Employee Benefit and Pension Schemes

Employee Benefit and Pension SchemesSubmitted By:-Payal Yoganandi-11490Jeetendra SadhuThe meaning of employee benefitsThe rationale for employee benefitsEmployee benefits strategies and policiesTypes of employee benefitsAdministering benefitsTotal reward statements

Employee Benefits 2The meaning of employee benefitsEmployee benefits consist of arrangements made by employers for their employees that enhance the latters well-being. They are provided in addition to pay and form important parts of the total reward package.Benefits are sometimes referred to dismissively as perks (perquisites) or fringe benefits, but when they cater for personal security or personal needs they could hardly be described as fringe.Rationale for employee benefits provide for the personal needs of employeesmeans of increasing their commitment to the organization and demonstrating that their employers care for their well- bieng.4Employee benefits strategies and policiesThe strategy forms the foundation for the formulation of employee benefit policies. Employee benefit policies are concerned with: the types of benefits to be provided, taking into account their value to employees, their cost and the need to make the benefit package competitive; the size of the benefits; the need to harmonize benefits; the total costs of benefits provision in relation to the costs of basic pay;the use of flexible benefits.Types of employee benefitsPersonal security Health careInsurance coverSick payRedundancy payCareer counselingFinancial assistance Company loanSeason ticket loanMortgage assistanceRelocation packagesFees to professional bodies

6Cont..Personal needsmaternity and paternity leave and pay above the statutory minimumleave for personal reasonschildcare through workplace nurseries or vouchers;pre-retirement counselingpersonal counseling through employee assistance programmessports and social facilitiescompany discountsretail vouchers to buy goods at chain storesHolidaysa minimum of 20 days paid holiday per year, including bank holidays.Basic holiday entitlements are typically five weeks plus bank holidays, The entitlement for holiday begins to accrue on the first day at work.Company cars still remain one of the most valued perks, perhaps because people do not have to make a capital outlay, do not lose money through depreciation and are spared the worry and expense of maintenance. Other benefits free car parking, Christmas parties and tea/coffee/cold drinksVoluntary (affinity) benefits opportunities for employees to buy goods or services at discounted prices.Popular voluntary benefits include:Health: private medical insurance, dental insurance, health screening.Protection: critical illness insurance, life insurance, income protection insurance, personal accident insurance.Leisure: holidays, days out, travel insurance, computer leasing, bicycle leasing, pet insurance, gym membership.Home: household goods, online shopping. Concierge servicesinclude dealing with home and car repair and maintenance, financial services, buying presents, restaurant reservations, theatre tickets and travel arrangements.9Administering benefits

can be expensiveThere should be a budget for employee benefit costs and expenditure should be monitored against it. Regular surveys should be undertaken of the attitude of employees to the benefits package.

Total reward statements

communicate to employees the value of the employee benefits such as pensions, holidays, company cars, free car parking and subsidized meals they receive in addition to their pay. The aim is to ensure that they appreciate the total value of their reward package. Too often, people are unaware of what they obtain in addition to their pay.

Armstrong's handbook of reward management practice improving performance through reward 3rd ed.pageno.387The meaning of flexible benefitsReasons for introducing flexible benefitsTypes of flexible benefit schemesHow to introduce flexible benefits

Flexible Benefits The meaning of flexible benefitsFlexible benefit schemes give employees a choice within limits of the type or scale of benefits offered to them by their employers.A wide variety of approaches is available. Interest in such schemes has been generated because employee benefits are not all equally wanted or appreciated by the staff that receive them and, from the employers point of view, some benefits will not therefore provide value for money. Reasons for introducing flexible benefitsFlexible benefit schemes may be introduced in order to: meet the diverse needs of employees and increase the perceived value of the package to them enabling them, to a degree, to decide for themselves what benefits they want and the size of particular benefits to suit their own life style rather than being forced to accept what their employers think is good for them;enable employers to get better value for money from their benefits expenditure because it meets the needs and wants of employees;control costs by providing employees with a fund to spend rather than promising a particular level of benefits;aid recruitment and retention as flexible benefits are generally preferred by employees to fixed benefits of equivalent value;help to harmonize terms and conditions in a merger.Types of flexible benefit schemes

Flex individual benefits Employees are given the opportunity to vary the size of individual benefits, paying extra if they want more or, in effect, being paid cash if they want less. A typical example is a flexible car scheme. Another common arrangement is to provide scope, within limits, to buy or sell holiday time over the holiday year; for example, so many extra days could be bought at the daily rate of the employee or so many could be sold and the amount at the daily rate added to pay. Flex existing entitlement Employees may choose to increase, decrease or end their current benefits and select new benefits from the menu provided. The value of the benefits bought and sold is then aggregated and the net amount added to or deducted from pay.Flex fundEmployees are allocated a fund of money to spend on benefits from a menu. This is therefore sometimes described as the cafeteria approach. The value of the flex fund is big enough to enable individual employees to buy their existing benefits and thus retain them without additional cost.

