Critical changes will impact employee attraction and retention. By Jerry Botha
The National Budget 2012 announcement confirmed the significant changes on the way for employee benefits in South Africa. The question faced by employers is how they will react to these changes, as part of their remuneration and reward offering given to employees.
The only aspect which is certain is that those who don’t change will fall behind in delivering value to employees. This, of course, is not only against King III (principles 2.25, 2.26 and 2.27), but also impacts employee attraction and retention. Explained at the most basic of levels, where an employer does not have an optimal employee benefit strategy, they will find that competitors can give more value to employees at the same or lower cost to employer.
Here are some of the immediate challenges and competitive aspects faced by employers, based on proposals by National Treasury as well as already enacted legislation.
The employer contributions to pension and provident funds will become fully taxable (proposed from 01 March 2014 onwards) and the employee will then get a corresponding deduction of 22.5% (below 45 and up to a maximum of R250,000 per annum) or 27.5% (above 45 and up to a maximum of R300,000 per annum). The deduction will be allowed on the higher of employment income or taxable income. There will also be a minimum deduction of R20,000 per year for lower earners. This will require a revisit by employers of their remuneration strategy, fund rules, contribution rates and potentially even employment contracts and other affected policy documents. Obviously, these are not small changes and before the change is initiated, the employer must make sure that the new treatment is fully compliant, gives employees the best possible value and is aligned with the employer’s/remuneration committee’s philosophy and methodology. The process may be depicted in figure one.
The significant changes to employer provided insurance must be considered. The fact that most employer provided insurance is now taxable, means that the existing insurances within a business must be reviewed. Many employers undertake the process on which insurances should be retained, or, otherwise, removed and the cost rather included into an employee’s package. This exercise must be conducted with the help of the employee benefit broker and insurance provider. They will be the sole point of call in advising on what is approved (no fringe benefit tax), unapproved (fringe benefit tax) and which other covers are in place where the employer or employee is the beneficiary (which impacts the section 11(w) treatment). The process may be depicted in figure two.
Other matters which need to be considered are the impact of National Health Insurance on medical aid provision to employees, AARTO costs, toll fees, non-financial benefits and rewards, employee assistance programmes, employee travel best practice, essential vehicles (20% tax rule) and petrol cards, to name but a few.
Many South African employers are also expanding into Africa or internationally. With this comes the need for offshore pension funds and aligning with the social security systems and often compulsory benefit regimes of other locations.
The next couple of years will be a period of significant change. In promoting the remuneration and reward profession, the extent to which we actively become involved with the legislated changes will not only ensure a workable and clear new system, but also ensure that our members remain at the forefront of remunerating their employees.
In Jerry Botha’s article on page 32 of HR Future, March 2012, the Medical Credit rates used were those promulgated on 10 January 2011. On 22 February 2012, the Budget announcement updated the rates. The new rates are available at http://www.hrfuture.net/reward/2012-medical-credit-summary.php .
Jerry Botha is on the South African Reward Association (SARA) Executive, www.sara.co.za, and Chairs the Financial Planning Institutes Tax Interest Group.