There has never been any time when there is such a pressing need to secure our financial future and protect our savings. Employers and employees need to better understand the several mandatory retirement benefits that they can implement.
In Pakistan, there are currently three types of retirement benefits in place. These are gratuity, provident fund, and the comparatively more recent voluntary pension schemes (VPS). Each is different in terms of payout, structure, and the amount of payment that is obligatory (if there is any) to be paid by the employer.
Gratuity
Gratuity is a lump sum payment made in cash at the time of retirement by the employer to their employee. This can be seen as a token of appreciation for the service they have performed for the employer. The “golden handshake” popular in banking circles, is a kind of gratuity payment.
The amount of the gratuity paid to an employee, is calculated with the formula of ‘thirty days wages for every completed year of service or any period over six months’.
In numerical terms, gratuity can be calculated by the following formula:
Gross salary in last year of employment/26) x 30 x number of years of employment in the company.
Of the three existing retirement benefit schemes, gratuity is the only benefit that is a statutory obligation on some employers. However, this obligation does not apply to all employers, and not all employees are entitled to receive gratuity.
Instead, gratuity is only obligatory for industrial or commercial establishments that have a specific number of workers. This means that an organization must have a specific number of employees who are not working in any managerial or administrative work. Such workers are then entitled to receive gratuity on their retirement.
The specific rules for gratuity applicability vary across the provinces. The rules in Punjab, Sindh, and Islamabad Capital Territory (ICT) set the minimum threshold at 20 workers for an organization to be required to pay gratuity to its employees.
In the case of industrial establishments, an additional condition applies which states that at least 50 employees should have been employed by the employer on any given day within the last 12 months.
For Baluchistan and Khyber Pakhtunkhwa (KPK), the obligation to pay gratuity is also applicable for employers that employ at least 20 workers. But in the case of industrial establishments, the additional condition requires that at least 21 employees should have been employed by the employer within the last 12 months.
Moreover, in cases where gratuity payments are obligatory on the employer, the employer can in theory only be relieved of this obligation if an employee is terminated for misconduct.
Provident Fund
The law in Pakistan allows employers to offer provident funds as a substitute for gratuity. However, the provident fund is run as an investment fund in which both the employee and the employer make contributions which are then invested on behalf of the employee.
For the provident fund to qualify as a substitute for gratuity the employers must match the employee’s contribution in the fund. However, while a provident fund lets employees invest in a fund and earn a return on it, it’s a one-fit-for-all solution in the sense that it does not take into account individual investing preferences or risk appetites. In simpler words, everyone in the organization invests in the same portfolio and earns the same percentage return.
Moreover, provident fund regulations also differentiate between workers (employees not involved in managerial or administrative work) and other employees. Workers are entitled to receive the amount present in their provident fund (including employer contributions) even in case they resign or are dismissed from work.
In the case of other employees, since they are not entitled to receive gratuity or provident fund, to begin with, provident fund trust deeds can contain certain clauses that allow employers to recover their contribution to the employees’ provident fund and the interest earned on it in case the employee is dismissed or leaves before the expiration of their contract for reasons other than unavoidable circumstances or illnesses.
From an employer’s perspective, provident funds are much more expensive to set up and manage compared to both gratuity and VPS. The law requires provident funds to register themselves as separate trusts with the Securities and Exchange Commission of Pakistan (SECP) and the Federal Board of Revenue (FBR).
They also need to have a separate board of directors and get an audit separate from the rest of the company. Moreover, in case the amount invested in the fund reaches a certain threshold, provident funds are required to hire an investment advisor who usually charges 0.5 percent to 1 percent of the total assets under management as their fee.
Practical Implications
While in theory, workers (employees not involved in managerial or administrative work) are entitled to receive gratuity or a substitute in place of gratuity, this does not always happen.
In some cases, employers have been reported for terminating their employees at the end of the company’s financial year and rehiring them at the start of the next financial year.
As gratuity is a function of the number of years working in a company, this practice of terminating and reappointing employees at year-end means that the total sum paid to employees as gratuity is lower than what they would have received if paid in full at the end of their actual tenure. Even worse in other instances, employers simply do not pay gratuity even when they are legally bound to do so.
In contrast, big companies are often reported to go one step ahead when it comes to implementing the laws related to retirement benefits. For example, some companies offer gratuity, provident funds and a host of other allowances to their employees who are not even legally entitled to receive gratuity.
Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.
