts or trusts managed by life insurance companies. If they are insurance managed trusts, then the insurance company gives a consolidated statement to the employer, but may not provide it to individual employees.
While in case of self-managed trusts, trustees are supposed to give annual statement to employees, it is unlikely that this happens at the ground level, admits Lobo. “Ideally, superannuation is part of the Cost To Company and the employer should disclose how much money goes to the fund, returns generated, etc. And since employees can also contribute an additional amount to the fund, they must ask for details of the investments,’’ he said.
It is not a big concern if the superannuation fund is not regulated by one authority, since these funds are governed by income tax rules. But logically they must be regulated by PFRDA since it is the pension regulator, he adds.
Today, companies are more focused on benefits that address current needs rather than retirement, such as healthcare, leave allowance, etc. This has taken away the focus from retirement benefits like superannuation, says Sudip Mukhopadhyay, managing partner, VantageHealth and Benefits Consulting.
To judge the performance of your superannuation fund, check if returns match current EPF rates. As per rules governing investment, superannuation funds can invest only in safe instruments, mostly debt, he adds.
According to I-T rules, the investment pattern for superannuation funds is as follows: government securities-minimum 45% and maximum 50%, debt securities and term deposits of banks- minimum 35% and maximum 45%, money market instruments- up to 5%, equity and equity related instruments-minimum 5% and up to 15% (this also includes exchange traded funds, index funds and derivatives) and asset backed securities, units of real estate/ infrastructure investment trusts-up to 5% limit.
Due to the lack of transparency regarding superannuation funds, and because employees don’t ask for details, a lot of times management and trustees may not be very proactive in investing and the fund may fail to generate optimum returns.
Or employers may not make the contribution on a regular basis, especially if cash flow or profits have been low in a particular year. The only way to know this is to ask for annual statements from your company about the fund.
“While so far there have been no cases of fraud where money is not paid to the superannuation fund, there have been cases where the record administration is not clear and individual allocation is not disclosed. Employees who face such problems can approach the Labour Court. That is the only recourse,’’ says Lobo.