Superannuation - a general discussion

This paper discusses the general philosophy behind employment based superannuation, together with the arguments for and against an employer providing employee benefits. It also looks at the general options available to an employer.

The role of superannuation

Superannuation should always be viewed within the context of the human resource strategy and the business goals of an organisation. The role of superannuation, like other management policies, must relate to building or maintaining a competitive advantage to the organisation, by the efficient management of employees. The basic objective of providing superannuation therefore, should tie into all or some of the stages of an employee’s career with the organisation, depending on the overall long-term needs of the organisation. The three stages relate to:

• the attraction of new employees;

• the retention and motivation of current employees, who are important to the organisation;

• the facilitated "retirement" of non-performing employees. Retirement in this context refers to employees leaving the employer at any age, where it is in the employer’s interests.

Superannuation can also play a role in the prudent financial management of the organisation by reducing the costs to the organisation, or assisting in the funding of the costs, of involuntary severance of non-performing employees. This is particularly relevant since 1 February 1999 when it became no longer possible to retire an employee on account of age.

KiwiSaver

Superannuation career and financial management

To facilitate the career and financial management of employees, superannuation can:

promote the organisation as a good corporate citizen;

reinforce the organisation’s core values and culture;
provide potential employees with a comprehensive, but flexible, remuneration package;

assist employees capture the government subsidies and other advantages of KiwiSaver;

provide long-term rewards to encourage long-term performance;

encourage loyalty and longer service;

assist in the succession and career planning of the organisation;

encourage employees to build financial security or provide employees with financial security;

meet or directly provide for the financial needs of employees.

Not all of the above factors will be applicable for every organisation and superannuation is unlikely to achieve any, or all, of them in isolation. It is also doubtful whether a superannuation plan will, by itself, attract, retain and motivate key employees. However, this is not to say that superannuation cannot contribute in these areas, as part of a wider strategy. Superannuation must be viewed with reference to its contribution, reinforcement and relevance, to the human resource strategy and other policies and practices of the organisation. Collectively these are designed to achieve the attraction, retention and motivation goals.

Career management and financial management are issues from the employer’s perspective where there will or will not be an identifiable benefit. Providing an employment related superannuation plan can also provide cost savings to an employee, at no, or minimal cost to an organisation. This is based on the group purchasing power of the organisation. Giving employees access to wholesale, as opposed to retail products, is a real benefit.

Employee’s financial health

Superannuation can play a role in employee and organisation management because of the personal financial needs of the employee. By helping the employee, the employer may gain an advantage greater than the associated cost. Part of that advantage will also be minimising risk to the organisation.

Employers have an interest in the financial health of their employees whether they like it or not. For employees to work effectively and in the interests of an organisation, the distractions to the employer’s business as a result of an employee’s poor personal financial management need to be minimised. If an employee's financial affairs are not in order, the time lost, and the disruption to, the business may be significant.

An employee’s financial health extends to both short-term needs (immediate cash flow and life, disability and health insurances) and long-term needs (retirement savings). Superannuation can assist the management of the business by providing a partial solution

to these needs. However, this does not mean that an employer should adopt a paternalistic approach to superannuation. Employers are often better to adopt policies that encourage employees to be responsible in respect of individual financial needs, without committing the organisation to long-term unsustainable costs.

Turnover

While the potential cost to an organisation of employee inefficiencies and financial distractions, in terms of money and management time, is considerable, the cost of high employee turnover is also large.

Superannuation aims to contribute to the goal of minimising turnover though, it is doubtful that superannuation can, on a consistent basis, directly influence employee turnover, without incurring significant costs. However, by shaping attitudes and culture, superannuation can have a measurable indirect impact. When providing superannuation, an employer needs to find a balance so that healthy retention is encouraged, but unhealthy retention of under-performing staff is not.

Environment

In terms of the current environment the issues that employers need to consider when determining their retirement policies include:

KiwiSaver: Under the current KiwiSaver regime, employers have to subsidise an employee’s KiwiSaver savings at 3% of total taxable pay. This applies to all employees 18 or older. The question therefore is “does the employer gain by doing something on top, that integrates with KiwiSaver or works alongside KiwiSaver”? Also, should KiwiSaver be on top of the employees’ remuneration or built-in? This is the pay+benefits versus total remuneration issue.

Value: In the absence of tax incentives, the real value that an employer can add is group purchasing power. For many employees, paying contributions is no different to paying salary. The exception is for those earning between $70,000 & $84,000, between $48,000 & $57,600 and between $14,000 & $16,800, when salary sacrifice or superannuation benefits confers a small tax benefit.

Compliance costs: In recent years legislation has imposed increased compliance regulations and costs on superannuation plans. Compliance with legislation requires management time and incurs professional/advisor fees. Unless an employer can spread such costs over a large pool of assets or a significant number of employees, employers may be better off not operating their own employer plan.

Employee mobility: Employee mobility means many employees no longer look to their employer as the sole or main source of their retirement income. In fact some prefer to keep their financial arrangements separate from their employer.
Employee profile and demographics: The demographics within different parts of an organisation may mean that superannuation is not an attractive or a valued benefit across the whole company. A company may therefore need to distinguish between different employee groups.

Individual needs: Employees have different needs and requirements. Traditionally an employer plan was designed for the “average” employee. With cost constraints, an “average” superannuation plan may not be an efficient use of the employer’s resources. It may also not be the best way to meet all employees’ individual needs. An employer may have a goal to help employees become financially healthy, but should be indifferent as to whether an employee improves their financial well being, by paying off debt, or investing directly for retirement.

