Benefits Barometer 2016 by Alexforbes

WORKING TOGETHER, FINDING SOLUTIONS, IMPROVING LIVES

RETIREMENT SOLUTIONS RISK BENEFITS

HEALTHHOUSING RISK BENEFITS

RETIREMENT SOLUTIONS

EMERGENCY SAVINGS EDUCATION EMERGENCY SAVINGS HOUSING RETIREMENT SOLUTIONS TIME FOR A BENEFITS PROGRAMME RISK BENEFITS FOR SOUTH AFRICANS

Disclaimer

The information in this book is not advice nor is it intended as a personal recommendation, guidance or a proposal on the suitability of any financial product or course of action as defined in the Financial Advisory and Intermediary Services (FAIS) Act. While care has been taken to present correct information, Alexander Forbes and its directors, officers and employees take no responsibility for any actions taken based on this information, all of which require advice. Please speak to your financial adviser for tailored advice based on your individual financial needs before you make financial decisions based on this information. The graphs and charts in this book are for illustrative and information purposes only. The information in this book belongs to Alexander Forbes. You may not copy, distribute or modify any part of this document without the express written permission of Alexander Forbes.

Alexander Forbes Financial Services is a licensed financial services provider (FSP 1177 and registration number 1969/018487/07). Alexander Forbes Health is a licensed financial services provider (FSP 33471 and CMS registration number ORG 3064). Produced by Alexander Forbes Communications Photos: Gallo Images

11245-RF-RD-BB-2016-06

BENEFITS BAROMETER 2016

Foreword by Group Chief Executive Deon Viljoen (Interim) Executive summary

PART

SETTING THE SCENE

Chapter 1: The context

Chapter 2: What is the right social need?

Chapter 3: What is the value of employee benefits?

Chapter 4: The flip side of the coin: learning from the informal sector

Chapter 5: What do our members want?

FLESHING OUT THE VISION

Chapter 1: A better model

Chapter 2: Could we do it in South Africa?

Chapter 3: It’s an emergency

101

Chapter 4: Housing as a stepping stone to financial well-being

115

Chapter 5: Education – the engine room for social mobility

135

Chapter 6: We can make it if we really try – controlling health costs

147

Chapter 7: Risk is in the eye of the beholder

163

Chapter 8: Investing in the face of scarcity

173

CONTENTS

PART

AN ANSWER 190 Chapter 1: A new approach to solving for savings

191

Chapter 2: Knowing your assumptions from your elbow

203

Chapter 3: The final saving grace: the underappreciated annuity

211

Chapter 4: Dawn of the digital adviser

221

Chapter 5: Time for a benefits programme for South Africans

233

THE ISSUES, THE BAROMETER AND THE DATA 242 Chapter 1: The issues

243

Chapter 2: The sector case studies

253

APPENDICES 283 References 284 Thank you 294

BENEFITS BAROMETER 2016

FOREWORD This edition of Benefts Barometer sets out a vision for a savings model that we believe resonates with South Africans. It addresses that perpetual balancing act that individuals and their families face: between meeting aspirations of social mobility, ensuring social protection and acquiring greater financial capability. We believe that by addressing these issues, we stand a better chance of getting South Africans to engage with long-term savings.

FOREWORD

We hear our members: It’s time to rethink retirement savings! Benefits Barometer has now entered its fourth year. Already, in its short existence, we can see how it’s reshaping the conversation around employee benefits, retirement savings, managing risks and meeting the financial needs of individuals in South Africa. Each year Benefits Barometer has challenged us to consider whether our industry is being as effective as it could be to meet what matters most to these individuals. Each year we get that much closer to understanding what changes need to occur in our industry. Our aim is to keep pushing the industry, including ourselves, out of its comfort zone. It is a constantly evolving process. Benefits Barometer 2016 reflects our most significant challenge to date. We ask if the needs of South Africans might be better served by expanding the objectives around retirement savings priorities. Should it really be only about retirement income? What we know from surveys and focus groups with our individual clients is that retirement savings compete head on with saving for housing, education, additional

medical care, risk protections and emergency savings, to say nothing about meeting the cost of everyday life. Our research is suggesting, though, that if we can help individuals to tackle these changing priorities through an integrated, evolving process that responds to their changing financial needs, we can gain far greater value from those savings and still meet a minimum protection for retirement. It’s about creating a balance between tangible and immediate needs and longer-term demands such as retirement and income protections. The key to success will be to create a new form of employee benefits platform or programme that helps individuals control when to shift from one savings priority to the next. Core to the value proposition will be the idea that individuals maintain a constant contribution to savings. But without question, the real benefit will come from allowing individuals to more effectively manage these savings to meet their targets before and at retirement. This is not a challenge to government’s reform process. Rather, we see it as an appeal to employers and the architects of benefit structures for employees. If we could help them provide a more expanded savings environment that allows their employees to address such issues as emergency savings,

housing, education, medical coverage, risk protections and, yes, retirement savings, in one integrated framework, we believe we could help employers deal with their two greatest challenges: ■■ Getting their employees to see real value in their benefits programmes. ■■ Helping employees genuinely address their lifetime savings needs in a more cost-effective and disciplined framework. We believe both of these points speak directly to employers’ continual challenge of ensuring the financial stability and viability of their employees. It’s a measure that has direct linkages to higher employee engagement and productivity. It’s a vision that demands different thinking and more flexible solutions. We will have to build these concepts out bit by bit. But if we can succeed in shifting the language, focus and thinking of the savings and risk industries, we feel we will have provided employers and employees with an invaluable benefit. And who knows … if these ideas begin to resonate, perhaps this can form the start of a wider debate with policymakers.

BENEFITS BAROMETER 2016

EXECUTIVE SUMMARY Here and now, South Africa stands at a critical pause point as to how the future of social protection, employee benefits and retirement savings will unfold. Our question at this juncture is this: How do we design a programme that would have the greatest impact on serving the interests of South Africans, their employers, union representatives and the government as a whole? In this edition of Benefits Barometer, we contemplate a brand-new model for longterm savings that better serves the needs of South Africans. By building this breakthrough model within the existing framework for retirement savings, we believe that a more rewarding and holistic financial solution will be simple and easy for employers of all stripes to introduce. We start with a provocative question: Should a singular focus on retirement savings be the top priority for South African workers? By allowing employee benefits to tackle a broader set of financial imperatives for individuals, we believe we could build a model for long-term savings that will have a considerably greater positive impact on South Africaâ&#x20AC;&#x2122;s current challenges.

1 Alexander Forbes Research & Product Development, 2015 2 ReThink Africa, 2016

The model proposed in this edition of Benefits Barometer aims to increase the financial capability and fiscal responsibility of South Africans. By promoting selfdetermination and financial empowerment, the model provides a way for South African workers to map their own way to financial stability for their families. Success on this front has the potential to reduce future dependencies on government grants and social protections. Consider the statistics: Members are currently retiring from our retirement funds with an average replacement ratio of 32%. Preservation rates are averaging around 8% of members1. By all accounts it would seem our system is not delivering the required results for many participants. As we have previously argued, our system has simply become too fragmented. Trustees focus on retirement benefits, policymakers focus on retirement benefits, and umbrella funds, which have now replaced many employers in offering employee benefits, also provide a singular focus on the retirement funding issue. In summary, with the conversion from defined benefit funds to defined contribution funds and from standalone funds to umbrella funds, who is now helping the employee with their financial journey that marks the greater part of their lives?

But ask South Africans about their desire to save, and the willingness is clearly there2. The problem is that the long-term savings priorities of funding homes, educating children, providing for medical emergencies and ensuring that families are protected against risks all tend to compete head on with saving for retirement. Short-term financial crises also play havoc with any of these financial commitments. Where help is desperately needed is in enabling individuals and their families to better manage these conflicting demands. Itâ&#x20AC;&#x2122;s essentially a balancing act for South Africans between meeting aspirations of social mobility, ensuring social protection, and acquiring greater financial capability for themselves and their families. By addressing these issues, we stand a better chance of getting South Africans to engage with longterm savings. And if long-term savings can only be realised when there are short-term funding options to fall back on in time of financial crisis, then we need to solve for that as well.

EXECUTIVE SUMMARY

By creating an integrated approach to solving a range of long-term savings priorities, it makes it much more likely that individuals and their families will meet their lifetime goals. It’s an insight that we believe could have significant implications for how we conduct financial planning in the future.

We believe we can address this challenge but we’ll need to rethink how we engage with long-term savings. We’ll need to stretch our existing framework to allow members to solve for multiple life priorities in a controlled and interactive environment – both up to and after retirement. This means a new form of benefits platform (which leverages current underlying blocks) that will allow us to offer scalable and affordable solutions to individuals, whether they’re part of an employer group, an affinity group, or no group at all.

progress to this end can be achieved within the existing benefits framework provided by your companies and industries. None of the suggestions we make are contingent on government finalising its thinking around tax and retirement reform. As such, we believe you could implement aspects of these proposals with limited cost or impact to your current fund structure. It’s more a matter of repositioning the value proposition of savings to your members and introducing vehicles that could help them address those competing life priorities.

South Africa remains a leader among developing economies in financial services sophistication. Isn’t it time we started to apply this depth of know-how and insight to solving these trade-off problems for South Africans?

Let’s begin to explore this potential.

This edition of Benefits Barometer sets out the vision. In so doing, we’ve come to see that an integrated approach to solving a range of long-term savings priorities makes it much more likely that individuals and their families will meet these goals. It’s an insight that we believe could have significant implications for how we conduct financial planning in the future. We hope as well to discern just how attractive such a model might be to both employers and employees. But while we test these waters, for those employers, unions or boards of trustees who find aspects of this concept compelling, we believe that some

Financial CAPABILITY Navigating your way through your financial needs

Social PROTECTION

Social MOBILITY

BENEFITS BAROMETER 2016

PART

Setting the scene This section of Benefits Barometer 2016 gives us the context, the focus and the economic rationale for this unconventional proposal. We cover enough of the evolution of both the pension fund industry in South Africa and our thinking around the challenges that it has failed to address, to provide strong arguments for why we set out the proposals that we do. When we do consider these proposals, it is with the recognition that we need to create an integrated financial picture of an individual or their family: one that acknowledges that thereâ&#x20AC;&#x2122;s much to be gained from their interactions with both the informal and formal financial services world. We end this section with the recognition that we need to move beyond speculating what employees want from a long-term savings programme to asking them directly. In the last chapter of Part 1, we present the findings from the online survey, focus group interviews and one-on-one dialogues that we conducted with members from the Alexander Forbes Retirement Fund, the umbrella fund for the Alexander Forbes Group. The findings were not surprising for a country with our history and demographic profile: savings were important, but saving for a retirement income was not as high a priority as making sure that there was a home, a means to social mobility and protections against potential loss. This clearly gave us pause for thought: while long-term savings were an important priority for almost all our respondents, did we serve the best interests of South Africans by having such a singular focus on retirement savings at the expense of other priorities?

Fleshing out the vision In Part 2 we paint the picture of one highly successful country programme around savings that appears to tick all the boxes for promoting fiscal responsibility, self-sufficiency, social mobility and social protections. Our example is the Central Provident Fund of Singapore. We flesh out exactly what has made this programme such a success and ask serious questions about whether there are aspects of it that could work in South Africa. We believe there are. We spend Part 2 describing exactly why saving for housing, education, health and risk protections is very much on a par with saving for retirement â&#x20AC;&#x201C; more because of what they contribute to social mobility than what they offer as a social protection. We show how employers could facilitate the inclusion of these savings priorities into a broader employee benefit offering. Most important, though, we show that when individuals try to solve for these lifetime savings imperatives as separate savings challenges, our chances of success on all counts are fairly low.

EXECUTIVE SUMMARY

PART

An answer Part 3 starts with a bang. We demonstrate that if we can take these same six savings priorities and solve for them by employing an integrated, time-varying, lifecycle approach to the savings problem, we significantly enhance the outcomes to the individual. This is effectively the punchline of this whole holistic effort. Further, we show how we could, within the current regulatory framework, develop an employee benefits platform that would allow employers to add on any of these proposed additional savings programmes to their existing benefits structure. This segment of the book also includes several additional chapters of â&#x20AC;&#x2DC;watchwordsâ&#x20AC;&#x2122;. We provide commentary on the importance of understanding the underlying assumptions used in any modelling exercise and why the industry might benefit from a bit of standardisation around these assumption sets. We also analyse why it is that when employees finally reach that retirement door, convincing them to buy an annuity stream poses such a challenge. We offer solutions on what would make annuities more intuitively appealing. Finally, we end this section of the book with a thought piece on how digital advice could address the issue of providing such an advice-driven platform to a population with little prospect of being able to avail themselves of a financial adviser.

The issues, the barometer and the data In this last section of the book we recap the progress we may or may not have made in addressing some of the issues that often prove to be barriers to the success of any benefits programme. We use the benefits barometer wheel to highlight which issues are most problematic to which sector. Finally, we end this section with the latest consolidated update of the current employee benefit offerings, successes and failures. In summary, Benefits Barometer sets out the value proposition that achieving this vision will demand a certain commitment by employers to help facilitate this type of holistic savings programme. If employers will commit to making these services available to their employees, we will in turn commit to creating the type of benefits platform that could make such an initiative feasible.

PART 1 Introduction

BENEFITS BAROMETER 2016

A CHANGING WORLD

OLD SYSTEM

DEFINED BENEFITS

NEW SYSTEM

DEFINED CONTRIBUTION BOARD OF TRUSTEES

EMPLOYEE WELL-BEING

EMPLOYER MANAGEMENT COMMITTEES

STANDALONE FUNDS

UMBRELLA FUNDS

PART 1

BENEFITS BAROMETER 2016

Introduction

WHO IS MANAGING THIS?

Retirement savings

LEGAL RESPONSIBILITY

HEALTH HOUSING EDUCATION RISK BENEFITS EMERGENCY SAVINGS RETIREMENT SOLUTIONS

? 11

PART 1 Chapter 1

BENEFITS BAROMETER 2016

PART 1 SETTING THE SCENE Chapter Chapter Chapter Chapter Chapter

1: 2: 3: 4: 5:

The context What is the right social need? What is the value of employee benefits? The flip side of the coin: learning from the informal sector What do our members want?

13 21 31 49 61

THE CONTEXT

PART 1 Chapter 1

THE CONTEXT

OVERVIEW Benefits Barometer is now in its fourth year. With each year, we seem to develop better and better insights around the issue of South African savings. In those first years, the focus was on the retirement fund industry â&#x20AC;&#x201C; were our members winning? But as our thinking evolved, we realised that there were much bigger issues at stake. This chapter provides the background to this journey of discovery and sets the stage for some critical questions. We suggest that if ever there was a time for the industry to pause and reflect on what needs to be the primary focus, that time is now.

PART 1

THE CONTEXT

Chapter 1

THE CONTEXT

2013

? Three years ago we embarked on a journey with Benefits Barometer. We started with a simple question: How effectively were employee benefits meeting the needs of South African employees? The answer in 2013 was: not very. And so began a long and complex path of discovery. At that time, one core problem loomed large – the system developed to provide for employees’ mental, physical and financial well-being was too fragmented. Too many decision-makers in employee benefits delivery weren’t coordinating their efforts. Indeed, at times they seemed to be almost acting in opposition to each other.

PART 1 Chapter 1

THE CONTEXT

2014

By 2014 we recognised that any progress to resolving the problem was further complicated by the fact that both employers and employees were gradually disengaging from the debate. From the employers’ perspective, the shift to the defined contribution model and to an umbrella fund administration framework (encouraged by both policymakers and the financial services industry) meant that less and less was being demanded of the employers’ involvement in securing their employees’ future financial well-being. And from the employees’ perspective, individuals were far more concerned with their day-to-day

financial stability than they were with their retirement savings. A disengaged employee meant that employee benefits in general were neither well understood nor particularly valued. Our conclusion in 2014 was that unless the financial services industry could help individuals with the here and now of their financial well-being, saving for retirement or buying income protection was going to rapidly lose relevance in people’s lives. Given that these benefits represented the only significant safety net they and their families had to fall back on apart from the old age grant and the Unemployment Insurance Fund (UIF), the situation was serious.

Unless the financial services industry could help individuals with the here and now of their financial well-being, saving for retirement or buying income protection was going to rapidly lose relevance in people’s lives.

PART 1

THE CONTEXT

Chapter 1

2015 As such, Benefits Barometer 2015 reflected a dramatic shift in focus. Our research on the pension fund industry turned to the plight of the individual trying to manage their own financial well-being. The logic was simple. Until we could stabilise membersâ&#x20AC;&#x2122; financial well-being, retirement funds and employee benefits were at risk of being cashed in at the first opportunity. The workplace provided an excellent place for engaging with employees and their families about financial stress and their capabilities.

a rollercoaster ride in the course of their financial lives, veering from time to time towards debt and potential financial ruin, and then righting themselves and clawing back towards stability. This meant that the industry needed to find a way to finally bridge the gap between the credit-impaired and the creditworthy in the way it serviced individuals. After all, these were for the most part the same individuals and families at different stages in their financial journeys.

From the employersâ&#x20AC;&#x2122; perspective, having employees in financial crisis posed real risks to any company, but the fact of the matter was that most financial wellness and employee assistance programmes were falling far short of the mark of reducing those risks. Benefits Barometer 2015 provided a veritable roadmap to why these programmes failed, what needed to change, and how the financial services industry could step up to provide this critical resource.

Enhancing individualsâ&#x20AC;&#x2122; financial decisionmaking skills also demanded a completely new type of product and service offering. It needed to be one that would actually help individuals understand the trade-offs they were making whenever they made a financial decision or bought a financial product. This framework would need to allow them to tailor the product to address which tradeoffs were optimal for them. Importantly, it needed to help them understand the potential consequences of their decisions over a longer term.

The problem, though, was that meeting such a need effectively demanded a complete overhaul of the industry: its business models, its mode of advisory and consulting engagement, and its digital, customer relationship management and administration systems. Getting this right was no longer about selling products, but about nurturing behavioural change. It was about understanding that the average South African retirement fund member experiences

But as compelling and convincing as all this sounded, one fundamental stumbling block still remained: how could such a monumental shift ever be funded? Put simply, the cost of the shift could exceed any pay-off time that shareholders of a publicly listed company might tolerate. It could also exceed the funding and distribution requirements of any start-up disruptor.

PART 1 Chapter 1

THE CONTEXT

2016

And then came February 2016. This was the month that government pushed the pause button on some of the retirement reforms. This was such a critical point of inflection for this whole conversation. The debate around issues such as mandatory annuitisation and preservation and whether South Africa had an effective social security net threatened to merge into one potentially explosive issue: Whose money was this anyway that was being allocated to this savings programme, and who has the right to determine what happens to it? Makhado R Ramabulana, an advocate in the Pension Funds Adjudicators Office, argued in a Business Day opinion piece that “in the debate over the changes to pension funds administration arising from the Taxation

Laws Amendment Act, both sides make reasonable points”1. He went on to contextualise the discussion by pointing out that employment and the role of pension funds have changed dramatically since 1956 when the Pension Funds Act was first passed: Instead of a paternalistic role, where the employer provided a life-long employee with a gold watch and a pension for the rest of their lives on retirement, increasing employee mobility (to say nothing of increasing concerns about the financial risks that funding these liabilities posed to a company) demanded a much more portable solution, one that today is perceived more as a personal savings plan than a retirement savings programme. The shift from the company-centric defined benefit (DB) scheme where the employer carried all funding responsibility, to the employee-centric defined contribution (DC) model, meant that the employer shifted this responsibility by simply accounting for the funding in an employee’s total cost-to-company calculation. What was effectively once a gratuitous company perk has now become a deduction from an employee’s salary package. Considering that it’s not compulsory for employers to offer a pension fund scheme to employees, it’s little wonder that employees began to regard these schemes as sources of accessible savings rather than as inaccessible retirement provision2.

Whose money was this anyway and who has the right to determine what happens to it?

1 Ramabulana, 2016 2 Ibid

PART 1

THE CONTEXT

Graeme Kerrigan’s 1991 notes, as a former Alexander Forbes actuary and chief executive, on why unions like Cosatu lobbied hard for the shift from DB to DC – even when on some level it didn’t appear to provide employees with the best income security after retirement – provide historical context. At that time, these were considerations that were uppermost in the minds of those who advocated the shift: ■■ Workers’ priorities lay with housing, education and funeral benefits, none of which were catered for in existing DB schemes. ■■ Lump-sum benefits were preferred over income benefits because of a lack of confidence that pensioners would receive an ongoing income in rural areas. ■■ Most employees at unskilled levels expected to resign or to be retrenched rather than to retire, and wanted good early-leaver benefits. ■■ Low-income employees believed that they had a higher death rate than higher income employees and that they would therefore end up subsidising the pensions of higher income employees.

3 Kerrigan, 1991

■■ There was little understanding among DB scheme members, whereas the alternative DC provident funds were seemingly simple, easy to understand and communicated to all levels of members. ■■ Members had no share in fund management. Workers distrusted the paternalistic attitude of employers, who were perceived to dominate existing schemes. All of these concerns pointed to the need to create a more inclusive and flexible savings model that better addressed the realities for many workers at that time. Clearly a win on this front would provide the trade union movement with a cause around which they could “consolidate existing membership and recruit new members”3. Today, many of these same points probably still apply. That said, in spite of all the sabre rattling about whether tax and reforms to this hard-fought-for model would be tolerated, what doesn’t appear to be in question is whether retirement funds should exist in the first place.

Chapter 1

Rather, two other more challenging considerations appear to be at issue:

1 2

If government wants to mandate preservation and annuitisation, this requires an effective social security system that can provide a financial safety net during times of crisis. If workers’ assets are to be tied up in government or financial services coffers, who ensures that these assets are managed in members’ best interests?

Perhaps the important point is that if there is even a shadow of a doubt from members, the system then becomes vulnerable to substandard behaviours. More importantly: if the debate becomes too contentious and the recommendations too prescriptive on how workers must allocate their savings, there might be an unfortunate backlash. Difficult questions might be raised about who has the right to make that call.

PART 1 Chapter 1

THE CONTEXT

CONCLUDING THOUGHTS If the debate becomes too contentious and the recommendations too prescriptive on how workers must allocate their savings, there might be an unfortunate backlash. Difficult questions might be raised about who has the right to make that call. If ever a time was ripe to rethink exactly what we are all doing here, this would probably be it.

WHAT IS THE RIGHT SOCIAL NEED?

PART 1 Chapter 2

WHAT IS THE RIGHT SOCIAL NEED?

OVERVIEW In this chapter we try to make a distinction between long-term savings and social protections. The first leans more towards enabling social mobility, while the second leans more towards social security issues. The two are interlinked. But global assessments of pension system excellence seem more focused on the social protection dynamics. We raise the question whether that focus best serves the interests of a developing economy such as South Africa.

PART 1

WHAT IS THE RIGHT SOCIAL NEED?

Chapter 2

ARE WE SURE WEâ&#x20AC;&#x2122;RE ADDRESSING THE RIGHT SOCIAL NEED? At some level, long-term savings programmes and public policy around social protections are interlinked.

PART 1 Chapter 2

WHAT IS THE RIGHT SOCIAL NEED?

To begin with, we all agree that a healthy savings culture contributes to a country’s economic growth in a number of ways. LONG-TERM SAVINGS can: ■■ help fund development initiatives ■■ foster capital market formation and increase stock market liquidity and breadth ■■ encourage entrepreneurship ■■ reduce our dependency on foreign capital to fund our national debt. There are important social and psychological benefits as well. Long-term savings help smooth consumption, ensuring that people are protected over different phases of their economic journey. By engendering a savings culture, a country can fortify its citizens against short-term economic shocks and, as such, reduce the cost of welfare provision for the state. Most importantly, it can build a level of financial empowerment and stability that has knock-on effects on health, both physical and mental, in individuals, families and communities. Each element of value helps reduce the burden that would fall on the government.

SOCIAL PROTECTIONS, however, represent a slightly different concept. Like social security, the focus here is on providing a financial floor or medical assistance to people who are at risk because of lack of income from unemployment, old age, poor health, limited capacity from childbirth or single parenthood. If a country can successfully integrate longterm savings with social security, they can keep their citizens financially secure during good times and bad. This is in effect the imperative that has long kept pension funding at the top of the priority list as a long-term savings initiative in developed economies. More importantly, if a country can tackle this challenge through a public–private partnership with its financial services industry, a massive burden on the state fiscus can be relieved. Here the solution is arrived at through the collective efforts of multiple agencies – not just the government – although the government will often play the role of overseer to ensure there’s some link or integration.

A pension system primer As such, pension fund models globally have become almost inextricably entwined with the need to fund social protections for a population. International organisations such as the World Bank, the Organisation for Economic Co-operation and Development (OECD) and the International Labour Organization have tried to map out exactly how these essentially public–private partnerships can be integrated to address the numerous requirements for a given country. The multi-pillar pension framework that’s set out on the next page is often applied to assess how comprehensive a social protection system needs to be. The more columns a country can fill on this scorecard the better. The model recognises that to cover all the requirements of a given population, different funding models or different agency partners may be required. This is where the interactions and interdependencies of that public–private partnership are best understood.

Pension fund models globally have become almost inextricably entwined with the need to fund social protections for a population.

PART 1

WHAT IS THE RIGHT SOCIAL NEED?

Chapter 2

A model for pension system excellence The zero pillar

is a government-funded social pension that ensures there is at least a minimum level of oldage income support, regardless of a person’s employment history. For some countries, like South Africa, qualification is means tested. In other countries, this basic minimum is available to all. The distinguishing feature of this pillar is that funding is non-contributory. The government finances it, typically from tax revenues.

The first pillar

is a compulsory contributory public pension where contributions are linked to earnings. It aims to replace a portion of pre-retirement income, typically on a pay-as-yougo basis (think a defined benefit type arrangement). Contributions of one generation fund the income requirements of the previous generation. As such, there are potential political and demographic risks. When South African policymakers originally conceptualised a national social security fund back in 2006/2007 this type of funding was envisaged. There would be contributory benefits for people earning above the old-age grant level.

The second pillar The third pillar

is a compulsory earningsbased scheme managed by the private sector. It’s essentially an individual savings account although it can be structured in multiple ways. Second pillar funds employ a defined contribution-type framework wherein the investment and longevity risks sit squarely with the individual and the choices they make.

represents the type of employer-based or occupational schemes that tend to dominate pension funding in South Africa. These are generally voluntary taxincentivised programmes that can provide either a defined benefit or defined contribution savings scheme and generally include risk benefits. Note the employer doesn’t have to offer such a scheme in South Africa, but once on offer, all permanent employees must join it. This pillar can incorporate as much flexibility and discretion as an employer would like to include.

The fourth pillar

is financial and nonfinancial support to the elderly apart from pensions. It provides either formal or informal support to facilitate social programmes such as healthcare or housing or asset accumulation (whether financial or non-financial1).

South Africa has a fairly minimal version of the zero pillar with its various grant programmes such as the old person’s grant and the Unemployment Insurance Fund. But it also has a surprisingly robust and mature third pillar solution.

1 World Bank Pension Reform Primer, 2008

PART 1 Chapter 2

WHAT IS THE RIGHT SOCIAL NEED?

The Melbourne Mercer Global Pension Index The Melbourne Mercer Global Pension Index takes this exercise one step further. It rates each countryâ&#x20AC;&#x2122;s social protection system by evaluating the extent to which a country provides cover across these multiple pillars. Their final score assesses the adequacy, sustainability and integrity of the cover given the countryâ&#x20AC;&#x2122;s economic, social, cultural, political and historical context2.

Zero pillar A basic public pension that provides a minimal level of protection

First pillar A public, mandatory and contributory system linked to earnings

Second pillar A private, mandatory and fully funded system

Third pillar A voluntary and fully funded system

Fourth pillar Financial and non-financial support to the elderly apart from pension

Benefits Savings Tax support Benefit design Growth assets

Coverage Total assets Contributions Demography Government debt

ADEQUACY

SUSTAINABILITY

4 Regulations Governance Protection Communication Costs

Indicators including

5 Indicators including

INTEGRITY Sub-index

40%

35%

25%

Country score and grade in the Melbourne Mercer Global Pension Index

2 Melbourne Mercer Global Pension Index, 2015

PART 1

WHAT IS THE RIGHT SOCIAL NEED?

How does South Africa stack up against such criteria? South Africa has a fairly minimal version of the zero pillar with its various grant programmes such as the old person’s grant and the Unemployment Insurance Fund (UIF). But it also has a surprisingly robust and mature third pillar solution. This means the private sector carries the bulk of the responsibility for providing protections beyond the most minimal. For the most part, these protections only apply to people who are employed. Note that only one or two countries in Africa (Mauritius being an important exception) have all five pillars in place. This lack of inclusiveness earns South Africa a C score in the Melbourne Mercer Global Pension Index3. This means the system “has some good features but also has some major risks and/or shortcomings that should be addressed. Without these improvements its efficacy and/or long-term sustainability can be questioned.”

Chapter 2

Consider, for example, the fact that we currently provide a highly evolved solution for retirement savings but there has been little progress made on creating a comprehensive social security system to address the needs of all South Africans. It is this aspect of our system that has most likely contributed to our score of C, in spite of the sophistication of our pension fund industry and the strong scores it receives for governance and integrity in the index. In our next chapter, we address the question of coverage adequacy with our current government-provided social protections. More importantly, we try to illustrate just how much value our current system actually adds to both the government, in alleviating demands on the fiscus, and to employers, in enhancing employee attraction and retention. But the question we will repeatedly raise in this edition of Benefits Barometer is: Is this enough and could we not do more?

As noted in the report: “Although it has some admirable features, it is not deemed to be a sustainable or comprehensive solution.” More troubling is that this score appears to be slipping as the reform process gets more muddied4. The report offers no further comment.

PART 1 Chapter 2

WHAT IS THE RIGHT SOCIAL NEED?

We agree wholeheartedly that long-term savings and social protections can be most effective when they are interlinked. We also believe that in a developing economy, a public–private partnership is most costeffective in providing such a solution. The point we will challenge is whether placing retirement savings at the top of the list for a long-term savings drive serves the broader challenges of a developing economy best. This question is particularly pertinent when that developing economy is South Africa, with its unique historical, political and social features. It means our employers and policymakers alike have very different challenges beyond retirement savings that urgently demand our attention. For employers and the country, these challenges are about financial stability, financial capability and a financial security that transcends more than just the retirement years.

