About Provident Fund

Provident Fund's Definition

What is a provident fund?

A provident fund​  is an investment fund that is jointly established by the employer and employee to serve as a long term savings to support an employee upon retirement. It also represents job welfare benefits offered to the employee.

Sources of money invested in the provident fund:

  1. Employee or member An amount will be deducted from the employee’s monthly salary; it’s called the “employee’s contribution.”
  2. Employer. The employer will contribute a portion into the fund each month, besides the usual salary payment made to the employer. This contribution in the fund is called the “employer’s contribution.”

Money placed in a provident fund will be managed by an investment management company which will invest that money in various securities to maximize the financial returns, given the level of risk that is acceptable or in accordance with a specified investment policy. The fund is a unique legal entity which is fully separated from the employer and the investment management company; it must also be registered with the Securities and Exchange Commission (SEC). Employees or provident fund members can therefore be confident that if the employer or the investment management company becomes financially insolvent, the fund’s entire assets continue to belong to the employees or provident fund members and not affected by any liabilities the employer may have.

Employee’s contribution:
Employee’s contribution (portion by employee/member): the amount of money that the member contributes into the fund will be deducted from the monthly salary at between 2-15% of the salary each month. Terms depend on the fund scheme set by the employer.

Employer’s contribution:
Employer’s contribution (portion by employer): the amount of money contributed by the employer each month at a rate no less than the contribution made by the member, but not exceeding 15% of the monthly salary. Terms depend on the fund scheme set by the employer

Employer’s contribution:
Employer’s contribution (portion by employer): the amount of money contributed by the employer each month at a rate no less than the contribution made by the member, but not exceeding 15% of the monthly salary. Terms depend on the fund scheme set by the employer

Returns from employer’s contribution:
Returns from employer’s contribution (portion by employer): Investment returns generated from the employer’s contribution is earned from interest, dividends, etc.

Benefits of a Provident Fund

Benefits of a Provident Fund

1) Investment management

• Strengthens the employer’s image as a solid company that values staff welfare
• Increases employee’s confidence in the business, thereby enhancing staff performance
• Builds a strong relationship between the employer and employees, minimizing potential for labour disputes
• Decreases employee turnover and increases staff loyalty for longer service with the company

2) Financial security

• Encourages planning for long-term savings
• Financial security for the member and family upon retirement, resignation, or death.  

3) Return on investment

• Additional benefit from the employer’s contribution made each month
• Earn returns from the provident fund in the form of interest, dividends or capital gains. Members can potentially
  earn a higher return than placing the sum in a bank deposit. The level of returns is dependent on the fund
  scheme selected or the risk tolerance level specified by the member. The investment will be professionally managed
  by a qualified and experienced investment management company.
• Savings through the provident fund is a continuous process, despite resigning and switching to work for
  another employer. The investment can be kept with the original fund (maintain) or transferred into another
  provident fund.
• Upon retirement, the member may also keep the balance in the fund (maintain) or may choose to withdraw
  the sum as annuities, in order to continue generating returns on the investment.

4) Tax

• The employer receives a tax allowance on the employer contribution by deducting it as an expense of the
  company when determining net income subjected to taxes. Actual amount can be deducted, but not
  exceeding 15% of each employee’s salary.

Types of Provident Funds

Types of Provident Funds

1. Single Fund refers to a provident fund established by only one employer

  • Investment policy: Selected by the Provident Fund Committee or Employer. Policy can be modified.
  • Authority of the Provident Fund Committee: Sole decision-maker as long as the Provident Fund Act is complied with.
  • Expenses: Varies according to fund size and number of members. Can be configured for expenses to be covered by the employer o the fund. Varies according to the category of

2. Pooled Fund refers to a fund which is jointly established by 2 or more employers. The employers can either be affiliated companies in the same group or unrelated.

  • Investment policy: Cannot be modified since the investment policy is established by majority concensus. If the employer desires to change the investment policy, the employer may transfer the investment into another provident fund that has an investment policy that is compatible with the Provident Fund Committee.
  • Authority of the Provident Fund Committee: Decision making is achieved through concensus with the Provident Fund Committee of other employers in the fund.
  • Expenses: Pro-rated according to investment size of each respective employer’s fund.

Remarks:

  1. Employers which belong to the same provident fund will all adhere to the same investment policy
  2. Each employer in the provident fund may uniquely configure their own employee contribution rate and employer contribution rate and terms of payments made from the fund.
  3. Pooling investments together this way creates a larger fund size which improves investment opportunities and ability to generate higher returns and/or better risk diversification. It also lowers overall costs through

What is Employee’s Choice

What is Employee’s Choice

The investment policy governs how the providend fund is managed and is jointly agreed between the Provident Fund Committee and the investment management company. Typically, the investment policy will specify the asset class and portfolio weightings of each type of investible asset that the fund allows the investment manager to invest in. The investment policy should be configured to match the objectives and risk tolerance of members.

However, having only one uniform investment policy may not be an ideal way of catering to each employee’s different requirements. As such, a means was pursued to enable each employee to be able to choose an investment policy to suit oneself and this had led to the introduction of the Employee’s Choice feature.

Employee’s Choice is a scheme whereby the employee is able to influence the choice of investment policy that is suited to one’s needs. SCBAM wishes to therefore propose the Employee’s Choice feature based on various investment policies. This allows each member of the provident fund the ability to select the investment policy that one considers most appropriate to one’s needs and acceptable risk level. This is illustrated in the diagram below.

1. Choice to select an investment policy
Although there are many available choices, a member may only choose one investment policy and the proceeds are all invested according to the chosen investment policy that each particular member has selected.


2. Choice to select an investment plan
The employer may offer several investment plans to choose from, whereby each investment plan consist of different portfolio weightings as prescribed. A member is permitted to choose one investment plan that is suitable with a risk level that


3. Choice of selecting your own investment weightings (DIY)
Under this feature, the employer offers several investment policies to choose from and allows members to select the investment policies and portfolio weightings as desired in order to help achieve good diversification. The employer’s contribution and the employee’s contribution shall be allocated in accordance to the portfolio allocation selected. The return on the investment will be dependent on the returns generated by each of the investment policies.