There’s been an increase in companies adopting a Total Guaranteed Package (TGP) as the basis for determining pensionable salary.
This is a change from traditional models that reference a Basic Salary, consisting of only the cash elements of a remuneration package, says Lindiwe Sebesho, Managing Director of Remchannel, a division of Old Mutual Corporate that specialises in remuneration and benefits research and advice.
“While the move towards TGP, which consists of both the cash and the costs of all benefits, potentially means a higher amount is referenced for retirement savings, our findings also indicate that more employers offer flexibility on the percentage of TGP that can be selected to determine the pensionable salary,” Sebesho notes.
“This means that, without adequate guidance, employees may choose lower percentage options that result in short-term take-home pay gains at the expense of their long-term financial security.”
Shifting remuneration basis for retirement
The Remchannel 10th Employee Benefits Guide, published in December 2023, looks at the impact of shifting the remuneration basis for retirement savings. Its survey of 94 organisations across various sectors highlights the nuanced implications of the shift towards TGP models.
Most participants (54.5%) now base the pensionable salary on TGP. However, only 22% of the participants require employees to base their retirement contribution on 100% of TGP. The remaining 78% provide employees with the flexibility to determine their pensionable salary as a percentage of TGP, ranging from 40% to 95% thereof.
Only one company has reported that employees can choose up to 160% of TGP, meaning that those employees can elect to save more towards retirement.
Some companies still base the pensionable salary on Basic Salary or the cash component of the package – 80% base it on 100% Basic Salary, while the remaining 20% provide flexibility to employees ranging from 30% to 97% of Basic Salary. This has a major impact on retirement savings, where employees may opt to save based on the minimum pensionable amount to maximise their take-home pay.
Sebesho notes that Basic Salary is normally only 66% of a total guaranteed package, which means that the actual pension-fund contribution rate can be based on an amount as low as 30% of 66% TGP where Basic Salary is used. This typically has a profound impact on the retirement outcomes – and employee expectations – at retirement.
In addition, the use of pensionable salary versus TGP can also have an impact on the quantum of the risk cover that’s in place for any given employee. As an example, where disability benefits cover employees for 75% of pensionable salary on disability, this can mean the employee is only covered for 50% of their TGP (i.e. if pensionable salary is 66% of TGP).
Adapting to a new retirement-planning era
In the wake of these findings, companies and HR managers are urged to consider how their strategies can help to address the short-term needs of their employees without compromising their long-term financial wellbeing.
“The post-COVID-19 world has accentuated the need for more adaptable and supportive retirement benefits strategies,” says Sebesho. “Employers have a crucial role to play in not just offering flexibility, but also in ensuring employees make informed decisions regarding their financial futures.”
Encouragingly, the report also shows trends towards employers who enable their employees to select higher contributions, underscoring the importance of employer involvement in enhancing retirement savings.
Another mechanism to achieve enhanced retirement savings is that of allowing top-up payments for retirement funding in line with the tax advantages thereof.
Currently, the amount an employee is entitled to as an annual tax deduction is limited to the lesser of R350 000 and 27.5% of their remuneration. Accordingly, the majority (74.7%) of the participating organisations indicated that they allowed additional top-up payments to the fund before the end of the tax year (end of February or at any other time), to enable employees to contribute more towards their retirement and thereby secure up to the maximum possible tax benefit.
Some employers permit supplementary retirement funding, however, only 13.8% of participants reported that supplementary retirement funding is offered as an option to employees. This means that employees can make these arrangements, and the deductions thereof are permitted to go through the company payroll.
The survey also indicates that 58.4% of companies allow employees to select a higher/lower employee contribution towards retirement funding. Just over a quarter (25.6%) allow employees to do this, and nine companies have indicated that they give both the employee and employer higher/lower contribution options.
“With flexibility comes responsibility, and therefore employers and HR managers should ensure that employees are educated and provided with the necessary information about the impact of the options they select on their retirement outcomes. In addition, employees should be earnestly encouraged to consult their fund administrator or a financial advisor before deciding on any options related to their retirement savings,” Sebesho concludes.
The full Remchannel 2024 Benefits Guide provides participating organisations with benefits trends used by organisations to attract, engage and retain key skills in a highly competitive marketplace. It includes current policy and benefits information across a broad section of South African industry sectors and delivers a best practice guide for South African companies.
Need more information?
For a full copy of the latest Remchannel Employee Benefits Guide, please email Louna.Robbertse@remchannel.com.