Accountability: In many organisations the desire to encourage individuals to take responsibility for their actions and decisions in their job, can be reinforced by encouraging the same in terms of the employee’s personal finances particularly retirement savings.

Core business: Superannuation is not a core business activity of most employers. Employers may be better to leave it up to external organisations that specialise in the superannuation area so they can focus on their core business.

Alternative products: In the past the range of alternative products in the market place has been limited. In recent times more flexible and lower cost products have been established.

In the context of the above each employer must balance its benefits and needs with its resources in determining its retirement policy.

Retirement policy options

Because employers have an interest in the financial health of their employees, “best practice” suggests that employers should have a retirement policy. The policy should extend beyond a simple attitude to superannuation and cover succession planning, culture and general employee management.

As part of that policy employers will determine what role they should play in the retirement savings (i.e. the provision of superannuation) for their employees. Cost, value added, philosophy and ensuring that the employer’s interests are protected, will drive the scope of the role. The options open to an employer include:

A. Doing nothing;

B. Providing access to a vehicle(s) for employees to provide for themselves and encourage individual responsibility;

c. Establishing an employer subsidised plan (either stand-alone or via a master trust) and:

(i) contribute in full; or

(ii) contribute in part; or

(iii) not contribute at all, except perhaps to assist with the administration costs.

While the three options appear significantly different they have similarities, but different underlying philosophies. The difference between A and B is that B gives employees access to wholesale priced services and information to enable the employee to save, and the employer makes a conscious effort to promote or encourage superannuation. B, need not cost the employer directly, but reduces the employer-risk associated with poor employee decisions. If option B is adopted, there may be advantages in offering a range or choice of vehicles. This eliminates the risk associated with using a single provider.

The difference between B and C is that under C, the employer also contributes and therefore makes decisions on the subsidy level, vesting of the subsidy, management etc. This creates a different culture relating to partnership. However, C also affects remuneration levels and must therefore be consistent with the remuneration policy.

In order for B to work successfully it requires the employer to create a sustainable environment where employees will consistently act in their own long-term interests. This requires constant education and information encouraging individuals to act responsibility and motivating the employees to act. Education should not be restricted to information at the launch with no regular follow up.

It can also be argued that option C requires a significant level of employee education if the employer is to receive appropriate recognition for the value of its subsidy and the costs of operating a plan though C can work with less education. The issue is will employees appreciate the value if they are not constantly reminded?

Whether option B or C is adopted, encouraging individual responsibility through education and flexibility is perhaps the most likely scenario to ensure success and value for money and to justify doing something other than A. The success would be twofold. First, in helping employees manage their long-term financial health. Second, in reducing dependency on the employer and reducing the long-term demand for employer contributions and cost of severance payments. Education and flexibility also enables individuals to balance the competing demands on their immediate financial resources with the full knowledge of the impact and consequences of their decisions long-term.

Educating employees about their individual responsibility for providing for their retirement is consistent with the trend to individual accountability in decisions affecting their job responsibilities. In many cases retirement education will also have the advantage of promoting other human resource initiatives of the employer. However it requires, a commitment from the employer to ensure adequate resources are allocated at the onset and then each year to ensure its success. It cannot be achieved with a one-off effort.

If an employer goes down the education route then, the employer must decide whether or not they should provide a wholesale facility (i.e. a superannuation plan) for employees to buy the financial services they require or whether the employees should access the products available in the retail market. In most cases the answer to this will be the former, as employers can deliver the benefits of group purchasing power and economies of scale at no cost to themselves. In providing the wholesale facility employers can look to master trusts or group schemes as the vehicle, as opposed to having their own stand-alone plan.

Summary

The arguments for an employer providing superannuation, relate to the benefits the employer it can gain and the benefits it can confer on its employees. The employer can gain in the three key areas:

Employee management i.e. the recruitment (attraction), progression throughout their career (retention and motivation), and severance (succession planning) at the end of their career with the employer.
Financial management i.e. reducing, or assisting with, the funding of the costs associated with severance and succession planning.
Purchasing power i.e. providing benefits to employees that they need and want, at a price lower then they can achieve themselves.

From an employee benefit viewpoint, this last advantage can be significant. Typically under a retail savings or superannuation plan, individuals incur costs of 2% to 2.5% p.a. of assets. In contrast under an employer arrangement the costs are typically 0.2% to 1.5% of assets, depending on size etc. Over the long-term, fee reductions of this level result in savings approximately 20% higher or alternatively, savings can be less to achieve the same benefit. Similar savings can also be made in terms of life, disability and medical insurance. Therefore, even if an employer does not directly contribute to a superannuation plan, the employer can offer a significant benefit to employees by using its purchasing power to obtain wholesale rates.

However, if an employer establishes and/or promotes a superannuation plan then the costs in terms of compliance and contributions are significant. If something goes wrong (e.g. poor investment performance) the employer may feel a moral obligation to put it right. Even if there is no moral obligation, there will be a cost of “distraction” to the organisation. These costs and risks have to be weighed up against the costs to an organisation of not having a plan to determine whether or not there is a balance of advantage. An employee benefit programme should only be operated if it will give the employer a balance of advantage, relative to the associated costs and risks of not providing a plan.