A Mercer survey reveals wide disparity across sectors when it comes to superannuation benefits to employees
With the demographics of our workforce heavily skewed towards younger people, awareness about pension benefits in India still has miles to go. Employers nevertheless have not let this deter them from designing employee benefits in order to differentiate themselves, while at the same time making the most of their compensation budgets. Superannuation benefits, while not mandatory, are one such instrument companies have begun to leverage to that end. Employer contributions are tax-deductible and superannuation investment earnings too are not taxed. Although the benefits are taxed as income in the hands of employees, one-third of the benefits can be claimed as a tax-free lumpsum.
Supplementary income
For employees of a certain tenure in the organised sector, superannuation benefits are an important supplementary source of retirement income. Healthcare financing in India is largely out-of-pocket; government budgetary expenditure and health insurance play an insignificant role. But as life expectancy rises (the average life expectancy at age 60 is 16 for men and 17 years for women) and as morbidity patterns undergo a change — there has been a shift towards ‘lifestyle’ diseases which are more expensive to treat — this benefit gains a lot of importance. It is a different matter that superannuation benefits are only given to employees at a certain managerial level.
Mercer, as one of the world’s leading retirement consulting firms, has conducted surveys in India over two consecutive years to understand how employers in India provide superannuation benefits. After short-listing companies, Mercer developed a questionnaire in line with the survey objectives and sent participation invitations to the shortlisted companies. Mercer sent questionnaires to senior personnel from companies who confirmed their participation. Data was collated from the questionnaire responses and supplemented by publicly available information. After collating the data, a detailed analysis was done by Mercer consultants to prepare the survey report.
In a retirement practices survey conducted last year, 68 per cent companies in the private sector and 77 per cent in the public sector, from a total pool of 48 companies listed on the stock exchanges, offered superannuation benefits.
Today, almost two-thirds of the companies, 64 per cent to be precise, provide superannuation benefits, according to Mercer’s latest survey. The means of delivering this benefit, however, varies. As many as 82 per cent have in place a defined contribution scheme, while 12 per cent provide a defined benefit scheme. Six per cent provide a hybrid scheme which is a combination of the two. A defined benefit scheme is one in which the benefit is determined in advance, whereas a defined contribution scheme is one in which the rate of annual contribution is predetermined.
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However, only 28 per cent of these provide this benefit to all employees, while most reserve it for senior employees since it is still not a statutory requirement. The superannuation benefits, says the survey, are being provided mainly to the management cadre. The survey found that 39 per cent companies provide it to all management cadres, and 33 per cent provide it only to the top management.
According to the survey, companies that offer higher than average monthly salaries are less likely to offer superannuation benefits than those that offer lower average monthly salaries. This may be because with a higher salary the employer feels less in need for a retirement benefit plan as the employee can save for himself. The survey hence found that the prevalence rate declined as the average monthly salary increased. Ideally, with a higher salary, an employee will have higher expenses, and the requirement of more retirement benefits to maintain the standards will be higher. Hence, such employees should be provided more benefits.
Forty-four per cent of companies providing superannuation benefits to their employees in the survey say that they are doing so because it is a tax-efficient way of providing compensation to their employees. In the Union Budget for 2009-10, the fringe benefit tax on superannuation plans was abolished, but the addition of a sub-clause to Section 17 of the Income Tax Act makes superannuation benefits taxable in the hands of the employee if the contribution exceeds Rs 100,000. This clause will impact the take-home salary for employees. This has caused companies to consider alternate options to this form of benefit.
The survey says that small organisations with fewer employees tend not to provide superannuation benefits. According to the survey, the primary reason for a company with a small number of employees not providing superannuation benefits is that the cost per head of operating the scheme is high. As the number of employees in the organisation increases up to 10,000 employees, the likelihood of a superannuation scheme in operation also increases. Beyond the employee level of 10,000, the likelihood of superannuation benefits decreases again. In practice, the increase in employee numbers usually tends to lead to a higher prevalence of superannuation benefits.
The survey covered 80 leading companies in India across various industries. While 15 per cent of the companies belonged to the finance, banking and insurance sectors, 14 per cent were from technology and computer services, and 13 per cent each were from engineering & architecture and manufacturing & consumer goods. The rest were from the chemical, pharmaceutical, biotechnology, energy, mining, telecommunications, automobile & transportation and other sectors.
As per the survey, all companies in the automobile and transport sections have put in place superannuation benefits for their employees. It falls to 80 per cent in manufacturing, consumer goods, engineering and architecture; 73 per cent in technology and computer services; 50 per cent in energy and mining; 46 per cent in finance, banking and insurance; and 43 per cent in telecommunications. It is the lowest — 20 per cent — in chemicals, pharmaceuticals and biotechnology.
Among companies providing superannuation benefits, 57 per cent make the scheme membership compulsory for their employees, whereas 43 per cent have it as an optional scheme.
While companies look at superannuation as a tax-effective means to optimise the compensation mix, employees look at it as a means to boost their post-retirement income or, in other words, their income replacement ratio. With the wider acceptance of the New Pension Scheme on the cards, companies will soon have more than one choice. Employees will have to wait and watch for the one that translates to a better payout for them.
Mercer’s retirement, risk and finance consulting division has been advising clients for a decade on the various aspects of superannuation schemes and has recently advised the Pension Fund and Regulatory Development Authority of India in the designing and implementation of the New Pension System.