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SOUTH AFRICA 2025: SALARY FORECAST FEB 2025

FEBRUARY 2025 UPDATE

In August 2024 (click here) we published our 2025 South Africa Salary Increase Forecast article and revisited our forecast in November 2024 (click here) where we encouraged clients to adopt a scientific approach to the preliminary salary increase forecast and then to use the unfolding economic data over the next few months to update the original forecast. Wise words as inflation has been moving persistently lower. The October 2024 inflation rate of 2.8% in October was the lowest reading since the 2.2% recorded in June 2020 when we were in the throes of the Covid pandemic. Inflation has ticked up slightly to 3.9% in December 2024.

The salient reasons for the slight increase in December 2024 can be attributed to housing and utilities (4.4%), miscellaneous goods and services (6.6%), food and non-alcoholic beverages (2.5%) and alcoholic beverages and tobacco (4.3%).

The bad news is that there will be pressure on inflation over the next few months. The main reasons include the possible changes in US economic policy emanating from a Trump presidency, potentially higher oil prices resulting from the escalating Ukraine war and increased electricity and administered prices.

The MPC also warned about possible higher inflation at the January 2025 MPC meeting when they stated, “The risks to the inflation outlook are assessed to the upside. In the near term, inflation appears well-contained. However, the medium-term outlook is more uncertain than usual, with material risks from the external environment. Domestic factors such as administered prices are also problematic.”

In view of the lower inflation, we have revised our forecast for 2025 inflation down from 4.2% to 4.0%. The revised detailed forecast is:

The lower 2024 inflation does mean that employees received a higher real salary increase in 2024 – 1.5% compared to the “new normal” yardstick of 1.0%.

Our August and November 2024 articles recommended a 5.5% salary increase for 2025, and one must question whether this incoming data changes this recommendation. A purely scientific approach would recommend the following:

Inflation in South Africa is notoriously difficult to predict as same is always subject to exogenous shocks. One must recognise this danger and the concern expressed by the MPC Committee that “…the medium-term outlook is highly uncertain, with material upside risks”.

Cognisance must also be taken of the following:

- The average real salary increase granted to employees over the last 5 years has only been 0.5%. A slightly higher 1.3% real salary increase this year will compensate employees for the erosion of their disposable income over the last 5 years; and
- We highlighted in our recent article (click here) that medical aid costs will increase by between 9.30% and 12.75% on 1 January 2025. Given the dominance of the Total Cost To Company (TCTC) remuneration model in South Africa, many employees will have to foot the bill themselves for these increases.
- The National Energy Regulator of South Africa has announced a 12.7% tariff increase for Eskom. Eskom was seeking a 36.% increase so these lower increases will aid both inflation and consumers.

Despite the above concerns, we are lowering our recommended salary increase forecast to 5.0%. The salient reason is that we expect inflation to remain benign and are concerned about growth. Growth contracted in the 3^rd quarter 2024 because of agricultural production and while we do see a rebound in the last quarter of 2024, we expect growth to languish at 1.7% in 2025- hardly a booming economy facilitating large salary increase.

2025 RECOMMENDED SOUTH AFRICA SALARY INCREASE 5.0%

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PAYROLL INSOURCING VS. OUTSOURCING: WHICH IS BEST FOR YOUR BUSINESS?

Payroll Insourcing vs. Outsourcing: Which Is Best for Your Business?

In the early 1970s, when the first outsourced payroll companies were formed, the debate immediately commenced evaluating whether outsourcing payroll was better than insourcing (running the payroll in-house).

This debate has continued and even escalated since those early days with a plethora of articles having been written promoting either option. When Googling “payroll outsourcing versus insourcing”, there are 58,000 results and the debate has not been settled. Why?

There is no generic correct answer and/or better option

it depends on the company, their specific needs, unique requirements, geographic location and distinctive circumstances

One could argue that outsourcing is relatively inflexible. A counterargument is that in-house personnel often lack compliance experience in complex jurisdictions like Africa. Arguments and counterarguments can be made ad infinitum.

