New Remchannel study warns of unseen negative consequences of salary flexibility on pension savings

Johannesburg - The shift towards a Total Guaranteed Package (TGP) basis for pensionable salary determination is shaping the retirement savings landscape for South African workers but is also having unintended consequences, according to a new Benefits study by Remchannel.

Lindiwe Sebesho, Managing Director of Remchannel, a division of Old Mutual Corporate specialising in remuneration and benefits research, insights and advice to help clients attract, motivate and retain talent, said there was an increase in companies that had adopted TGP as the basis for pensionable salary, a change from traditional models that referenced Basic Salary, which consists of only of the cash elements of package.

“Whilst the move towards TGP, which consists of both the cash and the cost of all benefits, potentially means a higher amount is referenced for retirement savings, our findings also indicate that more employers offer flexibility with regards to the percentage of TGP that can be used. This means that without adequate guidance, employees may still opt options that result in short-term gains at the expense of their long-term financial security,” Sebesho elaborates.

The Remchannel 10^th Employment Benefits Guide 2024, published in December 2023, scrutinises the impact of shifting the remuneration basis for retirement savings, with findings that prompt a need for careful consideration of the long-term impact of current trends. Derived from a survey encompassing 94 organisations across varied sectors, this report highlights the nuanced implications of the shift towards Total Guaranteed Package (TGP) models on employees’ retirement planning.

The survey report indicates that most participants now base the pensionable salary on TGP (54.5%). However, only 22% of the participants require employees to base their retirement contribution on 100% of TGP.  The remaining 78% provide employees with flexibility to elect their pensionable salary as a percentage of TGP ranging between 40% and 95% of TGP. Only one company reported that employees can elect up to 160% of TGP, meaning that employees are enabled to save more towards retirement.

In response to a call for flexibility from employees, some companies still base the pensionable salary on Basic Salary or the cash component of the package – 80% base it on 100% cash while the remaining 20% provide flexibility to employees ranging between 30% and 97% of basic salary.  This has a major impact on retirement savings where employees may elect to save based on the minimum pensionable amount to maximise their take home pay.

Sebesho notes that Basic Salary is normally only 66% of total guaranteed package, which means that the actual pension fund contribution rate can be as low as 30% of the 66% TGP. This typically has a profound impact on the retirement outcomes and employee expectations of outcomes at retirement. In addition, the use of pensionable salary vs TGP can also impact the quantum of the risk cover in place for employees. 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 if pensionable is 66% of TGP.

She says this evolution in pensionable salary determination has far-reaching implications, challenging employees and employers to navigate the delicate balance between immediate financial needs and long-term retirement readiness, underscoring the urgency for informed decision-making in an ever-changing economic landscape.

Responsibility key to effective adapting to a new era of retirement planning

In the wake of these findings, companies and HR managers are urged to consider how their strategies can help address the short-term needs of their employees without compromising their long-term financial well-being.

“The post-Covid world has only accentuated the need for more adaptable, supportive retirement benefits strategies,” Sebesho notes. “Employers have a crucial role to play in not just offering flexibility, but also in ensuring employees make informed decisions for their future.”

Encouragingly, the report also shows trends towards employers who enable their employees to elect higher contributions, underscoring the importance of employer involvement in enhancing retirement savings.

Another mechanism is through allowing top-up payments for retirement funding. There are tax advantages to increasing retirement funding contributions. Currently, the amount the employee is entitled to as an annual tax deduction is limited to the lesser of R350,000 and 27.5% of the employee’s 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 (February or at any other time) to enable employees to contribute more towards retirement and get the maximum tax benefit.

Some employers permit supplementary retirement funding, however only 13.8% of the participants reported that supplementary retirement funding is offered as an option to employees. This would mean that employees could make their own arrangements, and the deductions would be permitted to go through the company payroll.

The survey also indicated that 58.4% of companies allowed employees to elect a higher / lower employee contribution to retirement funding. Just over a quarter (25.6%) allowed employees to elect a higher / lower employer contribution, and nine companies indicated that they gave 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 on the impact of the elections they make on their retirement outcomes. In addition, employees should be earnestly encouraged to consult their fund administrator or a financial advisor before deciding on retirement options related to their retirement savings,” Sebesho concluded.