Offering a private pension plan to employees is not a luxury accessible only to multinational corporations and large companies. On the contrary: when intelligently planned, the investment can bring more benefits than expenses.
This is because the financial investment has a number of tax benefits that make the company’s contribution to the employee’s plan, the so-called “match,” cost up to 60% less than the same amount paid in the form of salary .
Furthermore, customized rules allow the company to control the conditions for withdrawing the amount it sponsors for each employee – the so-called “vesting” period . In this way, it is possible to create an efficient way to retain talent.
Offering private pension plans also helps improve employee productivity , as it increases their financial security.
Why does the tax benefit make the “match” advantageous?
No one doubts that corporate private pension plans with “matching” are attractive to any employee. But there’s an extra advantage: this type of plan also represents a low cost for the employer due to tax benefits the company receives when sponsoring the installments.
According to a survey by the consulting firm Aon, conducted with 536 companies in 2017 (the latest available), the “matching” model was the most widely used by companies. At the time:
- 96% opted for the benefit.
- 80% contributed 100% of the employee’s contribution amount.
- 30% wanted to offer the plan with matching in the coming years.
See below the benefits that can be obtained by sponsoring employees’ private pension plans:
Income Tax Deduction
Contributions made to pension plans can be deducted as operating expenses for income tax purposes. There is a limit to this deduction, equivalent to up to 20% of the payroll of those who joined the plan.
To obtain the tax advantage, the requirement is that the company opts for the actual profit taxation regime and lists these expenses as operating expenses.
CSLL abatement
Contributions made by the company to the employee’s corporate pension plan that exceed the income tax deduction limit may offset part of the tax base for the Social Contribution on Net Profit (CSLL) .
Absence of labor charges
The company is exempt from paying labor charges on contributions it makes to the corporate pension plan. This is because these amounts are not considered salary.
How much can you save?
As a result of tax advantages, the company’s contribution to the corporate pension plan ends up being 60% lower than if the amount were granted in the form of salary. For example, for every R$ 1,000 per month paid to an employee, the cost in the form of salary would be around R$ 1,700, while paid in the form of private pension it would be equivalent to R$ 660.
Considering an 80% employee participation rate in the plan, the average percentage for companies that offer “matching” benefits, and a contribution equivalent to 5% of salary, the increase in payroll costs for employees would be around 2.5%.
Costs can be offset.
Since the employer’s contribution to the employee’s pension plan is cheaper than including the benefit in the salary, one way for employers to reduce payroll costs is to include the benefit when designing a salary policy.
In this way, it is possible to reduce payroll costs while simultaneously attracting talent due to the differentiated benefit.
Types of retirement plans with a “match”
In the ” match ” system, the company can choose to contribute a fixed percentage of the employees’ contributions or also take into account factors such as salaries, age, and length of service.
One way to avoid excessive expenses with the plan is to contribute less to plans for younger employees, since these employees tend to have a higher turnover rate.
Employees in higher positions generally have a more critical view of the corporate pension plan, which requires careful design of the benefit to attract these professionals. Therefore, offering a higher contribution percentage to these employees is advisable.
Why is “vesting” one of the advantages of corporate pension plans?
There are clauses that employees are required to fulfill in order to redeem the contributions made by the company. These are called “vesting” clauses and come into effect when the employee who joined the plan decides to leave the company or is dismissed.
As a result, part of the company’s spending on financial benefits can return to its cash flow over time, providing financial breathing room for the business and offsetting expenses related to the benefit. These rules are customizable so they can be adapted to each company’s talent retention policy.
Given the possibility of defining the rules for withdrawing funds from the plan, the human resources team therefore has a great opportunity to develop an effective talent retention policy.
Rules aligned with company policy also allow for the renewal of the company’s workforce from time to time. This is because they facilitate terminations or dismissals if the fund’s resources can be fully redeemed at a given moment.
See below the main “vesting” rules present in corporate pension plans:
Company tenure
The minimum contribution period to the fund, which is equivalent to the employee’s length of service with the company, is the main “vesting” rule of a corporate pension plan.
According to Aon’s benefits research, employees generally begin to be entitled to a percentage of company contributions after two years of employment. After three years, an employee can withdraw an average of 25% of the amount sponsored by the company, while after five years this number rises to 50%, and after eight years it reaches 100%.
These rules don’t apply to everyone and must respect the company’s strategy. If the company’s goal is to retain younger employees , who tend to change jobs more frequently, allowing the employee to receive 100% of the company’s contributions in a shorter timeframe may be more effective.
Waiting period for redemption
Minimum waiting periods are not limited to the portion of the company’s contribution that the employee may or may not be able to withdraw, nor the time frame for withdrawal. They also include conditions for redeeming the money.
Redemption may only be permitted upon an employee’s departure from the company or over time during their tenure.
Allowing employees to withdraw funds during their time at the company is an important factor for companies seeking to provide financial comfort to their employees during a difficult period, even though it is inadvisable for them to withdraw from their pension plan in the short term or before their period of inactivity.
On the other hand, this permission may make talent retention policies less efficient. In this case, there are minimum waiting periods required by SUSEP, equivalent to 60 days for contributions made by employees and one year for contributions made by the company.
Type of dismissal
Whether the resignation was initiated by the employee or the company, and whether it was with or without just cause, it can also affect the withdrawal of funds.
For example, if an employee resigns, the percentage that can be deducted may be lower than if they were dismissed without just cause. It’s a way to provide financial security to the employee while simultaneously retaining staff.
It is important that all rules are clearly defined and laid out by the company in the contract.
Why is the financial health of employees an advantage for the company?
In addition to tax benefits and the possibility of creating an effective talent attraction and retention program, private pension plans also improve employees’ personal budgets by encouraging them to build up financial reserves. Contrary to what one might think, this not only increases employee well-being but is also an advantage for the company.
According to research by the UK benefits company Salary Finance, involving 10,000 employees in 2018, financial stress leads to decreased productivity, absenteeism , and high turnover. In monetary terms, this cost is not small. In the United States, it can represent 13% to 18% of the value of salaries paid.
Therefore, it is important for the company to track and monitor the financial situation of its employees not only passively, by offering financial benefits, but also actively, as a way to ensure that the private pension plan and financial security are effective.