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How to Set Up a Provident Fund

    IndianMoney.com Research Team | Wednesday, May 27,2009, 04:21 PM
 

To set up a provident fund, six necessary steps must be taken in the following order :

  • Campaign for Prospective Members
  • Election and Appointment of Fund Committee
  • Selection and Appointment of Management Company
  • Signing Contract with the Appointed Management Company
  • Fund Registration
  • Fund Management and Reports

Step 1: Campaign for Prospective Members


Setting up a provident fund requires, mutual cooperation between the employer and its employees. While the former facilitates knowledge enhancement and better understanding, the latter or potential fund members should study their own savings patterns in parallel with the rights and benefits, mainly tax incentives, of provident fund investment. Campaigning for a provident fund can come in any flexible formats those suit employees’ characteristics, many common approaches like printed materials, seminars and Q&A sessions regarding the importance and mechanism of the provident fund, help to elevate employees’ awareness of retirement savings.

Step 2: Election and Appointment of Fund Committee


Once the employer and the employees implant a mutual understanding of provident fund, they should be ready to reach an agreement to set up one that will best serve both parties. The next preliminary step is to appoint a fund committee to supervise the fund management, under the Provident Fund Act B.E. 2530; the fund committee must include representatives elected by the employees and those appointed by the employer.

Step 3: Selection and Appointment of Management Company


The fund committee is authorized to appoint a management company, the committee is recommended to go through a selection procedure before making a final decision. Other professional service providers will also be busy in fund management to comply with the mandate that provident fund assets must be segregated from those of the employer’s and the appointed management companies. Such qualified service providers, i.e., “custodian” and “auditor” must obtain a license to perform their respective tasks from the Office of the Securities and Exchange Commission (SEC). The custodian has duties to take custody and ensure safekeeping of provident fund assets, the auditor has duties to audit and confirm fund financial reports. Besides, the management company may delegate administrative duties to “fund administrator” whose duties include collecting contribution, registering members and disseminating semi-annual statements to members.

Step 4: Signing Contract with the Appointed Management Company


The period of a management contract should be long enough to accommodate a provident fund’s purpose of long-term investments for retirement savings. In addition, regular changes of management companies should be avoided as they may result in discontinuance of investment policies and mismanagement of assets/liabilities, which will lead to short-term benefits and possibly unachieved long-term goals. The present regulation requires a minimum management term of at least two years. Before signing a management contract, the fund committee should be careful to protect the best interest of the fund members.

Step 5: Fund Registration


A contracted management company should act as a coordinator for the execution of fund registration or fund article amendment; there are two forms of provident funds as follows :
  • 1. Single Fund:One provident fund for one employer whose fund size is comparatively large.
  • 2. Pooled Fund: One provident fund for various employers whose fund size ranges from small-to medium-sized.

A pooled fund article consists of two parts, i.e., general conditions for all employers and precise conditions for individual employers.

Step 6: Fund Management and Reports


Fund management and records include the following;

Contribution remittance and member records
Employer may allocate the personnel department or the finance department to take responsibility for member records for contribution collection. Employer is bound to remit contributions into the fund within three business days after the date of wage payment; a violation would result in a monthly surcharge of 5% of the delayed amounts.

Investment
Contributions remitted to the fund will be managed by one or more management companies under the supervision of the fund committee to ensure that the fund manager will invest in compliance with the fund management contract. The SEC has also extended the concept of “employee’s choice” to provide members with an opportunity to select an investment policy that best suits their own risk tolerance and return expectations. Nevertheless, whether or not this concept can be effectively implemented depends on the members’ awareness and understanding of capital market investment.

NAV Calculation
The Net Asset Value (NAV) of the fund is calculated upon the Mark-To-Market (MTM) practice, market prices of several assets in the portfolio such as stocks and bonds determine the fair value of fund assets. The fund committee and the management company agree on the frequency of trade dates that must take place minimum once a week. The NAV – primarily assessed by the management company – is updated upon a specified trade date and verified by an NAV verifier to ensure accuracy.

Reports
The management company renders the fund committee with monthly and annual reports on the investment portfolio and returns. Members receive semi-annual statements of their contributions and benefits, members’ queries concerning the fund management can be made through the fund committee.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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