Pension Insight: PenCom enhances voluntary contribution processes to address concerns, encourage participation

The National Pension Commission (PenCom) has enhanced the processes of voluntary contribution (VC) in a significant move aimed at improving the contributory pension scheme (CPS). In response to feedback from licensed pension fund operators (LPFOs), PenCom issued a circular to LPFOs to address significant concerns raised by contributors and retirees regarding voluntary contributions.

BACKGROUND AND OBJECTIVES OF THE REVISION

The Pension Reform Act (PRA) 2014, in Sections 4 (3) and 4 (7), allows an employee to make voluntary contributions to his retirement savings account (RSA) in addition to the mandatory monthly contributions.

The VC is a non-mandatory contribution remitted into an employee’s RSA through the employer in order to bolster retirement benefits. It allows employees to make additional contributions beyond the mandatory contributions set by law (minimum of 10 percent by employer and 8 percent by the employees). In 2018, PenCom issued the guidelines on voluntary contribution to establish uniform rules, provide withdrawal procedures, enhance future retirement benefits, and assist various categories of retirees and contributors.

However, in the course of implementation, some issues were identified. Key concerns included the two-year retention rule for 50 percent of voluntary contributions and variations in withdrawal criteria for different contributor categories. Additionally, there were some issues regarding tax deductions on voluntary contributions. The following are the enhancements in the voluntary contribution processes, which the circular seeks to attain:

REDUCED RETENTION PERIOD

Mandatory and non-mandatory contributors can now access the 50 percent contingent portion of their voluntary contributions after one year, which is a reduction from the previous two-year requirement. This change aims to provide speedy access to funds in order to meet personal needs, which often arise.

In the previous guidelines, active/mandatory contributors can only make withdrawals from their VC after the contributions have been retained in their retirement savings account for a minimum of two years.

Non-mandatory contributors, such as retirees, exempted contributors, political office holders, employees in an organisation with an approved existing scheme (AES), and foreigners can access their VC upon the expiration or termination of their contract.

In the circular, VCs can now be withdrawn after one year from the date of contribution for both mandatory and non-mandatory contributors.

UNIFORM WITHDRAWAL RULES

Retirees, exempted contributors, political office holders, employees in organisations with an AES, and foreigners are now permitted to withdraw 50 percent of their voluntary contributions before the expiration of their employment or contract. This provision seeks to eliminate withdrawal variations in the previous guidelines.

In the previous guidelines, VC for retirees, exempted contributors, political office holders, employees in an organisation with an AES, and foreigners, were retained in the RSA to be accessed at the expiration or termination of their contract employments.

In the new requirement, non-mandatory contributors can access 50 percent of their VC as contingent withdrawals before their employment/contract expires.

TAX DEDUCTIONS

In line with section 10 (4) of the PRA 2014, any income accrued on voluntary contributions are taxable according to relevant tax laws if the withdrawal is made before five years from the date of contribution. This clarification ensures consistency with the Act and addresses concerns raised by stakeholders.

Previously, tax deductions for mandatory contributors were only made on the income earned when withdrawal is within five years from the date of contribution. Therefore, tax deductions for non-mandatory contributors were applied on both the income earned and principal amount when withdrawal was within five years from the date of contribution.

IMPLEMENTATION AND COMPLIANCE

PenCom has issued a circular to all LPFOs for immediate implementation. PFAs are required to comply with these operational directives and submit necessary documentation to PenCom for processing contingent withdrawals.

CONCLUSION

The circular on voluntary contribution under the CPS represents a significant step towards addressing contributors’ concerns and enhancing the scheme’s attractiveness. By reducing the retention period, allowing uniform withdrawal access, and aligning tax deductions with the PRA 2014, PenCom aims to foster increased participation and sustainability of the CPS. These changes reflect PenCom’s commitment to continuous improvement and responsiveness to stakeholders’ needs.