What is a Provident Fund

A provident fund is a compulsory, government-managed retirement savings scheme similar to the Social Security program in the United States. It’s used in places like Singapore, India and Mexico. Workers contribute a portion of their salaries into a provident fund and employers must contribute on behalf of their employees. The money in the fund is then paid out to retirees. In some cases, it’s paid out to the disabled who cannot work. 


How do Provident Funds Work?

BREAKING DOWN Provident Fund

Provident fund specifics vary widely by country, but their general purpose is to provide financial support for those who meet the plan’s defined retirement age. Governments set the age limit at which penalty-free withdrawals are allowed to begin. Some pre-retirement withdrawals may be allowed under special circumstances such as medical emergencies. In Swaziland, provident fund payouts can be claimed at any age if emigrating permanently. Those who work past the minimum retirement age may face restricted withdrawals until full retirement.

If a worker dies before receiving benefits, his or her surviving spouse and children may be able to receive survivors' benefits.

Each national provident fund sets its own minimum and maximum contribution level for workers and employers. Minimum contributions can vary depending on a worker’s age. Some funds allow individuals to contribute extra to their benefit accounts and allow employers to contribute extra for their employees.

How Provident Funds Differ From Social Security

Unlike the U.S. Social Security trust funds, provident fund accounts in some countries are held in individual members’ names so younger workers don’t pay into a communal account. Instead, individuals get back the money they contributed to their own accounts plus interest or investment returns. In this regard, a provident fund’s structure resembles the U.S. concept of a 401(k). However, money in provident funds is held by the government, not by a private financial institution. And instead of employees, the government or a provident-fund board largely or entirely decides how contributions are invested. Some countries such as Singapore guarantee workers a minimum return on their contributions.

Provident funds are also different from sovereign wealth funds, which are funded through royalties obtained from the development of natural resources.

The State of Public Retirement Accounts Such as Provident Funds

While the use of private savings accounts has grown in popularity, publicly administered retirement accounts remain important in both developing and developed economies. Societies in the developing world are still catching up with the rapid rise of industrialization, movement of citizens from rural areas to urban ones and changing family structures. In traditional Asian societies, for example, the elderly were provided for by their extended families. But declining birth rates, widely dispersed families and longer life expectancies have made maintaining this extended safety net difficult. Thus, governments have stepped in to provide long term financial support.