FROM EMPLOYEE BENEFITS SYSTEM
Pensionable pay is embedded in many individuals’ contracts, but often goes completely unnoticed, or is misunderstood. The key problem with this is the gaps it creates in employee protection – both for retirement and risk. For instance, if an employee’s pensionable pay is 70% and their fund’s replacement ratio target is 75%, this means the fund is seeking to provide a post-retirement income that is 52.5% of the employee’s pre-retirement income. Because of the complexity of all these percentages, we argued that benefits should rather be communicated in rands and cents.
Pensionable pay has its roots in defined benefit schemes. It aimed to limit the employers’ benefits obligations by eliminating volatile elements in the pay package like commissions or bonuses. These issues of volatility persist, but do not justify retaining this confusing and misleading concept.
New insights
With the legislative definitions of retirement-funding income and non-retirement funding income falling away, pensionable pay may well be an anachronism. However, companies face challenges with removing it from their terms of reference:
- Dropping it would probably require that most companies rewrite their employment contracts – an exercise that’s possibly not worth the cost if there’s no impact on the employer.
- For companies who still pay for their employees’ risk benefits, these benefits are often expressed as a multiple of pensionable pay.
Both of these challenges can be overcome in two ways:
- Employers can phase pensionable pay out of employment contracts over time.
- Companies who still pay for their employees’ risk benefits have to find a way to provide for contributions that derive from 100% of an individual’s pay. If companies don’t want to pick up the additional cost of risk benefits, they can simply allow the employees to pay for the additional amount.
Given that tax benefits for retirement savings will now be based on remuneration and taxable income, companies and funds will need to find ways to communicate in these terms, even if they retain the term pensionable pay.