The Goldman Sachs study for the American Payroll Association found that the prevalence of outsourcing decreases as the number of employees increases – refer to the chart below. Larger companies can afford to spend significant sums on payroll systems. Whether cost savings or increased efficiency is obtained is debatable. However, in the in/outsourcing argument this inverse correlation appears to be the only quantifiable fact.

Axiomatic Consultants currently provides insourcing and outsourcing options to clients in 44 African countries, so we understand this debate. Further, one would expect this article to vehemently promote the superiority of outsourcing. However, we firmly believe there is no better or worse option. The question to be asked and evaluated by each company is- what is best for my company?

Instead of adopting the route followed slavishly by many of the 58,000 articles which list advantages and disadvantages, we have elected to opt for a simplistic approach and pose the question – why would one model be better than the other from a simple logic basis?

Outsourcing companies use economies of scale across multiple clients to achieve what a corporate payroll would refer to as a centre of excellence. Economies of scale facilitate investment in superior technology, consulting, compliance, tax expertise, processes, administration and most importantly, human capital. The economies of scale achieved by payroll outsourcing vendors are logical. It is equally logical that large companies can also achieve similar economies of scale which facilitates the insourcing of large payrolls.

To achieve the holy grail of economies of scale, outsourcing providers force their clients to adopt their practices and procedures. A company with an insourced payroll can completely customise the process, procedures and technology to achieve what works for them. Critically though, customisation comes with additional costs which may destroy any ROI. As such, larger companies can achieve ROI with significant investment; it is the smaller companies who typically struggle with the debate.

Commonly used methodologies by Axiomatic.

Outsourcing: A full end-to-end service offering where both the technology and administration services can be provided to complete the payroll function across 44 African countries. At Axiomatic, we believe in continuous improvement, embracing technology, employing integrations and AI while simultaneously attempting to provide clients with as much flexibility as possible. Further, we manage our client’s good governance in Africa and mitigate any damage to reputational risk.

Insourcing: A service offering where the technology is provided across the 44 African countries we service. This is backed up by best-in-class support to our clients to ensure they have a trusted partner with an extensive and superior pool of resources.

Hybrid Model: This model provides the company with flexibility- we do not believe that every time a company changes their payroll model/ platform it should have to repay for the set-up. The salient advantage of this model is that with the flick of a switch, the client can change from insourcing to outsourcing and visa versa. Our experience has shown that enhanced efficiency is obtained where a hybrid model is employed by a company – some payrolls are insourced, while others are outsourced but where all payrolls use a common true cloud-based technology platform.

This enables common reporting in a base currency. Most importantly, if the company experiences problems with an insourced payroll for a myriad of reasons, that payroll can immediately be “transferred” to an outsourcing model. This also furnishes the company with an insurance policy against key man risk- Axiomatic provides a parachute in case the payroll manager and/or staff resign.

To reiterate – this arrangement is almost like having a free insurance policy, a free put option or a golden parachute which leads to a seamless transition between the two models ensuring that employees do not experience any delays to their pay.

The success of the hybrid model is attributable to flexibility

Payroll, like any other process, is simple:

Input – Process – Output

Input – Most systems and providers are working with integrations and/or AI to minimise manual processes in the collection of Input. Axiomatic via our innovation called AxioOnline, aims to not only provide greater flexibility in the collection of input methods from the client but also to automate validations to ensure the accuracy of the source data.

Process – Payroll systems are embroiled in a race to achieve better automation and speed of processing. Many vendors are claiming AI automated checking will replace payroll managers in the immediate future.

We estimate that our AxioOnline system, in conjunction with integration, will decrease administration processing by 90%.

Output – Payroll systems have made tremendous strides with reporting. The emergence of BI tools, coupled with APIs, has enhanced reporting to unprecedented levels. A word of caution- before embarking on these projects scrutinise the costs to determine if they do provide an ROI.

Will continued technological advances spell the death knell of outsourced service providers? Cognisance must be taken of the following:

No matter how sophisticated automated checking processes become, you will still need highly experienced professionals to support this process.
No matter how good automated input and processing systems get, you will still need highly experienced professional to back this process up.
No matter how hi-tech payroll systems get, you will still need highly experienced professional to back this process up.