CAPABILITY STABILITY SECURITY

FINANCIAL

A lack of inclusiveness earns South Africa a C score in the Melbourne Mercer Global Pension Index. “Although it has some admirable features, it is not deemed to be a sustainable or comprehensive solution.”

3 Melbourne Mercer Global Pension Index, 2015 4 Ibid

PART 1

WHAT IS THE RIGHT SOCIAL NEED?

SOCIAL MOBILITY

Chapter 2

HEALTH ASSET ACQUISITION EDUCATION HOUSING

For broader South Africans, the immediate challenge is how to better address the issue of social mobility. By social mobility we mean the ability of an individual or their family to employ occupation, education, wealth or some other similar indicator of achievement to change their perceived status in the community or economy. With this in mind, we would like to propose that there is a shift in thinking about compulsory savings: what’s needed at this point in our evolution as an economy is a compulsory savings programme that promotes: ■ asset acquisition to a population that has been denied such access for four generations ■ education, in a country where only 50 public schools out of several thousand are sufficiently equipped to provide transformational education5 ■ health, in an environment where government-funded universal health may only be feasible in 15 to 20 years ■ risk protections against loss of income to one’s family – in the event of death, disability and, yes, even retirement.

5 Spaull and Kotze, 2015

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WHAT IS THE RIGHT SOCIAL NEED?

CONCLUDING THOUGHTS Let’s get to that discussion though, after we’ve had a chance to thoroughly examine the value of what’s already in place – both in terms of the social protections offered by the public sector and contributions from the private sector. At issue is not just what each sector is currently providing but who is best placed to provide South Africa with what it needs going forward. This is not a contest. It’s a recognition that as a country, our servicing needs will have to evolve as needs and agencies evolve.

WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

OVERVIEW South Africa has a particularly well-evolved employee benefits programme – but for the employed only. Conversely, there has been slow progress in the establishment of a comprehensive social security system that would address the (basic) needs of all South Africans, employed and unemployed. One of the risks we face is that we somehow lose sight of the invaluable role that employee benefits play in South Africa. This is not just about how employee benefits bolster the attractiveness of an employer’s pay package. It’s about understanding what the economic impact would be to South Africa if such a system didn’t exist. This chapter tries to take a deeper dive into the economics behind employee benefits and asks the question: How much economic value does the system actually contribute?

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Chapter 3

WHY SHOULD WE CARE? Each preceding edition of Benefits Barometer has argued the same point: that employee benefits are important. We’ve framed our arguments from any number of different perspectives though. Benefits Barometer 2013 tried to map out the interconnections between the various stakeholders of the government, employer, union and household in terms of how these four entities come together to tackle the significant task of managing the physical, mental and financial well-being of an individual. Our focus in that edition here was primarily on the tenuous and fragmented nature of these connections and how this created sub-optimal outcomes.

just about being nice to employees, it’s about safeguarding the future of our society.

In 2014, Benefits Barometer examined the role that employee benefits play in providing, on behalf of the government, those ‘minimum floor’ and ‘rising floor’ social protections to one important segment of the economy, the employed. As employee benefits are often the only form of financial savings or safety net for many South Africans, getting it right isn’t

What this chapter tries to add to the debate is a perspective on the true economic value of these benefits to the various stakeholders: the government, the employer and the individual. In essence, we recognise here that we need to provide a bit more financial substance to the argument: ‘Employee benefits are important!’

In 2015, our focus shifted to the employee specifically. Sadly, we realised that collectively we were losing the war on getting both employees and employers to care enough. We thought we appreciated why this was the case. We argued that the value of these employee benefits would never be properly assessed or appreciated by the individual until we helped them address their more immediate needs of day-to-day financial survival – their holistic financial well-being mattered.

ANOTHER WAY WE COULD

ASK THE QUESTION IS: What if employee benefits didn’t exist?

What would be the cost to the government? And what would be the cost to an individual? What would be the cost to the employer?

As employee benefits are often the only form of financial savings or safety net for many South Africans, getting it right isn’t just about being nice to employees, it’s about safeguarding the future of our society.

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What if the government was our sole provider of employee benefits? Exactly what do we include when we consider the ambit of social protections? Conventionally these inter-related protections cover income protections for individuals and their families in the event of retirement, loss of employment, loss of income from becoming disabled, and loss of life, as well as healthcare benefits and initiatives to enhance financial capability. In many ways, itâ&#x20AC;&#x2122;s in our interests to have the government play a role here. When there are issues of redistribution, government is clearly in the best position to oversee this exercise. Where there are circumstances when the market size exceeds the capacity or appetite of the private sector (such as in providing unemployment benefits), the government must fill that gap. In theory, a government could provide its citizens with many or all of these protections. As we saw in earlier chapters, governments around the world have implemented various models, ranging from totally centralised, government-controlled arrangements to totally decentralised, privatised arrangements, and any combination in between.

1 National Treasury, 2015

As it currently stands, though, the South African government provides an array of means-tested social grants that primarily target the lowest income groups. Unfortunately, the current raft of legislated benefits are not ideal on their own. Older personâ&#x20AC;&#x2122;s grants (OPG) and disability grants are two of the more critical tools the government employs for protecting lowincome workers when retirement savings or disability income replacement policies would be beyond their reach1. The Compensation for Occupational Injuries and Diseases Fund (COID) and the Occupational Diseases in Mines and Works Act (ODIMWA), for example, provide employees with an option to claim for loss of income due to injury or disease suffered on the job. Additional government-driven benefits include the Unemployment Insurance Fund (UIF) which provides short-term benefits to cover unemployment, absence due to illness, maternity leave, and even, in some cases, to assist families in the event of death. And finally thereâ&#x20AC;&#x2122;s the Road Accident Fund, which applies to injuries in motor vehicle accidents exclusively.

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Chapter 3

But a government could provide its citizens with many or all of these protections.

Above and beyond that, the government employs tax incentives and oversight bodies to create an array of supplementary protections (disability and death cover, medical schemes, spousal and family protections, income savings for retirement) that are outsourced to the private sector. As things currently stand, there are significant overlaps and gaps between the offerings of these various programmes, both within public sector offerings and between the public and private sector. Processing of claims frequently demands applications to multiple agencies. As such, itâ&#x20AC;&#x2122;s likely that considerable efficiencies and cost savings could be gained from restructuring and consolidation. To do so, though, would no doubt require considerable political will from a number of different agencies in the process. The reality is, not only are these state benefits mostly capped, but generally benefits are at an unsustainable level for many families. Consider the employer who says that they were simply not interested in providing their employees with an employee benefit package. How viable would these existing protections be as fall-back solutions?

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Government grant or assistance

Who qualifies

What’s granted

For what timeframe How it is funded

Older person’s grant War veteran’s grant Disability grant

Any citizen over pension age, means-tested

Up to R1 500 a month for someone with income less than R2 250 a month, and assets less than R990 000

Until death, while qualifying under means test

Tax revenues

Child support grant

Primary caregiver of child below age 18, means-tested

Up to R350 a month for caregiver with assets less than R42 000

Until child reaches age 18

Tax revenues

Care support grant

Primary caregiver of child with severe disability, means-tested

Up to R1 500 a month for caregiver with assets less than R180 000

Until child reaches age 18

Tax revenues

Compensation for Occupational Injuries and Diseases Fund

Both casual and temporary workers who experience loss of income due to job-related injury, disease or death

Temporary disability (not deemed permanent and reviewed after a year):

Temporary disability:

Employer contributions using Department of Labour assessment formula: (Total worker’s pay/100) × tariff based on risks associated with job

Totally unable to work: receive 75% of normal wage they would have earned over disability period Partially able to work: COID Fund tops up 75% of the difference between the partial wages received and what would have been the full wage had injury not occurred Permanent disability: Disability rated between 1% and 100% depending on severity of disability Disability less than 30%: Cash lump sum determined by fund Disability between 30% and 100%: Monthly pension amount determined by fund Disability = 100% 75% of wages

Payment of period of disability up to 1 year, then review Permanent disability: Until death

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Unemployment Insurance Fund

Contributing workers who are unemployed or unable to work as a result of illness, maternity or adoption leave

Low-paid workers get paid up to 58% of their normal income, with higher paid workers earning a lower percentage The cap is for workers earning R12 478 a month or more, who get 38% of this amount

Worker gets one day’s credit for every six calendar days they have been employed, up to 34 weeks (238 days)

Chapter 3

Employee and employer contributions = 2% of pay to a limit

Unemployment, adoption or dependant benefits: up to 238 days earned Maternity benefits can be paid up to 121 days (17.32 weeks) earned Road Accident Fund

2 Road Accident Fund, 2015

Any person injured, and dependants of anyone killed in a road accident, except for the driver who caused the accident

Amount determined by the fund. Average value of a claim in 2015 was R114 9692

Fuel levies

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What would an individual get from government? What’s clear is that what individuals and their families could currently get in the way of social protections would be minimal at best. Despite the large portion of national budget dedicated to social protection (about 13% of allocated government expenditure), the government is still not able to satisfy fully the need for this type of protection. To illustrate this, let’s assume that getting an adequate payout means getting near 100% of the gross income you were earning while you were working (this may sound high, but for lower income workers it’s probably the reality of need). That would mean that the old person’s grant of R1 505 per month (to be increased to R1 510 in October 2016) would only be adequate for: ■■ individuals who have never worked or earned an income ■■ the lowest earning 50% of unskilled workers ■■ roughly the lowest 25% of semi-skilled workers. This estimation is based on the monthly earnings data reported in the Labour Market Dynamics in South Africa 2014 report by Statistics South Africa. This report estimates that the lowest earning 50% of unskilled workers were earning about R1 800 per month. Similarly, the COID Fund pays only about 75% of wages for the time an individual is booked off for temporary disability.

3 National Treasury, 2015 4 Rossouw, Joubert & Breytenbach, 2013

The UIF, which is generally limited to formal sector workers, excludes other workers such as household, casual and temporary workers. And its benefits (and contributions) are capped to certain levels, which are considered quite low. Additionally, the fund does not cover employees if they become unemployed because they failed to report to work at required times and dates, or they quit. This fails to recognise that there are numerous reasons that force an individual to leave a job. This includes instances where an individual resigns to take care of a sick family member, a time when they are likely to most need UIF support. The 2016 Budget Review notes that the draft Unemployment Insurance Bill proposes to improve maternity, illness and death benefits for eligible contributors3. This is certainly a step forward but hardly provides much more than a stop-gap solution. Effectively, even if this benefit were accessible to all, there would be a need to top it up to an adequate level for many workers. Overall, government’s social security funds may currently be in a commendable financial position (the Road Accident Fund being the exception), but a range of challenges such as internal systems, governance issues and rising unemployment raise a few flags. By contrast, government assistance programmes funded out of tax money, such as the social grants, are in a worse-off position because of the problems facing the fiscus – notably the stubbornly low growth rate. It seems unlikely that the situation will improve. Research by economists Rossouw,

Joubert and Breytenbach indicated that if the spending trends from 2012/2013 were to continue unabated, South Africa would reach a fiscal cliff by 2026. A government fiscal cliff is a situation where government expenditure becomes too large to sustain and therefore threatens sudden or severe economic decline. It’s likely that the extension of social protection and the increasing cost of living will only serve to make public financing more unsustainable than it appears to be currently4. So let’s get to a more relevant question: Should we even be asking the government to provide anything more than the most basic of protections given the current demands on the fiscus, the administrative skills of government agencies, and the current concerns around ‘state capture’? And does the government not have more important work to do creating jobs and generating economic growth so that South Africa can deal with poverty, inequality and unemployment as envisaged in the formerly adopted National Development Plan?

Regardless of who provides the benefits, three important questions remain: 1. Do individuals actually need the benefits and do they know they need them? 2. Given free rein, would individuals actually buy them? Or would behavioural aspects derail the process? 3. Can they buy it? Would they be able to access the benefits at all, or at a reasonable price?

PART 1

WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Passing the mantle to employers As our system evolved, it simply made sense for the government to outsource some elements of the value chain. By global standards, South African employers have been particularly attentive in coming to the fore and providing these essential benefits. In Benefits Barometer 2015, we highlighted that what employers actually do is provide a ‘rising floor’ of protection to employees in contrast to the ‘minimum floor’ provided by the government. This makes government responsible for making sure that everyone has the very basic standard of living. Beyond that, the very fact that an individual is employed starts to elevate them to another class. Typically, individuals in formal employment have higher standards of living, which employers protect through the employee benefits structure, providing a ‘rising floor’ that corresponds with the individual’s unique circumstances, their standard of living and the particular risks they may face.

But what if business pressures make employers more circumspect about making these benefits available? Here we think it would be useful for employers to consider that choice from three distinctly different perspectives. In the first case below, we can consider employee benefits from the conventional view: their impact on productivity and talent management. Secondly, we can examine the economic contribution of employee benefits to the broader economy. Last, but certainly most importantly, we can examine whether, in absence of employer-sponsored or government-provided safety nets, it would be economically viable for an individual to source an adequate level of protections on their own – as a retail consumer.

Chapter 3

and ensure higher job satisfaction and motivation6. In theory, an attractive benefits package helps to create an image of ‘a preferred employer’ when the market for talent becomes highly competitive. Intriguingly, while South African employers are attentive to making sure a minimum level of benefits is available, they probably haven’t capitalised as much as American companies might have in making benefit packages a particular drawcard for talent. Figure 1 on the next page summarises the most common benefits offered by employers in various industries.

CASE 1. Corporates offering benefits to employees Traditionally, the case for employers to provide employee benefits is presented from the perspective of their business value: they increase employee productivity, reduce employee turnover5 and absenteeism

What employers actually do is provide a ‘rising floor’ of protection to employees in contrast to the ‘minimum floor’ provided by the government. 5 Gardner and Nyce, 2014 6 Rappaport, 2013

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Sector

Figure 1: Risk benefits offered in each sector7

Percentage of employers in a sector who offer a certain type of benefit Source: Alexander Forbes Financial Services, 2015

7 Alexander Forbes Research & Product Development, 2015

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Figure 1 demonstrates the variety of cover that employers tend to provide. Various industries provide different benefits according to the specific needs of workers in that industry, but given how dramatically different these industries are, what is perhaps more surprising is that there isn’t more variation. But employers derive other ancillary values from providing employee benefits. Traditionally employee benefits were considered a form of management tool. Employers could structure benefits in such a way that they not only could attract the right sort of employee into their companies (those who placed a high premium on financial prudence) – but they could also make sure these employees exited employment at a time that worked best for the employer8. Ultimately, the tax treatment of employee benefits also works to the advantage of all stakeholders. In the absence of the tax incentives, either the cost of these benefits would be shifted to the employee in the form of lower wages, or customers would have to absorb them in the form of higher prices or fees (to enable higher wages to be paid given a return on capital) or the providers of capital would have to accept lower returns. Either way there are consequences for the economy at large.

8 McCarthy, 2006 9 True South Actuaries and Consultants, 2013 10 Ibid 11 Charles River Associates, 2011

CASE 2. The economic value of employersponsored benefits Placing a monetary value on employersponsored benefits is quite difficult, especially given that there are also substantial non-monetary benefits. Employee benefits are protections against the risk of potential future events that could negatively affect employees’ financial well-being. As these events are entirely uncertain, assigning a specific, concrete value to them is seemingly impossible. This is further complicated by the fact that the value of these protections to a specific individual is subjective and differs according to their preferences. Economists have attempted to work around this. The simplest approach to take is to say that it’s the cost of providing a benefit or the total amount in premiums paid to secure the benefits that determines how valuable that benefit is. Using this approach, a study by True South Actuaries and Consultants is quite illustrative. The study reported that of the 13 million earners in South Africa at the time, 130 050 were expected to die each year, while 43 065 were expected to experience a disabling event9. Therefore, using the premium approach described above, the study found that existing group risk products translate into savings to the government and indirectly to taxpayers to a total of R2.619 billion for death cover and R4.660 billion for disability cover10.

Chapter 3

Recently, though, a study entitled Financial security for working Americans: An economic analysis of insurance products in workplace benefits programs broke new ground by providing a far more rigorous way of assessing this value. Their analysis takes into account consumer choice in the face of uncertainty, employer responses to tax and labour market conditions and the provisions of government public assistance programmes. Using this approach, they determined, for example, that in the United States, employees value each dollar of disability cover at 20 to 60 times its cost in premiums. Life insurance, in turn, was valued at 60 to 170 times its premium value. And this was based on a prospective view of the benefit. If the benefit was triggered, the actual value was even higher11. In their assessment, the main reason employees derive economic value from employee benefits is the fact that most individuals are quite averse to uncertainty, and so any mechanism that reduces this (such as insurance) will be valuable to them. The authors factored in how much the government provides for social security insurance and the tax advantages that employer-sponsored benefits enjoy, and made assumptions about individuals’ risk aversion – a measure of how much people are willing to pay to be protected from an unfortunate circumstance such as disability.

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All told, the study concluded that there was a welfare value of employer-sponsored group disability insurance that ranged from $230 billion to $590 billion per year on a population of 40Â million employees. Similarly, employer-sponsored group life provided an economic value of $1.25 trillion to $3.5 trillion annually to the approximately 105Â million people covered12. But the study also detailed the contributions these protections made to society at large by reducing the call on public assistance resources. They calculated that reduction in burden to be close to $2.25 billion to $4.5 billion a year. They further cited the impact on the overall standard of living that was another consequence of these employersponsored benefits. Our point in describing these findings in detail is simply to highlight that if we were able to perform a similarly rigorous analysis of the true economic value of these employer-sponsored benefits in South Africa, employers and employees might formulate a deeper appreciation for the role they play. Unfortunately, estimating these values for South Africa is made difficult by the fact that we lack full information about individualsâ&#x20AC;&#x2122; levels of risk aversion and other technical, mathematical components required to make estimations in the South African context. However, an important point is that the

12 Charles River Associates, 2011

estimates of the economic value of employersponsored insurance for the United States are that high, despite an extensive social security system in that country, illustrating that employer-sponsored benefits are a crucial complement to government-provided benefits.

CASE 3. How well could individuals source these protections on their own? The answer to this question is: it depends. It firstly depends on whether they know they need the benefit in the first place. So some form of advice or recommendation, or compulsion may be required. Secondly, it depends on whether they will actually do anything about it. Apathy and other behavioural factors can play a role. Finally, if they know they need it, and want to do something about it, can they do so in their individual capacity? For example, a terminally ill patient may require life cover but could struggle to access life cover as an individual, without the benefit of a group scheme with underwriting limits.

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Chapter 3

Let’s consider the following worked examples:

TABLE 1 Admin

How much more expensive would ‘going it alone’ be by getting an individual retail product? 25 years

Annual salary

Sum assured

35 years

45 years

55 years

Benefit

72 000

216 000

Life cover

49%

69%

137%

327%

144 000

432 000

Life cover

-15%

66%

232%

72 000

216 000

Lump-sum disability

65%

99%

166%

265%

144 000

432 000

Lump-sum disability

-5%

16%

83%

191%

72 000

20 000

Funeral

663%

144 000

20 000

Funeral

663%

25 years

35 years

45 years

55 years

23%

39%

94%

250%

TABLE 2 Manufacturing Annual salary

Sum assured

Benefit

72 000

216 000

Life cover

144 000

432 000

Life cover

-30%

-17%

36%

172%

72 000

216 000

Lump-sum disability

122%

177%

370%

716%

144 000

432 000

Lump-sum disability

61%

114%

308%

640%

72 000

20 000

Funeral

568%

144 000

20 000

Funeral

568%

Note: This is Alexander Forbes Life data. However, because Alexander Forbes does not offer a stepped premium pattern for 25-year-olds, the premiums in the table are for illustrative purposes only.

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In the worked example, we contrast the range of premiums a particular individual might pay if they purchased these protections themselves against what they would pay as a member of a group scheme. We’ve used two examples: an employee in the business services sector, and an employee in the manufacturing sector, to capture both whitecollar and blue-collar workers. In both cases, the employee is a male non-smoker with a Grade 12 qualification. The example shows how premiums might change for the different risk products of life cover, disability cover or funeral cover as both the individual’s age and salary increase. Note how these changes impact on the product costs bought as an individual, but they remain the same inside a group scheme, irrespective of pay or age. The final sub-table in each section shows the extent to which ‘going it alone’ would be relatively more expensive, by showing the percentage by which retail premiums are higher than employer group schemes at different life stages and income levels. Several points become clear here. At different ages, there’s a differential experience with group schemes. For the young new entrant, it’s typically cheaper to seek out a retail product than pay a group scheme premium (as the negative values show), so there’s the tantalising prospect that they could get better costs on their own. But that situation begins to change dramatically once factors like age, marriage and children and other dependants come into the question.

An exception here would be retirement savings. Irrespective of age, individuals should generally be able to get lower investment (and administration) costs in a group scheme when compared to a retail investment product. The issue an employer needs to grapple with is, if left to their own devices, how likely would it be that that individual purchases such protections? Once an individual has ducked these costs, how likely would they be to reconsider these financial protections at a later date when they would most definitely need them most? The fundamental point here is that it’s really in no one’s interest, long term, to have an employee without some level of financial or medical protection. Addressing this question of cost and benefit requires a deeper appreciation of the economics of employer-sponsored arrangements. Other than often more affordable premiums in group arrangements, being part of employer-sponsored arrangements also means avoiding the underwriting process, which can otherwise result in higher premiums and endorsements. The underwriting process involves assessing the lifestyle and health risks of a particular individual, where a person with higher risks (unhealthier lifestyle, genetic conditions) would have to pay a higher premium.

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Chapter 3

Therefore, the advantage of employee benefits being structured as group arrangements are as follows:

Economies of scale

Cross-subsidation

(Costs like administration or consulting fees are spread out among more individuals)

(less risky individuals pay for riskier individuals)

Lower premiums

Making cover accessible

The favourable tax arrangements that go hand in hand with some employee benefits also generate some value for employees. This really depends on the employeeâ&#x20AC;&#x2122;s particular salary level and benefit level. Those who are higher up on the earnings scale are less likely to benefit because of the escalation of the tax system, and those who are at the very bottom are unaffected by tax, and so do not benefit from tax incentives. Nevertheless, at least the proportion of employees in the middle of the earnings scale do benefit economically from these arrangements.

How do we see the way forward? Thereâ&#x20AC;&#x2122;s good reason to believe that in the future employee benefits as we have outlined here will be a thing of the past. Already we are moving to the point where we can offer group rates and group pricing without an individual necessarily being attached to a specific employer. From the perspective of the employer, this may not be entirely desirable.

Put it all together and what have you got?

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The employee benefits system from a numbers perspective Employed

15.7

Total national population

55 million

million

Employed in the formal sector (non-agricultural)

11.0 million

(2015)

Employed in the informal sector (non-agricultural)

2.6 million Total working-age population

Active working-age population

36.4 million

21.4 million

(Januaryâ&#x20AC;&#x201C;March 2016)

Unemployed

5.7 million Inactive working-age population

15.1 million

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WHAT IS THE VALUE OF EMPLOYEE BENEFITS?

Active retirement members who are still in employment, in formal retirement schemes: 11.0 million

Income tax payers

5.0 million individuals (assessed) for personal income tax 652 847 companies assessed for company income tax

Chapter 3

Employed benefits schemes (pooled assets) Pension assets under management: R3.7 trillion Contributing members: 10 969 309 Contributions or revenue: R195.4 billion Total paid out in benefits: R189.0 billion Life and risk assets under management (AUM) â&#x20AC;&#x201C; total long-term insurance industry (This figure is for the total long-term insurance industry and is therefore not limited to insurance provided through an employer) R2.12 trillion Revenue (net premiums received by primary insurers): R373.7 billion

4.7 million members not linked to formal scheme (estimated)

Total in benefits paid out (primary insurers: R324.5 billion)

Government benefits Older personâ&#x20AC;&#x2122;s grant Government expenditure: R58.3 billion (2016/2017) Number of beneficiaries: 3.3 million

Stokvels 11.5 million members (stokvels) Industry value: R45 billion Self-administered friendly societies Total contributions to friendly societies (burial, sick pay, death, funeral): R96.4 million Number of members in friendly societies: 532 081

Disability grant Government expenditure: R20.4 billion (2016/2017) Number of beneficiaries: 1.1 million Unemployment Insurance Fund R113.6 billion (AUM) | Contributions or revenue: R16.2 billion Total in benefits paid out: R7.1 billion Compensation for Occupational Injuries and Diseases Fund R53.2 billion (AUM) | Contributions or revenue: R8.2 billion Total in benefits paid out: R2.5 billion Road Accident Fund Revenue (fuel levy and investment income): R22.7 billion Total in claims paid out: R28.0 billion

See the list of references in Part 4: Appendices for all the data sources.

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CONCLUDING THOUGHTS Employer-sponsored benefits help protect employees’ minimum standard of living, especially by complementing the inadequate protections that the government currently provides. Although quantifying the value of employersponsored benefits is tricky, there is reason to believe that the economic value added to employees, employers and the country exceeds the mere cost borne by employers in providing them. Employees gain from cost advantages arising from economies of scale. Employers gain from the stabilising influence these protections have on their workforce. And the South African economy gains from the amount of stable, long-term savings injected into the economy. What we haven’t completely addressed here is the extent of the overlaps and gaps between the two systems. Work on this is currently under way from various quarters, but this will provide the ultimate ‘glue’ that’s currently missing from our social protections. But we do not believe that one has to wait for a utopian outcome before meaningful change can be effected. In Part 2 we outline a programme that we feel allows us to fill in some other critical elements that constitute both the social protection and the social mobility aspects that our system needs to provide. In this idealised model we see important but clearly distinctive roles for both the public and private sectors.

THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

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THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

OVERVIEW For generations, people excluded from the formal financial sector have developed ways to meet their short-term and long-term financial needs through informal group savings and lending. Stokvels and burial societies solve a broad spectrum of financial needs: from getting access to credit or capital, managing debt, addressing educational and housing needs, and providing both emergency savings and long-term investment vehicles. Since effective social protection involves taking care of the whole financial journey, we canâ&#x20AC;&#x2122;t afford to ignore a sector that still fulfils these critical roles for millions of South African households. Any attempt to create a benefits model that addresses what people want from their savings efforts demands that we determine how best to integrate these two worlds.

PART 1

THE THE FLIP FLIP SIDE SIDE OF OF THE THE COIN: COIN: LEARNING LEARNING FROM FROM THE THE INFORMAL INFORMAL SECTOR SECTOR

Chapter 4

UNDERSTANDING THE CONTEXT In recent years, there have been commendable efforts to improve access to formal financial services and products such as banking, credit, insurance and contractual savings to South Africa’s poor. Extending the benefits of South Africa’s fairly developed financial industry to millions of South Africans who were previously excluded from it during apartheid has been a task taken up jointly by government, the financial sector and others to improve economic participation and integration. But it is becoming apparent that in spite of these efforts, South Africans from all walks of life continue to use, if not in some cases prefer, the services made available by the informal financial sector. To date, as many as 52% of adult South Africans employ informal sector financial products in some form1. What makes the informal sector noteworthy is that it has attracted enough acceptance by regulators that they are not only recognised but actually exempted from certain requirements by the Financial Services Board.

The formal and the informal: financial inclusion in South Africa What do we mean when we use the term ‘formal’, or for that matter, ‘informal’ in conjunction with financial services? The informal financial sector can be described as financial services and activities that are conducted apart from formal institutions, like microcredit lenders and banks, or those that are either unregulated or less strictly regulated. But perhaps the most informative definition is a more colloquial one: informal financial activities are those whose “proper functioning relies at least as much on the establishment of personal relationships as on formal rules and procedures”2 . As such, informal products and activities include: ■■ stokvels ■■ burial societies ■■ informal borrowing from family, neighbours or other members of the community.

In practical terms, and for this discussion, products and activities included in the formal sector include bank accounts with registered banks, risk insurance products, life cover, retirement annuities, pensions, provident funds or contractual savings such as life cover facilitated through a formal contact with a regulated financial services provider. The FinScope Consumer Survey looks at the extent of financial inclusion in the country– the extent to which people have access to and use formal products. The general trend has been that of increasing inclusion. About 84% of adult South Africans in 2015 were formally served with at least one formal financial product. In most cases, this was a bank account. Still, according to the survey, 36% of South Africans used some combination of formal and informal financial products.

What is it exactly that continues to attract investors to informal sector products? Are there compelling aspects to these products that might help us better address some of the challenges posed by formal sector products?

1 FinMark Trust, 2016 2 Aliber, 2002

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Financial inclusion, and formal or informal product usage

2015

Banked

OVERLAPS

2014

Other formal

15%

16%

10%

OVERLAPS

Banked

36%

Not served

4.8 million = 13%

5.3 million = 14%

Informal financial product usage 53%

Burial society

24%

Savings

7% 6%

Source: FinScope South Africa Consumer Survey

34% Other formal 6

Source: FinScope South Africa Consumer Survey

14%

Informal %

Remittances

13% 14%

Informal %

Credit

Other formal

PART 1

THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

Chapter 4

Understanding the informal financial market The two dominant savings and investment vehicles in the informal sector are stokvels and burial societies. The term ‘stokvel’ is a century-old term referring to a variety of savings and investment clubs that involve regular monetary contributions from a fairly small number of club members, with rotating turns of which member takes the lump sum. The National Stokvel Association of South Africa (NASASA) estimates that there are about 800 000 stokvel groups in South Africa, with about 11.5 million individuals who participate in this R45.1 billion rand industry. By contrast, burial societies or funeral schemes are usually much larger, often involving tens or even hundreds of thousands of people. Instead of rotational contributions and payouts, burial societies pay out at the time of need, that all-important requirement to provide one’s loved ones with a proper send-off. In 2013, self-administered friendly societies had a total of R796 million in net assets. 80% of these friendly societies were funeral societies that paid out R48 083 000 in funeral benefits3. These two informal vehicles are also recognised and exempt from certain requirements by the Financial Services Board.

3 Registrar of Friendly Societies, 2015 4 National Stokvel Association of South Africa, 2016 5 Ibid 6 Ibid 7 Financial Services Board, 2013

Informal savings by numbers

Types of stokvels

SAVINGS

BURIALS AND FUNERALS

800 000

GROCERIES AND CHRISTMAS

Stokvel groups in South Africa

SHOPPING

11.5 million

BUSINESS

Number of individuals

R45.1 billion

Total value of the stokvel industry

518 322

LENDING

Number of individuals in burial societies and other friendly societies Note: Based on friendly societies that submitted returns to the Financial Services Board. Most friendly societies are burial societies.

