The value of long service leave

by 12 Nov 2009

Q. We have quite a lot of long service leave on our books, and our finance department would like to reduce or minimise its impact on our financial accounts. Aside from asking employees to take leave, are there other ways of doing this?

A. Long service leave is an undervalued employee benefit and can often be a large cost component on a company’s financial accounts. However, it is possible to educate employees, more accurately value the liability, and strategically manage long service leave to get the best value from the cost of providing it.

Education and promotion – a valuable employee benefit

Long service leave is a statutory employee benefit provided to loyal, long-serving employees, in addition to annual leave and other entitlements. It provides an incentive for employees to remain with the company, as well as giving them a more extended period of rest and relaxation. Unfortunately, it is a benefit that many employees are unaware of, or undervalue, because companies do very little to promote it. The value of long service leave to employees can be improved by including relevant information in new employee packs, and by including information in communications such as regular staff updates, training sessions and annual performance reviews.

Accurate valuation on financial accounts

Companies are required to set aside money in their financial accounts to pay staff their long service leave entitlements – they are seen as a “cost of employment”. There are many factors that can affect the cost of long service leave, including:

? salary increases – long service leave cost increases when an employee’s salary increases, for past service as well as future service

? remuneration packaging – an increase in salary for long service leave entitlements can mean a significant increase in costs for the company if employees are permitted to alter their remuneration packaging.

Taking these factors into account and putting a more accurate value on long service leave as a financial liability should be a business priority. If you feel your liabilities associated with long service leave could be more accurate, an actuary may be able to provide some good advice and guidance.

An actuary performs projections to determine when the long service leave entitlements are likely to be taken and brings these liabilities back to present day value. This is an alternative to the commonly used method of valuing the liabilities at their current notional value, which doesn’t take into account:

? the likelihood of those not yet eligible for long service leave (newer employees) staying with a company and eventually being entitled to that leave; or

? the fact that not all eligible employees will take all of that leave immediately.

You may find the actuarial value of your company’s long service leave will be less than what you are currently recording, reducing the impact on your financial accounts as a result.

Strategically managed approach

Another great idea is encouraging and enabling work/life balance for your employees, which will lead to more people taking long service leave while in service. Where retrenchment programs are concerned, determining which employees are to be made redundant can also affect the liabilities relating to long service leave. Some employees will be entitled to long service leave upon being made redundant, yet they wouldn’t be entitled to if they voluntarily left. So strategically managing this area can also have a definite impact.

By Saffron Sweeney, Principal & Actuary, Employee Benefits Solutions, Aon Consulting. Email saffron.sweeney@aon.com.au Website www.aon.com.au