The domestic economy remains fragile with a third-quarter GDP growth of 0.8% which is below expectations. The government is now targeting the low end of its forecast for 2009. We wonder whether companies would be confident enough to loosen a bit their belts. Definitely, some sectors need to keep theirs tight.


One major expense in a company's budget is employee compensation and the accompanying cost of employee benefits. Most possibly, many companies are hard-pressed to increase minimally, if not freeze, the salaries much like the past year. While inflation has slowed down, salaries have yet to catch up with last year's near double-digit inflation rate.


These times call for an effective management of employee benefits. Effective management does not only mean reduction or maintenance of cost. More importantly, ingenuity is needed so that benefits are improved to offset employee sentiments resulting from getting minimal or no salary increase, but at no cost, or if not possible, at the least cost.


Following are some insights and suggestions on how to improve the effectiveness of three of the more common employee benefit programs retirement, medical and life insurance programs within the context mentioned above. If any of the three programs is not yet in place, insights are also provided as to whether this is an opportune time to set up such program.



Retirement Programs


Does your company have a formal retirement program? If it does, how can benefits be improved at no or at the least cost? If it doesn't have, is this an opportune time to introduce one and if it is, how should it be designed?


For those who have no formal plans in place, putting up a qualified retirement program may have a big impact to employees and could be designed in such a way that the cost would be minimal.


How? R.A. 7641, otherwise known as the Minimum Retirement Benefit Law, mandates the payment of a retirement benefit if an employee who is at least 60 years old with at least 5 years of service retires. Relatedly, Philippine Accounting Standards No. 19 (PAS 19) requires that companies accrue cost for retirement benefit as mandated by R.A. 7641. In other words, even if there is no formal retirement program, expense is recognized by the company.


This means that putting up a formal retirement program that provides a retirement benefit as mandated by law does not entail any additional cost except for the cost of plan documentation and filing for tax-qualification that is very minimal. The actuarial valuation report used for PAS 19 could be used for BIR filing, hence, no additional cost. The bank trustee's fee is normally charged or offset by the tax-free interest earnings of the fund.


Actually, a retirement program qualified by the BIR is even given tax incentives that could be useful to employers. These incentives are as follows:

  • Contributions to the retirement fund are allowable deductible expense for corporate income tax purposes, subject to certain rules. It should be noted that retirement cost accruals are not. This means that by contributing to a retirement program, the company would have to pay less tax without incurring additional expense.
  • Income of the retirement fund is not subject to tax.
  • Retirement benefits are not subject to tax provided that the retiree is at least 50 years old and has rendered at least 10 years of service.


Of course, there are BIR requirements before tax-qualification is granted (e.g. benefits should not be discriminatory, the fund should be held by a trustee) but such requirements could be easily complied with at no cost. 


Companies should not worry about the availability of cash to fund the program. Some banks or investment houses offer trusteeship services for an initial placement of as low as P 100,000. On the other hand, BIR does not prescribe a minimum level of funding nor a minimum periodic contribution.


Having a retirement fund should provide employees with additional sense of security amidst these hard times. If the benefits to be provided however are only those mandated by law, there may not be much impact to employees. Thus, it is suggested that ancillary benefits that do not cost much should be included in the program. These are as follows:

(1) Death and total and permanent disability (TPD) benefit. A death and TPD benefit equal to the normal retirement benefit, under normal/reasonable actuarial assumptions, costs only around 10% to 15% of the normal retirement benefit payable upon attainment of age 60 and at 5 years of service. A retirement benefit of one (1) month salary per year of service could cost around 3.5% - 4.0% of payroll. This means that the death and disability benefit cost only around 0.5% of payroll.


(2) Early retirement benefit. The earliest that a retirement benefit is exempted from tax is upon attainment of age 50 and completing 10 years of service, thus, it is advisable that early retirement eligibility be set at that age and service requirement. This has more or less the same cost as the death and TPD benefits. (The immediate cost impact under PAS 19 should, however, be evaluated because increases in vested benefit due to plan improvements are recognized immediately.)


While this benefit entails additional cost for the program, this might improve the overall finances as this gives the company a way to replace old employees with high salaries but with less production (usually true for industries that require manual labor) without having to declare the positions redundant to exempt the benefit payable to the employee from tax. 

For those who have formal plans in place, here are possible plan improvements:


(1) Make the retirement fund available for loan to employees who have vested benefits. This is a benefit that should not only help employees but should also help the retirement fund grow and therefore, reduce the cost of the program.