Systems enable compliance and, accuracy and the on-time nature of payroll they do not ensure it.

We posed the question at the beginning of this article- which is better – insourcing or outsourcing? The unfortunate conclusion is it depends.

Your Payroll, Your Way Why settle for a one-size-fits-all solution? Axiomatic offers customized payroll services designed to fit your business. Get in touch today to find out more!

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JOINT STANDARD ON CYBERSECURITY AND CYBER RESILIENCE

Joint Standard on Cybersecurity and Cyber Resilience

Retirement funds administer a significant amount of personal and financial information. Moreover, they hold about R4.3 trillion in invested assets, about half of the country’s GDP. Introducing the two-pot system adds flexibility and access for members, increasing the number of transactions in retirement funds. This combination of information, assets and flexibility represents a high level of risk when it comes to the technology infrastructure and protocols deployed to process information and transactions safely.

In this environment, cybersecurity, and keeping information safe, is an increasingly critical concern and risk mitigation area for retirement fund trustees.

Because of this, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) published Joint Standard 2 of 2024: Cybersecurity and Cyber Resilience Requirements for Financial Institutions (“the Joint Standard”). Retirement funds, and retirement fund administrators, are considered financial institutions in the context of this Joint Standard. Trustees must, therefore, prioritise awareness and proactive measures to safeguard their members’ retirement savings from cyber threats.

Joint Standard

The Joint Standard sets out the minimum standards for sound practices and processes of cybersecurity and cyber resilience for categories of financial institutions. Key components include requirements for implementing security-by-design principles in software development, establishing access controls, and ensuring proper incident response protocols.

Retirement funds will have to implement processes and make sure they have the tools and technology to prepare them for cyber-attacks as well as respond to and recover from such attacks.

The Joint Standard addresses requirements relating to governance, cybersecurity strategy and framework, cybersecurity and cyber resilience fundamentals, cybersecurity hygiene practices, as well as regulatory reporting.

Requirements in the Joint Standard

Joint Standard 2 of 2024 requires financial institutions to:

- Establish and maintain a cybersecurity strategy and framework to address changes in the cyber threat landscape, manage cyber risks, allocate resources, and identify and remediate gaps.
- Identify and classify business processes and information assets in terms of criticality and sensitivity, which in turn must inform the prioritisation of protective, detective, response and recovery efforts.
- Carry out security risk assessments on critical operations and information assets to ensure protection against compromise.
- Ensure that access to information assets and associated facilities is limited to users, processes, and devices authorised by the fund.
- Review their privacy policies developed in terms of POPIA to make sure that cybersecurity issues are raised and mitigated.
- Make sure agreements with service providers provide for the secure return, transfer or deletion of data upon termination of services.
- Regularly provide training and resources to educate members about cybersecurity risks and safe online practices. Clear communication regarding how to verify requests for personal information or changes in banking details is crucial, especially for less tech-savvy members.
- Notify the Authorities of any material systems failure, malfunction, delay or other disruptive event, or any cyber incident, within 24 hours.
- Engage in information-sharing initiatives with other retirement funds and industry stakeholders to stay updated on emerging threats, trends and effective risk management strategies.

Effective date

The effective date of the Joint Standard is 1 June 2025. However, the Authority has encouraged retirement funds to prepare ahead of the effective date, as requirements significantly impact operational practices.

Take action now to ensure your retirement fund is ready for the Joint Standard 2 of 2024 by June 1, 2025.

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NIGERIA AN UPDATE ON OUR 2025 SALARY INCREASE FORECAST

Nigeria: An Update on our 2025 Salary Increase Forecast

In our August 2024 article (click here) we stated that when the CFO asked Sharon to provide Finance with the forecast Nigerian salary increase percentage for 2025, she broke out in a cold sweat.

Here’s an update on Sharon: She’s now bedridden. The main cause of her deteriorating health condition is that all economists expected inflation to decline from June. This has not happened, and in fact, inflation increased in October 2024.

