Provident fund ("the fund") is a fund set up voluntarily between the employer and employees. Assets of the fund consist of money contributed by both employer and employees in the rate of 2-15% of basic salary depending on provident fund’s articles which registered with the Securities and Exchange Commission (SEC), the registrar and supervisor.
Provident fund not only provides a tool for employees to save with the employer’s assistance, assets of the fund are further managed by a professional fund management called "Asset Management Company (AMC)." The benefits derived from management are distributed to members of the fund proportionately.
Member’s savings could grow over time on account of the monthly contributions from both employer and employee, plus assets derived from investments or interests incurred from assets of the fund. However, interests and dividends from investments will not be paid to fund members before membership termination since the purpose of setting up the fund is to accumulate the savings into a large amount with the intention to assure a quality life after retirement. Moreover, members are not entitled to withdraw part of the savings before termination of membership since it is not consistent with the objective of saving for retirement.
The employer can set the vesting scheme of accumulated employer contribution and its earning according to years of employment or years of provident fund membership. Therefore, setting up of a provident fund can be regarded as a kind of benefit so as to motivate employees to work with the employer.
Upon termination of membership, members will receive all of their savings and its incurred benefits, as well as a certain amount of employer's contribution and its incurred benefits according to the fund’s articles. In case of resignation, member can choose to temporarily keep their money within the former fund before transferring it to the provident fund of his/her new employer or the Retirement Mutual Fund (RMF). This will allow members to maintain their retirement savings in the system.
Provident Fund Investment
To set up provident fund, AMC will require information from the employer and the employees with regards to experience with investment asset, investment obligations, average age of employees to see investment time horizon, risk tolerance levels, and desired levels of returns (Customer’s Profile). AMC will analyze Customer’s Profiles to propose appropriate investment plan for the employees (Suitability). Fund Committee together with AMC will design suitable investment plans for employees.
Provident fund investment must be under the regulations of the Securities and Exchange Commission (SEC), fund registrar and supervisor. Nowadays employee’s choice is provided for employees. In order to know their investment objectives and acceptable risk level, the employees need to fill in “Member Risk Profile” to evaluate themselves and select the suitable investment plan. Otherwise, they can join “Target Date” Fund which a series fund over time and portfolio becomes increasingly conservative as it nears the target retirement date.
Provident Fund Benefits
Provident Fund Type under Principal’s Management
Single Fund - established by the sole employer or many employers which are affiliated companies. There are two types of Single Fund:
Pooled Fund - established by AMC for small companies to share all the fixed costs (economy of scale). There are three types of Pooled Fund
Target Date Fund
Principal Asset Management Company Limited sets up an innovation fund named “The Registered Provident Fund of Principal Target Date” which is master-sub pooled fund with Target Date platform and Target Risk platform which are able to satisfy both provident fund member who has little knowledge about investment and who is very keen on investment.
Problems that provident fund member faces presently
There are two platforms in this pooled fund:
1. Target Date – Member selects the investment plan once according to his/her year of retirement. The portfolio will be managed closely by fund manager. The portfolio’s asset allocation and risk will be adjusted to suit the member’s age. This platform is suitable for member who would not like to select plan by him/herself.
2. Target Risk – Member selects the investment plan which matches his/her risk tolerance level. This platform is suitable for member who is confident that he/she is able to select the most suitable plan for his/herself.
Target date funds have become very popular among those who are saving for retirement. They are based on the simple premise that the younger the investor, the longer the time horizon he or she has and the greater the risk he or she can take to potentially increase returns. A young investor's portfolio, for example, should contain mostly equities. In contrast, an older investor would hold a more conservative portfolio, with fewer equities and more fixed-income investments.
Benefits for members:
No uncertainty – to select the suitable investment plan
No confusion – to switch the investment plan
This fund is designed to meet the needs of member that wants an investment option suited to the his/her particular investment time horizon and that tends to be more accepting of risk in the early years of his or her time horizon and becomes more risk-averse as he or she nears the retirement.
The investment objective of this fund is to seek a total return consisting of long-term growth of capital and current income consistent with the investment strategy of member who expects to retire in the year identified.
A glide path is a representation of how we manage a series over time and how it becomes increasingly conservative as it nears the target date.
Each sub fund is pure investment asset which is managed to get return not much deviated from index return (benchmark). There are five sub funds as follows:
* Sub Fund: iDAILY
This sub fund is short-term fixed income fund and is able to invest onshore and offshore with fully hedged.
Target: For member who needs rate of return higher than bank deposit and high liquidity.
* Sub Fund: iFIXED
This sub fund is medium- term fixed income fund which is expected to have higher return than money market fund, short-term bond fund and inflation rate in the long run. This sub fund is able to invest onshore and offshore with fully hedged.
Target: For member who needs good rate of return for medium-term and long-term and can accept interest rate risk.
* Sub Fund: iDIV
This sub fund invests in high and consistency dividend stocks for consistent income with less volatility as well as growth stocks of the companies whose earnings are expected to grow at an above-average rate relative to the market.
Target: For member who needs high rate of return with high tolerance risk level.
* Sub Fund: iEQ
This sub fund invests in offshore growth stocks of the companies whose earnings are expected to grow at an above-average rate relative to the market. This sub fund invests thru one or several foreign investment funds (FIFs) depending on fund manager’s investment outlook. These FIFs can be hedged or unhedged, so the currency risk is involved.
Target: For member who needs to diversify investment to offshore to gain return from global stocks. This sub fund is suitable for member who has high tolerance risk level.
* Sub Fund: iPROP
This sub fund invests in property funds and reits which yield good and consistency return from rent payment that tends to increase in the future related to higher inflation rate. Member can get the return from capital gain, dividend and auto-redemption. This sub fund is the alternative investment for more diversification.
Target: For member who needs higher rate of return than fixed income rate. The risk level is medium and suitable for long-term investment.