How to introduce flexible benefits

The steps required to introduce flexible benefits are described below:Define business needSeek viewsDecide objectives and essential elementsSet up project teamDecide who is going to carry out the development workDesign schemeCommunicate details of the schemePilot testIntroduce schemeEvaluate schemeThe nature of occupational pensionsWhy they are providedThe two main types of occupational schemesdefined benefit and defined contribution Other types of pension schemesThe legal limits on providing pensions adviceCommunicating to staff about pensionsPension Schemes The nature of occupational pensions

Pensions provide an income to employees when they retire and to their surviving dependants on the death of the employee, and deferred benefits to employees who leave.Occupational pensions are the most significant employee benefit and are a valuable part of the total reward package. But they are perhaps the most complex part. The so-called pensions crisis has arisen because many occupational schemes are underfunded and suffering the strain of having to cope with more pensioners who are living longer.Why they are providedthey demonstrate that the organization is a good employer concerned about the long-term interests of its employeesGood pension schemes help to attract and retain high quality people by maintaining competitive levels of total remuneration.Types of occupational schemesDefined benefit (final salary) schemes Pension entitlement on retirementOn retiring the employee is entitled to a pension that is calculated as a fraction of their final salary (on retirement or an average of the last two or three years) multiplied by the length of pensionable service. The maximum proportion of salary allowed by the Inland Revenue is two-thirds of final salary after 40 years service. The amount of the pension depends on the final salary, the value of the annuity that provides the pension and the accrual rate. The accrual rate refers to the fraction of final salary that can be earned per year of service. When a pension is described as 1/60th it means that 40 years service would produce a two-thirds of final salary pension, and 30 years would produce a pension of half the final salary. This is a fairly typical fraction in private sector firms. Employer and employee contributionsEmployer contributions can be a fixed percentage of salary. Alternatively the percentage increases with service or is a multiple of the employees contribution (eg the employer contributes 15 per cent if the employee contributes 5 per cent). The level of employer contribution is typically around 16 per cent.Employee contribution rates vary considerably, ranging from 3 per cent to 15 per cent with a median of around 8 per cent. Pension fundEmployee and employer contributions are paid into a combined fund and there is no direct link between fund size and the pensions paid. The money remaining in the fund after any lump sums have been taken out is invested in an annuity to provide a regular income, the amount of which may be revised upwards periodically to compensate for inflation.Dependants Dependants are entitled to a percentage of the employees pension entitlement if he or she dies during retirement or in service with the company.Lump sum Part of the pension may be exchanged for a tax-free lump sum, up to a maximum under Inland Revenue rules of 1/80th per year for up to 40 years service.Defined contribution (money purchase) schemesPension entitlementThe employee receives a pension on retirement that is related to the size of the fund accumulated by the combined contributions of the employee and employer. The amount of the pension depends on the size of contributions, the rate of return on the investment of the accumulated fund and the rate of return on an annuity purchased by the employer. It is not related to the employees final salary.Contributions The employer contributes a defined percentage of earnings, which may be fixed, age-related or linked to what the employee pays. The level of employer contribution is typically around 6 per cent. The employee also contributes a fixed percentage of salary. Pension fund The contributions are invested and the money used at retirement to purchase a regular income, usually via an annuity contract from an insurance company. The retirement pension is therefore whatever annual payment can be purchased with the money accumulated in the fund for a member. Members have individual shares of the fund, which represent their personal entitlements and which will directly determine the pensions they receive. DependantsDependants receive death in service and death in retirement pensions. 398 Employee Benefit and Pension SchemeLump sum One-quarter of the pension can be taken as a tax-free lump sum on retirement.Comparison of defined benefits and defined contribution schemes

Other types of pension schemesHybrid schemes Personal pensions Group schemes Stakeholder pension Executive pensionsThe state pension scheme The Basic State Pension The State Second Pension

The legal limits on providing pensions advice

Specific advice on the merits or otherwise of a particular personal pension plan personal pensions are classed as investments by the Financial Services Act can, however, be given to employees:On the companys occupational pension scheme, since it is not classed as an investment. About the general principles to be borne in mind when comparing an occupational pension scheme with a personal pension; these could include spelling out the benefits of the companys scheme, thus leaving employees in a better position to compare the benefits with whatever an authorized adviser may indicate are the benefits from a personal plan. What should not be done is to tell people categorically that they will be better off with the companys scheme or to advise them to look elsewhere. On their rights, for staff who are leaving, to preserve their pension and the advisability of finding out from their prospective employer whether existing rights can be transferred to their scheme and, if so, what the outcome will be in terms of pension rights at the new company. On the general advantages of making additional voluntary contributions.

