According to
Pakistani law provident fund and gratuity funds are two distinct things. Provident funds are paid to regular employees
and gratuity payments are made to contract employees. Gratuity is a tip for
good services and therefore its payment is contingent on successful completion
of contract. Employees who are removed on disciplinary basis are not entitled
to gratuity payments.
Permanent
employees are to be paid provident fund at the end of service irrespective of
quality of their services. Hence, removal of permanent employee from employment
on disciplinary basis doesn’t disqualify him/her for receiving provident fund.
How these
funds work
Employer
makes regular payment to these funds and these funds are then invested in
variety of securities. The returns generated on these funds are reinvested and
generally paid to employees at the end of their term.
Employers
register these funds as trusts and appoint the trustee who oversee and invest these
funds for the ultimate benefit of beneficiaries.
Tax
treatment
These funds
are exempt from taxes provided they are registered. Any unregistered fund is to
be taxed at reduced rate.
Where these
funds are invested
These funds
are invested in variety of securities. Generally Govt. securities are preferred
for the investment as these are secure and there is smaller risk of default. A
small portion of fund can also be invested in equity to generate increased
return. The problem faced by the managers of the fund is to strike a balance
between return and risk.
Federal Govt
provident fund
Federal Govt
maintains provident fund for its employees. Finance Ministry has notified new rates
for minimum subscription to GP fund. Employees in grade 1 has to pay at least
3% of their average salaries in the fund. From BPS 2 to BPS 11 employees has to
subscribe atleasat 5% of their mean salaries into the fund whereas BPS 12 and
above will have to contribute on minimum 8% of their mean salaries to the fund.
Govt. pays
11.30 % per annum mark up on the fund to civilian employees serving under
ministries other than defense and railway ministry.
Challenges
for provident funds/gratuity funds
These funds
must earn huge returns to pay off the accruing liabilities. This present a challenge
to fund manager (trustee), who has to invest these funds in venues where
returns outweigh the risk. With one wrong decision, the fund manager risks
millions of workers’ hard earned money. To find a right balance between risk
and reward a manager employees the services of financial analysts. These
professionals make sure that workers’ hard earned money doesn’t wipe away in
market crashes.
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