PARTYING AND ENTERTAINMENT

INVESTMENTS

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THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

WHY HAS THE FORMAL FINANCIAL SECTOR FAILED TO PENETRATE THE MASS MARKET? Formal financial services have tried for some time to find ways to extend their penetration into this sizeable market segment. In late 2005, the four major retail banks and Postbank launched a low-income transactional banking ‘Mzansi’ account. By the end of 2008, the Mzansi effort had given as many as six million people access to a bank account, but the impact was shallow: many users either never activated their accounts or converted back to cash8. Long-term contractual savings products (with a term of longer than five years), savings for education and old age, and life cover products have also had little success with consumers at the lower end of the income spectrum. Roth, Rusconi and Shand’s 2007 study on the challenges of financial inclusion found that the penetration failure was less about consumer reluctance to take up such offerings and more about subsequent

8 Bankseta International Executive Development Programme, 2012 9 Roth, Rusconi & Shand, 2007 10 Bankseta, 2012 11 Roth, Rusconi & Shand, 2007

consumer dissatisfaction with how the products were conceptualised and serviced9. In the case of the Mzansi bank initiative, for example, the authors of the Bankseta 2012 Investigating vehicles for banking the unbanked report suggested that the initiative seemed to focus more on distribution and less on meeting the end users’ most pressing needs10. The Roth, Rusconi and Shand study concluded that dissatisfaction with voluntary long-term contractual savings products stemmed from such things as: lack of full, clear and simple disclosure about what one is buying, early termination penalties and poor after-sales service11. Recent years have brought in tighter regulations, such as the National Credit Act and Financial Intelligence Centre Act (FICA) requirements, as sensible steps towards protecting vulnerable consumers. But these necessary but burdensome governance and compliance requirements also play

a role in deterring consumers from using formal products in the less formal space. A simple FICA-type requirement of proof of residency, for example, can become an almost impossible requirement to fulfil. As South Africa’s Independent Electoral Commission recently found, verifying proof of one’s residence is hampered by the reality that many of those in what counts as formal employment live in informal settlements with no marked street or house numbers. Credit assessment requirements can mean that many intended transactions are simply non-starters. Time constraints around transactions and access to funds are similarly problematic. And last but not least, formal product forays into the informal sector have generally failed to grasp the most compelling aspect of informal product offerings: the power of community and peer group to reinforce responsible fiscal behaviour and promote greater financial understanding and insight.

PART 1

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Chapter 4

WHAT DRIVES PEOPLE TO SAVE IN THE INFORMAL SECTOR? One way to tackle the question is to first understand the general drivers of household savings. Economists De Clerq and others provide an intuitive hierarchy of motives . 12

LEVEL

THE CASH MANAGEMENT MOTIVE

Involving short-term financial issues, such as direct payments for transactions

LEVEL

THE PRECAUTIONARY MOTIVE Developing a financial reserve for unexpected household expenditures

LEVEL

THE DOWN-PAYMENT MOTIVE R

LEVEL

12 De Clerq, Venter & Van Aardt, 2012

Accumulating financial deposits for buying a house, car or durables

WEALTH MANAGEMENT MOTIVE

Incorporating enterprise and investing assets

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THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

Households with little disposable income, either because they have little income to start with or because their income has to stretch across many needs, will often choose flexible savings products to meet their short-term financial needs. Importantly, a household need not be poor or have a low income to be dominated by short-term financial needs. This can occur when there is a need to distribute income to other members of the extended family who may have very different and more immediate agendas for that income. The magic of informal products is they have a high degree of flexibility and low degree of regulatory or administrative complexity. When flexibility is of paramount concern, these products fill this gap handily for a number of South Africans. However, the flip side of this lack of compliance safeguards is that these investments cannot be used for security. Nor do investors have any form of recourse aside from community moral suasion should any product problems arise.

But there is more. Trust, peer pressure, status, communal pooling of risk and the accumulation of social capital play a critical role in the operational strategies of the informal sector. In addition, because of the communityâ&#x20AC;&#x2122;s role in the governance of these products, the informal sector can impose heavy fines for withdrawal, being late, not assisting in funeral planning, or even being drunk â&#x20AC;&#x201C; effectively a degree of behavioural control that formal products would find particularly hard to replicate. That means that informal sector products are significantly more effective at addressing the next level of savings motives: the precautionary motive that allows individuals to create emergency savings. Finally, community and peer support has been shown to be particularly effective in providing an all-important, ongoing coaching and prodding mechanism that ensures people stay on target with longer-term asset accumulation and wealth management. This means that the social aspect of stokvels strengthens social relations.

Community and peer support has been shown to be particularly effective in providing an all-important, ongoing coaching and prodding mechanism that ensures people stay on target with longer-term asset accumulation and wealth management. This means that the social aspect of stokvels strengthens social relations.

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Chapter 4

In summary, financial products in the informal sector provide participants with these benefits: ■■ Diverse applications: Stokvels are simple and can be used for any number of purposes. ■■ Low transaction costs: Formal products, by contrast, can introduce a host of fees and bank charges for on-boarding, transactions, withdrawal fees and termination. ■■ Tangible value with targeted outcomes: Stokvels make the value of the financial behaviour tangible. Stokvels further encourage better financial behaviour through regular contact with club members and reminders of their financial goals. ■■ Financial education: Stokvels and burial schemes involve open discussions about how the money is going to be used. This is a valuable opportunity to learn with peers about topics that are usually daunting and laden with technical jargon when handled by formal sector professionals. This also creates the space to reflect on and learn from different members’ financial journeys, building solidarity and empathetic appreciation of the challenges each member faces, which differs from the impersonal model of formal institutions. ■■ Control over terms and regulations: Stokvels are governed by a stokvel constitution that is adopted by the members as a collective and may be amended by a simple majority vote. This means that if the users have particularly unpredictable and fluid financial lives and needs, it is not an onerous process to amend the terms to suit the circumstances. We have discussed some of the shortcomings of the formal financial sector, and how those shortcomings often feed into the pull factors that lead consumers to employ the services of the informal financial sector. But what lessons can and should the former learn from the latter? The following section discusses some of these lessons and provides some recommendations on how these learnings can assist the formal sector in rethinking its offering.

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THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

HOW COULD WE BETTER INTEGRATE THESE INFORMAL ATTRIBUTES INTO OUR WORKPLACE? The power of pooling As stokvels can eliminate unwieldy administrative compliance and administration functions by treating their pool of investors as one entity, they can easily use this lump-sum investment to secure favourable discounts for fees and costs. Grocery stokvels, for example, already enable a community or a company group to buy food stuffs in bulk.

l e v k Sto =f pooling o Power + iscounts able d r u o v Fa +of the Power roup peer g

This means the stokvel model could have particular applicability when it comes to initiatives around housing. In the formal sector, the relevance here could be either for pension-backed housing loans or employer-sponsored housing grants

and subsidies. The power of pooled resources from members can be applied to the negotiation of favourable deals on construction materials, specialist services, and land rights or purchase of existing assets. More importantly, the stokvel model can provide a platform for members to share ideas, find educational material, recommend service providers and share best practices. These functions can be invaluable services for the self-build market at the lower end of the housing market in helping people save their time and money â&#x20AC;&#x201C; both valuable resources on anyoneâ&#x20AC;&#x2122;s financial journey.

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The power of peer pressure in debt management and credit rehabilitation Debt and managing financial crises present pervasive threats to the financial well-being of many South Africans. Both can be accompanied with feelings of guilt and shame and powerlessness that drain people’s ability to get out of a downward spiral. But this again is where the power of the group can help individuals overcome that sense of alienation and find the type of ongoing support that can provide that day-to-day guidance. In this regard, the stokvel-type model could be particularly useful in the workplace, where the employer has a decided interest in helping employees cope with debt issues. A savings club aimed at healthy fiscal responsibility could have a number of benefits: ■■ A platform for emotional support, professional counselling and financial education. ■■ Peer support helps to overcome debt through pooled funds. ■■ More favourable interest rates are determined by club members according to the needs of the indebted person.

Chapter 4

If a stokvel is a member of an appropriate industry body, such as NASASA, it is allowed to use the accumulated capital from contributions to lend out money to members. The stokvel constitution determines the repayment terms. This means that a workplace debt management stokvel could be created that uses the regular contributions from group members to facilitate emergency group savings. The stokvel would set rules about how to prioritise debt and could settle it on behalf of members. It could also offer favourable interest rates for those assisted, if any at all. Of course, the key to success in these arrangements is that they are voluntary and that there’s trust and familiarity between the individuals. That means that these concepts are most powerful when they are employee led and managed rather than employer led. But employers can lend support by taking an interest in these activities and making time, facilities and other resources available to help employees as and when they are requested.

The key to success in these arrangements is that they are voluntary and that there’s trust and familiarity between the individuals.

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THE FLIP SIDE OF THE COIN: LEARNING FROM THE INFORMAL SECTOR

CONCLUDING THOUGHTS Much of the strategy of engaging with the informal savings space has been from a top-down approach and the two worlds have roughly carried on independently from each other. But when we reflect on the qualities of these informal savings products and why they are so persistent, we can see how necessary it might become to modify formal sector products and services to solve more effectively for social protection. So what can the formal sector learn from the informal sector? The overall lesson is that people use the informal sector not exclusively because of necessity or lack of access. People often find using informal arrangements much simpler and more versatile to their needs. The shared risk, peer pressure, flexibility of terms and rules and the opportunity to add social aspects such as education and encouragement show that formal sector products may benefit from offering their products with these features. The formal sector as a whole and particular stakeholders like employers have an interest in incorporating these innovations and benefits into their own formal structures as a supplement to products and programmes meant to take care of financial well-being. The most important reason for finding a way to bridge these two worlds comes out clearly in Part 2 where we ask our members: What do you want? South Africans want the value they see in both worlds and any attempt to keep them separate could lead to inefficiencies in an optimal savings model. We will need to ensure we can integrate the constructive aspects and minimise the destructive ones from both systems in our model. This would enable us to deliver a model that more effectively satisfies the unique needs of South African savers.

WHAT DO OUR MEMBERS WANT?

PART 1 Chapter 5

WHAT DO OUR MEMBERS WANT?

OVERVIEW The data tells the story. There is clearly a problem with getting employees to engage with their retirement savings programmes. But we can only guess why that might be the case and what would change that outcome. To that end, we felt it was time we spoke directly to our members to gain a better insight into the real issues. To answer those questions we first needed to understand how our members currently viewed their benefit offerings: how well these schemes address their most critical needs and what might have to change to make them more relevant to their wants.

PART 1

WHAT DO OUR MEMBERS WANT?

Chapter 5

WHAT DO SOUTH AFRICANS REALLY WANT? What follows are the findings from the survey that we undertook with ReThink Africa to determine the answers to those questions. ReThink Africa is a youth-led, pan-African social enterprise focused on applying research to shaping the discourse on development issues in Africa. Employee benefits typically provide an essential form of risk mitigation for employees. Specifically, these benefits

target a discontinuity of income in response to retirement, disability, death and in some instances, retrenchment. Income discontinuity, however, is not the only financial risk that employees face over the course of their financial journeys. Emergency savings, housing and transportation demands, educational opportunities and health crises all perpetually compete for a share of our wallets.

As such, trustees have come to appreciate that when financial imperatives suggest that our members have greater priorities than retirement income, they will in many cases look to their retirement savings to fund those more urgent needs.

PART 1 Chapter 5

WHAT DO OUR MEMBERS WANT?

OUR JOURNEY TO THE RESEARCH QUESTIONS Our three overarching questions: Our study methodology incorporated three research techniques: online surveys, semi-structured interviews and focus groups. We will discuss some of the insights and findings from the process in this chapter. We then identified and grouped the different lines of enquiry into three overarching questions which would inform the design and administration of the different research instruments.

RESEARCH

QUESTION

What do people really want, and what can the financial services industry and other role players do to assist individuals and households along their financial journeys?

RESEARCH

QUESTION

Is it really meaningful for the average South African to focus so doggedly on retirement savings when there has been so little focus on an individualâ&#x20AC;&#x2122;s overall financial journey? Could there be other ways to rethink this?

RESEARCH

QUESTION

What might people be prepared to save for over the long term, and what would incentivise them to do so? What other key aspects beyond monthly income could employee benefits fund?

PART 1

WHAT DO OUR MEMBERS WANT?

Chapter 5

Limitations Our research process began with the online survey administered to hundreds of employed South Africans whose employee benefits were currently being administered by the Alexander Forbes Retirement Fund (AFRF). Since the aim of the study was to capture as diverse a set of insights as possible, we also conducted a number of focus groups and semi-structured interviews with self-selected members. The sample size of respondents to the survey and focus group naturally suggests certain limitations. Despite these limitations, we feel that the research process unearthed many important insights.

Geographic In the case of the survey, focus groups and semi-structured interviews, there is a strong provincial bias to the responses. The overwhelming majority of respondents to the different research methods were based in Gauteng. This province is the most prosperous, with exposure to primary, secondary and tertiary sectors. According to the 2011 census, the province experiences high levels of inward migration, with half the population having been born outside the province. This may be one of the factors contributing towards a particular urban and Gauteng-focused bias. The online survey did, however, have a few respondents from other provinces, in particular a handful from the Eastern Cape, Limpopo and Mpumalanga.

Demographic The survey attempted to mirror the key demographic markers of race, gender and income. The figures of the targeted sample, however, do not wholly reflect the working population of South Africa. For example, with regard to race, the working population demographic markers are as follows: black (73.8%), white (12.4%), coloured (10.6%) and Indian or Asian (3.2%). However, our survey sample had an overrepresentation of white, Indian and Asian and an underrepresentation of black and coloured respondents.

Population group

South African working population

Survey response rate

Black

73.8%

57.8%

White

12.4%

33.9%

Coloured

10.6%

3.0%

Indian or Asian

3.2%

5.2%

PART 1 Chapter 5

WHAT DO OUR MEMBERS WANT?

51.75

48.26

MALE

FEMALE

Gender bias We had 51.75% male respondents, and 48.26% female respondents. This half-half gender split almost mirrors the same trend in the Alexander Forbes Retirement Fund Member WatchTM dataset, which, in turn, reflects the same gender split in the general population.

Age bias

20-29

YEARS OLD

About 40.4% of respondents were between the ages of 20 and 29, while 1% of the respondents were between the ages of 30 and 39. The 40–49 year age group made up 16.5% of the survey respondents. About 10% of the respondents were between the ages of 50 and 59 years and 2.2% between the ages of 59 and 65, while 1.7% of the respondents were above the age of 65. While the data indicated a strong bias towards respondents in the 20–29 age category, this may be fine when compared to the overall population as South Africa has a relatively young population. Note that this means a large portion of respondents are still at the early stages of their financial lives.

Income bias

Another specific bias in the data was income level. The dataset of our survey demonstrated a bias towards those in the R25 000–R39 999 per month total income bracket. This would place them in the middle and upper middle class category in South Africa. The AFRF dataset median is somewhere between R6 000 and R9 000 per month. This bias may suggest that access to the online survey was more readily available to higher income members. This bias was later addressed by including a more representative focus group composition.

PART 1

WHAT DO OUR MEMBERS WANT?

Chapter 5

SURVEY RESULTS

Throughout the process weâ&#x20AC;&#x2122;ve worked to respond directly to our three overarching research questions. RESEARCH QUESTION

What do people really want, and what can the financial services industry and other role players do to assist individuals and households along their financial journeys?

100%

50%

Survey insights: In responding to this question, we posed two questions. The first one was an introductory question probing how important long-term savings were to respondents. Close to 80% indicated that long-term savings are important to them, with only 4% of respondents indicating no importance.

The second question: Who did the respondents feel would be best placed to provide a savings programme that resonated with their financial life priorities?

How important are long-term savings to you?

Very important

Reasonably important

Not important

Figure 1: How important are long-term savings to you?

Who do you think would be the most effective at providing a savings tool or programme? FS 100%

80%

60%

40%

20% 0% FS: Financial services M: Myself E: Employer

G: The government F: (Extended) family or friends U: Union

Figure 2: Best stakeholder to facilitate a long-term savings programme

PART 1

WHAT DO OUR MEMBERS WANT?

The fact that financial services companies placed first was probably not unexpected given that individuals are probably accustomed to seeing the financial services industry occupy this space. The fact that the government, employers and extended families received a lower percentage than initially anticipated and that trade unions received no votes was somewhat less expected. This last result may simply be a function of the fact that the members being surveyed mainly belong to employer funds as opposed to union funds.

Focus group insights

■■ Informal stakeholders: There was a strong emphasis on the role of informal institutions, networks and relationships as key access points for financial services, especially for those often overlooked (for a range of reasons) by formal financial institutions. While financial inclusion may be slowly increasing to 87%, there appears to be a parallel increase, now 36%, in individuals who will use both formal and informal financial services to address their financial needs1. ■■ Role of employer-provided benefits: Many participants emphasised the importance of employer-provided benefits, even though there might be minimal engagement with these members over the course of their financial journey. An important message here is that we potentially underestimate the importance of employee benefits in the ultimate choice of an individual to work for a particular employer, especially for those in middle and upper income jobs who may be at an advanced stage of their careers (not necessarily management or executive stage).

1 FinMarkTrust, 2016 2 Finn, 2015

■■ The importance of an income in the absence of assets: Many of the participants who would be termed members of the ‘black middle class’ emphasised the point that the historical barriers to asset acquisition have meant income, and the protection thereof, is an even more critical concern to them. As the graph from the National Income Dynamics Survey suggests, once incomes start to exceed R6 000 a month, the employer becomes the driving force in the financial well-being of most individuals.

Shares of total income by household decile Share of total income

Chapter 5

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0

Wages Remittances Government grants Investment 1

Household income deciles Source: Arden Finn2

Our survey, focus group and interview insights then turned to the question of what kind of longterm savings would people be prepared to commit to.

RESEARCH QUESTION

Is it really meaningful for the average South African to focus so doggedly on retirement savings when there has been so little focus on an individual’s overall financial journey? Could there be other ways to rethink this?

RESEARCH QUESTION

What might people be prepared to save for over the long term, and what would incentivise them to do so? What other key aspects beyond monthly income could employee benefits fund? For what else, other than retirement savings, are people willing to save? Survey insight: In responding to the above questions, we asked a counter-factual question that probed what would incentivise respondents to take up long-term savings. This question not only indicated what mattered to our sample along their financial journeys, but also moved away from an insistence on long-term saving as a risk-hedging measure alone. It also explored how people hedge for their own risks in ways that differ from traditional financial services approaches and methods.

PART 1

WHAT DO OUR MEMBERS WANT?

Chapter 5

The survey probed what people would view as incentives to joining a long-term savings programme. Respondents appear to value having some freedom to what they can do with their earnings, ranking no restriction, but also no tax or matching benefit higher than the other alternatives of receiving a matching contribution from the government or employer and a tax break (deduction). What was less clear is whether respondents had considered the cost of that freedom.

“I would be interested in committing to a long-term savings programme if I could also use it to:” Rank each option by importance. cover family funeral costs get a lump sum at retirement get access to emergency funds buy or build a house

pay for education

pay for medical expenses protect family from loss of income get a monthly income in retirement

0.5

1.0

1.5

2.0

2.5

Figure 3: Priorities for long-term savings

The numbers on the horizontal axis represent weighted averages of the responses. From the data we can see that people place greater emphasis on covering funeral costs, getting a lump sum at retirement (probably to pay off debt), accessing emergency funds, paying for medical and education expenses and buying a house, than getting a monthly income in retirement, which ranks lower than all other alternatives. What’s notable here is that, while saving for retirement ranks second in importance, deriving a monthly income ranks significantly lower. Once again, this brings the focus back to the challenge of asset acquisition earlier on in an individual’s life and the necessity of the lump sum to fund that need.

PART 1 Chapter 5

WHAT DO OUR MEMBERS WANT?

“I would commit to a long-term savings programme that provided:” Rank each option by importance. no restriction, but no tax or matching benefit matching contributions from my employer or the governments a tax break (deductions)

0.5

1.0

1.5

2.0

2.5

Figure 4: Incentives to use long-term savings

Focus group and interview insights: The focus groups and interviews placed relative emphasis on the last two questions. We probed whether the focus on retirement funds was the priority, or whether other aspects of South Africans’ financial reality required greater attention. We also sought to understand how the intended reforms would be received by our sample, and what impact they felt these would have on different income, race and gender categories. Why did we do this? We felt this would be a crucial entry point to a broader discussion of what would incentivise long-term saving, and what could be changed about the current benefits framework that would create these incentives. We also interrogated what key aspects of our sample’s financial journeys had a bearing on how the financial services industry, and in particular the benefits industry, responds to its greatest asset: its members (current and potential).

■■ Incentives: Similar to the survey, access to emergency funds, acquisition of housing and a lump sum at retirement fared stronger as choices of incentives for long-term savings than an assured monthly income. For instance, the blue-collar ‘working and lower middle class’ participants indicated their wish to buy property during and at key points along their financial journeys. However, because asset acquisition has previously been beyond their financial reach, they often use the lump sum for big-ticket items that require significant financial outlays: housing, debt settlement, renovations, tombstones and settling education fees in advance.

PART 1

WHAT DO OUR MEMBERS WANT?

The middle class segment placed an emphasis on savings and investment, alongside another factor: the ability to access emergency funds. This shows us how important financial stability is as a precondition for most individuals. ■■ Reform biases: It became clear that respondents felt the way the government designed retirement fund reforms demonstrated a particular ‘middle class bias’. Why do we say this? The assumption inherent in the government’s approach is that retirement benefits should provide a regular income beyond working age – a premise of the current retirement benefits system. However, blue-collar respondents tended to see retirement funds as the income that would allow them to get their heads above water while also covering aspirational expenditures that potentially contribute to social mobility. The financial services industry places a primacy on replacement ratios as a key measure of success. That target ratio is often around 70% or more. This further emphasises the point that securing a replacement income after retirement should take precedence and suggests there is an assumption that all other expenditures (asset-focused, debt settling and aspirational) have all been completed during each member’s financial life before retirement. This is clearly not the case.

■■ Perceptions and mistrust: Much of the work of incentivising long-term savings requires not only understanding what people want, but also what they don’t want. We probed respondents on what perceptions, feelings of mistrust and negative user experiences may be preventing them from prioritising long-term savings. When respondents compared the formal benefits and risk frameworks provided by the financial services sector to alternative informal arrangements, many participants highlighted that it was often unnerving that they had to “jump a lot of hoops to access funds”. The roots of mistrust also relate to an often articulated perception that many consumers have (especially those in the low-income segment). In acquiring long-term savings and insurance products (including funeral insurance and investment products) they run the risk of “potentially losing everything if my employment situation changes”, as one focus group participant shared. The same sentiment emerged in many of the semi-structured interviews, indicating the need for greater vigilance and education around provisions for continuity in instances where income from employment is no longer available and premiums and contributions cease.

Chapter 5

■■ Innovation: In responding to the question of whether we should focus so doggedly on retirement and long-term savings when we haven’t solved for the immediate demands of South African consumers, our focus groups and interviews revealed some interesting insights. One of our interviewees from a black-owned fund administration company argued that for some of their clients (mostly low-wage employees in key service sectors such as retail, cleaning and security services), retirement benefits were a misplaced focus. This service provider has in fact provided, in line with other formal financial services companies and the Pension Funds Act, pension-backed loans for the acquisition of housing. The suggestion that was made was that, rather than solely focus on ensuring an income after retirement, policy reforms should consider how the other parts of the benefits framework might be used to help people acquire assets, especially housing. One of the major drivers of poverty and financial instability is the lack of assets in low-earning communities. The resources people hold in their employee benefits could easily be used to help them acquire these.

PART 1 Chapter 5

WHAT DO OUR MEMBERS WANT?

Where to from here? At the start of the research process, we sought to better understand what people really wanted from their financial journeys. We also wanted to find out which stakeholders should be tasked with which aspects to ensure individuals and households achieve financial well-being. HEALTH

EDUCATION

HOUSING

EMERGENCY FUNDING PRIORITIES

RETIREMENT SAVINGS

INCOME PROTECTIONS

PART 1

WHAT DO OUR MEMBERS WANT?

Coordinating social protection interventions

stakeholders, including employers, the financial services industry and associated government agencies.

All participants in the research process appreciated the importance of long-term savings. However, importance doesnâ&#x20AC;&#x2122;t often imply immediate necessity or optimality, and for many South Africans it may be important but not feasible under their current circumstances to prioritise long-term savings.

Such an approach first requires a common objective before engagement can be productive.

Whatâ&#x20AC;&#x2122;s needed to turn this situation around? A starting point could potentially be to understand that the expenditures that are often associated with cashing in employee benefits are often social protection-related expenses, or expenses geared towards acquiring assets or capital (financial, human or social). This implies that many of the prevalent gaps in the current benefits framework can be plugged with a collaborative approach that aims to make the South African social security system a seamless and efficient model with complementary commitments from different

Chapter 5

If we recognise that housing, education, health and emergency funding priorities compete directly with retirement savings and income protections, then how could the public and private sectors provide a coordinated attack on addressing those issues? We could envisage a situation where the public sector could provide the absolute floor protections across that range of priorities and the private sector could, in turn, provide those elements that enhance social mobility and asset acquisition. For example, this could mean greater coordination in providing housing and education for children of low-income employees, over and above the minimum floor of benefits provided by the state.

A starting point could potentially be to understand that the expenditures that are often associated with cashing in employee benefits are often social protection-related expenses, or expenses geared towards acquiring assets or capital (financial, human or social).

PART 1 Chapter 5

WHAT DO OUR MEMBERS WANT?

Shifting focus from an industry and policy perspective A regular monthly income after retirement appeared to be relatively less important in the participants’ reflections throughout all the research engagements. This is not to say that a regular income is not important, but it ranks below other important expense items that individuals prioritise along their financial journeys. Should we regard this as myopic? We think not, given that securing a lump sum ranked second in the array of priorities. Once again, the issue was less about long-term savings and significantly more about how these savings could be best applied. This has implications for two sets of stakeholders: the financial services industry and policymakers. Is there a need to prioritise interventions that link the provision of much-needed social security interventions, such as housing and education, alongside the commitments of employers and the financial services industry?

On the part of the financial services industry, there is potentially a need to transition towards a holistic set of measures in our assessment of fund member financial health that goes beyond simple replacement ratios. We need to start assessing how effectively members are navigating the whole financial journey. This approach will demand that we equally start paying attention to aspects of clients’ financial lives that go beyond maintaining their current standard of living, especially if their current standard of living lies far below their envisaged standard.

Holistic behavioural models and approaches We emphasised in Benefits Barometer 2015 the importance of understanding the sociocultural drivers to financial decision-making for clients in a diverse country like South Africa. Our focus groups in this study reaffirmed a serious need for the financial services industry to reconsider how it assesses the overall worthiness of an individual client. Cursory credit checks, bank

statements and risk profiles don’t always tell the service provider the entire picture. This in turn influences the outputs (the amount a member qualifies for, if they’re applying for a loan or risk protection product for instance). There are any number of aspects, in particular of poorer and low-income households, that the current system often overlooks, including extended family needs, relationship and the extent of obligation, ‘black tax’, asset deficits, collective or household budget commitments, cultural spending (rituals, lobola), and engagement with informal sector savings and credit networks, institutions and arrangements. We would recommend that existing risk and behavioural assessment measures probe more creatively for information on these aspects. This means that there is a serious need to structure product offerings that are more responsive to sociocultural contexts.

PART 1

WHAT DO OUR MEMBERS WANT?

Chapter 5

CONCLUDING THOUGHTS In our brief three-month research process we worked to answer the question, ‘What do people really want?’ In this chapter we’ve outlined some of the sub-questions and looked at the methodology we deployed in the research, as well as some of the limitations. Despite these, we felt there were very strong insights from the research that provide us with the basis for a research agenda aimed at achieving stronger synergies between different stakeholders and across the benefits and social security landscape. Such complementary commitments between these stakeholders aim to give realistic meaning to the things that people indicated they wanted from the benefits industry. The process also allowed us to explore some of the key gaps in the industry, offering brief recommendations for consideration, by including the voices of individuals at the heart of the matter. We believe this can provide valuable input into reflections on policy reform aimed at creating a more efficient, sustainable and empowering benefits and social security system. More importantly, these insights are what inform the proposals we set out in Part 2.

PART 2 Introduction

BENEFITS BAROMETER 2016

TIGHTROPE BETWEEN COMPETING NEEDS A BENEFITS MODEL FOR SOUTH AFRICANS By promoting self-determination and financial empowerment, the model provides a way for South African workers to map their own way to financial stability for their families.

Financial CAPABILITY Navigating your way through your financial needs

Itâ&#x20AC;&#x2122;s essentially a balancing act for South Africans between meeting aspirations of social mobility, ensuring social protection, and acquiring greater financial capability for themselves and their families. By addressing these issues, we stand a better chance of getting South Africans to engage with long-term savings.

PART 2

BENEFITS BAROMETER 2016

Social PROTE

CTION

Income pro

tection Medical aid Emergency savings Disability co v Old personâ&#x20AC;&#x2122;s er grant

Introduction

Y T I L I B O M l a i c o S Education Housing nts Investme Assets

PART 2 Chapter 1

BENEFITS BAROMETER 2016

PART 2 FLESHING OUT THE VISION Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter

1: 2: 3: 4: 5: 6: 7: 8:

A better model Could we do it in South Africa? It’s an emergency Housing as a stepping stone to financial well-being Education – the engine room for social mobility We can make it if we really try – controlling health costs Risk is in the eye of the beholder Investing in the face of scarcity

79 95 101 115 135 147 163 173

A BETTER MODEL

PART 2 Chapter 1

A BETTER MODEL

OVERVIEW Consider this: During the 40-some-odd years that an individual is employed, their benefits are decided on by employers or boards of trustees who have little insight into that individual’s specific needs. By necessity these decision-makers must solve for ‘an average’. But what employee is truly ‘average’, and at an ‘average’ point in their financial lives, with ‘average’ hopes and dreams for their futures? We can do better here. It’s time we do it.