Communicating to staff about pensions

Good schemes demonstrate that employers care about the future security and well-being of their employees, and pensions are a valuable means of gaining and keeping employee commitment to the organization.It is particularly important to communicate the reasons for any changes and how they will affect staff. This is a demanding situation if a defined benefit scheme is to be replaced by a defined contribution scheme.HR professionals have a key role to play in being honest about the real picture and its alternatives, and informing employees of all the implications.Pension Fund Regulatory & Development AuthorityPension Fund Regulatory and Development Authority was established by the Government of India on 23rd August 2003to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.PFRDAThe Pension Fund Regulatory and Development Authority Bill, 2005 was initially introduced in the Lok Sabha in March, 2005 to provide for a statutory PFRDA.The Bill lapsed on dissolution of the 14th Lok Sabha.The PFRDA Bill, 2011 was introduced in the Lok Sabha on the 24th March, 2011.The legislation sought to empower PFRDA to regulate the New Pension System (NPS).Official amendments to the Pension Fund Regulatory and Development Authority Bill, 2011that the subscriber seeking minimum assured returns shall be allowed to opt for investing his funds in such schemes as may be notified by the Authority;withdrawals not exceeding 25 per cent of the contribution made by subscriber will be permitted from the individual pension account as may be specified by PFRDAthe foreign investment ceiling in the pension sector at 26 per cent or such percentage as may be approved for the Insurance Sector, whichever is higher may be incorporated in the present legislation;to establish a vibrant Pension Advisory Committee with representation from all major stakeholders to advise PFRDA on important matters of framing of regulations under the PFRDA Act.the membership of the PFRDA will be confined to professionals having expertise in economics, finance or law only

National Pension scheme(nps)National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India.

Under the NPS, individual savings are pooled in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of government bonds, bills, corporate debentures and shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empanelled life insurance company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.

advantages in joining NPSFlexible- NPS offers a range of investment options and choice of Pension Fund Manager (PFMs) for planning the growth of your investments in a reasonable manner and see your money grow. Individuals can switch over from one investment option to another or from one fund manager to another subject, of course, to certain regulatory restrictions. The returns being totally market-related.

Simple Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. The scheme is structured into two tiers:

Tier-I account:This is the non - withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.

Tier-II account:This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.Portable-NPS provides seamless portability across jobs and across locations, unlike all current pension plans, including that of the EPFO. It would provide hassle-free arrangement for the individual subscribers.Regulated-NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.Contributory Provident FundThe Contributory Provident Fund Rules (India), ,1962 are applicable to every non-pensionable servant of the Government belonging to any of the services under the control of the President. A subscriber, at the time of joining the Fund is required to make a nomination in the prescribed Form conferring on one or more persons the right to receive the amount that may stand to his credit in the Fund in the event of his death, before that amount has become payable or having become payable has not been paid.A subscriber shall subscribe monthly to the Fund when on duty or Foreign Service but not during the period of suspension. Rates of subscription shall not be less than 10% of the emoluments and not more than his emoluments. The employer's contribution at that percentage prescribed by the Government will be credited to the subscriber's account and this is 10%. Rate of interest with effect from 1.4.2009 is 8% compounded annually. The Rules provide for drawl of advances/ withdrawals from the CPF for specific purposes. General Provident Fund and IncentivesAs per General Provident Fund (Central Services) Rules, 1960, all temporary Government servants after a continuous service of one year, all re-employed pensioners (Other than those eligible for admission to the Contributory Provident Fund) and all permanent Government servants are eligible to subscribe to the Fund. A subscriber, at the time of joining the fund is required to make a nomination, in the prescribed form, conferring on one or more persons the right to receive the amount that may stand to his credit in the fund in the event of his death, before that amount has become payable or having become payable has not been paid. A subscriber shall subscribe monthly to the Fund except during the period when he is under suspension. Subscriptions to the Provident Fund are stopped 3 months prior to the date of superannuation. Rates of subscription shall not be less than 6% of subscriber's emoluments and not more than his total emoluments. Rate of interest on GPF accumulations with effect from 1.4.2009 is 8% compounded annually and the rate of interest will vary according to notifications of the Government.

NDCPF