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INTRODUCING A VOLUNTARY OCCUPATIONAL PENSION SCHEME AS A
STRATEGIC HR RETENTION TOOL
GOZO BUSINESS CHAMBER
26th September 2019
ĠEMMA EDUCATION MATERIAL
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02 The Pension Framework
03Voluntary Occupational
Retirement Scheme
04VORPS as a Strategic HR
Retention Tool
01The Cost of Losing an Employee
AGENDA
3
THE COST OF LOSING AN EMPLOYEE
YOUR EMPLOYEE
• In the new economy undoubtedly your company’s most import resource
• Produces more and adds more value as s/he learn and gain experience
• A considerable part of that knowledge is in his or her head, emails, and on the computer hard disk
RETENTION IS BECOMING MORE CHALLENGING
• Social shifts: aging; migration; globalisaton, mobility and millennial’s culture, etc.
• Never been easier for employees to find new jobs
• Increasingly difficult to find employees with the skills essential for a 21st century workforce
WHY TURNOVER MATTERS
• It is costly
• It affects a business’s performance
• It may become increasingly difficult to manage
LOSING AN EMPLOYEE: WHAT IT MEANS TO YOU IN €
AND IN INTANGIBLE TERMS
Financial HR staff time (exit interview, payroll administration, benefits)
Manager’s time (retention attempts, exit interview)
Accrued paid time off (vacation, sick pay)
Temporary coverage (contingent employee, overtime for remaining employees)
Replacement New hire’s compensation
Hiring inducements (signing bonus, reimbursement of relocation expenses, perks)
Hiring manager and unit/department employee time
Orientation program time and materials
HR staff induction costs (payroll, benefits enrolment)
Training Costs Formal training (trainee and instruction time, materials, equipment)
On-the-job training (supervisor and employee time)
Mentoring (mentor’s time)
Socialization (other employees’ time, travel)
Productivity loss until replacement has mastered job
LOSING AN EMPLOYEE: WHAT IT MEANS TO YOU IN €
AND IN INTANGIBLE TERMS
Other Delays in production and customer service; decreases in product or service quality
Lost clients
Clients not acquired that would have been acquired if employee had stayed
Stiffer competition as employee moves to a rival company or forms own business
Contagion (other employees decide to leave; for example, to join defector at his/her new organization)
Disruptions to team-based work
Loss of workforce diversity
Nobody selected
Replacement is a mistake
LOSING AN EMPLOYEE: WHAT IT MEANS TO YOU IN €
AND IN INTANGIBLE TERMS
ESTIMATING PRODUCTIVITY LOSS
Direct Costs to Replace an Employee
Average costs per hire €2,500
Average 1st year training costs per hire
€4,000
Total Direct Costs €6,500
Interim Reduction in Employment Costs
Total average employee costs €50,000
Average time to hire 52 days
Interim Reduction in Employment Costs
€7,000
Total Cost of Turnover / Lost Employee
Direct costs €6,500
Interim reduction in employment costs
€7,000
Lost productivity €40,300
Total cost of Turnover €39,800
Lost Productivity Costs
Average time to hire 52 days
Average time to reach productivity of lost employee
+ 60 days
Total non productive days = 112/365
Average annual revenue per employee €130,000
Interim Reduction in Employment Costs
€40,300
WHAT THE LITERATURE SAYS ON COST OF TURNOVER
• Time to replace: on average 52 days (Bersin-Deloitte)• Time to train: between 4 to 8 weeks at a minimum (Bersin-
Deloitte)• Productivity: may take new employees 6-9 months to
become productive and profitable (Bersin-Deloitte)• External hires demand a 18% to 20% more in salary than
internal hires (University of Pennsylvania)• Direct replacement costs can reach as high as 50% to 60%
of an employee’s annual salary (Society of HRM) • Total costs associated with turnover ranging from 90% to
200% (Society of HRM)
ĠEMMA CALCULATOR
EXAMPLE OF COST OF LOSS OF EMPLOYEE
No ofHrs
Average Cost / Hr - €
Cost
On Resignation Exit interview, administration, etc.
