Regulatory impact statement

Executive summary

At present the Remuneration Authority (the Authority) is not required to take into account the prevailing economic conditions when making a determination. This may lead to negative public perceptions of the Authority and position holders, in light of difficult economic conditions experienced in New Zealand.

The preferred option is that the Authority must take into account any prevailing adverse economic conditions based on evidence from an authoritative source.

In the event of such evidence, the Authority will exercise its discretion as to whether it will determine remuneration at a rate lower than it would otherwise determine.

The preferred option will impact on the determinations of the Authority under the Remuneration Authority Act 1977.

In addition, the opportunity is being taken to make several minor or technical changes to update the Remuneration Authority Act 1977 with respect to the titles of positions covered by it, and to make the date of its annual reporting consistent with that of the public sector.

The Department of Labour considers that this regulatory impact statement meets the tests of adequacy.

Status quo and problem

Recent determinations of the Remuneration Authority with respect to a range of positions have given rise to public debate about the appropriateness of salary or remuneration increases for those in public office in the context of the present recession, including by those to whom the determinations apply. These increases appear to be viewed by some as being out of step with a general appreciation of the need for “belt-tightening”, Government’s signals around wage expectations in the public sector, and reports of household financial hardship and job losses experienced by ordinary New Zealanders.

Both the public commentary and the responses of some recipients to salary or remuneration increases indicate that there is a perception that the criteria by which the Remuneration Authority arrives at its recommendations may not provide adequate guidance to the Authority about the extent to which adverse economic conditions ought to be taken into account.

The change sought is broadly about providing an assurance about the level of fairness in decision making and addressing concerns that the Authority is (or is perceived to be) making its determinations without sufficient due regard to the economic conditions affecting Crown revenue and other wage and salary earners’ wage or salary levels (where these conditions are adverse).

A review of recent determinations made by the Authority suggests that such perceptions are not accurate. These determinations indicate that the Authority has in fact been cognizant of economic conditions. Officials consider that the flexibility implicit in the system means careful consideration must be given to the matter before legislative change is agreed.

Objectives

In considering changes to the Remuneration Authority Act 1977 (the RA Act), the key objectives are—

• (a) ensuring that adverse economic conditions are taken into account when the Authority determines salary or remuneration levels; and

• (b) maintaining the independence of the Remuneration Authority in relation to the exercise of its functions.

Alternative options

Three options were identified in relation to adverse economic conditions. The preferred option is outlined on page 5 under the heading “Preferred option”. The other 2 options are:

• (a) leaving this matter to the Authority to determine; or

• (b) the Government making a submission to the Authority on the matter.

Allowing the Authority to determine what economic conditions to take into account is not the preferred option as this may be perceived as lacking transparency of decision making and may add to the workload of the Authority.

The Government making a submission to the Authority on the economic conditions is not the preferred option as this may be perceived as reducing the independence of the Authority from Government. Furthermore, a Government submission will be based on relevant documents and publications that would be available to the general public, effectively “doubling up” the work of some agencies.

The other issue relating to adverse economic conditions is whether the Authority must take them into account or have discretion to do so.

The second is not the preferred option because it is considered that a stronger requirement is needed to remove any doubt about whether or not economic factors have been included in the decision-making process.

Preferred option

The preferred option in relation to adverse economic conditions is for the Authority to refer to evidence from an authoritative source, which contains reliable and standard economic indicators, and makes an informed prediction on their future movement. One such document that has been identified is the regular Economic and Fiscal updates published by the Treasury.

As to whether the Authority may or must take the adverse economic conditions into account, the preferred option is that the Authority “must” take them into account as this will remove doubt about whether or not economic factors have been included in the decision-making process, thereby making the Authority’s determinations more transparent.

Risk assessment and mitigation

A risk identified around the possible introduction of amendments that would prevent or reduce a salary or remuneration increase is that subsequent “catch-up” adjustments may be required to meet other considerations the Authority is statutorily required to take into account (such as “achieving and retaining relativities”).

In the current recessionary environment, it can be argued that savings are still being made for that 1 year (or more years if the downturn persists). Furthermore, this year’s determinations are raising problems because economic conditions have not yet fully impacted on wage and salary levels. If this is the case, next year’s determinations could be lower. The proposed changes could therefore have a “smoothing” effect.

Impact on regulations

The preferred option will impact on the determinations of the Remuneration Authority by requiring the Authority to take account of any adverse economic conditions and, on that basis, giving the Authority discretion to prevent or reduce a salary or remuneration increase that might otherwise have occurred. This is in line with the desired policy effect.

Incidental minor or technical amendments will also be made to the regulations to ensure that the titles of positions covered by them are up to date; and to align reporting requirements with that of the public sector.

Implementation and review

The proposal will require legislative amendment to the Remuneration Authority Act 1977.

The Remuneration Authority has been adequately notified of the proposed legislative change, with the recommendation that the legislative change affects not only future determinations but also the ones the Authority is currently reviewing (providing these determinations are made after the amendment comes into effect).