PART 2

A BETTER MODEL

What if we asked a different question? As defaults become more widely employed, decisions around employee benefits are tending to fall into the ‘set and forget’ mode of financial engagement. It’s not surprising then that employees are neither invested emotionally in the process nor any more financially savvy because of the process. But what if we completely reframed the question – and in so doing, reframed the potential answers? What if we said to employees: “We want you to engage in a long-term savings programme. It’s good for you, your families and the economy. But let’s widen up the opportunity set for you as to how you could use these savings for things that are more relevant to your life at each step in your financial cycle.” We believe individuals would start paying more attention then. A programme like that could help us address the most difficult balancing act of all: How responsible should the government be for its citizens’ well-being, and how much should we hold our citizens accountable for their own well-being?

1 Singapore Ministry of Finance, 1964 2 Ng, 2000

Shifting our focus to developing higher levels of fiscal responsibility and financial knowledge will surely also have the knock-on effect of alleviating a dependency on government? In grappling with these questions, we found one other country that has successfully tackled exactly these issues.

Singapore: a case in point Singaporeans may seem worlds apart from South Africans and the types of trials that have affected us over the last few generations. But there’s one aspect in Singapore’s economic success story that is worth noting. Just before Singapore achieved self-government in 1959, it looked set to introduce a social insurance or public assistance plan similar to a number of other post-colonial government-funded social security systems. But wiser minds prevailed, and the view emerged that these limited government resources could be better applied elsewhere. Retirement savings were simply not the highest priority for an emerging economy fiscus1.

Chapter 1

When it came to determining how to cope with the social consequences of a highly diverse population with deep ethnic divides and a potentially explosive housing problem, Singapore made the conscious decision that it was not in their interests to become a welfare state. As such, the central tenet of their compulsory savings vehicle, the Central Provident Fund (CPF), was that “the individual was responsible for determining how best to secure the future of their financial well-being”2. That meant that, although both saving and preservation in the fund were compulsory for citizens of Singapore until the age of 55, there was still an extraordinary amount of latitude given to individuals on how best to apply those funds to secure their financial protections. As the CPF evolved through the years, the fund expanded to the point where individuals could determine whether to use their savings to fund their housing, their (or their children’s) further education, their health (with options for basic medical coverage, additional hospital coverage for emergencies and post-retirement frailcare demands), their investments, their income protections, a top-up of other family members’ retirement or medical coverage, longevity insurance and, of course, their retirement income.

PART 2 Chapter 1

A BETTER MODEL

Central Provident Fund â&#x20AC;&#x201C; Singapore Housing

Education Ordinary 30% Approved investments Employer contribution 20%

Employee contribution 20%

Retirement savings as well as top ups for other family members

Central Provident Fund 40% Medisave 4%

Hospital costs

Old age Special 6% Contingencies

Source: Central Provident Fund

PART 2

A BETTER MODEL

What was particularly bold about the Singapore model is that while it acknowledged that saving for retirement was indeed important, it was not seen as the only important priority for a developing economy or the citizens of that economy who were still battling to acquire the basic necessities to maintain a viable financial existence. It turned out to be the right decision for the country at that particular stage. Where developed countries have used social welfare to promote social rather than economic goals, Singapore was singular in its efforts to employ social security and a housing policy to serve economic development. This transformed Singapore both physically and socially. As Vasoo and Lee point out, “It also differed from the pooled-risk system of Western welfare states where social security benefits are not directly linked to personal contributions. The CPF has been designed to help people become more self-reliant. The idea is that the financial burden of social security should remain within a generation and not be shifted to the younger generation. The advantage of such a system is that, when a society ages, the increasing burden of care of the elderly will be borne by individuals and families with savings, and not shifted to the state”3. Singapore’s benefits model provided social protections, but migrated the problem from a more typical tax-based system of funding welfare to a savings-investment model of asset accumulation. The net effect was that Singapore eventually evolved into one of the lowest tax bases in the world, a feature that was particularly attractive to foreign investors.

3 Vasoo and Lee, 2001 4 Tan, 2004

Chapter 1

At the same time, the CPF model also provided the government with an attractive self-generating pool of savings that they could tap into for special development funding. By underpinning the system with a socio-economic model that promoted “self-reliance, a traditional family support system, thrift and a positive incentive to work, and non-inflationary economic growth”4, the Central Provident Fund provided a powerful impetus for ingraining many of the values around fiscal responsibility that have helped make Singapore the economic powerhouse it is today.

Today Singapore has one of the highest savings rates in the world (24%), ranking just behind China and India.

Singapore has a consumer delinquency rate of 5.97% (late payment of more than 30 days) and a credit default rate that has remained constant between 0.12% and 0.15% for some time.

Singapore ranks highest in the State Street Center for Applied Research 2014 Study on Financial Literacy.

SINGAPORE

The idea is that the financial burden of social security should remain within a generation and not be shifted to the younger generation.

PART 2 Chapter 1

A BETTER MODEL

Global financial literacy report card Rank

Country

Weighted average

Grade

Singapore

9.08

70%

Australia

8.7

67%

United Kingdom

8.56

66%

Canada

8.5

65%

Hong Kong

8.27

64%

China

8.05

62%

Switzerland

7.95

61%

Italy

7.89

61%

Brazil

7.8

60%

United States

7.8

60%

Japan

7.73

59%

Germany

7.53

58%

United Arab Emirates

7.47

57%

India

7.45

57%

Netherlands

7.25

56%

France

7.1

55%

61%

Average Source: State Street Center for Applied Research, 2014

Percentage score

5 Sherraden, 2009 6 The Mercer Melbourne Global Pension Index, 2015

7.98

How much of this financial success story can we attribute to the Central Provident Fund model? This is a difficult question to answer with any degree of certainty. The development economists who evaluate the programme would argue that this has been one of its greatest achievements â&#x20AC;&#x201C; and we will get to that point shortly5. But pension fund experts have a different assessment. From the perspective of the Melbourne Mercer Global Pension Index, Singapore currently ranks only one grade higher than South Africa at a C+ score6.

PART 2

A BETTER MODEL

Chapter 1

The Melbourne Mercer Global Pension Index Grade

Index value

Countries

Description

>80

Denmark Netherlands

A first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity

B+

75–80

Australia

65–75

Sweden Switzerland Finland Canada Chile UK

A system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system.

C+

60–65

Singapore Ireland Germany

50–60

France USA Poland South Africa Brazil Austria Mexico Italy

35–50

Indonesia China Japan Korea (South) India

A system that has some desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt.

Nil

A poor system that may be in the early stages of development or non-existent.

<35

A system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.

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A BETTER MODEL

Importantly, the Melbourne Mercer Global Pension Index bases its assessment on the effectiveness and sustainability of the social protections at retirement. What’s not included in the analysis is whether the programme might have been successful at helping individuals (and the country of Singapore) achieve broader financial goals throughout their lives. In developed economies with a maturing demographic, retirement savings need to take the centre stage in policy debates around social welfare. In developing economies with limited resources though, it’s all about how a long-term savings programme can provide the greatest bang for buck for all stakeholders. When retirement fund experts Olivia Mitchell and David McCarthy evaluated the Central Provident Fund, the evaluation was in the context of how well the system addresses the economic challenges of population ageing. Their assessment: because of early, potentially sub-optimal allocation choices (say, towards housing at the expense of retirement savings), members of the CPF might find themselves asset rich but cash poor when they enter retirement. While the real return on that property may be close to 5.8%, the income replacement from the residual retirement savings might typically rise to a replacement ratio of only 28% of final salary. While this criticism of the potential shortfall is valid, perhaps the measure of real value to the individual needs to cover their and their families’ whole financial journeys, not just the end-game of retirement7.

7 McCarthy, 2002 8 Loke and Cramer, 2009 9 Ibid 10 Ssewamala, Sperber, Zimmerman & Karimli, 2010

When development economists Amartya Sen and Michael Sherraden weigh in, the assessment has a decidedly different flavour to it. What they see embedded in the CPF model ties more neatly into what they would term asset-based development programmes. Asset-based development is all about formulating an integrated approach to building human, social and economic capital. As development economists describe it: “The theory behind asset-based development or welfare policies suggests that while income facilitates immediate consumption, social development over the long term occurs primarily through asset accumulation and investment. Assets may not only provide individuals with the ability to exert control over resources that can increase their financial security, they might also orient owners to future aspirations and be linked to positive economic, psychological and social effects”8. The rising popularity of asset-based welfare programmes stems from a post-1990 shift in development thinking. What would be the most effective way to leverage an individual’s self-determination around their financial well-being? What Sherradan argued was that “people’s behaviour and attitudes are affected by access to assets, even minor ones. This in turn affects their ability to make choices and their human capability or human capital”9.Where welfare policies for the poor tend to focus on ‘income-for-consumption’, asset acquisition policies change the focus for families and communities from maintenance to capability building.

As Nobel prize winning economist Amartya Sen described it: it facilitates “the substantive freedom of individuals to achieve alternative functioning combinations” where functioning “reflects the various things a person may value doing or being”10. Effectively structured, these types of savings programmes are designed to provide people with limited financial and economic resources with opportunities or knowledge to acquire and accumulate long-term productive assets – assets that can produce other assets such as housing, education, financial savings and income-generating opportunities10. These programmes tend to focus on deriving financing access from a savings model, as opposed to a credit model. Their most distinctive feature, though, is that they provide the funding or savings participant with guidance and knowledge on how to most effectively apply their new access to income leverage. And this is where the concept links around to what we argued in Benefits Barometer 2015 as being an imperative for both policymakers and employers: achieving a level of financial stability and capability in individuals, whether today, tomorrow or the post-retirement future, means we have to start helping individuals solve problems and achieve aspirational goals that have the greatest meaning to them or their families.

PART 2

A BETTER MODEL

Would a Singapore-like model work for South Africa? The Singapore Central Provident Fund model provides an interesting starting point for this discussion because it recognises that retirement savings may not always be the top priority for long-term savings when a country or a population within that country might have greater economic imperatives. The Singapore model allows individuals and their families to place as much attention on the journey as on the end-game of retirement income. This seems to be something that South African retirement fund members are pleading for. The fact that the Singapore model has been put to the test since the early days of their independence in 1965 suggests that there is also something particularly robust about this model. But should the system necessarily be

Chapter 1

a role model for South Africa? Probably not, given its current form. To begin with, this is a 100% government-administered initiative. At this point in South Africa’s evolution there are too many other priorities on government’s plate to undertake a project this ambitious. Secondly, unemployment differences (2.5% for Singapore, 24%+ for South Africa, averaged over the last 20 years) and geopolitical differences create other challenges. A country can only function without social insurance or tax-financed redistribution when full employment is the effective operating model. South Africa doesn’t have that luxury. But, if we could all agree that it is the spirit of what this model is trying to address that is powerful and not get caught up in trying to emulate the details of their programme, then we believe there’s much of the essence of their model that we could begin to capture through our private occupational funds.

Where welfare policies for the poor tend to focus on ‘income-for-consumption’, asset acquisition policies change the focus for families and communities from maintenance to capability building.

PART 2 Chapter 1

A BETTER MODEL

Let’s consider the salient points about the Singapore solution. What is it that makes it effective? How different are our own circumstances? How likely is it that we would be similarly successful?

highly personalised savings priorities

MINIMUM SUM RETIREMENT INCOME 88

■ Fifty years ago, when Singapore first started evolving its Central Provident Fund model, Singapore was regarded as an emerging economy of lower to lower-middle income workers with limited prospects in a resource-starved economy. Housing was the number one social issue, with floods of migrants from Malaysia and northwards crowding into informal settlements that ringed the city. ■ From the start, though, Singapore was determined not to become a welfare state. The country has yet to develop a proper social security system. Addressing issues of social protections through grants, subsidies or risk pooling would not be an option – not yet at any rate. Rather, Singapore wanted to cultivate entrepreneurship and self-sufficiency. ■ Instead of trying to develop a range of social protections that the Singapore government would parcel out to citizens, it identified which aspects of social protection an individual could do a better job of prioritising for themselves. These five, highly personalised savings priorities were: housing, education, health, risk benefits and retirement savings. It then created an enabling environment that ensured that these required protections were adequately controlled and managed.

PART 2

A BETTER MODEL

■ Today, long-term savings for all is compulsory. It’s non-negotiable. And the number of contributions (20% for employees, 20% for employers up to certain caps) is also dictated by government – although this can vary in response to broader economic pressures. ■ There is only one long-term savings fund for Singapore – full stop. It is administered by the government and unless you elect to prioritise investments with your savings – by investing into unit trusts, individual share or other investment products with a portion of your assets as desired – the government manages your assets. That means there’s no need to switch funds when you switch jobs. Withdrawals are only permitted when you turn 55, if there’s a medical emergency, or if you leave the country. This is a huge bonus for ensuring these long-term savings initiatives deliver what members require. ■ By effectively employing a notional defined contribution fund, where a portion of members’ savings were rolled up into an interest-bearing fund, the government could ensure that a minimum retirement income could be almost guaranteed to

members without introducing market volatility. But above and beyond funding that minimum sum, employees could choose where to allocate their savings and which savings agendas should take priority in their lives. ■ The minimum sum calculation reflects the amount required to buy an annuity that could allow a lower-middle income retired couple to maintain a basic living in Singapore. This contrasts with net replacement ratios typically used in South Africa that calculate how much you would need to save to buy an annuity that would replace some portion of your own personal income at retirement. ■ Should a member not be able to meet that minimum sum allocation because, for example, they chose to fund their housing requirements instead, the government could provide home equity release funding to cover the shortfall. ■ Importantly, the CPF recognises that it is the financial stability of the extended economic family that is important. Savings options such as the Child Development Accounts (which target child support from birth to six), the Edusave Scheme (for

Chapter 1

the benefit of school-going children) and Post-Secondary Education Accounts all allow parents to channel savings into the advancement of the next generation. In addition to the Medisave and Medishield options that offer different degrees of medical coverage, the fund also makes provision through Eldershield to address long-term care and frailcare housing requirements for family elders. Finally, there’s a facility that allows a fund member to top up any other family member’s protections or benefits. ■ Perhaps the greatest innovation of the CPF is the recognition that for individuals to really engage with a long-term savings plan, they need to be able to leverage their account resources at strategic points along their financial life cycle. These funds could ultimately be used for a select range of asset-building and capital development purposes in the course of an individual’s financial lifecycle – while at the same time ensuring that there are minimum reserves to fund post-retirement income and medical aid needs.

Perhaps the greatest innovation of the Central Provident Fund is the recognition that for individuals to really engage with a long-term savings plan, they need to be able to leverage their account resources at strategic points along their financial lifecycle.

PART 2 Chapter 1

A BETTER MODEL

Note the shift in focus as the economy evolved. At the outset in 1965, the most important focus for Singaporeans was on asset acquisition and social mobility. Now, as a fully developed economy, Singaporeans are chanelling most of their savings into retirement. The point here is that an economy constantly evolves. What might have been an appropriate structure at one point in a country’s evolution may not be appropriate in a later era. As such, its pension system needs to evolve to accommodate this constant dynamic of change. This too appears to be part of the DNA of the Central Provident Fund11. How different is the Singapore situation from South Africa? Demographically, the number one problem in Singapore is immigration. This has been both a bane and a blessing. On the one hand, immigrants have helped fuel the entrepreneurial spirit that has been such an important contributor to Singapore’s growth rate. It also created a housing problem of seemingly insurmountable proportions soon after independence.

South Africa, by contrast, had apartheid. That had a crushing influence on any entrepreneurial drives that might have been in bud. More importantly, it meant that several generations representing the majority of our population were deprived of an opportunity to own and manage assets. This had serious consequences for the general financial capabilities of this population.

Like South Africans, Singaporeans also have a significant sandwich generation problem where newly qualified professionals entering the workforce find they must both care for their ageing parents and for their own children.

Sandwich generation in the workforce

26 23

% %

Singapore

South Africa

Source: Old Mutual, “The sandwich generation”

The point here is that an economy constantly evolves. What might have been an appropriate structure at one point in a country’s evolution may not be appropriate in a later era.

11 Loke and Cramer, 2009

PART 2

A BETTER MODEL

Chapter 1

While neither country is saddled with a significant old age problem, South Africa has a different burden in the number of children still under age 15. This leaves South Africa with a significantly higher dependency ratio than Singapore, 53% against 37%12. The dependency ratio is an age-population ratio of those typically not in the labour force (the dependent part – both children under 15 and adults over 64) and those typically in the labour force (the productive part). It is used to measure the pressure on productive population.

Singapore – 2014 100+ 95–99 90–94 85–89 80–84 75–79 70–74 65–69 60–64 55–59 50–54 45–49 40–44 35–39 30–34 25–29 20-24 15–19 10–14 5–9 0–4 320 256

192

128

(Population in thousands)

Age group

128

192

256 320

(Population in thousands)

South Africa has a significantly higher dependency ratio than Singapore, 53% against 37%.

12 Loke and Cramer, 2009

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A BETTER MODEL

South Africa – 2014 100+ 95–99 90–94 85–89 80–84 75–79 70–74 65–69 60–64 55–59 50–54 45–49 40–44 35–39 30–34 25–29 20-24 15–19 10–14 5–9 0–4 3

2.4

1.8

1.2

(Population in millions)

0.6

Age group

Here’s what we’ve learned over the last few years from focusing on the issue of financial well-being in families in South Africa: ■■ An effective contribution of 40% to a long-term savings programme might seem high, but it’s not actually unrealistic. Consider that in South Africa, the average employed family is contributing 15%+ for retirement savings, 10% for medical aid schemes, 3%+ for risk coverage and a further amount towards educational savings. While there’s some difference in the contribution levels, it’s not unthinkable

13 Alexander Forbes Research & Product Development, 2015

0.6

1.2

1.8

2.4

(Population in millions)

to imagine that South Africans might increase their allocation to a long-term savings fund that achieved more than just retirement savings. ■■ Currently South Africans are retiring with 32% replacement ratios. This is a function of the fact that as employees move from one company to the next, only 8% appear to preserve even a portion of their previous savings13. Until we sort out the issues around what needs to be mandatory in our long-term savings programme, this will continue to be the norm in South Africa.

PART 2

A BETTER MODEL

We can engage with this reality in the following ways: ■■ We can challenge whether securing a 75% replacement ratio really is the most critical target when there are any number of ways that individuals can secure a stable retirement environment above and beyond that explicit income. ■■ We can extend an individual’s commitment to their long-term savings programme by enabling them to solve for other imperatives in addition to retirement income. ■■ Provision could be made into an emergency savings vehicle that allows them to dip into reserves before being forced to cash in their funds. ■■ Focus could be concentrated on structuring solutions that allow individuals to continue contributing into an identical programme with identical benefits irrespective of who their employer is.

In Benefits Barometer 2014 we talked about ‘just-in-time education’. What we now also know is that individuals only start to engage with their financial well-being when they either have an asset they want to acquire or an asset they risk losing. This suggests that the more we can link an individual’s savings to a tangible asset, the higher the likelihood of getting that individual to engage. Ask an individual “What matters to you?” and the likelihood is that people will struggle with the answer. On top of that, ‘what matters?’ is likely to change for that individual every nanosecond. That’s where having a circumscribed set of options such as ones provided by a benefit platform can play a vital role. It asks the question: which of these set of circumscribed goals would you prioritise? It then sets up guard rails and rule-sets which

Chapter 1

govern what you can and cannot do within those parameters. People, for the most part, need this level of guidance, especially in a system they don’t fully understand and they expect to be able to trust the experts. It’s also not enough to offer people options such as pension-backed housing loans. The real challenge for first-time asset owners is not so much the funding as it is learning how to manage the ongoing financial responsibility of owning an asset. Bottom line: people are looking for products and solutions that actually teach them how to get from point A to point B in their financial journeys.

It’s also not enough to offer people options such as pension-backed housing loans. The real challenge for first-time asset owners is not so much the funding as it is learning how to manage the ongoing financial responsibility of owning an asset.

PART 2 Chapter 1

A BETTER MODEL

CONCLUDING THOUGHTS Armed with these parameters and caveats, let’s ask the really interesting questions: How far could we possibly push our current employee benefits framework and how close could we come to capturing some of this success story? We think further than you might first imagine. The great irony here is that after 50 years of successfully evolving this model for economic self-sufficiency, Singapore today is re-examining whether this model goes far enough to satisfy the needs of all its citizens. Suddenly unemployment relief is becoming more and more a concern. Recent recommendations from policymakers and the public have also pointed to providing tax-approved corporate pension funds, to incorporating financial counselling and finally to widening the inclusiveness of the system to freelancers and the self-employed. Singapore has reached a crossroad – it is now more ‘developed’ than ‘developing’ and the CPF must evolve to meet new challenges. But South Africa is in a very different evolutionary space. We might be closer to the Singapore of the early 1970s. The question for us is this: If we want to develop a solution that speaks to our more immediate needs, could the experience of Singapore possibly hold the key?

COULD WE DO IT IN SOUTH AFRICA?

PART 2 Chapter 2

COULD WE DO IT IN SOUTH AFRICA?

OVERVIEW What we’re aiming for with our proposal is a shift in the way people see their compulsory savings in South Africa. We want to create an enabling environment that helps individuals leverage their long-term savings in ways that more directly address their family’s immediate needs as they change through time. It’s as much about providing for intergenerational social mobility as it is about ensuring the family can withstand life’s financial demands. What our modelling process highlights is that if we can help individuals manage these savings goals as an interdependent, lifecycle investment problem, we can increase the probability of meeting these multiple goals.

PART 2

COULD WE DO IT IN SOUTH AFRICA?

Chapter 2

Changing the mindset around compulsory savings requires that we find a more effective way to use these savings to solve the problems that are uppermost to membersâ&#x20AC;&#x2122; needs. This means recognising that while retirement savings are important, itâ&#x20AC;&#x2122;s not the only important savings problem for South Africans. As with the Singapore Central Provident Fund, we suggest focusing on the five things identified as critical and highly personal social protections:

R HOUSING

EDUCATION

HEALTH

RISK COVER

RETIREMENT SAVINGS

EMERGENCY SAVINGS

We also understand that if we could provide an opportunity to solve for emergency savings at the same time, this safety net should help individuals stay focused on their longer-term savings objectives. To that end we add an emergency savings solution.

Getting members to buy in to this approach will demand two things:

We need to find a way to keep members committed to saving for the full duration, irrespective of the range of priorities they need to address. By keeping the amount an individual allocates to savings fixed, irrespective of the specific savings goal, members will have greater certainty about the amount of disposable income they have available for more immediate consumption needs. As such, the programme will need to guide members towards the optimal allocation for each funding imperative at the right time to deliver the most efficient use of available savings.

We need to create an environment where the savings experience also imparts knowledge and insights that enable members to be more fiscally responsible in managing the assets they build.

PART 2 Chapter 2

COULD WE DO IT IN SOUTH AFRICA?

Bringing the dream to life The lesson from Singapore was that getting people to engage with their priorities and actively manage them resulted in a more impactful and enduring outcome. Think of the programme as a lifelong engagement in personal financial planning. It’s a programme designed to shape positive behaviours and habits which can then be shared across generations within the family or workspace.

Think of the programme as a lifelong engagement in personal financial planning.

We’ve learned through our Benefits Barometer journey that the most effective way to shape positive behaviours is to: ■■ make it as effortless as possible for people to do the right thing ■■ take away the distractions that cause people to abandon their programmes – so if debt is an issue, facilitate emergency savings programmes or create peer group support at work ■■ maintain a savings target, but instead of a replacement ratio, consider the minimum sum required for retirement. (In Singapore, that number was based on the income requirements for a lower-income couple after retirement. In South Africa, that number could be above the threshold used for the old person’s grant.) ■■ start with the employment agreement and create a framework that allows employees to immediately see the long-term impact of their decisions around preservation, savings contributions and risk protections – before their contract is finalised

■■ get individuals to pre-commit to long-term automatic increases, as it’s easier to get people to commit to something that will only unfold at a period in the future ■■ trigger these contribution increases automatically when people notice them least – such as after set bonuses or salary increases ■■ give members a framework to monitor their progress and test out different decisions and consequences ■■ create incentives for doing the right thing. We’ve also come to appreciate that while employers have a sincere interest in their employees’ well-being and financial stability, human resource departments are typically stretched. Ideally we want to create an enabling environment that doesn’t impose additional pressures on the administration or human resources personnel. Effectively we want employers to be able to simply tick a box that says: ‘These are the benefits I would like to offer my employees.’ Employees, in turn, would simply select how they would like their savings allocated and what sort of programmes would work best for them and their families. And we, as the benefits platform administrators, would effect and administer these choices. We discuss exactly how we could solve for each of these savings options in the next few chapters.

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Modelling for impact The key to making this type of arrangement work would be a particularly sophisticated modelling capability that would show members the trade-off implications each time they choose which savings goal they want to prioritise. Practically, the model would represent a dynamic stochastic programme so that an individual can stress-test their choices or consider the impact of a different set of options on their total wealth as they move through time. The starting point would be to ensure that there would be funding for a base level of retirement income. But above and beyond that, the modelling exercise would help them assess how and when to best structure their contribution rates to meet other family priorities. For example, if a member chooses to prioritise housing and pursues a pensionbacked housing loan and mortgage hybrid, how would that impact on the amount of savings they would have available for their minimum retirement income? Would they need to later arrange some equity release on that home to fund that minimum amount? If a family chooses education funding, at what point would they need to resume or escalate their retirement contributions to maintain their minimum amount requirement?

Chapter 2

the problem, we believe that these models are essential if we want to help individuals address what is perhaps one of the most difficult financial problems they must solve: “What will happen to me and my family’s financial well-being in 30 years if I choose to follow this financial route and not this other one? What happens if I go in this direction for a while, and then, after 10 years, decide to veer off in another direction?” A modelling framework such as this makes it possible for individuals to solve not just for retirement income, but for other long-term lifetime priorities – at the same time. This gives members the best of both worlds in decision-making: what’s needed now and what will be needed in the future.

The good news is that such sophisticated modelling frameworks are beginning to emerge1. While they currently demand a particularly high level of computing power to cope with the mathematical complexity of

1 Dempster, Kloppers, Medova, Osmoloky & Ustinov, 2016

PART 2 Chapter 2

COULD WE DO IT IN SOUTH AFRICA?

CONCLUDING THOUGHTS Currently, National Treasury has been pushing for simpler and cheaper solutions to provide retirement funding. It’s easy to understand why they should see this as an imperative given the current shortfalls to the system. As such, the industry has been trying to accommodate this need by cutting the servicing models back to the bone. But the harsh reality is that financial planning in its fullest sense is not a simple exercise. What we envisage here is something that is far more holistic. This framework aims to simplify the decision-making process around financial planning for individuals and their families. What we’re aiming for is a ‘financial adviser in a box’ solution for the broad swathe of South Africans who would typically never be able to access such an advice framework. With the model we propose here, we can be by their side for the duration of their financial journey. But let’s start unfolding what that model should look like (and why) in our next six chapters.

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ITâ&#x20AC;&#x2122;S AN EMERGENCY

PART 2 Chapter 3

IT’S AN EMERGENCY

OVERVIEW Here’s an eminently sensible idea. If one of the contributors to poor preservation is financial crisis, then why aren’t we doing more to make saving for an emergency an automatic process for our employees? This chapter highlights why this is one of the most valuable benefits that you can extend to an employee and how we could get it to work. In financial planning, the starting point for any conversation around an individual‘s financial well-being is whether they have an emergency savings fund. In other words: how well can your wallet withstand a short-term financial crisis? This is something we’re encouraged to set up just after that first budgeting exercise – and long before considering any long-term savings programme. Still, we think nothing of propelling employees into a retirement funding programme without even attempting to understand how well they can weather a short-term financial shock. The price we pay for this oversight is high. Consider the simple problem of why there has been such an adverse reaction to any proposals for mandatory preservation or annuitisation in the retirement reform discussion. Or consider why it is that so many members will willingly quit their jobs to access their savings. Or appreciate why there is such a low rate of preservation when individuals change employers. More often than not these issues point to a lack of an emergency savings safety net. Should it come as any surprise that when a financial crisis looms the first port of call is to raid one’s employee benefits?

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How resilient are South Africans to financial crisis? As the following charts highlight, if suddenly asked to cover a R10 000 financial shock, 57% of employees earning between R6 000 and R19 999 per month would need to borrow the funds. And 30% of the same group would be unable to meet the demand by any means. Of those employees with salaries between R20 000 and R39 999 per month, 48% would need to borrow the funds and 11% would be unable to meet the demands by any means1. What these numbers suggest is that there’s a disturbing number of South African employees that are “just one destabilising shock from hardship.2” The lower the income, the more pronounced the shock is likely to be.

Ability to handle unforeseen expenditure (R6 000 to R19 999 monthly household income)

R1 000

R5 000

R10 000

Pay with a credit card

Take out a personal loan from an institution or a microlender

26%

51%

31%

17%

50%

34%

30%

Borrow from a friend or relative Borrow from my stokvel Use savings Would not be able to handle it

Will have to borrow

Source: Old Mutual Savings and Investment Monitor, July 2015

1 Old Mutual Savings and Investment Monitor, 2015 2 Collins and Gjertson, 2015

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Ability to handle unforeseen expenditure (R20 000 to R39 999 monthly household income)

R1 000

R5 000

25%

27%

13%

11%

34%

Borrow from a friend or relative

12%

Borrow from my stokvel

51%

39%

25%

11%

Pay with a credit card Take out a personal loan from an institution or a microlender

Use savings Would not be able to handle it

Will have to borrow

R10 000

Source: Old Mutual Savings and Investment Monitor, July 2015

The harsh reality is that financial shocks are without prejudice â&#x20AC;&#x201C; they can strike any one of us at any time.

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This is something we all need – no matter how wealthy we are Emergency savings serve all of our interests, no matter what socio-economic group we belong to. As a point of contrast, a 2013 US Federal Reserve Board study found that 47% of Americans would be unable to pay for a $400 emergency without borrowing or selling something. The harsh reality is that financial shocks are without prejudice – they can strike any one of us at any time. But the rise of a credit mindset has also created a sea-change in the way individuals make their financial decisions. Gone are the days of constraints that could limit the number of financial commitments an individual could make. A paper by Lusardi, Tufano and Schneider3 argues that the more sophisticated a country’s credit and financial markets, the more difficult it is for its population

to maintain a level of financial literacy. South Africa’s formal financial markets are renowned for their first-world sophistication. But our financial woes are complicated further by the fact that there’s another whole world of borrowing and savings, the informal sector, which rarely gets included in the total picture for the individual. Emergency savings do more than just prevent a financial maelstrom. They also can provide individuals with the first tentative step towards asset accumulation and management4. Emergency savings “enable people to achieve other goals and avoid other hardships”. It’s as much about being able to meet unexpected expenses as it is about being able to take advantage of unexpected opportunities (such as an unexpected training or educational opportunity)5.

