Friday, 29 April 2016

Unemployment Insurance or Retrenchment Benefits/Severance pay?

First Sylvia Lim proposed Redundancy Insurance for workers who are retrenched.

Then Chee jumped on the bandwagon because... political advantage?

Here is a summary of the proposals by the various parties, and their stance on the issue. Note, I make no warranty as to the accuracy of the summary. It's from the internet. As is this blog.

But the summary and the attributed statement seems credible.

And Lim Swee Say has rebutted Sylvia's proposal.

Briefly, the rebuttal is that Redundancy Insurance is not needed in Singapore because unemployment is low and Singapore employers provides Retrenchment Benefits (RB) and work with MOM to find re-employment for retrenched workers.

The retort was: "That's like saying you don't need fire insurance because fires rarely occur, and in any case we have a fire brigade (or SCDF)!"

Moreover, while 9 in 10 retrenched workers got retrenchment benefits, that's great if you are one of the 9. What if you are the one in 10 that DID NOT GET RB?

But... there is a question that anyone who intends to propose some kind of unemployment insurance (like Chee) needs to address: how to ensure that employers do not use the existence of UI to abdicate their responsibility to provide for RB.

Would an unemployment insurance (UI) mean that companies will drop their retrenchment benefit (RB) policies and simply rely on UI?

Short answer: It could.

Long answer: it depends on the terms of the insurance. The Insurance company would want to ensure that premiums for companies with no retrenchment benefits must be prohibitively higher. Another factor would be whether the company have re-employment fairs for their retrenched workers. And just like car insurance, the insurer can work in a deductible. That is, when there is a retrenchment, the company is required to pay the insurer $X per retrenched worker. If there are retrenchment benefits, and re-employment efforts, the $X can be low because there is very little risk that the UI would kick in for the majority of the retrenched employees.

If there is no retrenchment benefit, and/or if there are no re-employment efforts, then the $X can be very high, because UI payments would be sure to be paid out immediately (no retrenchment benefit), and for longer (no re-employment efforts).

Retrenchment Benefit (RB) and UI could be aligned - for example, many RBs exclude very new employees - say less than 2 years of employment - from benefiting from RBs. The UI COULD also exclude such staff. This would keep the UI premiums low for the company.

However the company may want the UI to provide a cover for new employees (who are usually the first to be retrenched in any downsizing exercise), so that they would not be doubly disadvantaged. If so the monthly UI premium would include a "rider" for new employees, and this would raise the premium for the employer.

To summarise:

Lower Premiums
Higher Premiums
Retrenchment benefits – severance pay
More than 6 mth salary average
Less than 6 mth salary average
Re-employment job fair held
More than 90% takes up new job offer at job fair
Covers new employees?
Yes, less than 2/4/6 years

The UI insurer can offer a lower premium if the company meets the criteria in the "lower premium" column. However, if the company elects to pay a higher premium, coverage can be extended.

Should the employer choose the lower premium but subsequently defaults on the condition, e.g. not conducting a job fair/re-employment fair, then the Insurer would be entitled to impose a penalty.

Default: No RB, or RB less than promised
$X per staff X 6, or some predetermined penalty
Default: No job fair
Default: Less than 90% takes new job offered at job fair

Another question is whether retrenchment benefits would be preferred or would UI payments be better? Would you rather have 3 months of salary as retrenchment benefit, or 6 months of partial salary?

That depends on your plans, and how soon you are re-employed. If you get 3 months severance package, and a job within a week of being retrenched, then the 3 months of retrenchment benefit is a bonus.

If you are close to retirement and do not intend to look for a job, the severance package could provide seed money for personal projects or investments. Or just serves as an early retirement gratuity.

Example: You are 59 years old and are retrenched with 3 years of salary as RB because of your years of service. And you recently had a grandchild, the RB and UI could see you past retirement.

Most workers should prefer a lump sum retrenchment benefit, rather than UI. But that may not have a bearing on the employers' decision. In the long run, it may simply make more sense for a company to use UI as default and only retrenchment benefit.

In which case, the PAP's position may make sense. It may well be that UI will drive out RB and that may not be better for employees.

So, the govt may need to step in and moderate. Companies could be accorded tax rebates or other incentives, such as being allowed to purchase the basic UI cover if they have a RB policy in place. Companies without RB could be compelled to buy more comprehensive UI policy that either provides more UI payments, or longer duration of payments, or payment and duration may be dependent on the years of service by the employee (to be in line with RB practice).

Or this could be left to the Insurance industry to work out the risks and the premiums.

The other point in the govt's rebuttal is that RB should not be made compulsory in order to have the flexibility to negotiate, as every retrenchment would be under different circumstances and constraints.

Would having a UI be a supplement, or at least a secondary safety net for when the company cannot provide RB?

Or should UI be extended to general unemployment, not necessarily only retrenchment?

That would be for further debate.

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