FAQ
1) Our company does not have a retirement plan, does this mean we do not need to pay retirement benefits?
If a company does not have a retirement plan then RA 7641 will automatically apply. In a nutshell, RA 7641 requires payment of retirement benefits to employees who are at least 60 year old with 5 years of service.
2) How much is the required retirement benefit payment under RA 7641?
The law states “one-half (1/2) month salary for every year of service”. However, the phrase “one-half month” does not immediately translates to 50%.
The law expounds on the meaning of “one-half month” as follows:
Table below illustrates sample computations on “one-half month” depending on the number of working days per year employed by the company.
Therefore, depending on the working days per year, the payment under RA 7641 may range from 75% - 100% of final monthly salary per year of service.
The law expounds on the meaning of “one-half month” as follows:
- 15 days
- 5 days leave incentive
- 1/12 of the 13 month pay.
Table below illustrates sample computations on “one-half month” depending on the number of working days per year employed by the company.
| Working Days/Year | 262 | 312 | 360 | |
| Working Days/Mo | 21.83 | 26.00 | 30.00 | |
| 15 days | 15.00 | 15.00 | 15.00 | |
| 5 days leave incentive | 5.00 | 5.00 | 5.00 | |
| 1/12 of 13th month (B/12) | 1.82 | 2.17 | 2.50 | |
| Total Days (C+D+E) | 21.82 | 22.17 | 22.50 | |
| Percentage (F/B) | 100% | 86% | 75% |
Therefore, depending on the working days per year, the payment under RA 7641 may range from 75% - 100% of final monthly salary per year of service.
3) Do we still need to book retirement liability accruals even if our company does not have a retirement plan?
That is a very common question. First, RA 7641 shall apply as your company’s retirement plan (See item 1). Second, PFRS or PFRS for SMEs both require proper disclosure as to liability and expense of post-employment (retirement) benefits.
4) In the financial statement disclosures, is it appropriate that our company just mention that RA 7641 is applied and not accrue for retirement liability and associated expense?
Unfortunately, that strategy is not compliant under both PFRS and PFRS for SMEs. See item 3.
5) Our company is considered an SME, are we required to perform an actuarial valuation?
For practical purposes, an annual actuarial valuation of the retirement plan is recommended for financial statement disclosures.
As an actuarial consulting firm, we find it hard to appreciate the value of approximations, as these methods are ad-hoc, confusing and non-scientific. Further, approximations tend to over estimate the liability and expense which may distort the current financial statement as well as the next one.
Bottom-line, an actuarial valuation aside from providing actuarially sound results would, in most cases, provide savings relative to results of adhoc approximations.
Example:
A 30 year old employee with 5 years of service
Salary is 10,000
RA 7641
Scenario 1: Approximation
Approximations
DBO = 100% * Salary * Years of service
Scenario 2: Full actuarial valuation
DBO = 5,500
The DBO computed in Scenario 1 is 800% more than that of Scenario 2.
As an actuarial consulting firm, we find it hard to appreciate the value of approximations, as these methods are ad-hoc, confusing and non-scientific. Further, approximations tend to over estimate the liability and expense which may distort the current financial statement as well as the next one.
Bottom-line, an actuarial valuation aside from providing actuarially sound results would, in most cases, provide savings relative to results of adhoc approximations.
Example:
A 30 year old employee with 5 years of service
Salary is 10,000
RA 7641
Scenario 1: Approximation
Approximations
- Current salary
- Ignore future service
- Do not use the projected unit credit method
DBO = 100% * Salary * Years of service
= 100% * 10,000 * 5
= 50,000
= 50,000
Scenario 2: Full actuarial valuation
| Discount Rate | 7% |
| Salary Rate | 3% |
| Turnover rate | 3% for first 10 years 1% thereafter |
DBO = 5,500
The DBO computed in Scenario 1 is 800% more than that of Scenario 2.