Chapter 3

influenced by their assessments of their current cash balances than by any valuation of their long-term asset accumulation potential6. We tend to focus on how well we could deal with a sudden financial crisis, rather than absolute levels of wealth. An emergency savings habit addresses two important issues. Firstly, should a financial crisis occur, it allows the individual to deal with it without destabilising any long-term savings strategies. And secondly, it has an impact on time-frame tolerance: the greater the financial cushion, the more willing investors are to adopt longer-term time horizons for other savings goals. Research also tells us that there’s a strong relationship between establishing an emergency savings habit and economic mobility, intergenerational wealth transfer and family stability7.

But perhaps the most powerful attribute of emergency savings is the psychological impact they have on the saver. We know, for example, that people’s perceptions of their financial well-being are typically more

Perhaps the most powerful attribute of emergency savings is the psychological impact they have on the saver. 3 Lusardi, Schneider & Tufano, 2011 4 Ibid 5 The Pew Charitable Trusts, 2016 6 Ibid 7 Collins and Gjertson, 2015

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WHAT MAKES A GOOD SAVER? Is saving something that belongs to the realm of nature, or nurture? Will individuals who are innately inclined to save become economically successful, or can individuals achieve economic mobility simply by adopting good habits around saving and money management skills? Findings from joint Swedish and American research on identical twins suggest that individuals are indeed born with a propensity to a specific saving behaviour8. Genetic differences can account for around 33% of the variation. This genetic influence, according to the study, seems to persist throughout an individual’s life. But socioeconomic circumstances and parenting influences can interact to temper that genetic predisposition. That said, parenting influences (good or bad) tend to dissipate when the individual becomes an adult. In the long run, current socio-economic circumstances trump upbringing, meaning that we can potentially nurture a savings habit. A further insight from the same study is that “behaviours regarding savings appear to be genetically correlated with one’s predispositions towards self-control or time preferences” – in other words, one’s level of

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8 Cronqvist and Siegel, 2013 9 Mischel, 2014 10 Cronqvist and Siegel, 2013

tolerance for delayed gratification. You may be familiar with the famous marshmallow test conducted at Stanford University in the 1960s, where Walter Mischel made a direct connection between a child’s willingness to postpone eating a marshmallow in order to gain an extra one and their professional success later on in life9. Perhaps the more intriguing aspect of the Swedish-American study is their finding that, while there appears to be no correlation between savings and education, there does appear to be a significantly positive correlation between an individual’s savings rate and income growth. Slightly more disturbing, though, was their observation that there also appears to be significant negative correlations between obesity or smoking and savings10. None of this suggests that social dynamics are not an important factor. What the research doesn’t tell us is how life experiences might factor in here. Nor does it give us any insight into when genetic predisposition might be the dominant influence or when environment might be the dominant factor. What we can conclude though is still important. Any number of factors are at play when it comes to an

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Chapter 3

Any number of factors are at play when it comes to an individual’s propensity to save.

individual’s propensity to save. On top of that, household members are often at very different phases of their financial cycles when it comes to accumulating, spending and rebuilding savings. This suggests that it is unlikely that any single approach will resolve the problem of getting people to save. Perhaps we’re missing an important opportunity by not understanding the critical role emergency savings play alongside long-term savings. Policymakers globally are generally silent on the point of emergency savings11. They have their attention firmly focused on the importance of long-term savings, particularly when it comes to such goals as retirement, housing and education. Or, if they focus on emergencies at all, it’s for the government to be the last port of call – after every other source of income: pension fund, insurance cover, job. In fact, where countries use means testing to determine whether individuals or families warrant financial assistance, this requirement can act as a strong disincentive to creating an emergency savings fund. The very existence of such a fund disqualifies an individual for assistance.

11 Lusardi, Schneider & Tufano, 2011

By introducing a framework that allows us to accommodate both short-term and long-term savings from one controlled environment, we think we can go a long way to defusing some of the tensions around compulsory long-term savings. This demands that we get individuals and their families to think differently about short-term and long-term savings, and to recognise that these two investments need to be managed differently. Finally, we need to create an enabling framework in the workplace that provides individuals with ways to manage these two imperatives simultaneously as part of a more holistic financial well-being programme.

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Looking for the answer We know from our survey covered in Part 1: Chapter 5 and from our discourse on the effectiveness of the informal financial sector in Part 1: Chapter 4 that creating some emergency savings is top of mind for all levels of South Africans. The question is how to address this efficiently. For a large portion of the South African population, the community, with its informal financial savings forums, offers any number of saving vehicles for crises in the form of stokvels or burial societies. In the workplace, employers who allow their employees to borrow against future earnings in the event of an emergency provide another potential resource. But neither solution is optimal. To begin with, for individuals to make meaningful trade-off decisions, they need to be able to have an aggregate picture of their financial health. And they need to be able to seamlessly and efficiently shift money around as needed. This is one of the drawbacks of splitting resources between the informal and formal savings environments. Additionally, borrowing from an employer against future income creates another bad precedent. Reducing future earnings distribution during a time of financial crisis has the potential of placing even greater financial strain on the family. The better solution might be one where the savings cushion is already in place – but out of sight and out of mind to discourage

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impulse withdrawals. An emergency savings fund might work best as a commitment device: get the individual to pre-commit to maintaining this balance and ensure that what’s required is deducted directly off payroll before the individual is able to use the funds for immediate consumption. It should become a ‘set-and-forget’ solution – until, of course, they need it. Unlike long-term savings where people tend to save once to meet a goal, emergency savings are perpetual, something individuals need to be able to access immediately, spend down to cover a crisis, and then repeat the process of replenishing – over a lifetime. As important as it is to have these surplus funds on tap, it’s equally important that there isn’t too much surplus capital sitting idle. This means that an automated system linking payroll to account should be employed. Creating a framework like this now means that it is the employer who is driving a shortterm savings culture for their employees. This may initially appear to be paternalistic but at some level this may be one of the methods we could devise to make the process effective. From the employees’ perspective, it’s particularly helpful to have money channelled directly from the payroll to a commitment device before one is tempted to reconsider. From the perspective of the employer, providing a savings model to cope with the inevitable employee financial crisis ensures that a bad situation doesn’t become a worse debt spiral. Helping employees

cope with debt spirals goes to a root cause of productivity declines, absenteeism, fraud ... the litany goes on. If employees are an employer’s most valuable asset, then emergency saving funds will provide an important foundation for keeping those employees financially stable.

Creating an enabling environment Setting up emergency saving funds as part of a holistic employee benefits package is straightforward. We need five conditions to make this work effectively: ■■ Members must pre-commit to the programme – after which all processes should run nearly automatically (except for withdrawals). ■■ Payroll must channel after-tax funds directly into low-risk, money-market type investment portfolios, preferably an institutionally-priced unit trust, before paying salaries to employees. ■■ Members must have ongoing sight of their aggregate short-term and long-term savings pictures. ■■ Members need to have easy access to their funds in case of an emergency. ■■ Members should be able to access financial guidance in relation to the emergency to ensure that they can get back on track.

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Because short-term savings are not tax-incentivised, employing a tax-free savings vehicle might not be optimal. Contributions would be capped at R30 000 per year and R500 000 overall and if money is withdrawn from the fund and if these limits have been reached, it cannot be replaced. The risk here is that, because individuals are not allowed to top up their funds in the event of a withdrawal from a tax-free savings vehicle, individuals might end up depleting their tax savings over time. The significant advantage of setting this up through an employee benefits platform is that it offers flexibility to structure this double-barrelled approach to savings in a way that would be most effective. Irrespective of how the solution is structured though, five decisions are central to the whole process: ■■ Who would determine what the funding process should look like? ■■ What would constitute an adequate emergency savings reserve? ■■ What is the most effective way to accumulate it? ■■ What sort of controls or nudges should be put in place to make sure these funds are used effectively? ■■ What vehicle should be used?

Chapter 3

You could consider using one or a combination of the following: ■■ Employer-driven, where the employer: • provides the solution as a default (employees could potentially opt out) • determines what level of savings is optimal • offers incentives to make sure employees apply these emergency savings optimally. This might be in the form of matching funding to an employee’s existing savings level in the event of a genuine emergency. R

■■ Member-driven, where the member determines: • the level of savings they want • the conditions under which they can withdraw the money • how they can replenish funds and what kind of incentives would keep them on the programme.

■■ Stokvel-type model for the workplace, where members: • determine contribution rates to pool emergency funding • offer ongoing support to monitor each other’s progress • determine conditions for withdrawal and replenishing the pool. This could either be structured as an actual workplace stokvel, or it could simply be a workplace support group.

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HOW COULD SUCH A SOLUTION LOOK FOR A MEMBER? There are two options for them to follow: they can either specify the length of time over which they would like to build up the fund to cover three months’ salary, or they can specify the amount that they would like to contribute.

OPTION

Specifying the saving period Assuming the employer and the individual both contribute the same amount towards the goal, but the employer contribution is paid over and above the individual’s current pay (so that the employee’s take-home pay is only reduced by the amount of their contribution), then the required contribution rates for a specified length of savings period would be as follows:

Length of contribution period

Total required contribution

One year

12.9%

One and a half years

8.2%

Two years

5.9%

Two and a half years

4.6%

Three years

3.7%

We calculated these required contribution rates assuming real investment returns of 1.8% per year compounded monthly, and applying a merit scale to the individual’s earnings. This return corresponds to the anticipated return on a portfolio made up of 67% cash investments and 33% bonds, which is simply a proxy for a low-risk, liquid fixed income portfolio. Without investment earnings, both the individual and the employer would need to contribute 6.3% of salary for 24 months, but investment returns have reduced this required contribution rate by just under 0.4%.

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OPTION

Chapter 3

Specifying the contribution rate The individual and the employer can also specify the amount that they would each like to contribute and let the savings period vary. Employer and employee contributions might not be the same, but there needs to be a restriction on how low and high the contributions can go. If the employer would like to limit their liability to just one and a half month’s salary, then they will need to select their contribution rate carefully.

The following table summarises the projected savings period if the employer and employee both have choice over the value of the contribution rate:

Employee contribution rate

Employer contribution rate

Savings period

2.5%

Four years and three months

5.0%

Two years and four months

7.5%

One year and eight months

In this model, depending on how much the employer and employee are willing to contribute, it could take over four years and three months to accumulate the required amount of three months’ salary. This may just not be viable. Employers might need to set higher minimum contribution rates as one solution. At an employee contribution rate of 5% and matching employer contribution rate of 5%, it would take just over two years to save the required amount. This seems like a much more reasonable amount of time. The success of this method relies on how generous employers are willing to be. Securing the employee’s peace of mind could be an easy investment decision for many employers. Structured correctly, an employer could even justify funding the exercise from employee engagement resources. Part 2: Chapter 8 takes a closer look at how we can solve for an emergency savings fund while addressing the member’s other long-term savings objectives.

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CUTTING THE CLOTH TO FIT THE COMPANY To illustrate how broadly different the optimal solution for a given company could look, let’s examine how two different employers have implemented this at two very different set-ups.

Model 1: Consciously rewarding prudent savings behaviour In this example, the employer determined that a reasonable emergency savings cushion would be approximately three months’ after-tax salary. They also recognised that accumulating such an amount without putting significant pressure on the family would take too long. Given this constraint, the employer stipulated that the employee only had to save up to one and a half month’s salary by making monthly contributions over two years. In turn, the employer agreed to make an up-front contribution of one and a half month’s salary into the savings pool every time a new employee came on board. As the employee contribution would come out of employees’ after-tax income, the employee would be free to withdraw the funds at any time, for whatever personal reason they might have. But, should a real financial crisis emerge, the employer would only release their contribution pot if they receive a legitimate emergency claim.

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One challenge here might be determining what constitutes a genuine financial emergency. Again options will be necessary. If there was indeed a financial crisis and the employee had demonstrated a responsible commitment to saving, the employer could release the matching amount. Clearly such a crisis would have to pass a qualifying test, which could be vetted through a set of pre-existing rules. The claim of a financial emergency could also trigger a session with a Financial Well-Being Consultant. This would ensure that any employee experiencing a financial crisis receives help as to how to get their financial affairs back on track.

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Chapter 3

Model 2: Helping employees help themselves

The thinking behind this model is to have as little employer intervention as possible and to capitalise on the ways that peer groups with a common purpose and common needs provide some of the most effective policing and coaching support. In this case, the employee joins a workplace stokvel specially designated for their employer, but controlled exclusively by the members. Payroll would still automatically collect monthly contributions to this stokvel, but these funds would then be channelled into a single pool and invested into a unit trust specially designed to service stokveltype savings clubs. A stokvel is an informal rotating credit union or saving scheme where members contribute fixed amounts of money regularly to a central fund. What makes them particularly effective

is that members generally know each other and ensure that each participant fulfils their obligation to the savings club. Stokvels are exempt from the Banks Act. For further discussion, please see Part 1: Chapter 5. Like many stokvels, this fund would function yearly. Contribution rates could be determined in advance by the individual for the year and apportioned into monthly deductions. Should an individual require access to emergency funding, they would be entitled to their full yearâ&#x20AC;&#x2122;s contribution at any point, but there would be a nominal interest charge on that loan and the borrower would forgo any capital gains or interest accumulation that their investments would have earned. The great power of the stokvel model is that regular monthly meetings offer all-important peer-group support where tips and insights become a real bonus for the participant.

The great power of the stokvel model is that regular monthly meetings offer all-important peer-group support where tips and insights become a real bonus for the participant.

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CONCLUDING THOUGHTS Both of these models use strategies that have been shown to be effective behaviour modifiers. In the first model, the primary driver is a matching strategy and in the second model, the peer pressure of the stokvel structure. But neither of these strategies alone can cope with the wave of behaviour biases that invariably undermine the best thought-out savings plans. For both of these models to be truly effective, we would have to bolster them with other effective behavioural change strategies: ■■ Auto-enrolment (where members could opt out) ■■ Commitment devices (once you’ve reached your short-term savings goal, those contributions would be reallocated to your long-term savings plans) ■■ Simplification ■■ Nudges and reminders (should you fall below your emergency savings target, you would receive notices that you need to fill it up)12. The kind of benefits platform we’re describing should be able to provide all of that. But what’s probably the most important feature of our parallel savings structure is that it gives members a mental accounting framework and helps individuals appreciate that short-term and long-term savings involve different considerations and demands. By accommodating both in a single environment that’s easy to access and to stress-test, individuals and their families can understand how to balance their two savings imperatives.

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Madrian, 2012

HOUSING AS A STEPPING STONE TO FINANCIAL WELL-BEING

PART 2 Chapter 4

HOUSING AS A STEPPING STONE TO FINANCIAL WELL-BEING

OVERVIEW How could we use retirement funds to leverage improved housing as an important part of the retirement package and financial wellness programme of low- to middle-income employees? We asked Shisaka Development Management Services (Pty) Ltd, a leading affordable housing consultancy, to share their insights. The first section of this chapter provides a background on low- to middle-income employeesâ&#x20AC;&#x2122; housing circumstances, the policy context within which they acquire housing, and why housing is an important aspect of their retirement planning. Section 2 focuses on how we can effectively support low- to middle-income employees to access home ownership. Section 3 sets out the role of pension-backed housing loans and why they are critical in supporting access to home ownership for these employees.

HOUSING

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Chapter 4

SECTION

Understanding the housing needs of low- to middle-income employees

When we asked our retirement fund members about their preferences for longterm savings, providing for housing ranked ahead of education, medical expenses, risk benefits and retirement income – in that order. And it ranked fourth to providing for funeral coverage, a lump sum at retirement and emergency savings (see Part 1: Chapter 5). Let’s investigate how we could use retirement funds to leverage improved housing as an important part of the

retirement package and financial wellness programme of low- to middle-income employees who earn between R7 500 and R25 000. How well do employers really understand the housing circumstances of their employees? For many employers, this is not typically thought of as their primary concern. But when lack of housing becomes a destabilising factor in employees’ lives,

employers might find value in examining the problem more closely. The fact of the matter is that employers and pension fund trustees can do significantly more to help their employees or members with this most fundamental problem. To do so, though, demands that we spend a bit more time understanding the dynamics of the problem more fully.

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How low- to middleincome employees are housed The Quarterly Labour Force Survey1 for Quarter 4 of 2015 indicates that there are 16 million individuals employed in South Africa. These individuals are employed in a range of sectors and by large, medium and small employers. Two-thirds are between 25 and 44 years of age. Approximately 40% are married and a further 40% are single. Of all employed individuals, 86% make contributions to a pension or provident fund. The survey doesn’t show salaries, but most are likely to be low- to middle-income employees. According to the Quarterly Employment Statistics for December 20152, employees in the formal non-agricultural sector are paid R17 517 a month on average.

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1 Statistics South Africa, Released March 2016 2 Ibid

Age and household status of employed individuals in South Africa

15–24 YEARS OLD

25–34

35–44

45–54

YEARS OLD

55–64 YEARS OLD

Household status of employed individuals (%)

MARRIED

LIVING TOGETHER

WIDOW OR WIDOWER

DIVORCED OR SEPARATED

SINGLE

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Chapter 4

Less than half of low- to middle-income employees own their own home. The following percentages are taken from Census 2011 for all households in South Africa earning between R7 000 and R25 000: ■■Approximately 46% live in formal houses that they own. Their housing needs are predominantly access to loans to improve their homes. Some may want to sell their house and buy another one, and both the buyer and the seller will need access to housing loans to effect these transactions.

■■Approximately 39% live in formal rented accommodation. Their housing needs are to become home owners either through buying land and building themselves or buying a newly built or existing house. Some may have savings, but most need access to housing loans.

■■Approximately 6% live in shacks in an informal settlement. Some may want to become home owners either through buying land and building in stages or buying a newly built or existing house. Some may want to buy materials to improve their shacks. Some may have savings but most will need access to small loans to finance these improvements.

■■Approximately 5% live in formal and informal dwellings in the backyards of small landlords. Some may want to become home owners either through buying land and building in stages or buying a newly built or existing house. Most will need access to housing loans.

■■Approximately 4% live in traditional dwellings often on tribal land.

Such households will not have registered title deeds to their homes but rather certificates of title which grant indefinite occupancy rights. The housing needs of these households are predominantly access to loans to improve services and to complete or upgrade their homes.

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What do people need?

How many …

Live in …

Housing needs …

Need access to …

46%

formal houses that they own

home improvements, or selling their home to buy a new one

home loans

39%

formal rented accommodation

becoming home owners by buying land and building themselves or buying a newly built or existing house

home loans

shacks in an informal settlement

becoming home owners by buying land and building in stages, buying a newly built or existing house or buying materials to improve their shacks

short-term loans if they don’t have savings

formal and informal dwellings in the backyards of small landlords

becoming home owners by buying land and building in stages or buying a newly built or existing house. In addition the small landlords may want to improve their backyard rental units

short-term loans if they don’t have savings

traditional dwellings often on tribal land

improved services and home improvements

short-term loans if they don’t have savings

Within all of these housing circumstances the quality of the housing is often very poor, with high levels of overcrowding and limited access to services. Employees’ housing needs reflect their current housing conditions and their desire to improve these conditions. Whether they can participate in the housing market depends on how much they can afford and the extent to which there are opportunities available and accessible in the market.

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One of the most significant constraints inhibiting a low- to middle-income employee’s ability to transact in the housing market is often a high level of consumer indebtedness and impaired credit records. As a result of the widespread use of unsecured credit, it’s estimated that in South Africa 9.22 million consumers have impaired records (47% of 19.6 million credit-active consumers)3. Statistics compiled by debt management firm Debt Rescue show that South African consumers owe the bulk of their monthly salaries to creditors, and more than 11 million of South Africa’s creditactive consumers were over-indebted4. They found that consumers owe as much as three-quarters (75%) of their monthly pay as instalments to creditors. Low- to middle-income employees meet their accommodation needs as an integral part of their socio-economic development and survival strategy. The way they invest in housing is not necessarily a single large transaction that occurs once or twice in their lifetime, as is the case with higher earning employees, but is rather multiple or a series of incremental investments. Moreover, low- to middle-income employees don’t invest in one place but rather in a number of places, as this enhances their access to social and economic opportunities. For example, a single household may: ■■ have a shack in an informal settlement which is going to be upgraded and is also close to the workplace (providing cheap, accessible accommodation)

3 Rust, 2013 4 BusinessTech, 2015 5 Lipietz, 1999 6 Shisaka for FinMark Trust, 2006

Chapter 4

■■ have a home in the traditional rural area (providing a space to build up and maintain some agricultural assets and tenure over a tribal homestead) ■■ rent backyard accommodation (providing access to nearby schools, healthcare or transport). Different members of the household will live in the different locations to access different education, health and economic opportunities and to meet social objectives. Many employees lack knowledge and are inexperienced in operating in the housing market, making them vulnerable to high-risk transactions. Their low incomes exacerbate their vulnerability5. Research indicates that for the most part, these employees rely on friends and family for advice and support in accessing housing, and most of these advisers also lack experience6. On the supply side, while there are professionals providing housing-related services, the houses available are either poor value for money (new developer housing) or constitute higher risk transactions because of the poor functioning of the lower end of the housing market, including unreliable or fraudulent service providers and poor information. It’s also highly difficult to access loans because financial institutions are reluctant to lend in certain areas and employees are unable to meet the financial institutions’ eligibility requirements for affordability and a deposit.

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This is more significant for low-income employees, as the Income and Expenditure Survey (2010/11)7 indicates that the success rate of securing a home loan for households earning between R3 500 and R16 000 per month is roughly one home loan for every 32 households. For households earning above R16 000 the success rate is one home loan for every 12 households. Recent work undertaken by the South African Housing Club – a newly formed organisation that provides housing wellness support to large employers – shows that demand far exceeds the availability of existing supply that is affordable to low- to middle-income employees across South Africa. Buying a stand and building a house in stages is often the most practical and costeffective way of becoming a home owner. A key problem in urban areas, however, is access to affordable stands and appropriate home loans. All of the above results in many employees taking unnecessarily high risks when transacting in the housing market, often losing scarce savings and failing to effectively acquire or complete building a house.

Buying a stand and building a house in stages is often the most practical and cost-effective way of becoming a home owner.

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7 Melzer, 2015

The success rate of securing a home loan for households earning between

R3 500 and R16 000 per month is roughly one home loan for every 32 households.

For households earning above R16 000 the success rate is one home loan for every 12 households.

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The policy context The government’s key focus is on households earning below R3 500 living in informal settlements and backyard dwellings, as well as on meeting the needs of new families. However, government policy and subsidy also focus on the affordable housing sector – often termed ‘gap’ housing – which is formal housing for ownership for low- to middleincome employee households. This is likely to increase, given new policy frameworks including the National Development Plan.

The following figure shows an overview of this financial framework. Currently the government is providing extremely limited support to low- to middle-income employees. Some employees earning below R15 000 could access support from the government through the Finance Linked Individual Subsidy Programme (FLISP). The once-off FLISP subsidy ranges between R10 000 and R87 000, depending on the applicant’s monthly income. The sliding

Chapter 4

scale applied results in the subsidy making a more substantial difference to affordability for applicants at the lower end of the income scale. Funding availability varies from province to province as it depends on the amount of funds each province allocates to FLISP. Generally FLISP funding is limited and not always available8.

South Africa’s financing framework for housing R15 000+

R15 000+: Regular market, no state support (but limited stock at bottom end)

R15 000

R3 500–R15 000: Finances Linked Individual Subsidy Programme (FLISP)

R7 000 R3 500 R2 500 R1 500

■■ Income eligibility: R3 501–R15 000 ■■ Maximum amount: R87 000

R0–R3 500 household income: Government housing and basic services subsidy. Still an emphasis on a 40 m2 house on 250 m2 plot of land with freehold tenure; sale restriction for eight years. The value is between about R120 000 and R200 000. ■■ About 3 million houses developed since 1995. It‘s estimated that 50% have not been registered on the Deeds Registry. ■■ Waiting list is long: can be 10 years. ■■ Shift in policy towards government providing a site only and investing in the public environment, with the household providing the top structure. ■■ Some finance available for rental stock but delivery slow.

Source: Rust, 2013

Generally low- to middle-income employees are expected to make their own investments in housing, as well as pay for rates and services. They make these investments either through savings or loan finance raised from financial institutions. How easy it is for individuals to access loan finance from financial institutions depends on income and levels of indebtedness, with individuals with higher incomes having better access. They can either use secured loans (home loans or pension-backed housing loans) or unsecured loans.

8 Smith, 2013

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Used to generate income either through renting out a portion of the house or property or through using the house to sell services and goods or for manufacturing.

Offers a social safety net for family members. It is also an intergenerational asset that gets passed on from one generation to another.

ASS TER L E SH

FIN A AS NCI SE AL T

SOC ASSIAL ET

IC OM N O ET EC

Can be traded,

or against which home loan finance can be accessed.

Housing as a retirement asset The recent boom and bust in housing markets has made the concept of housing as an asset controversial. While previously home ownership was considered a keystone of opportunity, what became painfully clear in 2008 was that there’s a big difference between good and bad home loans. During the sub-prime mortgage boom of 2003–2007 in the United States, home loan credit was extended under terms and conditions that were unsustainable and feeding a house price bubble that would inevitably burst, as occurred in 2008. In its wake, these lending excesses left a foreclosure crisis, a credit crunch, a global recession, double-digit job losses, and the loss of a staggering $7 trillion in housing wealth9. Despite this, there’s still a strong argument in favour of home ownership as an asset. Finmark Trust10 asserts that housing as an

asset provides three components of benefits for the household, in addition to providing shelter. According to this concept housing is a social asset, in that it offers a social safety net for family members, it contributes towards citizenship building and provides access to other social benefits, including networks and community support. It is also an intergenerational asset that gets passed on from one generation to another. It is a financial asset, in that it can be traded, or against which home loan finance can be accessed. When traded, the value of the transaction contributes towards a household’s actual wealth and can then be reinvested in better quality or more appropriate housing for the family. It is also an economic or productive asset when it is used to generate income either through renting out a portion of the house or property or through using the house to sell services and goods or for manufacturing. Since 2008 there has been extensive research into the benefits of home ownership as an asset generally and for enabling retirement. Despite there being

Home ownership is good for the economy and for individual households because it encourages people to save.

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9 Manturuk, Riley & Ratcliffe, 2010 10 FinMark Trust, 2008

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arguments on both sides of this issue, the one overriding fact is that home ownership is good for the economy and for individual households because it encourages people to save. “Perhaps the most compelling argument for housing as a means of wealth accumulation,” argues Richard Green of the University of Southern California, “is that it gives households a default mechanism for savings11”. Because people have to pay off a home loan, they increase their home equity and save more than they otherwise would. This is indeed a strong argument. Socialscience research finds that people save more if they do so automatically rather than having to choose to set something aside every month. Default on home loans in South Africa is relatively low. On the one hand, analysis by Ilana Melzer from Eighty20 indicates that for home loans originated between 2009 and 2014, the percentage of loans that are in arrears by 90 days or more is 5% or less. On the other hand, credit providers, including a range of non-bank players, indicate that over 40% of borrowers with a clothing or furniture account are 90 days or

11 The Economist, 2009 12 Melzer, 2015

more in arrears on their worst performing account in the category12. Given the high levels of indebtedness in South Africa, we can’t underestimate the value of home ownership and its importance for retirement arrangements of low- to middle-income employees. We can’t ignore the strong link between home ownership and financial well-being. At the same time, housing is only an asset when the financing is affordable and sustainable and holding it provides value in the context of an employee’s retirement plans. If investments are overly ambitious or focused on opportunities that don’t resolve the employee’s priorities, which may not be at a place of work, then the member risks becoming financially overstretched. The dilemma therefore for the employer is the extent to which they support investments of this nature.

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HOME LOANS

in arrears

OTHER LOANS

in arrears

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SECTION

Supporting home ownership for low- to middle-income employees

The importance of supporting home ownership The success of a business is directly linked to the performance, commitment and well-being of its employees. It stands to reason that there’s a negative effect on an employee’s performance and well-being when they live in inadequate accommodation or accommodation that does not suit their needs and lifestyle, or where the employee is under financial stress. While it is also not the employer’s obligation to care for an employee once they leave their employment, most employers’ reputations are affected when, on retirement, employees live in squalid conditions. Given the housing circumstances and extent of indebtedness of low- to middle-income employees currently in South Africa, their

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low levels of understanding of housing markets and the extremely fraught market through which housing is provided, there’s a strong argument for employers to support employees to become home owners on condition that it’s effective and reduces associated risks. This is not only to address the shelter and asset creation aspects of home ownership, but is also a good motivation for financial well-being. Unless an employee addresses creditworthiness issues, levels of indebtedness and budget realignment, they can’t access finance for housing and transact in the market. At the same time, once they’ve invested well and become owners, housing enables them to improve their financial sustainability.

It’s important to recognise that accommodation is a personal decision and employees have the right to make decisions around accommodation in terms of their own lifestyle, values and priorities. Employers therefore need to balance the extent to which they make resources available to enhance the ability of employees to live in formal, well-located accommodation and own their home in a way that enhances wealth creation. We also have to consider the extent to which employers can support employees, given that housing is not the employer’s core business.

