INTRODUCING A VOLUNTARY OCCUPATIONAL PENSION SCHEME AS A

STRATEGIC HR RETENTION TOOL

GOZO BUSINESS CHAMBER

26th September 2019

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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

david.spiteri-gingell@gov.mt

www.gemma.gov.mt

gemma@gov.mt