SuperLife

Cash is king?

 

The remuneration policy of “total compensation” results in many employers moving away from superannuation and simply paying employees cash.  While this has a sound theoretical basis and has good practical support, it is not universally the right answer.  

The strongest arguments for total compensation relate to its apparent simplicity and purity in terms of equity, and its focus on individual accountability.  However, the total cash philosophy ignores, except indirectly, the interests that employers have in employees behaving sensibly from a financial perspective.  Employers benefit by employees behaving responsibly and providing for their future.

In practice everyone has conflicting demands on their money and the short-term demands, along with peer pressure, will always result in many employees not making the best decisions for their long-term benefit and security.  Where employees do not prepare for their retirement and take care of their insurance and medical needs, it creates “risks” to the employer.  The risks may result in direct financial costs, or in indirect costs through reduced productivity and lost management time.  How do employers minimise this risk without incurring significant additional costs?

One solution is to focus on educating employees to help them make the right decision for their personal situation.  Where this is successful if it is the best solution, however employees often ignore the opportunity.  An alternative solution is not to pay the full remuneration package in cash and delivers some as benefits.  This then forces the employee to make a conscious decision to keep the benefits or convert them to cash.  In reality a combination, with the focus on education, is probably best. 

The main principle behind the total compensation philosophy is focussing on the true value or cost of remuneration and not necessarily the payment of the “cash”.  The actual delivery of the remuneration should be aligned to the organisation’s HR policy needs, in the context of the organisation’s business strategy.  The issue is what behavioural practices do you wish to achieve?  It is after all total remuneration and not total cash that is important.

If employers would like employees to become financially healthy, it makes sense to deliver compensation partly by way of cash and partly by way of quantifiable benefits.  One suggestion is to pay, or require to be paid, x% of remuneration (e.g. 10%) into an employee benefit plan (probably a modern master trust).  Once in the plan, it is then up to the individual to decide whether the contribution is saved, used to purchase death, disablement or medical insurance, or withdrawn to pay off debt or to be spent.  The “do nothing option” might be the save option.  The employers role in this context is in delivering impartial information and educating employees about the consequences of their decisions.  The “x%” would include KiwiSaver.

It can be argued that for some employees, the above policy would simply introduce a layer of cost, i.e. cash is diverted to a plan only to be withdrawn.  Paying 100% cash for these employees is more efficient.  However, from an employer’s perspective delivering part of the remuneration through a plan forces the employee to make a financial decision and to consider their savings and insurance needs without restricting the employee’s freedom.  The employer need not know the actual decision made, so there are no privacy issues, but the employer can take comfort in the knowledge that employees have considered their needs to some extent.

While the above approach lends itself to fully vested employer contributions, they need not be.  A vesting scale, particularly a short one, would work (e.g. 1/3 for each of the first 3 years), if there are business reasons for the employer getting involved in subsidising the outcome or deferring remuneration.  However in such circumstances it may be better to adopt a fully-vested variable contribution rate (e.g. 2% year 1, 4% year 2, 6% years 3 and 10% thereafter).  Also, while the ultimate goal may be to give every employee total flexibility, for some employers it may be appropriate to impose minimum requirements e.g. the cost of 1 times pay death cover, or 50% disability income cover or savings can only be withdrawn for reasons of health costs, education, housing or hardship.  Where rules are imposed (if any) there should be a clear business need and benefit to support the restriction.

Under the above approach, a recent university graduate for example, can focus on needs such as disability income protection, surgical/specialist medical cover or paying off a student loan.  A newly married couple can think about saving for a house deposit, increasing mortgage repayments or preparing for the costs of their children’s education.  Older workers can focus on retirement savings. 

A remuneration policy designed along the above lines offers individual flexibility, supports individual accountability and encourages the efficient targeting of income towards employee needs, thereby protecting the employer’s interests.  It also delivers wholesale or group purchasing power to individuals.  Providing access to wholesale rates is one of the real benefits an employer can provide its employees in today’s environment.  However, it will only work if it is supported by the provision of education and information to enable employees to make sensible decisions and to understand the consequences of their decisions.

About SuperLife

SuperLife promotes the registered superannuation scheme “SuperLife” and the KiwiSaver scheme of the same name.  SuperLife therefore provides flexible superannuation and KiwiSaver schemes, both with the same range of investment options. 

SuperLife imposes no rules other than those decided by an employer in respect of the employer’s superannuation arrangements for its employees, or by the government in respect of KiwiSaver.  This maximises flexibility and lets members tailor the options to their needs.  The overall arrangements let members invest their retirement savings as one, or separately.  Members receive a combined statement. 

SuperLife has the advantages of low fees, flexibility, frequent communication and a structure that helps to provide security and reduce risk.  SuperLife empowers individuals to make decisions.  SuperLife is the savings vehicle of choice for many New Zealand employers.

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