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In South Africa at present, generally only large employers support employees in accessing home ownership. The type of support varies as follows (for more details on the financial products indicated, see Table 1 on page 130): ■■ At its minimum the employer provides advice usually through the human resources department. In some instances the employer contracts an expert to provide training or information. ■■ The next level of support is providing access to small short-term loans for education or home ownership secured against a portion of pension or provident fund savings. Generally the employer comes to an arrangement with a financial institution who may offer reduced interest rates if the employer deducts repayments directly from the employee’s monthly salary. ■■ Employers also improve access to home loans. Employers often arrange with financial institutions to offer reduced interest rates as long as repayments are deducted from the employee’s monthly salary and paid directly to the lender. Some

employers provide additional support in the form of a guarantee or grant to assist with the deposit for the home loan or to pay a portion of the monthly repayment amount. ■■ Mining sector employers in particular provide a living out allowance. This means an additional amount is added to the employee’s salary, who may choose how to spend it. However, this form of support often results in the employee using this additional income to service consumption spending or loans rather than investing in housing. ■■ Building and providing accommodation for employees often occurs where an employer has operations in remote locations and there is no housing market. This is usually at a reduced rental, with the employer covering the bulk of the operational costs. In the past in the mining sector hostels were mostly provided as housing for low- to middleincome employees. These notoriously offered very poor accommodation where employees lived far from their families. A key element of the Mining Sector Charter

Chapter 4

is that employers must do away with these hostels and in most instances they’ve been converted to family accommodation or bachelor units. Generally employers now tend to focus on employing low- to middleincome employees from the local area. ■■ More recently, employers are providing a once-off housing grant. The grant is not paid to the employee in cash, but directly to the seller, the builder or the financial institution providing the house or loan. Where the employee is upgrading an existing house, the grant is paid to the builder or material suppliers. In providing support, employers have two objectives: to make sure their employees have good living conditions, and that the employee can access home ownership and asset creation. Sometimes these two objectives have no locational alignment. What this means is that employers’ support programmes need to balance both these requirements and should be flexible enough to accommodate both.

Accommodation is a personal decision and employees have the right to make decisions around accommodation in terms of their own lifestyle, values and priorities. Employers therefore need to balance the extent to which they make resources available to enhance the ability of employees to live in formal, well-located accommodation and own their home in a way that enhances wealth creation.

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Improving home ownership support The best housing support for employees earning below R25 000 per month is likely to be that which responds directly and effectively to employees’ own personal housing and financial circumstances, and where employees are proactively responsible for their own housing decisions and transactions. At the same time, employees need advice to decide on practical and sustainable housing transactions, access to finance and housing opportunities, as well as support to resolve creditworthiness constraints and transact effectively in the housing market. In structuring a programme, it’s necessary to understand that employees need to go through a complex decision-making process before they’re ready to transact. This process enables them to set their housing aspirations consistent with their financial reality so that they have a practical housing action plan that is affordable and achievable. They will also need sufficient affordability, creditworthiness, information, and social and emotional skills to transact. The South African Housing Club takes employees through such a decisionmaking process as shown on the right.

DECISION

WHERE DO I INVEST?

Town Rent with own family – cost?

DECISION

3 DECISION

Tribal area

Where will you live when working?

Rent without own family – cost?

Stay with family or friends – cost?

IN WHAT DO I INVEST? Buy or build a new house

Factors to consider: Family size Availability

DECISION

Elsewhere

Place of work

Buy a secondary house

Improving existing home

Small starter unit (R250 000) Two-bed unit (R250 000–R600 000) Three-bed unit (R600 000+)

WHAT CAN I AFFORD? Income – expenditure = affordability

DO I NEED TO RESOLVE OVER-INDEBTEDNESS? Income – expenditure = affordability

HIGH – over 30% of income committed to debt repayment MEDIUM – less than 30% of income committed to debt repayment or minor debt infringement against name LOW – less than 10% of income committed to debt repayment

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Once an employee has clarified their home ownership plan, they need support to implement it.

WHAT ARE MY HOUSING OPTIONS? 1

I can afford my investment choice immediately.

I can afford my investment choice, but need to resolve medium-term indebtedness. I can proceed but must resolve medium-term debt rehabilitation.

I cannot afford my investment choice and need to review it (save or change choice).

I cannot afford my investment choice because I’m highly indebted and need to undergo debt rehabilitation.

This support includes: ■■ Creditworthiness and affordability support that enables employees to overcome financial barriers to accessing housing, including over-indebtedness, tainted credit records and poor affordability, as well as to accessing the appropriate housing loans to undertake a housing transaction. ■■ Housing transaction support that comprises a range of services to assist employees to transact effectively in the housing market. Transaction options include buying a house in the existing market or from a developer, building a house, or upgrading or completing an existing house. ■■ Home ownership support that ensures employees understand and fulfil their roles and responsibilities of home ownership in a financially sustainable way. The financial support that low- to middleincome employees could access comes from three sources in addition to their own savings, namely from the employer, financial institutions and the government, as shown in Table 1 on the next page. Regardless of the financial support provided, a key element to the success of enabling access to home ownership is information and coaching. This is not only about the importance of home ownership and how to go about becoming a home owner, but also on the best financial product for an employee, as well as how best to transact to meet realistic housing aspirations.

Figure 3: Employees’ decision-making process

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Table 1: Overview of financial support provided to employees Provider

Type of support

Description

Advantages

Disadvantages

EMPLOYER

Grant

This is a once-off grant provided directly to the seller, builder or financial institution.

It significantly enhances employees’ affordability.

It has cash flow implications for the employer, as it requires a large upfront payment.

A cash contribution is made towards repaying interest on a home loan.

It significantly reduces the cost of home ownership for the employee.

It’s subject to escalations if linked to a percentage of the interest rate.

As the subsidy is paid directly in the transaction, there is no leakage.

It’s only effective if the employee succeeds in accessing a house and qualifies for a home loan.

Allowance

An additional amount is added to the employee’s salary and they can choose how to spend it.

It’s managed as part of payroll, with few other requirements from the employer.

There are high levels of leakage as the funds are often spent on other items.

Guarantee

This is a guarantee from the employer to assist the employee secure a 100% home loan.

There’s limited exposure or cost to the employer. It’s only effective if the employee succeeds in accessing a house and qualifies for a home loan.

FLISP

The once-off FLISP subsidy amount ranges between R10 000 and R87 000, depending on the applicant’s monthly income, which must be between R3 500 and R15 000.

It significantly enhances affordability, especially for employees at the lower end of the sliding scale.

Interest rate subsidy

GOVERNMENT

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As the grant is paid directly, there is no leakage.

The current administration of the FLISP makes it difficult and unreliable to access.

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Provider

Type of support

Description

Advantages

Disadvantages

FINANCIAL INSTITUTION

Mortgagebacked home loan

The financial institution provides the finance for a home, which the employee pays back. A home bond registered over the property is the financial institution’s security. Home loans are generally above R100 000, which is borrowed for a period of between 10 and 30 years, with 20 years being the most common. It’s only provided to creditworthy employees who meet credit requirements.

It’s the most cost-effective way of borrowing money for a house, as the interest rate is closely linked to the prime lending rate.

It’s only provided if the property is a freehold property meeting highquality specifications. It is therefore not available in tribal authority areas and is often not affordable.

Pension-backed housing loans

These are small loans provided by financial institutions, paid back over a medium term (normally five to eight years). The loan is secured by the employees’ pension or provident fund savings. To qualify, the employee must still meet the financial institution’s lending criteria.

It can be applied in all areas, regardless of the type of title.

It’s only for employees who have sufficient savings built up in their pension or provident funds. Employees would need to be saving for about 10 years to build a complete house.

Unsecured loans are usually for less than R100 000, provided by financial institutions and paid back over a comparatively short period, normally two to five years.

It can be applied in all areas, regardless of the type of title.

Unsecured small loan

It’s appropriate for owner builders and building in stages. Interest rates remain competitive because the loan is secured against the pension or provident fund and are similar to home loan rates.

It’s appropriate for owner builders and building in stages.

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Employees don’t typically preserve retirement savings when changing jobs. Interest rates tend to be significantly higher than for home loans and pension-backed housing loans.

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PENSION

-BACKED

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13 Sing, no date

Pension-backed housing loans – a critical part of the home ownership support package

Pension-backed housing loans are key to any employee home ownership programme. It’s often the best option for an employee who doesn’t qualify for a home loan or enables employees to pursue a wider range of housing opportunities which are often more affordable and in preferred locations. These loans are important for the following reasons13: ■■ Many lower-income employees often have difficulty in accessing home loans in areas that are not proclaimed. While these properties have secure tenure (with some form of certification), the title is not registered in the deeds registry and consequently mortgage-backed loans are not available. These types of properties include: • houses in traditional areas with certificates of title • houses in formal areas where the authorities have not yet proclaimed titling • houses where the housing transaction value is below a certain amount, which makes the costs of a home loan prohibitive. ■■ Many employees want to manage building their own house in stages on land they already own or wish to buy. Pensionbacked housing loans are appropriate for owner builder housing transactions, as the conditions of these loans don’t preclude the use of local labour-only contractors and incremental home building over extended time periods.

■■ Many lower-income employees are living in sub-standard housing which they own and want to upgrade themselves in stages. Pension-backed housing loans are appropriate to home improvement projects, as the average size of these loans is relatively small, interest rates are competitive and the cost of accessing such a loan is less than that of a mortgage-backed loan. Pension-backed housing loans are enabled through the Pension Funds Act, but can only be provided if they are explicitly indicated in the rules of the pension or provident fund. The key elements of a pension-backed housing loan are as follows: ■■ The employee applies through the pension-backed loan administrator to the financial institution for the loan. ■■ The financial institution applies normal credit criteria in assessing the loan application. ■■ The employee pledges a portion of their pension or provident fund to the financial institution as security for the loan. ■■ The pension or provident fund stands as co-surety for the employee’s loan from the bank. The employer often underwrites this pension or provident fund liability. ■■ The loan instalments are deducted directly from payroll.

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When structuring pension-backed housing loans, take the following factors into consideration: 1. Protection of the pension or provident fund’s assets: Mitigate the risks for the pension or provident fund by limiting the portion of retirement savings pledged as security to the lender. 2. Maximum loan size: Base the maximum loan size on sound credit principles and fund rules. 3. Lending arrangement: Offer the loan according to an agreement with the lender. Base the granting of loans on clear qualifying and affordability criteria. The key terms of the loan will include: ■■ initiation and monthly fees ■■ the term, not exceeding the date of retirement ■■ variable interest rate instalments ■■ payroll deduction by the employer. 4. The employer and the lender should undertake the administration of the scheme as part of their normal processes and procedures: To guard against exploitation and fraudulent loans, the facility should be offered through a housing support programme or a process of monitoring house expenditure (see Table 2).

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The table below sets out the key risks and mitigating factors.

Table 2: Key risks Risk

How to limit the risk

Adverse changes to employees’ fund credit values

If the loan is only a portion of the accumulated retirement savings, then the risk of the value of fund savings not covering the loan liability is limited.

Death and disability

The loans require life and disability cover. This cover will be ceded to the financial institution and will cover the balance of the loan in the event of death or disability.

Resignation or retrenchment

In the event of resignation or retrenchment, the loan may be called up against retirement savings. This is often resolved through an underwriting agreement with the employer for retrenchment.

Leakage – ensuring the proceeds of the loan are used for housing

The employer needs to put a process in place to ensure that the funds loaned are used for housing. This is often onerous administratively.

Divorce after the loan has been granted

Section 37D of the Pension Funds Act sets out an order of preference or hierarchy of allowable deductions from a lump-sum pension benefit or minimum individual reserve payable according to fund rules. Any amount that needs to be deducted for a maintenance or divorce order may only be deducted after allowing for housing loans or guarantees for housing loans granted before the court order. It follows that where a member exiting the fund has both an outstanding housing loan and a divorce order where a portion of the member’s pension interest has been assigned to their ex-spouse, the outstanding housing loan must be deducted first before the divorce order.

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CONCLUDING THOUGHTS Home ownership is a good motivation for financial well-being. Unless an employee addresses negative creditworthiness issues, levels of indebtedness and budget realignment, they can’t access finance for housing and transact in the market. At the same time, should they successfully transact and become home owners without overcommitting themselves financially, their financial sustainability and robustness will be substantially improved. Owning a home, particularly where there’s no outstanding home loan, is also a critical retirement asset, as it provides employees with affordable accommodation, is a financial asset and can also be used to supplement postretirement income. We believe that employees earning below R25 000 per month need housing support that responds directly and effectively to their personal housing and financial circumstances, and where they are proactively responsible for their own transactions. Employees need advice, access to finance and housing opportunities, as well as support to resolve creditworthiness constraints and effectively transact if they are to meet their own housing needs. However, this must be done in a way which empowers these employees to use their own networks and control the process of becoming home owners. This generally results in more cost-effective outcomes and increases employees’ control over their housing outcomes and ongoing maintenance. Pension-backed housing loans, particularly when linked to properly structured housing support, are critical in enabling low- to middle-income employees to become home owners, improve the quality of the houses they live in and strengthen their financial sustainability.

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EDUCATION â&#x20AC;&#x201C; THE ENGINE ROOM FOR SOCIAL MOBILITY

PART 2 Chapter 5

EDUCATION â&#x20AC;&#x201C; THE ENGINE ROOM FOR MOBILITY

OVERVIEW One critical area where we are not incentivised to save is education. And yet, in a country where social mobility and employment are of far greater importance than saving for retirement, saving to provide a better quality education for oneself or oneâ&#x20AC;&#x2122;s offspring probably provides the greatest rewards of all our savings priorities. This chapter explores not only why this is the case, but at what point in the educational journey the funding for an improved environment has the greatest payoff.

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EDUCATION

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Financial well-being is a complex, intergenerational, intra-family problem. Employee benefits go some way to provide a safety net to dependants, but a higher priority for many families may well be enabling dependants to become future financial contributors instead of perpetual dependants. As such, people generally have a keener interest in upward social mobility than retirement savings. More specifically, the demographic challenge for South Africa for the next 30 years will be the youth, not the aged. The need to fund for retirement pales in comparison to the scramble to enable and empower the next generation. The primary catalyst for the desired social mobility is education. If we as individuals only achieve a limited degree of financial security from our own jobs, we can still hold out the

hope that, with the right support, nurturing and education, our children can achieve even more. Thereâ&#x20AC;&#x2122;s a compounding element embedded in educational attainment, as shown on the right. From this perspective, improving the educational standing of every family member should come with a payoff. The economic principle at work here is that schooling is an investment. In a complete market, you should theoretically be able to invest in education until the marginal private benefit from that investment equals the private marginal cost. But in South Africa, investing in education for mobility demands a very different appreciation. The payoff is far more complex1.

Chapter 5

The better educated the parents

The greater the home support for the student

The higher the probability for academic success The greater potential for financial success

The demographic challenge for South Africa for the next 30 years will be the youth, not the aged. The need to fund for retirement pales in comparison to the scramble to enable and empower the next generation.

1 Behrman, Birdsall & Szekely, 1998

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HOW DOES THIS WORK IN SOUTH AFRICA? South Africa’s unique historical legacy throws some disturbing curve balls at the upward mobility dream. Three points in particular demand our attention and help explain that while investing in education may have a greater return in South Africa than other developing economies, getting the best payoff from such an investment is that much trickier.

To begin with, we can’t assume a linear payoff between years of schooling and economic achievement. The wages of apartheid left the country with a deeply divided educational system, with only 25% of our public school systems considered functional. In his study on schooling in South Africa, Nic Spaul of Stellenbosch University describes this chasm as a poverty trap:

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2 Spaull, 2015 3 Von Fintel, 2015

The tragedy is that these two systems continue to reproduce themselves despite the abolition of apartheid…. Although the top part of the education system and the labour market are no longer racially homogeneous (White), they are largely split along class lines. Those parents who can afford to pay school fees and send their children to well-functioning government or independent schools ensure that their children can get access to the top part of the labour market. Those parents who cannot afford school fees are excluded from these schools, often in informal ways. As it currently stands the dualistic South African education system is not an engine of social mobility but rather one of the key mechanisms through which an unequal society is replicating itself 2.

On top of this, access to good jobs is mostly through friends and acquaintances. It’s not just about acquiring greater knowledge or skills that accounts for better prospects, it’s about acquiring greater social capital or influence. Attending better schools allows for greater proximity to those valuable social networks3.

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Chapter 5

Spaul’s infographic provides an excellent summary of the issues of this dual system with dual outcomes:

Unequal society

Labour market HIGH PRODUCTIVITY JOBS AND INCOMES (15%)

Requires graduates, good quality matric or good vocational skills

Legislators, managers, associates, professionals

32 Vocational training Affirmative action (few make this transition)

High-quality High sociosecondary economic status school background Highquality primary school

Field of study (Engineering, arts and so on)

(with early childhood development)

Minority

20%

Big demand for good schools despite fees Some scholarships or bursaries

Some motivated, lucky or talented students make the transition

UNEMPLOYED (broad)

Low-quality secondary school ATTAINMENT

Often manual or low-skill jobs

Quality of institution Type of qualification (Diploma, degree and so on)

UNSKILLED Elementary occupations and domestic workers LOW PRODUCTIVITY JOBS AND INCOMES

Type of insitiution(TVET college or university)

SEMI-SKILLED Clerks, service workers, shop personnel, skilled agricultural or ﬁshery workers, plant and machinery operators

TYPE

QUALITY

Mainly professional, managerial and skilled jobs

UNIVERSITY OR TECHNICAL VOCATIONAL EDUCATION AND TRAINING (TVET)

Low socioeconomic status background

Majority

80%

Low-quality primary school

Limited or low-quality eduaction

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The financial payoff from investing in education in South Africa is essentially convex. Students would need to have completed a substantial number of years of schooling before there’s an adequate payoff for the investment. The following graph illustrates this point.

Translating years of education into hourly wage increases 4

Hourly wage increases

3.5 3 2.5 2 1.5 1 0.5 0

12 13 14

Years of education Primary education

Secondary education

Tertiary education

Source: Calculations on South African Labour Force Statistics, 20074

This accounts for why there is such focused attention in the media on matric results and university fees. As university appears to be the final launch pad for social mobility, this is where most parents give the greatest consideration to educational savings. By now, parents feel they should have some hint as to whether an investment in a child’s further education is likely to pay off. But that conclusion may well be misplaced, as our third point suggests.

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4 Van der Berg, 2013

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In fact, research now shows that an investment at the earliest stages of education might provide the greatest payoff. Separate studies by Van der Berg, Spaull and Taylor confirm that educational inequalities from our two-tiered school system start as early as primary school. By Grade 3, these inequalities accumulated into an educational differential of more than three years5. This highlights the powerful influence that early cognitive development has on an individual’s whole educational journey. By ninth grade the learning differential expands to five years. The following graph illustrates this impact, measuring the learning trajectories or tracks of wealthy and poor learners in South Africa by assessing their differential performances in maths exams. Maths scores appear to be reasonably good predictors of how people are likely to perform in the workplace.

South African mathematics trajectories by national socio-economic quintiles Poorest 20% Second poorest 20%

Effective grade

Middle 20% Second richest 20% Richest 20% Linear (richest 20%) Linear (poorest 80%)

Actual grade

Educational inequalities from our two-tiered school system start as early as primary school. By Grade 3, these inequalities accumulated into an educational differential of more than three years. By Grade 9, the differential is five years, this highlights the powerful influence that early cognitive development has on an individual’s whole educational journey.

5 Spaull, 2015

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In summary, the consequences of not paying particular attention to children’s education, especially in their formative years, is significantly greater in South Africa than other African or developing economies. But therein lies the rub. The last national household survey in South Africa revealed that almost two-thirds of children and youth cited lack of funding as the main reason for not attending school, despite a sharp increase in no-fee schools over the past few years. Registration fees (which have to be paid up front at high schools and tertiary educational institutions), transport and other education-related expenses continue to be obstacles for many disadvantaged South African families6. So, while we place a high value on education and the impact it can have on our children’s lives, finding effective ways to fund these aspirations can be a real challenge, particularly if net income exceeds the limits of government grants and bursaries. Cost continues to be an issue even for government schools. Educational inflation has tended to hover a good 3% above inflation since 2009.

The rising cost of education Education inflation compared with headline Consumer Price Index (annual rate of change) 12% 10.5% 10%

9.2%

8.6%

9.0%

8.7%

9.3%

8% 6% 4% 2% 0%

2009

2010 Education CPI

2011

2012

2013

Headline CPI

Source: Consumer Price Index, Statistics South Africa

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6 Mayer, Gordhan, Manxeba, Hughes, Foley, Maroc, Lolwana & Nell, 2011

2014

2015

2 3

2/3 OF CHILDREN

cited lack of funding as the main reason for not attending school.

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HOW MUCH EDUCATION WILL COST IN 20 YEARS, USING A 9% INCREASE

EXPECTED COST OF ONE YEAR OF EDUCATION

2016

2021

2029

2034

Public primary or high school

R29 000

R45 000

R99 000

R139 000

Private primary school

R71 000

R109 000

R217 000

R334 000

Private high school

R114 000

R176 000

R351 000

R540 000

University

R50 000

R77 000

R154 000

R237 000

Source: Old Mutual, 2015

These figures give us pause for thought, given that the current average cost for one year’s education in 2016 at a public school (primary or high school) is about R29 000, while private high school fees vary around the R114 000 mark. As the table highlights, projections rise to R45 000 for public and R176 000 for private high schools by 2021. This suggests that a savings plan for educational costs might be a high priority for many families. Source: Old Mutual, 2016

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COULD THE EMPLOYEE BENEFITS PLATFORM FACILITATE EDUCATIONAL FUNDING? Here is the savings challenge. Educational funding competes head-on with saving for a deposit on a home, accumulating emergency savings, saving for retirement and a host of other early parental considerations. The question becomes: Is there anything that we could temporarily crowd out (and then force back in) to create the space to focus on educational funding? The answer, surprisingly, could be your retirement savings.

This is an interesting turnabout. While advocating emphatically that individuals need to start saving as early in their working careers as possible (and at the highest contribution rate), we canâ&#x20AC;&#x2122;t deny that other priorities such as education or housing or emergency savings are equally important to the richness of their financial journey. If funding education results in slightly lower replacement ratios at retirement, but enhances overall family wealth, is this hugely problematic?

If funding education results in slightly lower replacement ratios at retirement, but enhances overall family wealth, is this hugely problematic?

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Diverting precious savings away from the retirement pool could be risky business, unless it’s done in a highly controlled environment. We believe that the benefits platform that we are discussing in this book could provide just the necessary controls. The power of the programme is that it could either be entirely funded by the member, or employers might find it attractive to offer a matching strategy to members below a certain threshold.

Here’s how we envisage the process

The member would commit to follow-through with each step of the educational savings programme. Once the member enters into the programme, each subsequent step would occur automatically.

At the outset, the member would determine the level of educational funding required, in how many years, and over what period. This could be done either with an online toolkit or through consultations with a financial well-being consultant.

The starting principle would be to set a reasonable contribution rate.

Savings could start at a trigger event: at the point of employment, marriage, birth of a child or at some early point in that child’s development. The golden savings rule remains: the longer the savings period, the higher the probability of success.

This is one area where an employer matching programme would add significant value. When the member has reached their funding goal, the ongoing contribution will be allocated back into their retirement fund to catch up on their long-term savings.

What makes this programme effective is that because the overall savings rate remains constant throughout the retirement savings period, there’s no new financial strain introduced to the family at any point. At the end of the day, the member ends up with a higher replacement ratio than if they simply diverted the money into education to pay for educational costs.

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CONCLUDING THOUGHTS The reality is: adequate funding to provide that critical educational boost at primary level is often beyond many young familiesâ&#x20AC;&#x2122; means. But a carefully orchestrated programme that allows a family to divert savings from retirement during those early years when that extra funding is required can still be achieved as long as those savings contributions are automatically channelled back to the retirement objective at that optimal transition point. In Part 2: Chapter 8 and Part 3: Chapter 1 we flesh this model out to illustrate how the varying savings goals can interact over time to allow us to solve for these differentiated priorities.

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OVERVIEW Consider healthcare costs as our financial wildcard. How healthcare will unfold in South Africa is currently particularly uncertain. If we continue on our current trajectory, individuals and their families may well wish to consider a savings programme that could cushion potential future blows. But we also argue that thereâ&#x20AC;&#x2122;s much that we can do collectively to control spiralling healthcare costs. This chapter explores both of these levers on our future financial well-being.

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Counting the costs Healthcare is a long-term savings challenge that is often overlooked. When we consider the savings that an individual needs to accumulate by the time they retire, we don’t usually consider the unique healthcare expenses that they might be confronted with in their retirement. On the one hand, individuals and their families are confronted with increases in costs year on year that will usually outpace general inflation levels. That means that as we grow older, health costs will constitute an increasing percentage of our income allocations, not just because our health may be failing with age, but because the costs are growing at a faster rate than other costs in our consumption basket. On the other hand, people can mitigate increasing health costs to some extent by taking pro-active measures to improve their health earlier on in their lives. This is at a cost as well, but a potentially significantly lower one over time.

Throughout a person’s life, expenses on healthcare-related items fit into three main components.

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Medical scheme contributions, for those with private medical scheme cover

Out-of-pocket expenditure, including copayments, deductibles, and shortfalls for medical events where there’s either no cover or where medical scheme benefits have been depleted

Other wellness-related and preventative expenditure – which could be considered a luxury good – including spending on vitamins, lifestyle improvements such as gym or eating plans, and other expenses aimed at improving health even if there’s no explicit problem. We can see how each component varies throughout an individual’s life, in order to advise on optimal healthcare spend.

Healthcare

When we consider the savings that an individual needs to accumulate by the time they retire, we don’t usually consider the unique healthcare expenses that they might be confronted with in their retirement.

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Let’s consider a person’s healthcare requirements over their working life

Medical scheme option Estimated monthly cost in 2016 Assumed monthly income

25 years

35 years

55 years

65 years

Low

Medium

High

Medium

R1 700

R5 100

R9 400

R7 800

R4 200

R16 000

R30 000

R40 000

R30 000**

Estimated monthly out-of pocket expenditure*

R350

R450

R200

R100

R300

R2 050

R5 550

R9 600

R7 900

R4 500

Total estimated monthly healthcare cost Estimated monthly total healthcare cost as a percentage of income

*Average out-of-pocket expenditure is likely to be understated because of unreported claims **Assumed replacement ratio in retirement of 75%

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Medical scheme cost as a percentage of income

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The table indicates the increasing costs of healthcare over time taking account of changing family demographics. Once in retirement years, we expect that our health requirements will be greater. As such we would want to be on a high benefit option in these years, but because of affordability, members often buy a more cost-effective option. The question we'd like to answer is: How can you make sure that your employees can afford the most appropriate healthcare benefits in their retirement? We’ve considered two ways to manage post-retirement healthcare costs:

1 2

Saving enough during employment. Taking preventative healthcare measures.

How much do we need to save for healthcare costs in retirement? Healthcare trends suggest that the need for medical scheme benefits increases as one ages. It may therefore be expected that a high level of medical aid cover is required during retirement. We’ve estimated the expected costs of medical scheme membership and out-of-pocket expenses after retirement for a married male, currently aged 25, who wants to save for a high level of cover during retirement, at age 65, for himself and his spouse. The table below shows the estimated monthly contributions to a savings or investment vehicle that this member would need to make for the next 40 years. We have assumed that his savings contributions increase in line with Consumer Price Index (CPI) inflation and that annual investment returns average 4% above CPI.

Level of cover

Monthly contributions Medical scheme contributions

Out-of-pocket expenditure

Total savings

Lump-sum present value of savings

High

R3 631

R37

R3 668

R889 000

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However, if the member was to live a healthy lifestyle, it’s likely that his health requirements in his retirement would be less. Therefore, he might not need to obtain a high level of cover during retirement. The table below indicates the estimated monthly contributions to a savings or investment vehicle that the member would need to make for the next 40 years to afford a medium or low level of cover. We have assumed that his savings contributions increase in line with CPI inflation and that annual investment returns average 4% above CPI.

Level of cover

Monthly contributions Medical scheme contributions

Out-of-pocket expenditure

Total savings

Lump-sum present value of savings

Medium

R1 983

R115

R2 098

R509 000

Low

R1 476

R1 165

R2 641

R639 000

Saving from a younger age means the member can save a significantly lower amount every month thanks to the effect of compound interest that’s lost by only investing at a later age. We discuss this point in greater detail in Part 2: Chapter 8. In general, the higher the level of cover required, the more money an individual needs to put aside to provide for cover. It’s interesting to note that the total cost for a medium-cover option is estimated to be lower than that of a low-cover option. This is because higher contributions for medium cover are offset by lower out-of-pocket expenses. Those who need a high level of cover in retirement will need to set aside significantly more for their healthcare needs – particularly smokers or heavy drinkers, and those who consume unhealthy foods and don’t exercise.

Those who need a high level of cover in retirement will need to set aside significantly more for their healthcare needs – particularly smokers or heavy drinkers, and those who consume unhealthy foods and don’t exercise.

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Managing healthcare costs through preventative care The World Health Organization (WHO) notes that the prevalence of non-communicable diseases (NCDs) is increasing worldwide. NCDs are defined as “non-infectious diseases of long duration, generally slow progression and they are the major cause of adult mortality and morbidity worldwide”1. The following four diseases are considered to be most prevalent and account for over 60% of all deaths in the modern world: ■■ Cardiovascular diseases, including heart disease and stroke (accounting for 47% of deaths) ■■ Cancers (21% of deaths) ■■ Chronic respiratory diseases, including chronic obstructive pulmonary disease and asthma (12% of deaths) ■■ Diabetes (2% of deaths) A quarter of those who die of chronic non-communicable diseases are in the prime of their productive years (below the age of 60). It’s expected that by 2030 the number of deaths as a result of NCDs will increase to 75%. Non-communicable diseases affect everyone: the economy, employers, medical schemes, their members and those suffering from the NCD.

Chapter 6

The South African economy The World Bank’s latest statistics reflect health expenditure in South Africa as 8.93% of gross domestic product (GDP) in 2013. It’s estimated that the accumulated losses to South Africa’s GDP between 2006 and 2015 from diabetes, stroke and coronary heart disease alone cost the country US$1.88 billion2.

World Bank’s latest statistics

Accumulated losses

between 2006 and 2015

■■ Diabetes ■■ Stroke ■■ Coronary heart disease

US$1.88 billion Medical schemes As the funders of private healthcare costs in South Africa, medical schemes are spending a greater percentage of contributions on the treatment of NCDs. Our largest medical scheme, Discovery Health Medical Scheme (DHMS), reported that in 20123, one in three families had a member with an NCD. The average age of chronic members was 45.96 years and 70% of all chronic members were below the age of 60. Between 2008 and 2012 NCD-related health costs increased by 83%. Cardiovascular disease accounted for nearly half of all expenditure on chronic conditions in 2012. Mental illness is becoming more and more widespread and represented close to R1 billion of expenditure in 2012. In total, approximately R5.4 billion was spent on treating NCDs in 2012. However, with ancillary costs such as doctors’ consultations and hospital admissions, this amounts to R14.2 billion.