4 11.25
Payment of unutilised VL, 1,363 1,428
ReplacementAdministration
Advertising, interviews, negotiation, contract, administration, etc.
7 10.33 698
Replacement Costs
Contagion, induced stress, temporary coverage
Not Estimated 0
Training Costs On-line, formal mentoring, 52 16.5 1,732
Productivity 11,256
Total 15,116
In proportion to compensation backage of €50,000 50.4%
COST TO VALUE OF A NEW EMPLOYEE
Bersin - Deloitte
Labour MarketMalta Employers Association - 2019
Employees claiming higher remuneration
Main reasons for wage inflation in respondent's organisation
Average wage increase (incl COLA) in respondent's organisation
Labour Costs affecting respondent's organisation
Labour MarketAverage labour turnover
Employee categories contributing to highest turnoverHow are companies dealing with labour market shortages
Claims for salary increases by size of company
What is resulting in labour turnover
RETENTION SHOULD START FROM DAY 0NE
PENSION ADEQUACY
MALTA’S PENSION FRAMEWORK
First PensionSocial Security Contributory Pension
Universal coverageMandatory
Second PensionVoluntary Occupational Retirement Pension
Contribution by EmployerIncentive based
Third PensionVoluntary Personal Retirement Pension
Incentive based
KEY LIFE JOURNEY MILESTONES
18yrs
28yrs
50yrs
61yrs
65yrs
79yrs
84yrs
Initiate 1st
Job orcontinue education
Likely enjoyinglife and spendingon consumergoods and travel
Settling down andsaving to start a family – during thisperiod structured costsentered into – mortgage,education, etc. Like to have dis-savings.
Period leading to retirement (at 61 or 65years) is period mostlikely to save as mortgageis paid and children havegrown
For persons born 1962 and over retirement age is 65 years – but if born between 1962-1968 can retire at 61 with 40 year contributions; and if born on and after 1969 can retire at 61 years with 41 contributions Male
longevityFemale
longevity
Retirement 14 yrs; 19 yrs if early exitoption is chosen
Retirement 19 yrs; 24 yrs if early exitoption is chosen
Likelihood of eating throughsavings in the absence of a retirement plan. Afemale is more likely to be vulnerable to this asshe has a longer lifeexpectancy than a male
UNDERSTANDING THE RETIREMENT PLANNING
LANDSCAPEOECD Survey by ĠEMMA 2018
Age 20-29 30-39 40-49
Confidence in Retirement Plan
Not confident 7.3% 11.0% 4.7%
No retirement plan 37.3% 23.1% 30.0%
Confident 16.9% 23.7% 28.0%
Retirement Funding
Government pension 21.5% 29.5% 36.0%
Withdrawal from savings 33.9% 37.6% 46.7%
Have a private pension plan 10.2% 25.4% 23.3%
Have an occupational pension 4.0% 1.7% 3.3%
Not able to make ends meet at least once in past12 mths
No 48.6% 63.0% 41.3%
Yes 41.8% 36.4% 26.7%
DESIRED QUALITY OF LIFE IN RETIREMENT
=Pension Income - Income from
Employment +Desired
Quality of Life in
Retirement
?
Quality ofLife inRetirement?
EXPECTED VALUE OF PENSION VIS-À-VIS SALARY
Pensionincome in 2019
MaximumPensionable
Income€23,701
MaximumAnnual Pension
€15,800
Salary €25,000 €30,000 €40,000 €50,000
Pension in proportion to
Salary63% 52% 39% 32%
LIVING COMFORTABLY IN RETIREMENT
What doyou needto live
Moderately
Comfortably
Well
Of your income during
employment
55-65%
65-80%
85-100%
HOW MUCH IS ENOUGH?
