How to Compute Retirement Pay in the Philippines

How to compute retirement pay in the Philippines? On January 7, 1993, Republic Act (R.A.) No. 7641, otherwise known as the New Retirement Law, took effect and amended Article 287 of the Labor Code of the Philippines (PD No. 442).  According to the new law, any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract.

We cannot stop the aging process of the nature. No matter who we are, we will reach the time that we need to retire from our job. In the principle of good employment, it is just and reasonable that retiring employees will receive due benefits to support them after serving their employers for years. Moreover, they need sufficient amounts of fund that will support their daily living at the age of 60 and above. Thus, the law intended to protect the welfare of those workers and employees.

Coverage of this provision

Republic Act No. 7641 or the Retirement Pay Law shall apply to all employees in the private sector, regardless of their position, designation or status and irrespective of the method by which their wages are paid. They shall include part-time employees, employees of service and other job contractors and domestic helpers or persons in the Personal service of another.

The law does not cover employees of retail, service and agricultural establishments or operations employing not more than ten (10) employees or workers and employees of the National Government and its political subdivisions, including Government-owned and/or controlled corporations, if they are covered by the Civil Service Law and its regulations.

Qualification of employees subject to retirement pay

Employees who are covered by RA No. 7641 can have an optional or compulsory retirement.

Optional Retirement. — In the absence of a retirement plan or other applicable agreement providing for retirement benefits of employees in an establishment, an employee may retire upon reaching the age of sixty (60) years or more if he has served for at least five (5) years in said establishment.

Compulsory Retirement. — Where there is no such plan or agreement referred to in the immediately preceding sub-section, an employee shall be retired upon reaching the age of sixty-five (65) years.

Upon retirement of an employee, whether optional or compulsory, his services may be continued or extended on a case to case basis upon agreement of the employer and employee.

Service Requirement. — The minimum length of service in an establishment or with an employer of at least five (5) years required for entitlement to retirement pay shall include authorized absences and vacations, regular holidays and mandatory fulfillment of a military or civic duty.

Computation of retirement pay

A covered employee who retires pursuant to RA 7641 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.

The law is explicit that “one-half 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 service incentive leaves” unless the parties provide for broader inclusions. Evidently, the law expanded the concept of “one-half month salary” from the usual one-month salary divided by two.

In reckoning the length of service, the period of employment with the same employer before the effectivity date of the law on January 7, 1993 should be included.

Substitute Retirement Plan

Qualified workers shall be entitled to the retirement benefit under RA 7641 in the absence of any individual or collective agreement, company policy or practice. In case there is such an agreement, policy or practice providing retirement benefit which is equal or superior to that which is provided in the Act, said agreement, policy or practice will prevail.

PAG-IBIG Fund as a substitute retirement benefit
As provided in RA 7742, a private employer shall have the option to treat the coverage of the PAG-IBIG Fund as a substitute retirement benefit for the employee concerned within the purview of the Labor Code as amended; provided, such option does not in any way contravene an existing collective bargaining agreement or other employment agreement. Thus, the PAG-IBIG Fund can be considered as a substitute retirement plan of the company for its employees provided that such scheme offers benefits which are more than or at least equal to the benefits under RA 7641. If said scheme provides less than what the employee is entitled to under RA 7641, the employer is liable to pay the difference.

If both the employee and the employer contribute to a retirement plan, only the employer’s contribution and its increments shall be considered for full or partial compliance with the benefit under RA 7641. On the other hand, where the employee is the lone contributor to the PAG-IBIG Fund, the employer being exempted from its coverage, the employer is under obligation to give his employee retirement benefits under the Act.

Guidelines for the Effective Implementation of R.A. 7641, The Retirement Pay Law

Disclaimer: This article was published for informational use only. New laws, rules, and DOLE issuances may render this article obsolete in whole or in part. For more information please visit and inquire with the Department of Labor and Employment (DOLE).

Victorino Abrugar is a retired CPA practitioner, a blogger, speaker, and an entrepreneur. He's the CEO of Optixor, Inc., a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.