1 WHO, 2005 2 Alexander Forbes Research & Product Development and Rethink Africa, 2016 3 Discovery Health, 2016

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DHMS data shows the following top three chronic diseases per age group, how widespread the disease is within each age group, the average cost to the scheme per claimant per month, and the average out-of-pocket expenditure for members to treat the disease: Age group

Disease

How widespread the disease is for each age group in the scheme

Average monthly claim cost to the scheme

How much members need to pay on average from their own pockets

0–19

Asthma

4.5%

R133

R31

Epilepsy

0.5%

R756

R98

Bipolar mood disorder

0.2%

R1 073

R158

Asthma

2.1%

R153

R28

Bipolar mood disorder

1.2%

R1 197

R186

Human immunodeficiency virus (HIV) infection

0.9%

R386

R33

High blood pressure

3.8%

R179

R41

HIV infection

3.1%

R430

R39

Asthma

2.2%

R188

R32

11.6%

R187

R47

High cholesterol

5.5%

R84

R40

Diabetes

3.8%

R493

R73

High blood pressure

26.1%

R205

R57

High cholesterol

14.3%

R86

R43

7.9%

R506

R73

High blood pressure

42.8%

R211

R61

High cholesterol

26.6%

R86

R41

Diabetes

11.4%

R485

R72

High blood pressure

58.0%

R217

R59

High cholesterol

36.1%

R80

R34

Coronary heart disease

14.0%

R844

R70

20–30

31–40

41–50

51–60

High blood pressure

Diabetes 61–70

70+

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A total of 3.8% of people on the scheme between the ages of 31 and 40 have developed high blood pressure. It costs the scheme an average of R179 per claimant every month to fund the treatment of the disease. Because some members don’t comply with treatment or scheme rules (for example, not using prescribed medicine lists) it costs these members about R41 per month in out-of-pocket expenses (which is roughly 16% of the cost). By the age of 70, we see that the percentage of members in the age category has increased to 58%, it’s costing the scheme an average of R217 per claimant every month, and members are funding an average of R59 per month in out-of-pocket expenses (21% of the cost).

Employers The Council for Medical Schemes report for 2014–2015 indicates that contribution increases between 2001 and 2014 were in the region of 3–4% above CPI inflation. Salary increases and company subsidies, where applicable, are generally linked to inflation. This places a higher cost burden on the employee as medical scheme contributions account for a great percentage of their salaries, which may result in disgruntled employees.

4 PWC Health Research Institute, 2016 5 Hofman, 2014

As a result of escalating contributions, medical scheme members are buying more cost-effective and less benefit-rich options, often exposing themselves to higher out-ofpocket expenses. Changes in out-of-pocket expenditure are fairly volatile over an individual’s life and depend on various factors: ■■ How closely their level of healthcare cover matches their healthcare needs, for example if they are on a lower benefit option than they currently require, then they will experience shortfalls and have higher copayments ■■ How willing they are to adhere to the rules governing their chosen benefit option, for example by using network doctors and hospitals, and medicines that appear on the prescribed medicine list ■■ What their chosen healthcare services providers charge Depending on each of these factors and how they interact, out-of-pocket expenditure can increase at a rate far beyond medical scheme contribution inflation, or can be closely controlled and not feature heavily in their budgeting. According to the latest PwC4 report on medical cost trends, where members don’t have adequate cover, they tend to sacrifice valuable medical attention, including early

Chapter 6

diagnoses and management of chronic conditions. Worsening health conditions can affect employers in the form of higher absenteeism or presenteeism, where employees are physically present but not productive. The South African Medical Journal5 notes that because NCDs are a leading cause of death in our working-age population, employers can face additional costs in the form of high staff turnover. They also note that obese workers cost their employers 49% more in paid time off than their non-obese colleagues.

Employees Employees are experiencing an ever-increasing cost in their healthcare expenditure. This includes higher medical scheme costs and greater levels of out-of-pocket expenditure. As a result, many employees buy less benefit-rich options and often don’t include all their dependants on their medical scheme plan in an effort to reduce costs. This can result in health complications, greater stress levels and a worsening of their physical and mental well-being.

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WHAT ARE THE MAIN CAUSES OF NCDS? The WHO reports that the following lifestyle risk factors can lead to NCDs:

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Physical inactivity

Unhealthy diet

Smoking

■■ Approximately 3.2 million people die each year from physical inactivity. ■■ People who are insufficiently active have a 20% to 30% increased risk of all-cause mortality. ■■ Regular physical activity reduces risk of cardiovascular disease, including high blood pressure, diabetes, breast and colon cancer, and depression.

■■ Inadequate consumption of fruit and vegetables increases risk of cardiovascular disease and cancer. ■■ Most populations consume higher levels of salt than recommended – salt being an important determinant of high blood pressure and cardiovascular disease. ■■ High consumption of saturated fats and trans-fatty acids is linked to heart disease.

■■ Almost 6 million people die from tobacco use each year. ■■ By 2020, this number will increase to 7.5 million, accounting for 10% of all deaths. ■■ It’s estimated to cause 71% of lung cancer, 42% of chronic respiratory disease and nearly 10% of cardiovascular disease.

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Excessive alcohol intake ■■ Approximately 2.3 million people die each year from excessive use of alcohol, accounting for approximately 3.8% of deaths in the world. ■■ More than half of these deaths occur from NCDs, including cancers, cardiovascular disease and liver cirrhosis.

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Government regulation The South African National Department of Health has promulgated mandatory salt regulations, beginning in 2016, to reduce the intake of salt. The World Health Organization recommends a daily intake of salt of not more than 5 g (about a teaspoon), but studies show that some South Africans are taking as much as 40 g of salt a day, increasing the risk of hypertension. This new legislation is expected to save a total of 6 400 lives from stroke, and 4 300 from non-fatal stroke, and cut hospitalisation costs by R300 million every year. Similarly, the newly announced tax on sugary drinks is expected to cut the number of obese people by 220 000 in three years. The Priceless Unit at the Wits Centre of Public Health concludes that ‘liquid sugar’ carries the biggest risk for diabetes. Drinking a sugary soft drink is equivalent to having at least eight teaspoons of sugar. They note that a can a day increases the risk of diabetes by 26% and being overweight by 27%. Children who drink a can a day have a 55% higher chance of being overweight.

Medical schemes typically encourage members to undergo screening tests to detect diseases early, resulting in better health outcomes and lowering the cost of treatment. Many medical schemes in South Africa have aligned themselves with wellness and loyalty partners. They provide members with financial assistance to access providers who can help them lead healthier lifestyles, by offering discounted gym memberships as well as smoking cessation and weight-loss programmes. Members are rewarded for their commitment to healthy lifestyles. Healthier members simply claim less than unhealthy members. Discovery Health Medical Scheme (DHMS) statistics reveal that members who engage with their wellness programmes save the scheme approximately R1 billion a year. Schemes also focus on disease management through targeted disease management programmes to assist members and providers to manage the treatment and associated risks of specific conditions.

Discovery Health Medical Scheme (DHMS) statistics reveal that members who engage with their wellness programmes save the scheme approximately R1 billion a year.

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Employers and wellness Employers who promote wellness within their employee base can benefit from a healthier workforce, increased productivity, reduced absenteeism and presenteeism. Healthier lifestyles reduce depression rates and healthier medical scheme members can benefit from lower medical inflation. This could allow for more affordable cover for many employees and yield workforces with greater access to healthcare services. This, in turn, may benefit employee engagement in the workplace.

Employees and wellness Employees who engage in healthy lifestyles reap all the benefits. They are in better positions to buy less benefit-rich options, freeing their budgets for other needs. They may be able to cover all their dependants on their medical scheme and are likely to experience an improved quality of life, and live a longer life.

Healthcare expenses for preventative measures will likely vary across different economic groups, and will depend on how much responsibility an individual is prepared to take for their own state of health. A person who considers their medical scheme responsible for future medical expenses is not likely to allocate current resources to improving future health, while someone who sees healthcare expenses as their own responsibility is more likely to take preventative action to ensure that future healthcare costs are as low as possible. Once employees reach retirement, with many employers doing away with post-retirement medical scheme subsidies, leading a healthy life during working years means they can choose more affordable cover for an extended period of time, while at the same time limiting out-of-pocket expenses.

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facilities differs based on region, facility and quality of care, but generally ranges between R13 000 and R25 000 a month. Many people who can’t afford these facilities spend as much as R16 000 on home-based care as they need multiple carers. Reducing and managing NCDs is beneficial to all stakeholders and to a healthy South African economy. The greater the focus on wellness, the more productive we can be as a nation, the more affordable our healthcare can be and the greater the access to health cover for all. This leads to an important question: How do we motivate individuals to take responsibility for their own state of health? This is particularly relevant in the current environment where lifestyle diseases such as diabetes, cholesterol and high blood pressure are so common.

Healthy members may also delay or limit the need for frailcare or homecare in their old age. Typically medical schemes don’t cover long-term frailcare needs. The cost of these

Typically medical schemes don’t cover long-term frailcare needs. The cost of these facilities differs based on region, facility and quality of care, but generally ranges between R13 000 and R25 000 a month. Many people who can’t afford these facilities spend as much as R16 000 on home-based care as they need multiple carers.

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Do older employees contribute to health-related costs? There are two dimensions to the question of managing employee health. The first is the cost of maintaining employees’ and their families’ health over their lifetimes. The second is how employee health costs impact on the employer. Over the past few years, employers have increasingly recognised how relevant managing health-related issues such as absenteeism and employee disability claims can be to containing costs and increasing productivity. Our research highlights a few areas where employers may be making unwarranted assumptions about what contributes to these costs. The question we address here is whether maintaining older employees actually increases the likelihood of health-related costs to employers or not.

For many employers, the combined pressures of global competition and low South African growth have meant that cost controls, productivity and efficiencies are top of mind. As such, more companies have started examining how absenteeism management might be an important way to address efficiency and costs. By managing employees’ attendance effectively, companies could control the largest expense item and the source of productivity. The importance of these cost controls are such that JSE-listed companies are now required to report on sickness absenteeism as part of the integrated annual report requirements. Psychosocial workload factors like increased job demands, fewer employees and low support have been associated with diminished health and increased absenteeism. Family-related factors like marital status and having children at home, and combining the demands at work and family life possibly resulting in work–family conflict, are also related to ill-health and sickness absenteeism. But the most obvious place to look for signs of deteriorating health is in the simple reality of an ageing workforce.

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At some point the physical limits of being human lead us to lower productivity. Company-imposed retirement ages were introduced as an equitable way of dealing with this without specific reference to individual circumstances. But there are also other agendas for when employees should be required to retire that may or may not be linked to real economic or cost considerations. To some extent, the earlier retirement age argument is driven by the belief that retiring employees open up the opportunity to replace these positions with younger, less expensive employees – an important consideration for a country that has effectively been brought to its knees by youth unemployment. Recent research by René Böheim on the effect of early retirement schemes on youth employment has highlighted the fact that the exact opposite may well be true. In certain business segments, maintaining experienced employees actually increases the likelihood of greater productivity and greater job creation. Our discussion here considers the other commonly cited consideration for low

retirement age costs: the perception that older age employees demonstrate increased healthrelated absenteeism and lower productivity. In one of the international studies in the British Medical Journal, Donders and others found that the determinants of sick absenteeism vary between different age groups. For example, the presence of chronic disease is associated with increased sickness absenteeism and is more prevalent in older people. Work–family balance is experienced differently between age groups and can be associated with sickness absenteeism, especially for younger employees. Findings from the Alexander Forbes Health sickness absenteeism database correlated with the cross-sectional study of Donders and others. We compare the age groups of 35–45 years and 55–64 years to determine the correlation of age and sickness absenteeism behaviour. The results of sickness absenteeism data over a year for a population larger than 63 000 employees are shown on the next page.

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more often, while the health problems that older workers are confronted with (not necessarily chronic conditions) often take more time to recover from.

Sickness absenteeism indicator Average for these age groups

35–45

55–64

% 2.25

% 2.55

Absence severity rate

3.4 days

5 days

Absence frequency rate

1.7 days

1.3 days

Sickness absenteeism rate

per incident

incidents per year

Use rate

of age group per year

The main findings include:

here is no significant difference in the T sickness absenteeism impact for the two age groups.

he second age group has a longer T average duration per incident.

he second age group has fewer T frequent incidents per year.

I n the second age group fewer employees use sick leave.

The Alexander Forbes Health findings correlate with the results of Donders and others that sick leave in the older age groups

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% 50.45

can partly be attributed to the presence of chronic diseases, supporting other reports that chronic diseases are a major cause of long-term sickness absenteeism. Donders and others found that compared with the under 36 age group, the over 55 age group had almost two times less chance of frequent sick leave, but 1.6 times more chance of prolonged sick leave. These findings support the results from earlier studies that older people are absent less frequently, although their absence is often more prolonged compared with younger workers. Younger workers seem to stay out of work as a result of minor health complaints

We’ve mapped out some strategies employers could consider to manage the impact of absenteeism and optimise productivity: ■■ As the absenteeism behaviour and trends of employees of less than 40 years could be influenced more by behavioural and circumstantial factors, there would be a bigger need for employee assistance and care support for female employees and family structures. This would also need absenteeism monitoring and management programmes to highlight higher use of individual employees and corrective strategies. ■■ As employees in the over 50 age group have a higher incidence of chronic medical conditions that could lead to prolonged sickness absenteeism and temporary and permanent incapacity, access to the medical aid benefit plan with relevant chronic options is essential. Employers should consider the cost and benefit of chronic disease care benefit programmes as part of the medical aid strategy and the impact of prolonged absenteeism and disability insurance programmes. ■■ Retaining skilled and experienced employees with the assistance of workplace rehabilitation and realignment programmes will not only assist employers to comply with disability requirements in the Employment Equity Act, but also optimise the value of their investment in human capital.

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WE CAN MAKE IT IF WE REALLY TRY â&#x20AC;&#x201C; CONTROLLING HEALTH COSTS

CONCLUDING THOUGHTS We strongly believe the solution is to be found in member education and communication. If individuals know that their future medical costs (and in turn retirement benefits) depend on how much time and effort they invest in their health now, they might start making some healthier choices for themselves and their families.

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OVERVIEW This edition of Benefits Barometer has been emphatic on one point: we can get much more value from our contributions if we pay closer attention to what we need to save for and when we need those benefits most. Nowhere is that advice more relevant than with our risk benefit choices – the one area that gets only a cursory glance from both members and trustees who focus more on cost than need. While we’ve lobbied hard to get employers to see the value of a lifecycle approach to risk benefit allocations, stakeholders are only beginning to appreciate the importance of evolving their thinking. This chapter highlights that the concept we’ve discussed before is working!

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Chapter 7

Why our current approaches may be failing members In our 2013 edition of Benefits Barometer we vigorously challenged the ‘one-size-fits-all’ convention of risk benefit coverage that appears so broadly with South African employers. That analysis looked at the rigidity of these ‘average’ benefit structures by assessing the potential shortfall in the level of death benefit cover as a multiple of salary relative to the required capital needed to target an assumed liability. In our case a spouse’s pension of 60% of pensionable salary at various ages on death. The required multiple was then adjusted to take into account assumed retirement savings at the various stages. The results can be summarised as follows:

Age band

Required multiple of salary

Adjusted multiple of salary, including ‘savings’

Actual multiple of salary

20–25

13.5

3.7

25–30

13.0

13.4

3.6

30–35

12.5

12.9

3.6

35–40

11.7

11.4

3.5

40–45

10.5

9.5

3.4

45–50

9.2

7.2

3.3

50–55

7.7

4.6

3.2

55–60

6.2

2.0

3.0

> 60

4.8

0.3

3.1

Source: Benefits Barometer 2013

We can get much more value from our contributions if we pay closer attention to what we need to save for and when we need those benefits most.

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The reality of these disheartening shortfalls can be summed up in a simple example: Let’s consider a 25-year-old member who passes away. The required death benefit cover (capital) to target the 60% spouse’s pension is 13.5 times the member’s annual salary, while the actual multiple insured is only 3.7 times annual salary. What does this mean?

25-year-old member

R250 000 annua

l salary

Actual death bene ﬁt, retirement saving including s

3.7 × R250 000

= R925 000

Required death be

neﬁt cover

13.5 × R250 000

= R3 375 000

R3 375 000 − R9 25 000 = R2 450 000 sh ortfall This example puts the potential shortfalls in context.

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But we also saw that exactly the opposite could occur in an undifferentiated approach to determining risk coverage. In many funds we have cases of older members with large multiples of life cover, but insufficient retirement savings. Since those 2013 and 2014 insights we’ve had to contemplate an additional factor: regulation that introduces and mandates a consideration of ‘Treating Customers Fairly’. Treating Customers Fairly (TCF) is an outcomes-based regulatory and supervisory approach. This means ensuring that products and services meet the member’s needs, fulfil their expectations and provide appropriate advice to suit their circumstances. Essentially the existence of TCF means that trustees and employers need to be far more circumspect when considering whether what they place on offer really addresses this best. The challenge is trying to find a balance between solving for the ‘average’ member and solving for a constantly changing member reality.

The potential shortfalls are significant. We have previously highlighted the plight of a younger member starting out in the working environment, where their retirement savings are relatively low or zero as they haven’t had enough time to accumulate savings. During this phase individuals may start expanding their families, incurring long-term debt such as a housing loan or vehicle finance, and even still be paying off their student loans. It’s clear that a death benefit based on the ‘average’ and on a low start-up salary would certainly not cover their debt, let alone provide for a family. Designing the offering with choice or introducing more appropriate defaults (or a combination of defaults with choice) would clearly take us some way towards addressing these inefficiencies.

Chapter 7

Our initial work on solving for this established that while it would be difficult to achieve an efficiency score of 100% in terms of whether the coverage was adequate over time, giving individual members the ability to choose higher cover at a young age and then maximise their retirement savings as they got older proved to be an efficient solution. In a lifecycle approach, the default and flexible death benefit is priced on the whole member risk pool (per one times annual cover) and not based on the age bands. This still allows for cross-subsidisation, which is beneficial for a larger number of members. The efficiency score reflects the extent to which retirement and death benefits can be met from the current contribution levels after purchasing disability income cover.

It’s clear that a death benefit based on the ‘average’ and on a low start-up salary would certainly not cover their debt, let alone provide for a family.

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How can we get better outcomes? Including such flexibility for individuals within the retirement fund or as a separate risk benefit scheme provides an employee benefit programme that is of much greater value than one that purely targets the average. Some of the options that have been used to introduce flexibility in the confines of the group arrangement are as follows:

Age-related approach to risk benefits ■ They provide a fixed multiple of cover per age. ■ There’s no cross-subsidy. ■ Because the cover is based on the age band, the lower level of cover within an older age band could cost as much as the highest multiple of cover for the younger members. ■ The higher cost then affects the allocation of contribution to retirement when older members need it the most.

Lifecycle approach to risk benefits The lifecycle concept for saving and investing is not new. Introducing a default lifecycle death benefit, with an opportunity for individuals to opt out, would complement the current range of choice found within a group arrangement: ■ It’s a needs-based approach to employee benefits design. ■ Individuals have the flexibility to structure their benefits to suit their personal circumstances. Members can structure

Here’s an example of an age-related structure Cover as a multiple of salary

6.0

4.5

3.5

3.0

2.5

2.0

18–39

40–44

45–49

50–54

55–59

60+

Years

168

their benefits based on what they are prepared to spend on death benefits relative to their projected retirement income. ■ Offering choice would mean that an appropriate level of default cover must be implemented. ■ Structuring the pricing as a percentage of salary roll and not on rate per age means there’s still cross-subsidy, which benefits all members.

Flexible approach to risk benefits ■ The individual can choose any level of cover within the range provided by the scheme – it could be based on full flexibility or a core level plus flexible benefit. ■ The pricing of this cover would be based on a rate per age. The cost increases as the individual ages, which could affect retirement savings. Therefore as the member gets older, it becomes more and more expensive, to the detriment of retirement savings. ■ In most instances, individuals will be required to provide evidence of good health before being able to increase their levels of cover.

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Chapter 7

GAINING MORE TRACTION However, despite the fact that we’ve seen efficiencies from a lifecycle risk benefit structure when compared with individual member investment choice which was introduced a number of years ago, this new way of structuring employees’ benefits has gained only minimal traction. Members opting for flexible benefits in standalone funds increased by 45% from the previous year in a 2015 survey1. The survey also highlighted that there had been a move away from a ‘core + flex’ benefit towards agebanded and lifecycle cover. While the sample surveyed is relatively small, it does suggest that flexibility within the group arrangement might be gaining a bit more traction. There’s certainly a growing realisation that group benefits can be designed more efficiently to assist individual members to achieve their personal outcomes. Additionally, there’s recognition that using group efficiencies is more cost-effective and enables individuals to access cover without proof of good health.

1 Sanlam, 2015

But while risk benefits are important, they have historically been treated purely as ancillary to retirement savings. As a result, the cost of these benefits has been the driver of the design of the overall offering, resulting in the gaps that have already been highlighted. The main concern is that an increase in the costs will negatively impact on the individual’s replacement ratio in retirement. Potentially the change in the cost could have an impact on the replacement ratio, but at the same time, the benefit offering is better matching the overall need of the individual throughout their journey to retirement. Clients can make use of our risk benefits tool to assess the potential effect on the replacement ratios to better assess the viability of offering flexible death benefits. The opportunity cost of saving more for the future can then be weighed up against immediate needs that may occur along the way. Typically, a small sacrifice in replacement ratio goes a long way to better covering the risk benefit needs in a lifecycle approach.

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22-year-old married woman

Assumptions Let’s consider a 22-year-old married woman, who currently enjoys death benefit cover of three times annual salary. Her spouse is 26 years old and they are targeting the 60% spouse’s pension in retirement. If she has the option to default into a lifecycle approach or opt out and access full flexibility, what is the impact on her replacement ratio? Based on actual data, we can see that the change in the risk benefit cost over her lifetime does not have a significant impact on her replacement ratio, even though she has had full access to choice or a benefit that changed based on her age.

spouse’s pension in retirement

26-year-old spouse

We have assumed

100%

Replacement ratio target

75%

Growth scenario

Retirement age

Spouse’s age

Spouse’s pension

60%

Guarantee period

5 years

Current cover – 3 times annual salary

Lifecycle approach

Current age

Salary

100 000

Salary

100 000

Salary

100 000

Investment amount

–

Investment amount

–

Investment amount

–

Net contribution to retirement savings

14.6%

Net contribution to retirement savings

14.8%

Net contribution to retirement savings

13.8%

Output of pensionable salary

170

Pension increase target

Buy up to 8 times annual salary

Output of pensionable salary

Pension

165 441

Pension

162 080

Pension

156 250

Replacement ratio

70.6%

Replacement ratio

69.2%

Replacement ratio

66.7%

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Funds offering choice have not lost sight of the fact that retirement savings should be maximised over time, but they do recognise that each member is an individual with different needs. A proviso in offering flexibility would be to ensure that individuals do not spend all their contributions on risk benefits only and that there’s balance between saving and protection, giving them the freedom to fine-tune their personal balance over time. This concept of balancing core benefits is a central theme of this year’s Benefits Barometer. Employers, trustees and management committees can effectively set certain parameters to protect these interests.

Where to from here? It’s evident that the shift from the employee benefits norm is to provide a solution that meets the needs of individuals throughout the various stages of their lifetime, recognising that no two individuals are the same. The approach should not only be holistic to afford the individual flexibility to structure their benefits – retirement, risk and healthcare – within the confines of a group arrangement, but also be cost-efficient.

Chapter 7

While all indicators might show that flexible risk benefits offer a better member-specific solution, the real challenge is changing the mindset of the various stakeholders in the employee benefits programme to move away from the traditional group structures and cater for a more individualised focused programme that uses group efficiencies. Importantly, compulsory group life cover is normally the only cover a member has, and in many cases may be the only cover they can get for medical or other reasons. For this reason, most rely on the employer and the fund benefits to ‘look after’ them and their families. The ability to provide more suitable benefits in the design of the offering is readily available. Making use of group economies of scale adds to the appeal. Last, but not least, being able to integrate this type of solution into a holistic long-term programme that creates wealth, grows savings and protects in the event of loss not only fulfils the requirements of TCF, but is in the best interest of the individuals represented within the funds.

It’s evident that the shift from the employee benefits norm is to provide a solution that meets the needs of individuals throughout the various stages of their lifetime, recognising that no two individuals are the same.

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CONCLUDING THOUGHTS We have come a long way in recognising that the purchasing power of the group can be used to provide a more efficient benefit offering for the individual and, while we recognise this, itâ&#x20AC;&#x2122;s time now to put this into action. These benefits fulfil a vital role in any individualâ&#x20AC;&#x2122;s financial plan and if they are not structured properly, this can have a devastating effect on the wellbeing of the individual in the event of disability and on financial dependants in the event of death. Providing more meaningful benefits for the individual goes a long way in meeting these targeted needs and, more importantly, allowing individuals the opportunity to access more suitable benefits through their trusted group arrangements.

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PART 2 Chapter 8

INVESTING IN THE FACE OF SCARCITY

OVERVIEW We investigate whether our concept of solving for multiple savings goals over the course of a lifetime is feasible. We describe in detail how much additional savings would be required to solve for each savings priority in its own right. If we tackle the problem the way individuals are currently tackling it, where we try to cope with all these savings challenges at once, the answer is we wonâ&#x20AC;&#x2122;t get very far. But we donâ&#x20AC;&#x2122;t end our story there.

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The problem of scarcity The challenge with discussing investments and investment strategy where we have to tackle multiple savings goals is that investing can only take you so far and only achieve so much without introducing imprudent risks. In a world of infinite savings goals, investment problems, like any other economic problems, require that we recognise our scarce resources and prioritise our choices. In its simplest form, each individual has a finite amount of money to allocate across their various needs: ■■ Immediate consumption needs (spending today at today’s living standard) ■■ Deferred consumption needs (spending tomorrow to maintain your standard of living) ■■ Future risks (making provision should something happen to impact on your earnings ability or potential) ■■ Aspirational needs (wanting to improve your standard of living). An individual’s resources are a combination of human capital (your skills that allow you to earn a salary) and financial capital (savings or assets). The challenge is that we never seem to have enough financial capital, while we heavily undervalue human capital or don't

1 World Economic Forum, 2015 2 Oxfam, 2016

use it effectively. This is the classic financial adviser’s dilemma – how to allocate an individual’s limited resources to their financial goals.

Financial inequality In the past few years, the World Economic Forum’s global outlook report1 has seen the ‘deepening income inequality’ rising to become the most important and key challenge of our time – the poorest half of the population often controls less than 10% of its wealth. This was further highlighted in the recent Oxfam report, Economy for the 1%, with the stark statistic that 62 of the world’s richest people have the same wealth as half the world’s population. This is a global economic crisis which Oxfam declares as ‘morally questionable’2. If history repeats itself, as it does, then this could result in significant social disruption on a scale far greater than the French Revolution. It’s a universal challenge for the whole world to address.

Chapter 8

generations. Research has shown that housing and children’s education are pivotal factors in providing financial security – and these in themselves are catalysts towards creating intergenerational capital, which in turn has the ability to reduce financial inequality. Our next question is: Can savings and investments contribute to a solution? Our key focus is to review the viability of a savings programme which allows an employed individual to meet basic financial goals that can provide financial independence up to retirement, while enhancing financial and human capital. And if we find a strategic solution, should not become an obligation for government, corporates, employers or other institutions to provide the means and resources to help develop effective sustainable frameworks to achieve this end?

One way is to emphasise initiatives that either enhance human capital, particularly of low-income earners, or translate human capital into financial capital and create the opportunity to grow wealth across

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The power of compounding If you go to a financial advice seminar, it’s likely that one of the sections would describe the power of compounding. This concept demonstrates that the earlier you begin to save – and therefore the longer the savings period – the greater the ultimate benefits of your savings. Assume three friends (Vusi, Nazia and Joe) want to save R1 000 every month for 10 years to buy a special gift in 30 years’ time. Vusi is disciplined and starts today. Nazia, less diligent, starts 10 years later. And Joe, a serial procrastinator, starts 20 years later.

Each puts away the same amount for 10 years, yet time is the greatest differentiator to their largely diverse outcomes. Nazia would have to put away R2 010 per month for 10 years to get to the same value as Vusi in 30 years, but Joe would need to save R4 040 per month! To solve the savings problem, we need to harness the greatest asset available to investments – time. The challenge of meeting multiple goals simultaneously, including retirement, emergency savings, housing, education and medical savings, requires as many levers in your investment toolbox as

possible: time, investment strategy, portfolio design, cost management, risk controls and liability modelling. In modelling this problem it becomes evident that the earlier you start the process, the more likely you are to meet these objectives, specifically when the available resources are scarce. This also suggests that sequencing investment decisions for multiple goals matters. The amount available for saving and the time you have need to work in tandem to maximise the probability of meeting your financial objectives.

Vusi, Nazia and Joe Vusi R703 122

30 YEARS

Starts saving today R1 000 x 12 months x 10 years

Nazia R347 842

Nazia would need to save

Joe R173 085

Joe would need to save

Starts saving 10 years later R1 000 x 12 months x 10 years

Starts saving 20 years later R1 000 x 12 months x 10 years

Figure 1: The power of compounding, assuming a 7% interest rate

176

R2 020 x 12 months x 10 years

R4 040 x 12 months x 10 years

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Chapter 8

Reviewing the savings problem The research conducted through this section of Benefits Barometer outlines core savings challenges individuals and households face. A significant part of the problem is structural, but behavioural elements also play a large role. An investment strategy can only be stretched so far before it falls apart. At that point, problems require different solutions, which can be structural, legislative, paternalistic or even behavioural. Our starting point is to assume that the following liabilities will need to be covered and will use up peopleâ&#x20AC;&#x2122;s capital over time:

Funding retirement

Dealing with emergencies

Buying a house (which enhances financial capital of the household)

Educating yourself and your family (enhancing human capital for the household)

Healthcare (maintains human capital, but also can be a major source of financial risk)

Funding risk benefits (protecting your income)

In modelling this problem it becomes evident that the earlier you start the process, the more likely you are to meet these objectives, specifically when the available resources are scarce. This also suggests that sequencing investment decisions for multiple goals matters.