In determiningwhat is enoughyou must takeinto account thefollowing
MONTHLY AMOUNT SAVED
PERIOD YOUR ARE SAVING
PLANNED WITHDRAWAL
THE POWER OF COMPOUNDING
€83/month
25 years 40 years
Invest forAge
€71,772
Amount at age 65
Investing €1,000 annually at 2.5% Interest Rate
40 years 25 years €27,821
50 years 15 years €19,828
VOLUNTARY OCCUPATIONAL RETIREMENT SCHEME
WHAT IS A VORPS
• A pension scheme introduced by an employer either through collective bargaining or as a model employer or for competitive advantage purposes
• Based on a contribution paid by both the employer and the employee
• Employer is incentivised in order to introduce a VORPS• An employee is incentivised in order to become a
member of a VORPS• Normally established as a Pension Insurance Contract
with product offered by financial institutions• Normally designed on a ‘defined contribution’ basis
VORPS’ KEY RILES
• Rules relate to contributions paid to a Qualifying Scheme established in the context of an employment relationship for the purposes of providing retirement benefits to qualifying employees
• Scheme is established on a voluntary basis for, or by:– An employer– Number of employers– An association representing employers, jointly or
separately, for the benefit of qualifying employees
Key Definitions
A Qualifying Scheme is one which:
(i) provides for the commencement of payment of benefits to a Qualifying Individual between the ages of 61 and 70 (except where it provides for payment by reason of the permanent disability or death); and
(ii) provides for programmed withdrawal arrangements
Drawn down of Pension Benefit by an Employee
Can be accessed between the ages of 61 and 70:
Maximum of 30% as a tax free lump sum (optional)
Balance to be used to generate income for life through Programmed Withdrawals and/or Annuities:• Considered as“Pension Income” which is taxable under the
Income Tax Act at the individual’s marginal rate of tax at the time.
VORPS’ TAX BENEFITS
Contributions Made Tax Benefit Remarks
Qualifying Employee Tax credit of 25% of contributions made into a VORPS up to €500 each year
• Administrator reports to IRD• Contributions stated in FS3• In addition to tax credits
received if employee has a Private Personal Pension
Qualifying Employer Up to a maximum of €2,000 qualifying contributions in respect of each qualifying employee can be claimed as tax deductible expenses
• P/L taxable item• Allocated to the Final Tax
Account in the case of a company
Tax credit of 25% of contributions made into a VORPS up to €500 each year
Contributions made by employer are not subject to Fringe Benefit Tax by the Employee
Administrator reports to IRD
VORPS AS A STRATEGIC HR TOOL
Does Introducing a Pension Strategy provide an Organisaton with a
Competitive Advantage?
• Do you believe that offering higher salaries is the only way to retain or attract talent?
Measures taken by Maltese Firms to Counter Turnover - MEA
HOW DO EMPLOYEES VIEW A PENSION AS PART OF THEIR EMPLOYMENT PACKAGE?
• Research in the UK shows that employees are not only after bigger salary or bonus. 82% of UK employees said pensions were an important part of their benefits package, ahead of performance related bonuses, support for mental health and stress and private medical insurance1
1. Peoplemanagement.co.uk
How to Make Pensions Part of the Talent
Retention Strategy
• Flip the way you look at pensions on its head• Reframe pensions so that employees see you as a
trusted partner – a social partner that works with them to ensure they can be confident in their quality of life during retirement
• Shows that the organisation is providing a sense of comfort and assurance about their retirement, and encourages them to stay
• Support staff with financial education and guidance are essential to make employees feel confident about their future and engaged enough to make informed, positive decisions about their pension along the way
The Cost of Introducing a VORPS
EXAMPLE
• AB Consulting Ltd
– Medium Sized consulting organisaton
– 22 FTEs
– Knowledge based
– Total employee cost including training: €36,364
IMPACT OF INTRODUCING
A VORPSNo VORPS Maximum 2,000
Contribution
Cost of introducing VORPS €0 €44,000 €22,000
Profit Before Tax €150,000 €106,000 128,000
Profit following tax at 35% €97,500 €68,900 €83,200
Tax credit €0 €11,000 €5,500
Profit after tax credit €0 €79,900 €88,700
Effective cost to Employer €17,600 €8,800
Average effective cost / FTE €800 €400
Loss of 1 FTE €15,116 €15,116
FOR FURTHER INFORMATION
David Spiteri Gingell
Head, Retirement and Financial Capability Unit
Office of the Permanent Secretary
Ministry for the Family, Children’s Rights, and Social Solidarity
www.gemma.gov.mt