Defined Benefit And Insurance Impacts Of COVID-19 - Updated
Millions of employees have had salaries and working hours reduced or stopped suddenly due to changes in employment conditions. According to the Budget Overview the Government's JobKeeper payments have supported over 3.8 million workers with the payment of $60 billion in wages. Considering ongoing restrictions in Victoria, the Government announced changes to the JobKeeper and a six-month extension from 28 September 2020 through to 28 March 2021. (source Budget Paper No.1)
JobKeeper changes include:
The relevant date for employment moving to 1 July 2020 from 1 March 2020;
A reduction of the $1,500 per fortnight to $1,200 and a further reduction to $1,000 per fortnight from 4 January 2021;
Lower payment rates for employees that worked fewer than 20 hours per week; and
A requirement that businesses seeking to claim JobKeeper demonstrate that they have suffered a decline in turnover using actual GST turnover (rather than projected GST turnover).
This article discusses direct and indirect impacts to superannuation and insurance benefits caused by reduction in salary and/or working hours, particularly for funds that offer Defined Benefit (DB) accounts.
WHAT WE KNOW
Any superannuation benefits that rely on salary, service fraction and/or working hours information could potentially be impacted. This includes leaving service or retirement benefits, particularly for DB funds and insured benefits (all funds).
Salary and wages that do not relate to the performance of work (including taking of leave) and are only paid to an employee to satisfy the wage condition for getting the JobKeeper support payment are exempt from superannuation contributions.
Contractual, modern aware or other arrangements governing employer contributions may still require payment of superannuation guarantee at a rate that exceeds those payable under Superannuation Guarantee laws.
In many cases, the JobKeeper payment is much less than the amount employees would have been earning and there is ongoing discussion around the impact this amount will have on superannuation.
ISSUES AND CONSIDERATIONS
Accuracy of Employer Payroll Data
Complete and accurate payroll data under the new working conditions is vital. Employers must be encouraged to pay extra care to supply correct working hours, service fraction and salary information. Payroll staff are likely to be swamped with extraordinary adjustments to staff wages and other work, so naturally human error will increase.
DB Salary Reduction Implications
Funds that include administration of defined benefits must consider the following questions:
Does the trust deed outline salary reduction minimum calculations or the salary used in the event of stand down?
If so, are these calculations automated, or have these always been calculated as a manual process when deemed necessary? These calculations will be critical for members that may undergo a large decrease in salary and be seeking benefit estimates or actual benefit payment from the fund.
If salary reduction provisions exist, are the calculations very complex?
Furthermore, are there enough staff/employees available with sufficient knowledge to verify information is correct?
Have calculations around insured benefits been verified with reductions in salary and/or working hours or service?
This is particularly front of mind in a pandemic as prospective benefit calculations typically involve salary and service fractions at current date.
Are compulsory member contributions required?
Members' ability to make contributions may be impacted by a stand down or reduced salary. Where salary is reduced accurate and timely employer salary data is critical to ensure compulsory member contribution requirements are accurately communicated and any impact of non-payment on defined benefit entitlement considered.
Have any such calculations been verified in the past after potential payments of partial benefits on compassionate grounds?
The number of these are likely to skyrocket (assuming fund is a hybrid fund or allows compassionate release) and can be complicated where DB offset accounts are used in a time of negative investment return.
Communications Implications
Communications need to be considered thoughtfully, particularly where member future benefits, such as prospective death and TPD benefits are likely to decrease due to decrease in working hours and/or salary. Communications accompanying benefit estimates or actual benefit payments should also be carefully considered.
Capacity Issues
Complex DB calculations, that may occur with salary reduction calculations, may lead to increased benefit quotation times, particularly where benefits are not fully computerised or there are too few specialised staff members. The uncertainty of how long the economic and societal impact will last means that extra work cannot be planned for.
Actuarial and Investment Issues
DB funds must consider both short-term and long-term funding impacts of COVID-19 and should revisit assumptions around investment returns, employment distribution and salary rates that may be proven to be drastically overstated.
Relationship with Insurers
Any relationship and arrangement with insurers, including the passing of wholesale changed employment information back and forth between involved parties where necessary, should be considered, particularly in a time when claims could increase due to pandemic related claims.
Customer Experience
Any delay in provision of quotation information, whether it be related to withdrawal/leaving benefits or insured benefits, can lead to member frustration and uncertainty.
Human Resources
Fund employees could be stretched to meet demand, leading to overtime and fatigue.
Adequate systemised calculations and data integrity checks allow for up-to-date and correct information to be used to accurately model impacts to all members, and to the fund as a whole, in a timely fashion.
Much has been written around the financial impact of reduced contributions and investment returns, but it is strongly advised that all calculations which may rely on a salary and/or service fraction be reviewed to determine potential impacts.
If anyone needs assistance with managing defined benefits impacts, I can be contacted directly on smahoney@qmvsolutions.com and +61 458 223 333.
Best regards
Stephen
Stephen Mahoney – Executive Director (co-founder)
This article was previously published April 8 2020. The new version includes update JobKeeper information.
HOW CAN QMV HELP
QMV offers flexible and timely advice and consulting support to the superannuation sector. We can provide standalone advisory, mobilisation of a consulting team or an individual resource.
QMV is here to help with the extenuating challenges and additional workload faced by your organisation via:
Project strategy, direction and oversight.
Preparation of policy and procedure documentation.
Delivery of online specialist support to your remote workforce.
Technology uplift and data management.
Defined benefit fund expertise.
Risk, regulation and compliance.
Communications strategy for internal staff and members.
Mark Vaughan - Managing Director
mvaughan@qmvsolutions.com and +61 413 082 011.
Michael Wilcox - National Manager, Strategic Partnerships
mwilcox@qmvsolutons.com and +61 472 817 237.
QMV provides trusted advisory, consulting and technology to Australia’s leading superannuation, insurance, banking and wealth management organisations. For further information please telephone our office p +61 3 9620 0707 or submit an online form.
Like what you see? Please subscribe to receive original QMV content.
You may also benefit from our free monthly pensions and superannuation regulatory updates.