Navigating Provident Fund Systems

Provident funds, or government-administered retirement funds, were introduced as a form of “social protection” to alleviate poverty at the time of retirement. Most social programs at the time did not provide enough to cover basic living expenses once a person retired and left the workforce. Provident funds are most prevalent in Asia and Africa.

It's often difficult for employee benefit managers working at multinational companies to understand the differences between various countries' retirement systems and how they differ from US retirement programs. This article introduces provident funds and their characteristics and provides a comparison of funds we often get questions about: India’s Employee Provident Fund, South Africa’s Provident Funds, and Australia’s Superannuation Guarantee funds.

What Makes Provident Funds Unique?

In some cases, provident funds are mandated by the government and administered by a third party, but most are structured like a defined contribution retirement plan and are administered by the government. The employer is always a contributor and depending on local regulations, the employee contribution requirements can vary from being mandatory, voluntary, or a combination of the two.

Most provident fund schemes allow participants to self-direct their contributions into various investment funds managed by insurance companies or financial institutions.

Provident funds are widely used in Asia. In Hong Kong and Thailand, employers can select the administrator of the provident fund, and the administrator then determines the participants’ investment choices. In other Asian countries such as India, Malaysia, and Singapore, the government administers the provident funds and is responsible for investing them.

India’s Employees' Provident Fund (EPF)

The Employees' Provident Fund (EPF) is a statutory program for employers in India with more than 20 employees and is administered by the Ministry of Labour and Employment. The EPF is a defined contribution scheme created for employees of private employers where the employer contributes 12% (contribution includes retirement and death and disability coverage) and the employee contributes 12% of their basic salary, up to INR 15,000 per month (contribution only goes to retirement). Employers are also responsible for the 0.5% administrative charge for the EPF as well as a 0.5% charge for the EDLI (Employer’s Deposit Linked Insurance), making the total employer contribution 13%. In November 2022, the contribution salary cap of INR 15,000 was eliminated, and new regulations provided employees the option to make voluntary contributions calculated based on their actual salaries, rather than being capped. Employers are still required to make contributions on monthly salaries up to INR 15,000.

The EPF is known as a long-term savings scheme. The normal retirement age is 58 and a member must have contributed to the scheme for at least 10 years before funds can be distributed.

The EPF provides an individual (upon retirement or resignation), or to the family upon the death of that individual, with the accumulation of the EPF contributions that they and their employers provided, plus interest on that accumulation. The funds are distributed as a lump sum, and annuities are not available.

In 2020, India revised its social security code to include workers who were not part of an organized sector (for example, agricultural laborers, fixed-term employees, or freelance workers) and were not covered.

South Africa's Provident Funds

Provident funds are common in South Africa and are similar to India’s provident funds in that they are employer-based and funded by both the employer and employee. While an employer doesn’t need to offer retirement benefits to its employees, the burden lies within the private sector to provide some form of supplemental retirement program to employees. In a recent survey, more than 83% of employers in South Africa provide supplemental retirement benefits, with the median employer contribution being 10% of the base salary.

The South African Income Tax Act and the Pension Funds Act regulate the funds. These acts provide oversight, registration, and incorporation, as employers are responsible for choosing a licensed administrator, and the administrator determines the participant’s investment choices. Employer contributions are considered a taxable benefit, but employees can deduct their own contributions on their income tax filings.

Upon retirement, South African Provident Fund participants are restricted to cashing out one-third of the account (taxable) and must take the remaining balance as an annuity that provides a monthly income. This regulation is effective as of March 2021. If the retirement account balance is less than R247,500, participants can take the full amount as a taxable cash lump sum. Should an employee leave their employer prior to retirement, accounts can be transferred to their new employer’s retirement scheme, a preservation fund, or a retirement annuity.

Australia's Superannuation Guarantee Funds

While Australia’s Superannuation Guarantee (SG) funds are similar to India's in that the program is mandatory and employers must make minimum contributions to a fund of the employee’s choice, they differ in that they do not require employees to make minimum contributions. Employee contributions to an SG fund are voluntary. Australia introduced SG schemes in 1992, and by 1993, they were a part of the country's three-pillar system:

1. Compulsory Superannuation: Employer contributions to an employee’s SG
2. Age Pension (Social Security): Flat allowance paid to eligible citizens and not based on earnings
3. Private Savings: Employee contributions to their SG and home ownership equity

Initially, employers were required to make a 3% contribution to the employee’s SG account, but over the years, employer contributions have steadily increased. As of July 1, 2023, employer contributions increased to 11% on quarterly earnings of up to AUD $60,270 and will steadily increase to 12% by 2025. Employees are not required to contribute to the SG fund but can make a voluntary contribution within the concessional contribution cap, also known as the Social Security Ceiling. The annual concessional contribution cap is AUD $27,500. Non-concessional contributions come from employees’ post-tax income, are voluntary, and are capped at AUD $110,000 per year. Employer contributions to an SG fund are considered wages and must be included when reporting salaries for statutory Workers’ Compensation coverage. Unlike India and South Aftrica, SG plans are burdensome and quite costly for employers to administer.

Australia's system is different from those of Asian countries due to their retirement systems being “open architecture.” This is a system where employees and employers have many funds to choose from, and the administrator is also the trustee and can offer both proprietary investment funds and funds available through a third-party investment firm.

Provident Fund Comparison Chart

Understand the Differences Between Provident Funds

To comply with laws and ensure that employees receive accurate contributions to their retirement funds, it's crucial for employers to understand provident funds in countries where they are located. If you have questions about provident funds in these or other countries, reach out to your Woodruff Sawyer account team to learn more.