One of the key components in an individuals’ retirement kitty is employer benefits. As the savings happen automatically through salary deductions and are most often mandatory part of employment, this builds up into a substantial amount by the time a person retires. Superannuation schemes where the contributions are built into the cost-to-company package offered to the employee is one of the major components of these benefits.
What is a superannuation scheme
Superannuation scheme is designed to provide a pension to an employee upon retirement or to their nominees in case of death during employment. Pension is not a mandatory benefit and employers may opt to give pension to employees above a certain level as a tool for attracting and retaining talent.
Types of Superannuation schemes
Based upon who contributes, group superannuation schemes can either be categorised as defined benefit (DB) schemes or defined contribution (DC) schemes. When only the employer contributes and the benefits are pre-defined based on the scale/designation of the employee, it is a DB scheme. When both the employer and the employee contribute and the payout depends on the amount of the accumulated corpus, it is called a DC scheme. The current environment is moving towards DC schemes for most retirement benefits.
Based on the investments of funds, the superannuation schemes could be categorised into traditional plans like a cash accumulation plan of LIC, where the investments are more into debt, or unit linked plans with various levels of debt-equity mix. Depending on the type of plan the returns differ. With the traditional plans, the returns will be more in line with the EPF returns while the unit linked plans will have differing returns based on the mix of asset classes chosen by the employee.
What do you get
Upon maturity, that is, at the time of retirement, the employee can commute i.e. withdraw upto one third of the accumulated corpus tax free. The rest of the amount will be used to purchase an immediate annuity. This will give payouts every month, quarter or annually as chosen by the employee. The amount received as annuity (pension) is taxable as per the tax slab of the individual.
In case of death of the employee during the currency of the scheme, his nominee will get the pension from the corpus accumulated. The nominee shall get this amount tax free.
In case of change of jobs, the employee has an option to transfer the funds to the superannuation fund of his new employer if available, else he can opt for immediate or deferred pension with or without commutation as per the rules of the scheme.
Issues with superannuation plans
In earlier days most of the pension plans were defined benefit plans. An employee had a fair idea of the kind of pension he will derive at retirement based on his designation or pay scale. As longevity increased the pressure on the pension corpus increased. The pool needed to last longer. On the other hand the returns generated on corpus diminished as it was primarily invested in debt instruments. There could arise a situation where the corpus is not able to sustain the pension payments. In recent times there have been murmurs in the market about there being a shortfall in the pension funding corpus of some public sector institutions and banks. It is due to an awareness of this possibility, that a move from defined benefit to defined pension schemes started world over, including India. It was in 2004 that all new government employees (except defence) joining the workforce started their careers with a defined contribution scheme. The creation of New Pension Scheme (NPS) was another outcome to avoid such a situation. The NPS is a contributory scheme and offers an option to invest upto 50% in equity which can boost the returns on the fund and create a bigger corpus upon retirement.
Earlier people used to work for one single employer their entire lives. Now change of jobs happen more frequently. This often leads to withdrawal of the funds lying in superannuation funds in very short periods. This totally eats away into the benefits of compounding which come into play over longer periods.
What should you do?
Supplementing the corpus built by employer benefits might be required in many cases, as lifestyles may not be supported sufficiently in light of longevity and inflation. This should be the case especially where majority of this kind of investment is being directed towards fixed income instruments.
While there are retirement products available from both insurance and mutual funds , they might be of help just from a discipline point of view, rather than offering any other benefits like reduced risk or increased returns that other open ended products offer. A combination of a pure term plan in insurance along with a regular investment in PPF along with SIPs in equity mutual funds is a good enough package to supplement superannuation accumulations. The exact composition in terms of the amount required and the time frame will depend upon the risk profile, overall asset allocation and the saving capacity of the individual. This kind of a supplemental corpus will also be beneficial in terms of the taxation, as the entire amount received at the end will be tax free (as per current laws). Another plus is that there would be no compulsion to buy an immediate annuity product which will generate a taxable income. An equivalent amount of tax free income can be generated from this additional corpus in various ways. Operationally too, it is much easier to manage a corpus which is individually controlled and can move in tandem with personal situations.
In conclusion, do rely on your employer’s pension fund, but it will help if you supplement it with other sources.
Source: Money Control