Payroll’s responsibilities in administering global pension programs and other savings schemes range over the entire process from enrolling employees to paying contributions, a global payroll consultant said May 9.
The OECD recommends that countries either have a mandatory pension program or a “soft compulsory” program, according to Tim Kelsey, FCIPP, AIPA, managing director of Kelsey’s Payroll Services.
He used the UK’s auto-enrollment system as an example of a soft compulsory program, where a “very significant” part of the workforce must be enrolled in a qualified pension plan with a required minimum contribution rate. Covered employees must become an active member of a pension plan before they can opt out, but they are allowed to opt out, Kelsey said. However, he said a small number of people actually opt out and attributed that to the affirmative choice that must be made with its accompanying forms.
Kelsey defined two models of pension plan as the “gold standard": a defined benefit plan, based on a fraction of the final salary earned before retirement taking into account years of service, or a career average plan, based on an employee’s average earnings over their entire employment.
Plan contributions are generally either a percentage or a fixed amount and not all wages may be subject to contributions, Kelsey said. One-off payments such as bonuses, overtime pay, or termination pay are likely to be excluded and there may also be an upper ceiling on earnings subject to contributions, he said.
Contributions can also be free from both income tax and other social taxes, Kelsey said.
Payroll departments are responsible for enrolling employees correctly in the correct plan, calculating contributions, potentially providing deductions or “tax relief” through the payroll process, and reporting earnings and contributions to plans, Kelsey said.
Of course, employers also have to pay contributions to the fund on time, Kelsey said, adding that he finds that “almost more important than paying the tax authorities on time.”
Returning to the UK’s auto-enrollment system, Kelsey said employers also have new-hire responsibilities there and must check if an employee between the ages of 22 and the current state pension age, works or “ordinarily” works in the UK, and earns at least 10,000 pounds (US$12,651.35) per year.
The employer must generally report employees’ pensionable earnings, contributions, types of leave such as sick leave, family leave, or unpaid leave, and events such as temporary promotions, Kelsey said. He emphasized that these records should be “ultra accurate” because they may form part of the employee’s pension record for decades.
Kelsey spoke at PayrollOrg’s 42nd Payroll Congress in Nashville.
Collective Bargaining Agreements, Other Progams
Some countries require participation in pension plans at industry level when a collective bargaining agreement covers the entire industry, Kelsey said.
For example, the Netherlands has a mandatory retail-industry plan required of all employers that do at least 50% of their business in retail, and all employees at least age 18 of covered employers must participate, Kelsey said.
Similarly to a career average plan, covered employees accrue an entitlement to a pension of 1.622% of their salary for each year of service, Kelsey said.
Australia is an example of a country that does not have a traditional social security program, instead providing a state pension that is not based on contributions, Kelsey said. In place of pension contributions, employers are required to pay superannuation, or super, contributions for all employees at least age 18.
Super contributions are based on “ordinary time earnings,” Kelsey said, which is based on the employee’s normal work hours plus some other allowances and bonuses. Overtime is not normally included in ordinary time earnings unless it cannot be clearly identified separately from other hours worked. While there are many different superannuation plans, the employer is required to provide an 11% contribution up to a quarterly earnings limit currently of A$62,270, but additional contributions can be made that are either tax-free or considered wages for the employee, Kelsey said.
Other savings programs can help employees save for life events, Kelsey said, such as Singapore’s Central Provident Fund Ordinary Account, which besides retirement can be used for buying a house, making investments, or paying for education.
Mexico’s INFONAVIT housing fund provides mortgages and other savings programs, Kelsey said. When an employee has an INFONAVIT loan, payments are taken out through payroll and contributions also serve as payments, he said.
To contact the reporter on this story:
To contact the editor responsible for this story: