Southern Mindanao Colleges

Subject: Ed. 240

Topic: Retirement Plan Philippine Law
Professor: Mary Arlene Carbonera, Ed.D.
Masterand: Ann Catherine B. Peñas

Republic Act No. 7641             December 9, 1992

AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS

AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES,
BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR
EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE
ESTABLISHMENT

Be it enacted by the Senate and House of Representatives of the Philippines in

Congress assembled:

Section 1. Article 287 of Presidential Decree No. 442, as amended, otherwise known
as the Labor Code of the Philippines, is hereby amended to read as follows:

"Art. 287. Retirement. – Any employee may be retired upon reaching the

retirement age established in the collective bargaining agreement or other
applicable employment contract.

"In case of retirement, the employee shall be entitled to receive such retirement
benefits as he may have earned under existing laws and any collective
bargaining agreement and other agreements: Provided, however, that an
employee's retirement benefits under any collective bargaining and other
agreements shall not be less than those provided herein.

"In the absence of a retirement plan or agreement providing for retirement

benefits of employees in the establishment, an employee upon reaching the age
of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby
declared the compulsory retirement age, who has served at least five (5) years in
the said establishment, may retire and shall be entitled to retirement pay
equivalent to at least one-half (1/2) month salary for every year of service, a
fraction of at least six (6) months being considered as one whole year.

"Unless the parties provide for broader inclusions, the term one-half (1/2) month
salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay
and the cash equivalent of not more than five (5) days of service incentive
leaves.

"Retail, service and agricultural establishments or operations employing not more

than (10) employees or workers are exempted from the coverage of this
provision.

"Violation of this provision is hereby declared unlawful and subject to the penal
provisions provided under Article 288 of this Code."

Section 2. Nothing in this Act shall deprive any employee of benefits to which he may
be entitled under existing laws or company policies or practices.

Section 3. This Act shall take effect fifteen (15) days after its complete publication in the
Official Gazette or in at least two (2) national newspapers of general circulation,
whichever comes earlier.

Approved: December 9, 1992.
Some of us have heard of the famous (or perhaps infamous) 401K of
the USA, or the Old Age Pension (OAP) of the UK. But what does the
Philippines have when it comes to benefits once one retires from
service?

The Philippines has Republic Act No. 7641 (RA 7641), also known
as the Retirement Pay Law.

Effective since January 7, 1993, this act was an amendment to Article

287 of the Labor Code of the Philippines in order to prescribe the
minimum retirement benefit which companies are mandated to pay to
their eligible employees. Since RA 7641 simply defines the minimum
retirement benefit, companies, therefore, have the option to provide
benefits more liberal than the minimum prescribed by this Act.

Companies often do this to gain an edge and be more competitive in

the market, allowing them to better attract and keep the best
employees.

While RA 7641 is defined to cover qualified private sector employees,

there are in fact exemptions from coverage by this law. Agricultural
establishments, government institutions, retail establishments
employing not more than 10 employees – all of these have no
obligation to provide the minimum retirement benefit under RA 7641.

For everyone else though, it may be high time to already take a closer
look at the regulatory benefit under the Retirement Pay Law. Key
questions that one must ask include, “When does an employee
become eligible?” and, perhaps more importantly, “What benefit
does it provide?”

Eligibility and Benefits

Employees who retire – not resign – at age 60 with at least 5 years of

service with the company will be entitled to the minimum regulatory
benefit under RA 7641. What must be noted here is that a retiring
employee must satisfy the dual condition of both minimum age (Age
60) and minimum service years (5 years) to be eligible for entitlement
under RA 7641.

So what then is the benefit under the Retirement Pay Law?

A brief backgrounder: the actual text of RA 7641 uses the term “one-

half month salary for every year of service.” However, one should not
make the mistake of thinking that “one-half month” means “50%” —
because it does not.
The reason for this is that RA 7641 goes on to further define that “one-
half month” includes ALL of the following three components:

 15 days salary
 cash equivalent of 5 days of service incentive leave, and
 1/12 of the 13th month pay

Looking at just the first two components, “one-half month” under RA

7641 is clearly already more than just 50% of the monthly salary. Add
the third component, and the actual benefit comes out as
approximately 22.5 days pay for every year of service. This now is the
minimum benefit when retiring under RA 7641.

Other Things to Note

Now that the eligibility and benefit under RA 7641 are defined, what
other questions should one ask? One common question is, “Does RA
7641 also require my company to set up a formal retirement plan?”

The answer, very simply, is No.

To clarify, the purpose of RA 7641 is to prescribe the minimum

retirement benefit to be paid by the company to its qualified
employees. But since RA 7641 does not require a company to also set
up a formal retirement plan, it becomes clear that the obligation under
RA 7641 is simply for a company to pay the regulatory benefit when it
becomes due.

Whether or not this payment will come from the company’s general
funds or from a retirement trust fund under a formal retirement plan is
a decision to be made entirely by the company.