Employer PRS Default Fund and an Older Employee's Fund Choice
A 15-employee engineering firm wants to start a PRS for its staff. It will contribute RM1,200 per employee per year, paid monthly, and has selected a PRS provider with a default core fund and several non-core funds. The firm asks whether employee consent is needed, what happens if an employee does not choose a fund, and whether the employer contribution is tax deductible. One employee, aged 52, wants to put 100% into a non-core aggressive equity fund because he plans to retire at 55 and wants higher returns. Another, aged 24, is happy to leave the default. The firm also wants to know whether it can vary or stop contributions later. The HR manager has read that PRS is voluntary but is unsure how the default option and switching rules work.
1. Explain how the default fund works and assess the 52-year-old employee's request.
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Employer PRS contributions are voluntary, but once the employer adopts a scheme it must follow the scheme rules and the provider's arrangements. If an employee does not choose a fund, contributions are invested in the default fund, normally a core fund designed for members who do not make an active choice. The 24-year-old can remain in the default.
The 52-year-old may choose a non-core fund, but 100% aggressive equity with three years to retirement is a high sequence-risk decision. A market fall just before withdrawal can permanently reduce his retirement sum, because there is little time to recover. The employer should not override his choice, but should ensure he receives the Product Highlights Sheet and a clear risk explanation. The default core fund or a lower-volatility non-core fund may better match his short horizon.
2. Explain the tax treatment, the employer's flexibility to vary contributions, and the employer's ongoing obligations.
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Employer contributions are generally tax deductible, subject to current tax rules. Employee contributions qualify for personal tax relief up to RM3,000 a year, also subject to current rules. The firm can vary or stop future voluntary contributions unless it has contractually committed otherwise, but it must not recover contributions already made.
Ongoing obligations include remitting contributions on time, providing employee statements and allowing employees to switch funds under the scheme rules. The firm should also give new employees the required disclosure and explain that the default fund applies only until the employee makes a valid choice. Records of employee fund choices and remittances should be kept.