Are employers obligated to match employees' contributions to a pension scheme?

I read a letter from a reader to you on November 14, 2010, and asked the employee representative of my company's pension scheme if that applied to us. To my utter dismay, I was told that there was no employer contribution to the pension scheme at my company. Are employers obligated to match employees' contributions to a pension scheme?

- Juliet

PFA: The answer to your question depends on the type of pension arrangement that is in place at your place of work, so I will begin by clarifying the difference between a pension scheme and a pension fund due to the general confusion in the use of those terms.

The Pensions Superannuation Funds and Retirement Schemes Act 2004 describes an approved retirement scheme as "a scheme to which persons who are self-employed or who are not active members of an approved superannuation fund make contributions towards a pension". It is a defined contribution plan.

The Pensions Act defines an approved superannuation fund as "a fund whereby contributions towards a pension are made by or on behalf of employees". An approved superannuation fund may be a defined benefit plan or a defined contribution - money purchase - plan.

An approved retirement scheme is an individual pension arrangement; an approved superannuation plan is a group pension arrangement.

A clue to your question is found in what is required for a superannuation fund and a retirement scheme to be approved by the Financial Services Commission as set out in the Pensions Act.

Here are some relevant clauses from the act:

"The fund is a bona fide superannuation fund established under an irrevocable trust ."

The principal purpose of the fund is the provision of a pension or annuity on retirement of members at a specified age or upon earlier retirement as provided in special circumstances

The sponsor is a contributor to the fund.

The ordinary annual contribution made by a sponsor in respect of a member shall not exceed 10 per cent of that member's annual salary or wages, so, however, that where the contribution of a sponsor does not meet the minimum funding and solvency requirement, the sponsor may make special contributions in order to meet those requirements.

Yearly contributions to the fund by an active member shall not exceed 10 per cent of the member's annual salary or wages.

The terms and conditions of employment include a requirement that an employee in a pensionable post becomes a member of the fund and that contributions of the sponsor and members shall be made to the same superannuation fund.

With respect to approved retirement schemes, the conditions are as follows:

The scheme is a bona fide retirement scheme established under an irrevocable trust

The members of the approved retirement scheme are persons who are self-employed or are employed in non-pensionable posts and do not otherwise contribute to an approved superannuation fund or another approved superannuation scheme; or on termination of employment have transferred their pension benefits from an approved superannuation fund to the approved retirement scheme

The annual rate of contribution does not exceed 20 per cent of annual emoluments

Each member is to contribute on a regular basis, at least once per year

If an employer contributes to the approved retirement scheme on behalf of a member, those contributions form part of the member's contributions for the purpose of determining whether the prescribed limit of contributions has been reached.

The contribution of the employer shall not exceed the maximum prescribed contributions payable under an approved superannuation fund.

You will see from the above that an employer does not have to contribute to an approved retirement scheme on behalf of an employee, but must contribute if the pension arrangement is an approved superannuation fund.

But must the employer match the employee's contribution in that case? The employee may contribute up to 10 per cent of his annual salary to the fund but it is the rules of the fund that establish the minimum that must be contributed, the compulsory contribution. The difference between that and the 10 per cent is called the voluntary contribution.

The employer may contribute a sum equivalent to 10 per cent of the employee's salary but it is not a requirement that he matches the employee's contribution. It is the rules of the fund that establish the level of that contribution.

In the case of a defined benefit plan, should the actuarial valuation of the fund show that its assets are insufficient to meet its future liabilities, the employer is required to fund the deficit.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Email: finviser.jm@gmail.com