Banks and other financial institutions are offering personal loans through the employers. The monthly interest rate is around 0.8% straight charge. The 0.8% monthly interest seems low but it really is not because it is applied on a "straight charge" basis. This means that the 0.8% interest is applied to the principal amount borrowed and not on the outstanding balance of the loan, which of course, diminishes as the loan is paid off periodically e.g. monthly. A straight charge of 0.8% monthly for a 12-month loan is equivalent to an effective interest rate of 1.2% monthly or around 15% annually.


The retirement fund on the other hand could just be earning around 6% per annum (average for the past 5 years) with market fluctuation already taken into account. It could even be less.


The fund may be loaned out at a straight charge of 0.5% monthly equivalent to about 9.5% effective annual interest. This means that the company takes off around 5.5% annual interest from the shoulders of borrowing employees with his fund earning 3.5% more or so. Add to that the fact that such investment is fully secured by employees' vested benefit under the program.


Internal guidelines may be implemented to safeguard the fund as well as company policies e.g. subject to availability of funds, net take-home pay of not less than 30%, maximum period of repayment, etc. Special guidelines may be implemented at times like this like 1-year deferment of loan repayment.


Some may think that allowing loans to be taken out of retirement benefit defeats the retirement program's purpose. It does not because the loan is re-paid. 


Of course, before such program could be implemented, the retirement plan should be revised and re-filed with the Bureau of Internal Revenue.


(2) Introduce ancillary benefits with minimal costs as mentioned above if the existing plan does not have such benefit yet.


Medical Programs


Medical program is usually one the costliest employee benefit programs with costs constantly increasing. The increase is usually higher than the overall inflation given that there are extra factors that push medical costs higher such as introduction of new but more expensive medicines and equipment and technological advancements.


As such, this may not be the best time to introduce such program for companies that don't have medical programs yet.


For those who already have, it is very important that the level of service is maintained, if not improved. In these hard times, employees could be unforgiving, and a declining level of service is simply not acceptable.


It is always important that the provider we choose provide quality service. While most providers strive hard to give their clients the best possible service, they have to protect their bottom line through the premiums they charge and the volume of business they generate which cause some service lapses.


When we talk about cost, it is basically the premium charged by our medical provider. Negotiate then the best possible rates. There seems to be a rule of thumb that utilization (claims divided by premiums paid) of less than 65% is a favorable claims experience. It is best to know however, the components considered in the premium calculation the claims incurred but unreported (IBNR), inflation, expenses, etc. This should give us a scientific basis for negotiating lower rates. Not knowing these things makes us satisfied with, say, a 5% decrease in the proposed premium rates when in fact, a bigger decrease is possible.


Favorable experience is usually the starting point for a successful negotiation for a reduction in premium (or additional perks) or at the least, maintenance at its current level without changing providers. Of course, companies can always shop around to ensure they get the most competitive premium. There are many downsides though hopping from one provider to another, to enumerate some: administrative burden relative to the transition; difficulties in adapting to changes in claims systems or procedures.


It goes to say that the usual problem is high utilization that gives the medical provider no other choice but to increase premiums. The best solution then is to manage utilization. How? Here are some: (1) introduce wellness benefits; (2) emphasize on prevention; (3) manage the utilization drivers; (4) responsible usage of the benefit. Utilization management is easier said than done. To be effective, actuarial analyses of data is needed along with many others that require specialized expertise.


Actually, all of the recommendations above ensure service quality, negotiate for the best possible rates, manage utilization may be easier said than done. The fact is, your broker, if you have one, should be the one doing these things for you. Otherwise, what are they there for? It goes to say that you need to evaluate whether your broker does its job well. If all that your broker is doing is present to you the renewal rates, you probably need to get someone else. Brokering services have evolved.


For those who don't have brokers, you may be missing services that you are possibly paying for anyway.  Providers usually tuck in provision for brokers or agents in their pricing. Still, it is best to find it out. One way is to canvass premium rates from providers by yourself then appointing a broker and let him do the same. Simply compare what you got from what the broker got.



Life Insurance Programs


Life insurance program is the least costly among the three. If your company doesn't have it yet, introducing the program would not be heavy to the company pocket. A life coverage of 24 times the monthly salary (the most common level of benefit) at P 1.50 (actual premium could be more or less depending on the company's employee profile) costs only about 0.3% of payroll for 13 months. Additional Total & Permanent Disability and Accidental Death & Disability cover cost less.


To keep the program cost low, always negotiate for the best premium rates and experience refund provision, if any.





The recommendations above may be summarized as follows:


Retirement Program

Medical Program

Life Insurance

W/ Existing


W/ Existing


W/ Existing









Actually, many of the above recommendations should be employed even during normal economic times. When we have overlooked to implement them though, these times call for immediate implementation.