The increase in inflation in October was the result of food inflation increasing by 39.2% because of the floods and was also exacerbated by the petrol price increases. Nigeria’s historic inflation rates and the revised Axiomatic forecast for the remainder of 2024 and 2025 are detailed in the table below:

Our average 2025 inflation rate has increased from 23.8% to 28.5%.

When determining an equitable salary increase, we would normally take the projected inflation rate, add the historic real salary increase and with a significant degree of confidence, recommend a salary increase for 2025. This is not possible in Nigeria.

We reiterate the advice contained in our August article that a feasible and reasonable option may be to introduce an Inflation Allowance (“IA”). The mechanics of a possible IA methodology can be summarised as follows:

A 20.0% salary increase is granted.
An IA is instituted and communicated to employees.
- The trigger would be 30.0%.
- If inflation in any given month exceeds 30.0%, the difference between 30.0% and the prevailing inflation rate would be paid to the employee as a monthly IA. The calculation of the IA would be done on Basic Salary.
- If inflation is equal to or below 30.0%, no IA is paid.
- If our inflation forecast is correct, the IA would be paid in January, February and March 2025 but would then cease.
- If the company’s increase cycle commences in April, a 28.0% trigger level could be considered.

As we stated in our previous article, the salient advantage of an IA is that employees will realize and appreciate that the employer understands the increasing and volatile cost of living pressure and is prepared to assist. Further, if inflation remains high, the employer will bear some of the pain.

This decisive action will hopefully furnish the company with a tangible Return on Investment because it will reduce staff turnover, improve the EVP, and mitigate the high cost of recruiting new employees.

Most importantly, the IA ensures that high fixed employment costs are not entrenched in perpetuity; rather, only some temporary relief is afforded to employees.

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UPDATE ON THE SOUTH AFRICAN SALARY INCREASE FORECAST FOR 2025

NOVEMBER 2024 UPDATE

In August 2024, we published our 2025 South Africa Salary Increase Forecast article Click Here, in which we suggested that a salary forecast is not difficult. We encouraged clients to adopt a scientific approach to the preliminary salary increase forecast and then use the unfolding economic data over the next few months to update the original estimates. These were wise words, as the October 2024 inflation rate was a shocking but welcome surprise.

Inflation slowed from 3.8% in September to 2.8% in October – the lowest reading since the 2.2% recorded in June 2020 when we were in the throes of the Covid pandemic. The salient reasons for the dramatic drop were the lower petrol price, local and international food prices, and the stronger rand because of the optimism associated with the formation of the Government of National Unity. Importantly, this reading of 2.8% is below the bottom of the Reserve Bank’s 3.0% to 6.0% target range.

The MPC also warned about possible higher inflation at the November 2024 MPC meeting when they stated, “In the near term, inflation appears well contained. However, the medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water, as well as insurance premiums and wage settlements.”

Our revised inflation forecast is:

Our forecast for 2024 has decreased from 4.9% to 4.5%. Our forecast for 2025 has been revised lower from 4.5% to 4.2% and is slightly above the MPC Committee’s forecast of 4.0%.

This does of course, mean that employees will receive a higher real salary increase in 2024 – 1.5% compared to the “new normal” yardstick of 1.0%.

Our August article recommended a 5.5% salary increase for 2025, and one must pose the question of whether this incoming data changes this recommendation. A purely scientific approach would recommend the following:

Cognisance must also be taken of the following:

The average real salary increase granted to employees over the last 5 years has only been 0.5%. A slightly higher 1.3% real salary increase this year will compensate employees for the erosion of their disposable income over the last 5 years; and
We highlighted in our recent article (click here) that medical aid costs will increase by between 9.30% and 12.75% on 1 January 2025. Given the dominance of the TCTC remuneration model in South Africa, many employees will have to foot the bill themselves for these increases.

Given this, our recommendation is to stick to our August 2024 forecast:

2025 RECOMMENDED SOUTH AFRICA SALARY INCREASE 5.5%

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