According to the Society for Human Resource Management, work benefits constitute 30% of the reasons why employees leave or stay at their current organizations. What this means is that the businesses that offer better benefits could have lower employee turnover rates, thus keeping their best workforce. This eventually results in the business goals being achieved. Pension plans are one of the things you could add to your benefits arsenal. In this article, we look at what pension plans are, pension plan types, and retirement plan pros and cons.
What is a Pension Plan?
A pension plan can be defined as a pool where an employer deposits funds on behalf of the employees for the sake of the employees’ future. An employee is free to add to the pool, and the employer usually matches the employee’s contribution (up to a certain percentage or amount).
Types of Pension Plan Schemes
There are three types of pension plan schemes: defined contribution, defined benefit, and hybrid schemes.
- Defined Contribution Schemes
In defined contribution schemes, both member and employer contributions are fixed. The contributions could be a percentage of pensionable earnings or a specified amount. An employee’s retirement benefits will be equal to the contributions made to the scheme. However, expenses like insurance premium payments are deducted. Returns on investment, surpluses, and deficits are added to the employee’s benefits as determined by the scheme’s trustees.
- Defined Benefit Schemes
In defined benefit schemes, benefits are defined at the outset, rather than by the scheme rules. The number of years of service and/or the employee’s last final salary is what determines the benefits an employee gets.
- Hybrid Schemes
These schemes try to combine both defined benefit schemes and defined contribution features. They however try to lean more toward the former.
Why Offer Pension Plans for Your Employees?
It is not mandatory that employers provide pension schemes for their employees. Why then is it important?
- Tax Exemptions
It is possible to apply for tax exemption if you are an employer. This is however in the event that you register an occupational pension scheme (where only the members of staff of a particular employer can join). The tax relief is only on the contributions made to the scheme. The contribution is deducted from a member’s gross salary before tax is calculated.
The Kenya Revenue Authority also allows a tax relief of up to Kshs. 20,000 per month (Kshs. 240,000 annually) for amounts contributed to registered schemes.
- Attract Top Talent
Highly skilled employees are likely to be headhunted or have several job offers at a time. Having a pension scheme can be one of the ways to stand out from other companies. Employees are likely to have more confidence in companies with well-managed pension schemes, amidst constantly changing economic factors.
- Employee Motivation
Since employees are assured of a better retirement, they are more likely to remain loyal to their employer and work effectively to see that the company becomes successful. Pension plans show that a company values its employees, which creates a good public image.
Having a pension plan for employees comes with various benefits like tax exemptions, attracting top talent and employee motivation. Of importance is to find the right pension scheme partners who incorporate technology to make managing your employees’ retirement even smoother. Let us know how we can help.