Some of us have heard of the famous (or perhaps infamous) 401K of the USA, or the Old Age Pension(OAP) of the UK. But what does the Philippines have when it comes to benefits once one retires from service?
The Philippines has Republic Act No. 7641 (RA 7641), also known as the Retirement Pay Law.
Effective since January 7, 1993, this act was an amendment to Article 287 of the Labor Code of the Philippines in order to prescribe the minimum retirement benefit which companies are mandated to pay to their eligible employees. Since RA 7641 simply defines the minimum retirement benefit, companies, therefore, have the option to provide benefits more liberal than the minimum prescribed by this Act.
Companies often do this to gain an edge and be more competitive in the market, allowing them to better attract and keep the best employees.
While RA 7641 is defined to cover qualified private sector employees, there are in fact exemptions from coverage by this law. Agricultural establishments, government institutions, retail establishments employing not more than 10 employees – all of these have no obligation to provide the minimum retirement benefit under RA 7641.
For everyone else though, it may be high time to already take a closer look at the regulatory benefit under the Retirement Pay Law. Key questions that one must ask include, “When does an employee become eligible?” and, perhaps more importantly, “What benefit does it provide?”
Eligibility and Benefits
Employees who retire – not resign – at age 60 with at least 5 years of service with the company will be entitled to the minimum regulatory benefit under RA 7641. What must be noted here is that a retiring employee must satisfy the dual condition of both minimum age (Age 60) and minimum service years (5 years) to be eligible for entitlement under RA 7641.
So what then is the benefit under the Retirement Pay Law?
A brief backgrounder: the actual text of RA 7641 uses the term “one-half month salary for every year of service.”However, one should not make the mistake of thinking that “one-half month” means “50%” — because it does not.
The reason for this is that RA 7641 goes on to further define that “one-half month” includes ALL of the following three components:
- 15 days salary
- cash equivalent of 5 days of service incentive leave, and
- 1/12 of the 13th month pay
Looking at just the first two components, “one-half month” under RA 7641 is clearly already more than just 50% of the monthly salary. Add the third component, and the actual benefit comes out as approximately 22.5 days pay for every year of service. This now is the minimum benefit when retiring under RA 7641.
Other Things to Note
Now that the eligibility and benefit under RA 7641 are defined, what other questions should one ask? One common question is, “Does RA 7641 also require my company to set up a formal retirement plan?”
The answer, very simply, is No.
To clarify, the purpose of RA 7641 is to prescribe the minimum retirement benefit to be paid by the company to its qualified employees. But since RA 7641 does not require a company to also set up a formal retirement plan, it becomes clear that the obligation under RA 7641 is simply for a company to pay the regulatory benefit when it becomes due.
Whether or not this payment will come from the company’s general funds or from a retirement trust fund under a formal retirement plan is a decision to be made entirely by the company.
Raymund has over 20 years of experience in retirement consulting, entrepreneurship and marketing. He manages both the actuarial and the benefits administration services for Zalamea.
Raymund has also been successful in launching an online employee portal that provides seamless processing of payroll, timekeeping, retirement savings and loans.