An increase to the compulsory Superannuation Guarantee (SG or super) rate has been scheduled to come into effect on 1 July 2021, taking it from 9.5% to 10%. However, there has been talk of deferring the rate rise as the economy and businesses seek to recover from the impacts of the pandemic. While we may not know the timing of the super rate increase until the May budget, businesses should carefully consider the potential implications of the change which can be far reaching beyond the 0.5%.
The SG contribution rate has been at the current level of 9.5% since 2014, with the Government set to increase this to 12% over the next five years. How companies respond to the initial 0.5% change may impact not only the bottom line and remuneration framework in FY22, but also set the precedent for how it is managed for future rate rises.
Alternative approaches depending on the remuneration model
To get a sense of how the SG increase may be addressed through remuneration structures, we conducted a poll with both our weekly email readers and Linkedin connections. The results were quite evenly spread (See Fig. 1) with a number of responses indicating unsurprisingly that companies are yet to determine a position on the planned SG changes.
Figure 1 indicates 32% of poll respondents’ apply a base pay + super remuneration model, meaning that the SG increase will need to be fully passed on to employees at the employer’s cost. For the majority of respondents (65%) who have a total fixed remuneration (TFR) model, there are alternative approaches to applying the SG rate change including keeping TFR the same (with employee take home pay reduced). From the poll responses, all TFR alternatives appear to be “on the table”.
For some companies the position taken on the SG rate rise may not be a blanket approach, as remuneration arrangements can vary across the organisation. In our experience, it is typical for TFR to be the most common remuneration model at executive/management levels while base plus super is more prevalent for the broader employee base (often subject to industrial awards/enterprise agreements).
The real cost impact of the super rate rise
Whatever remuneration approach companies adopt, the 0.5% SG increase only tells part of the story. There are a number of other potential knock-on implications to the super rate rise which can ultimately impact remuneration structures and the company’s bottom line. We have listed some of these below.
Often short term or long term incentives are set as a percentage of TFR. To the extent TFR increases, so will the incentive opportunity. From our consulting experience, up to one third of companies pay super on top of the short term incentive cash payment.
Allowances (e.g. car)
From our consulting experience, typically over half of companies pay super on top of allowance payments which will therefore be subject to a higher rate under the planned changes.
Taxable wages includes superannuation contributions, meaning payroll tax will be payable on any increase to super contributions.
While the majority of companies calculate redundancy payouts on base salary, our experience indicates up to a quarter of companies calculate redundancy payouts on total employee remuneration (super inclusive).
We have provided below a simple example of the possible implications of the superannuation rate rise.
In the example above, the increased total employment cost from the super change represents 0.74% of base salary. While this may be manageable, if this example was applied for the planned super rate change of 2.5% over the next 5 years, total employment costs would increase by 3.7%.
It All Adds Up
There are a number of implications to consider when evaluating how your organisation should approach the super rate increase and how to communicate it to staff. An effective remuneration policy calculates total employment costs and enables organisations and employees to understand the full value of remuneration. The Reward Practice is currently working with businesses across a number of sectors to redesign and implement revised remuneration policies in advance of the upcoming financial year.
Contact us now for a no-obligation discussion about your plans for the planned super rate increase.