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CAN AN APPROPRIATELY DESIGNED SAVINGS PROGRAMME GET A PERSON ACROSS THE LINE? 23-year-old male

As standalone goals, each of these problems seems relatively easy to achieve, especially when you use a simplified assumption set. In particular, the contribution for each individual goal is not considered significant. Letâ&#x20AC;&#x2122;s review the impact of each individual goal: We use a 23-year-old male starting out with a R72 000 per year salary â&#x20AC;&#x201C; we apply the Alexander Forbes salary and annuitisation assumptions in modelling the problems. The models are built using real returns.

Salary R72 000 per year

RETIREMENT FUNDING

Retirement funding: The replacement ratio (RR) estimates the percentage of the final pensionable salary earned that will be replaced by a guaranteed inflation-linked annuity in retirement. If your pensionable salary is R10 000 per month, then a 50% RR implies that you will receive R5 000 pension per month. We assume a post-retirement interest rate of 3.25%, five years full pension guaranteed, with 50% pension reverting to the spouse on death. The investment portfolio is assumed to achieve a flat real return of 4% net of costs for the period.

12.5% contribution to retirement at 63

replacement ratio

178

If your pensionable salary is R10 000 per month, then a 50% retirement ratio implies that you will receive R5 000 pension per month.

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The contribution rate is the total contribution (individual + employer) allocated to retirement savings. The projected RRs for each 2.5% contribution differential can yield vastly different outcomes – approximately 10% difference in income during retirement. A 12.5% contribution from age 23 to retirement at 63 should allow an individual to retire on a 50% RR, which is considered acceptable (even though it’s on the low side). Contributions of less than 10% are unlikely to create a meaningful retirement outcome.

Projected replacement ratio for different contribution rates 70 60 50 40 30 20 10 0 40

7.5%

10%

12.5%

15%

Figure 2: Projected replacement ratios for different contribution rates

A 12.5% contribution from age 23 to retirement at 63 should allow an individual to retire on a 50% replacement ratio which is considered acceptable (even though it’s on the low side).

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Emergency funding: It’s generally agreed that we need an emergency fund of between one-and-a-half to six months’ worth of salary. When you have no funds, the task of balancing how much you save and the time it takes to get you to your safety net is arduous. The investment strategies that underlie emergency funds are usually more defensive to create certainty. We assume a real return of 2% net of costs.

EMERGENCY SAVINGS

Target number of salaries = 6 months

Saving 5–10% of your salary takes you to one-and-a-half month’s salary between one and two-and-a-half years later. Reaching three months of salary will take more than five years if the total contribution is 5%. For the newly employed, salary increases generally exceed investment returns, making the timeframe slightly longer. An employer who matches the individual’s contribution, creating a total contribution of 10%, would get an employee to a three-month salary reserve within three years. Depending on how emergencies arise, maintaining the reserve would be similar.

0.61

0.91

1.21

1 year 5% contribution

1.16

1.75

2.33

2 years 7.5% contribution

1.69

2.53

3.77

3 years

2.18

3.28

4.37

4 years

10% contribution

Figure 3: Time required to save targeted emergency funds for different contribution rates

It’s generally agreed that we need an emergency fund of between one-and-a-half to six months’ worth of salary.

180

2.66

3.99

5.33

5 years

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Housing: House ownership does not just represent the creation of financial capital but has use beyond other investments. Therefore, it also elicits an emotional connection to the decision to purchase. Most people would want to maximise the value of the home they buy. This can be quantified within a rational affordability framework â&#x20AC;&#x201C; the relationship between a house price and income earned. In South Africa the price-to-income assumption is 3.3, which implies that R100 000 of income should afford a house with a total cost of R330 000.

HOUSING

Assuming the contributions are invested in the original 4% real return after costs portfolio, our 23-year-old young man should be able to buy a starter home of R250 000 cash by age 34, by saving 15% of his monthly earnings. This purchase date can be reduced by almost two years if he saves 19%. The problem is that he needs to fund his accommodation expenses for those 11 years out of his remaining disposable income.

Real value of home that can be bought at age 35 R400 000 R350 000 R300 000

R250 000 starter home R250 000 R200 000 R150 000 R100 000 R50 000 R

24 15%

26 16%

17%

30 18%

19%

Figure 4: Real value of savings for different contribution rates at each age

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23-year-old male

We therefore need to expand the understanding of the housing problem. We explore three scenarios to funding a starter home of R250 000:

1 2 3

Initial rent is 70% of a standard

Buy a starter home using a 100%-funded 20-year home loan (debt only). Save money for three years, improve creditworthiness, use savings for a deposit and pay a 17-year home loan, while renting a starter home (debt and savings). Rent a starter home until enough money is saved to buy one (savings only).

Other scenarios are simply variants of these three, with house price, savings period and rental type being the key elements that can improve outcomes or make them more severe. In extended families, staying at home can delay the need for rental and accelerate the savings process. We also recognise that a 23-year-old just starting work is unlikely to be accepted for a home loan on a R72 000 annual salary, or will receive such a loan on highly unfavourable terms. In the following example we penalise the interest rate received by 2% per year to reflect this. We assume that the initial rent is 70% of a standard 20-year bond repayment and increases by inflation annually. We further assume that interest rates remain stable through the period. We use a 15% contribution rate for housing savings. In all three scenarios the individual lives in the R250 000 starter house for the entire period.

20-year bond repayment

contribution rate

In extended families, staying at home can delay the need for rental and accelerate the savings process.

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In all three scenarios, the expected percentage of salary used on housing would be about 45%, decreasing over time as real salary increases and the real value of the repayment decreases (the home is paid off by age 43 in the debt scenarios). A savings-only solution of 15% would require 15â&#x20AC;&#x201C;30% additional funding towards rent until age 34, with the house being paid for completely. The total expense consumed by housing costs is highest in a savings-only model (if you rent the house that you could buy). This is because rentals increase by inflation while bond repayments stay the same if interest rates remain stable. The other models reduce the cash flow burden on the individual quickly, freeing up cash for other uses: after eight years they reduce below the original 15% contribution rate. However, in many instances the debt-only option is not available or is started on terms that make the savings-only option more attractive. Understanding this profile and variants thereof can assist in structuring effective pension-backed loans and other housing assistance schemes.

Proportion of income used R72 000 (per year) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 23

Debt only

Savings and debt

Savings only

Figure 5: Examining the effect of housing payments against salary

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EDUCATION

Education savings are complex: as the cost is the same for everyone but it cannot be directly linked to an individualâ&#x20AC;&#x2122;s earnings. Of course, different schooling systems have different associated costs, which will drive the final education decision. Additionally, there are fee exemptions and funding programmes that apply to families below a certain threshold. But for our purposes here we use the assumptions made in earlier chapters: that the real cost of putting a child through primary and secondary school will be R29 000 a year, with tertiary education costing R50 000 per year growing by 3% annually. We use a male aged 23 earning R72 000 per year, who has a child at age 25 and another at age 27.

Education costs Starting annual salary

Expected contribution every year 1 child

2 children

R72 000

20.6%

38.0%

R90 000

16.5%

30.4%

R108 000

13.8%

25.4%

R126 000

11.8%

21.8%

R144 000

10.3%

19.0%

R162 000

9.2%

16.9%

R180 000

8.3%

15.2%

Assuming a 4% real return on the investment, he will need to contribute 20.6% of his annual salary from the day he starts working, for 23 years if he had one child, or he would need to save over 38% from day one for 25 years if he had two children! This would be when his children graduate from university, and these obligations would no longer exist!

Fundisa

This is a government initiative enabling you to save towards an accredited qualification at either a public college or university. You are paid an annual bonus on the investment, which can be up to 25% of the money you save annually up to a maximum of R600 per child. If you save R100 a month (R1 200 a year), you will get another R300 a year. To receive the maximum bonus of R600, you have to save R2 400 a year. The bonus can only be used by a learner from a household earning less than R180 000 a year, although anyone can contribute. You can withdraw the money you contributed, but you will then lose the bonus.

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Chapter 8

Healthcare and medical savings: In the earlier healthcare chapter, the requirement to save for medical costs in retirement was discussed. Medical costs have a substantial impact on overall wellness, more so in retirement where the overall cost of managing your health can be considerable. Because health costs carry risk (unknown timing, unknown cost), saving to pay your medical aid contributions over this period may prove more advantageous than trying to save to cover actual costs as they arise.

HEALTH

23-year-old male According to the article the medical expenses for different levels of cover would be: Level of cover

Monthly contributions Medical scheme contributions

Out-of-pocket expenditure

Total savings

Lump-sum present value of savings

Expected 40-year savings rate

High

R3 631

R37

R3 668

R889 000

5.3%

Medium

R1 983

R115

R2 098

R509 000

3.1%

Low

R1 476

R1 165

R2 641

R639 000

3.8%

We will use our 23-year-old male earning R72 000 a year on a merit-based salary scale to model the savings rate required as a percentage of his salary over a 40-year period. Clearly, it pays on multiple levels to remain healthy as a medium-cover plan requires only a 3.1% savings rate compared with a 5.3% savings rate for the high-cover plan. Medical expense coverage up to retirement is considered a living expense and is therefore not considered part of an investment savings strategy.

Salary R72 000 per year

merit-based salary scale

40-year period %

3.1

savings rate required to pay for medium-cover plan in retirement

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Risk benefits are less about savings and accumulation and more about protecting your income. Still vital to overall financial wellbeing, we assume for our purposes here that a pension fund member allocates around 3% on average to life and disability cover.

RISK BENEFITS

Making a 3% assumption to allocate towards life and disability cover is a fairly safe assumption simply because risk benefit allocations tend to be something of a tick-box affair. The employer proposes what they think might be required - often based on what other companies in their sector are doing. This would seem to be a reasonable strategy from the employer’s perspective. Remaining competitive means making sure you are not offering less than your competitors. But there are three competing forces here that are worth noting that invariably lead to the outcome that the allocation to risk benefits is often a grudge purchase and therefore given inadequate consideration. To begin with, boards of trustees or management companies often place a primary focus on hitting replacement ratio targets. Every 1% of an employee’s contribution to risk benefits is 1% that won’t be allocated to the investment strategy that funds that replacement ratio. Over a 40 year time frame that would be the equivalent to adding another 1% of investment cost drag to performance. Considered in that regard decision-makers may well feel the inclination to minimize the allocation to risk benefits, particular in industries where those costs may be high. Employees themselves can be the problem because they look at those costs for risk benefits as deductions from their take home

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pay. In truth, few employees are able to understand what exactly those risk benefits translate into in terms of financial value to themselves or their families. As such, here is another reason why, if given a choice, many employees would likely forgo the risk coverage in return for increasing their takehome pay. But a third factor that contributes to risk benefits being a grudge purchase is that they have only a limited relationship to what employees and their families actually need over the course of their financial lives. Employers solve for the “average” employee when decisions are made about coverage. Cross-subsidization between a full spectrum of employees is what makes these costs “on average” cheaper than what the “average” employee could source internally. But the reality is that most individuals experience a life cycle of risk coverage needs. That means that at certain points they will be paying too much for risk coverage. This is typically when they are young and as such most inclined to find a way to get out of having to shoulder the costs. Then later in life, when they now have families and need this coverage most, it’s often unlikely they will go out and seek the additional coverage that they now require. This leads us to one important insight. As with our broader savings problem, risk benefits solutions work best when we can integrate a life cycle dimension that can ensure that we are always getting maximum value for the money we are spending. But we will get to that in our next chapter.

PART 2

INVESTING IN THE FACE OF SCARCITY

Chapter 8

CONCLUDING THOUGHTS Let’s understand what we’ve done to our Vusis, Nazias and Joes by trying to solve for each of these goals independently. Managing each goal independently would consume more than 73% of income. Add the 30% additional requirement for housing at the beginning and it’s exceedingly clear that a low-income earner would not even be able to survive from day to day. Meeting primary financial goals is practically impossible if we continue to define them as independent financial goals. In Part 3 we set out exactly how, through a complete rethink of the problem, we can actually go an astonishing distance to solving our challenges.

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PART 3 Introduction

BENEFITS BAROMETER 2016

A NEW APPROACH TO SOLVING FOR SAVINGS An integrated lifecycle savings programme significantly improves the probability of meeting lifetime goals.

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PART 3

BENEFITS BAROMETER 2016

Introduction

BENEFITS R

HEALTH

RISK BENEFITS

EMERGENCY SAVINGS

RETIREMENT SOLUTIONS

HOUSING

EDUCATION

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PART 3 AN ANSWER Chapter Chapter Chapter Chapter Chapter

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1: A new approach to solving for savings 2: Knowing your assumptions from your elbow 3: The final saving grace: the underappreciated annuity 4: Dawn of the digital adviser 5: Time for a benefits programme for South Africans

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OVERVIEW Weâ&#x20AC;&#x2122;ve seen why solving for multiple savings strategies is near impossible for a middle- to lower- income earner if we use a traditional approach to these funding problems. This chapter shows how a concept that borrows heavily from lifecycle investing can go a remarkable distance in achieving those goals.

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Chapter 1

CAN WE POSSIBLY HAVE IT ALL? Rather than applying a time-varying approach to allocating capital for each individual goal, we use a concept borrowed from lifecycle investing: we approach the problem by using a constant savings percentage towards all goals simultaneously which, provided the contribution is sufficient, dynamically allocates to the different financial goals. The solution adopts a combination of goals-based investing, lifecycle investing and liabilitydriven investing strategies.

We’ve built a simplified model using the following assumptions:

A man enters the workforce at age 23 and retires at age 63. We use Alexander Forbes annuity rates for males.

His real salary will increase according to the Alexander Forbes actuarial salary scale tables (not published).

He earns a starting salary of R72 000 a year.

23-year-old male

He starts the savings programme for all goals from the first day of working.

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His overall intentions are:

Get to at least a 50% replacement ratio on retirement.

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Build and maintain an emergency fund of three months’ salary.

Provide a full education (from age six up to tertiary) for his two children born when he is 25 and 27.

Fund and pay off a starter house with a real value of R250 000 within 20 years (using the savings and debt model illustrated in Part 2: Chapter 8).

A real return of 4% (after costs) is assumed for the investment strategy that linearly reduces to 2% over the last five years to retirement, representing less risky investment strategies during a period where an individual’s general risk aversion increases.

A post-retirement interest ‘rate’ of 3.25%, five years full pension guaranteed, with 50% pension reverting to the spouse on death.

The emergency fund is topped up every five years. It assumes 0% real growth and that 50% of its value is drawn down through each five-year cycle.

Primary and secondary school costs are R29 000 a year. Tertiary education costs are at R50 000 a year funded for four years. Education costs grow at at 3% above CPI inflution.

10 11

The real value of the house purchased in 20 years is at least R250 000.

Risk benefit costs are ignored for this simplified model, but these would be based on a lifecycle model of expenditure of its own. We discuss this lifecycle risk benefit concept in Part 2: Chapter 7.

Tax effects are not considered.

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Chapter 1

Modelling outcomes and insights Estimated cashflow profile (from age 23 to age 63) R150 000

60%

Contribution

30%

Liability

R50 000

Replacement ratio 0%

-R50 000 -30%

-60%

-R150 000

-90%

-R250 000

-120% -R350 000 -150%

-R450 000

-180%

Age Figure 1: Expected cash flow profile over 40 year working lifetime 23 to 63 years

Based on the assumptions, the model solves to a 46.2% lifetime contribution from age 23 to retirement at age 63 to approximately meet all objectives: ■■ The individual achieves a 51% replacement ratio. ■■ He can pay off his home of R250 000 within 20 years at age 43. ■■ He has funds to dip into for emergencies. ■■ He can pay for his children’s education.

A 46.2% constant contribution, although meeting the investment objectives, would not provide the required means to support day-to-day living for an individual earning R72 000 a year, especially during the early years. At this contribution rate, despite the expected benefit, the savings programme would not be feasible against more immediate consumption needs. At R60 000 a year this rate jumps to almost 55%.

Absorbing housing costs, which include rental costs and interest rate funding early in the lifecycle, would force contribution rates to above 55%.

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Another significant factor to the high contribution required is the requirement of capital from the time a person is employed to the time a child needs to start school. Research presented earlier in the book outlines the need for effective primary education to maximise the chances of the future human capital trajectory. Accessing good early education for the child is clearly imperative. This is one of the areas where investments canâ&#x20AC;&#x2122;t be stretched to create healthy outcomes. Good, cost-effective schooling is a social imperative that can only be met with significant sacrifice by most employees, if these are the true costs they face. A further insightful observation is that a constant allocation towards each savings goal is ineffective. Despite a constant overall savings rate, the allocation to retirement savings remains negligible until the costs for a home and education costs are paid. Retirement savings as measured by the replacement ratio is almost zero at age 48. This variable allocation would be consistent with the principles in lifecycle investing.

For the savings programme to succeed for low-income earners, we need to explore other levers where investments can lower the overall contribution:

Using the power of time by effectively providing more time to contribute and grow capital before school expenses are needed and more time to recover to retirement

Introducing subsidisation by understanding the level of subsidisation required to provide an equitable balance for low-income households.

A further insightful observation is that a constant allocation towards each savings goal is ineffective. Despite a constant overall savings rate, the allocation to retirement savings remains negligible until the costs for a home and education costs are paid.

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Chapter 1

Using the power of time We see the power of compounding quite dramatically if the individual started work two years earlier at age 21 and retired two years later at age 65:

Estimated cashflow profile (from age 21 to age 65) R150 000

60%

Contribution

30%

Liability

R50 000 0%

Replacement ratio

-R50 000 -30%

-60%

-R150 000

-90%

-R250 000

-120% -R350 000 -150%

-R450 000

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

-180%

Age Figure 2: Expected cash flow profile over 44 year working lifetime 21 to 65 years

Based on the assumptions, the model now solves to a 36.5% lifetime contribution to meet all objectives: ■■ The individual achieves a 51% replacement ratio. ■■ He can pay off his home of R250 000 within 20 years at age 41.

■■ He has funds to dip into for emergencies. ■■ He can pay for his children’s education.

this nature should be implemented as early as possible, 36.5% still remains high.

This is almost a 25% improvement, which can significantly improve the use of and commitment to the savings programme. While this demonstrates that additional time is meaningful and any savings programme of

To address this, we’d like to see schooling and employee programmes introduce behavioural and educational programmes that highlight the value of compounding.

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Subsidisation: what expense structure can we tolerate? The liability streams of these savings goals are onerous, particularly the education expense, which is also the most important element for ensuring social mobility from one generation to the next. The inability to finance this cost not only impacts on a family but on the country as a whole, as it will fail to improve the social fabric of its communities, creating a deeper reliance on the government. If we remove the requirement to fund education, itâ&#x20AC;&#x2122;s possible to meet the remaining goals with only a 20% contribution, while funding the house quicker, within 16 years.

Estimated cashflow profile (from age 23 to age 63) R150 000

60%

Contribution

30%

Liability

R50 000 0% -R50 000 -30%

-60%

-R150 000

-90%

-R250 000

-120% -R350 000 -150%

-R450 000

-180%

Age Figure 3: Expected cash flow profile (no education costs) over a 40-year working lifetime 23 to 63 years

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Replacement ratio

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Table 1: Contribution rates required for different levels of salary Starting annual salary R72 000

R84 000

R96 000

R108 000

R120 000

R132 000

R144 000

34.0%

32.5%

31.1%

Expected contribution every year to meet all goals 46.0%

41.7%

38.5%

36.1%

This table demonstrates that unless the real income of a 23-year-old exceeds R144 000 a year, reflecting only a small percentage of highly qualified graduates, the savings programme will require lifetime contributions above 30%. We don’t see this readily being taken up as individuals will struggle to relate the use of this deferred consumption (although probable) to immediate consumption needs.

To improve this, we need to reduce the contribution rate. The only way we can envision this is by introducing some form of subsidisation against the costs. Subsidisation includes any programme or process that will reduce the overall cost of the goal and thereby reduce the contribution rate. This can be across any of the expenses

Chapter 1

in the savings programme. However, given the impact of education, we take an explicit look at approaches to reduce these costs surrounding education: ■■ Direct subsidies: public school feeding programmes, public school textbooks ■■ Regulated exemptions: government notice October 2006, for example, introduces a section for the exemption of the payment of school fees in public schools ■■ Indirect subsidies: Fundisa ■■ Matched (or partial) employer subsidies: contributions made by the employer to match contributions made by the employee for certain specific payments such as school fees or uniforms

Table 2: Expected outcomes on a 30% contribution Annual starting salary R72 000

R84 000

R96 000

R108 000

R120 000

R132 000

R144 000

Final projected replacement ratio

-12.2%

4.4%

16.8%

26.5%

34.2%

40.6%

45.8%

Maximum shortfall through lifetime

-R1 055 500

-R768 700

-R482 000

-R195 200

Subsidisation on education to meet all goals

60%

52%

43%

34%

26%

17%

Assuming that a 30% contribution rate is acceptable, let’s review its impact on the ability to meet the goals, measured by: the projected replacement ratio, which is the last of the financial goals to be met any shortfall in funding the savings goals at the required time. For earnings less than R108 000 a year, a 30% contribution will result in: ■■ replacement ratios becoming significantly low, as a person earning R72 000 a year will be in debt on retirement

■■ a funding gap at some stage in the cycle, as a person earning R72 000 a year will experience a severe funding shortfall of over R1.055 million. The table also reflects the amount of subsidisation required on education costs to meet all goals. For someone earning R72 000 a year, the cost needs to be subsidised by 60%. As school fees are just a component of the education costs for primary and tertiary

education, a 100% waiver on fees will only translate to about a 30% reduction (assuming R9 000 school fees), but more than 60% for tertiary education. This implies that over the early years an individual (translated into a household) will require greater assistance to access and support children at school. A higher-earning individual will also require assistance but a 33% reduction in school fees will have the required impact.

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DESIGNING THE INVESTMENT STRATEGY The traditional form of investing, which maximises expected return for a given level of risk, usually measured as volatility or the standard deviation of the expected returns, has proven woefully inadequate to meet the demands of an individual’s or household’s financial needs. A different approach is needed, one which recognises: ■ the purpose and importance of the savings goals ■ how much is actually needed (the liability) ■ when it’s needed, over what horizon ■ what risks the savings goals are exposed to ■ how much of this risk can be tolerated ■ what happens if the individual doesn’t meet the objective at the right time ■ how much is available to meet this goal. That being said, the future remains uncertain, and we can’t factor in all outcomes. But what is important is that a strategy takes cognisance of known factors and adapts to these risks. This is the basis of goals-based investing. Goals-based investing is an application of an institutional technique called asset-liability management, which is a framework for ensuring that future expenses (liabilities) are funded as they are expected. An asset-liability model remains the critical approach for most defined benefit pension plans. One of the key techniques applied is a stochastic estimate of the value of each liability for each date in the future. This, in turn, applies an asset-based investment strategy that focuses on meeting the ability to fund each and all liabilities as they become due. The goals-based investment framework adopts the same philosophy in a far more generalised form: ■ Define and prioritise multiple unique savings goals over different horizons ■ Identify the types of risk each savings goal is exposed to ■ Differentiate their capacity to take risk for each objective ■ Establish specific success criteria for each objective ■ Adapt and restructure their strategy as time, markets and circumstances change.

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Chapter 1

Goals-based solutions are built on three main approaches:

1 Static methods construct portfolio solutions that use a long-term, static, strategic asset allocation that can achieve predefined investment outcomes. We generally apply a stochastic simulation to optimise the match between the returns and liabilities. It’s usually a long-term simulation that doesn’t recognise shortterm market risks. This is the weakest approach to solving the problem. It goes beyond the traditional approach to solving the investment problem by varying the definition of risk to go beyond simple volatility by including alternative measures such as funding level risk and capital loss.

2 Dynamic methods apply dynamic asset allocation techniques to change the asset strategy mix of an individual portfolio based on market movements, risk exposures and maximising the probability of achieving target objectives. As the goal has greater certainty of being met, these portfolios will reduce the risk they take. This is similar to liability-driven investment strategies that institutional pension fund assets use. In many instances, these solutions can explicitly target and achieve those targeted outcomes.

3 Independent individual solutions start with the existing assets of the individual and then build a dynamically managed optimal portfolio that could include an infinite range of assets and securities. We can consider this as an individual asset-liability modelling exercise that’s constantly adapting. Unfortunately, this type of modelling doesn’t add significant benefit to a savings problem with no financial capital, which is the general case for South Africa.

Goals-based frameworks differ from traditional performance-based frameworks in that success is not measured by beating a market benchmark, a peer fund or ensuring that the investment strategy is on the efficient frontier. It requires the investment strategy to consider the context of the liability, the horizon and the specific risks of failure. Goals-based investing shifts the typical investment conversation from best performing products towards establishing the correct financial outcomes. It follows that determining the correct goals, managing to meet those goals, maximising the probability of success, and helping the individual understand the impact would lead to better financial behaviour and outcomes.

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CONCLUDING THOUGHTS The average individual will probably face the same savings challenges over their lifetime. In trying to meet them, itâ&#x20AC;&#x2122;s likely that they would try to achieve these goals independently, resulting in severe cashflow pressures at multiple stages as well as debt. The objective here is to get people to understand that the high savings rate provides a better lifetime use of earnings than trying to achieve these goals on their own. A lifetime savings programme is more efficient in achieving multiple goals in a structured way. However, given the low levels of income that many individuals have to survive on, accessing similar savings through retail channels can also be expensive. A public-, industry- or employer- driven solution can aggregate costs and administer such a programme more effectively. The issue is less about who does it, than it is about ensuring that someone fulfils that role. Another challenge is that the cost of education and housing is high relative to earnings. As such, either contribution rates are higher or costs subsidised meaningfully for each earnings group. Raising salaries only creates inflation, which may drive these costs up even more.

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PART 3 Chapter 2

KNOWING YOUR ASSUMPTIONS FROM YOUR ELBOW

OVERVIEW This chapter stands as a cautionary note â&#x20AC;&#x201C; not just for some of the modelling that we have presented in this edition of Benefits Barometer, but for the type of financial outputs on which any number of critical trustee and member decisions are based. In a way, this chapter represents a slight aside, where we can take a bit of time to reflect on how hugely dependent these outputs are on the quality and integrity of the assumptions that underpin the modelling. The inclusion of this chapter, as such, is essential if we are going to draw realistic conclusions about the limits of all modelling exercises.

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Chapter 2

THE MERITS OF AN INDUSTRY-WIDE PROJECTION ASSUMPTION SET Consider this for example: There’s evidence that commercial weather forecasts have been deliberately and materially changed to appeal to human biases. The theory of ‘wet bias’ suggests that weather forecasters deliberately exaggerate the likelihood of rain. The New York Times1 explains: “People don’t mind when a forecaster predicts rain and it turns out to be a nice day. But if it rains when it isn’t supposed to, they curse the weatherman for ruining their picnic.”

Behavioural biases

Unfortunately our behavioural biases often do more than trick us. They create perverse incentives for experts we trust to advise us – incentives to tell us what we want to hear. The same is true of financial advice. As consumers, we are often presented with financial modelling and projections. If you are a member of a retirement fund, you likely receive a statement illustrating the retirement income you might receive some day. Adverts for savings products might show how much your money could grow to or how much tax you’ll save when using a tax-free savings account. Your financial adviser is likely to show you projections for different investment strategies you may be considering. Without exception, the conclusions these exercises present are a product of the assumptions employed in the modelling process.

1 The New York Times magazine, 2012

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clients might incorrectly assume the first is offering a better solution. This creates an incentive for advisers to exaggerate the returns clients could expect to try to land more business. ■ People prefer to hear good news about things they are responsible for managing. Showing realistic, but negative projections can leave trustees despondent and possibly less enthusiastic about your advice and services. ■ Consumers and consultants alike may find it close to impossible to determine whether the assumptions used in these projections are realistic or even representative. ■ The subjectivity and the difficulty in setting these assumptions make it relatively easy for advisers to bias estimates and include at least some of ‘what people want to hear’ in their forecasts.

Why should this be a source of concern? To begin with, the particular assumptions required for these exercises are notoriously difficult to set. Examples include how long people are likely to live, what sort of salary increases they will experience, how interest rates will move, whether asset class returns will persist and what the level of inflation is likely to be decades into the future. More importantly, the output from these exercises can cause conflicts of interest for professional advisers and confusion for the consumer: ■ Many consumers mistake overly optimistic projections by one adviser as evidence of superior skills or know-how. If two competing advisers illustrate similar advice, but the first uses more optimistic investment return assumptions, many

TODAY

SUN

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Clearly high-quality assumptions are important as people use these forecasts to plan their lives and finances. How can we as an industry protect against the implications of poor assumption setting? MON

TUES

WED

THU

FRI

SAT

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One possible solution When selecting a cellphone contract today, we take it for granted that we are presented with a simple, transparent, total monthly cost. We can use this cost to compare different cellphone contract deals. This was not always the case; historically cellular contracts in South Africa were advertised with a plethora of charges and costs in fine print. This made it difficult for the average consumer to really understand what they would pay in total and to compare different offers. This practice was stopped to protect consumers and the industryâ&#x20AC;&#x2122;s integrity when the Advertising Standard Authority adopted revised standards.

Benefits of a standardised assumption set Letâ&#x20AC;&#x2122;s consider some benefits of a standardised assumption set. For the purpose of this chapter, we limit this to assumptions for any illustrative modelling and projections aimed at retail consumers and non-professional pension fund trustees. We donâ&#x20AC;&#x2122;t include assumptions for statutory valuation purposes in pension funds or modelling done for professional investors and commercial institutions. As such, these benefits would be as follows:

Standardised Some have suggested that the financial services industry adopt a similarly standardised approach when it comes to underlying assumptions. This would offer a single, consistent basis across the industry for formulating advice and comparisons of strategies. In this chapter we look at the merits of this suggestion. The merits discussed apply equally for an industrywide stochastic model rather than a simple assumption set only. We stress, though, that there are many other tools, other than a standardised assumption basis for tackling this problem, but this is the option we will consider here.

Comparing the effectiveness of different strategies: Investors can make meaningful comparisons between different products and advice frameworks or strategies. Ensuring minimum standards: A high-quality, realistic assumption set is an important foundation for meaningful financial advice. Small providers may find it difficult to invest the large effort and costs required to maintain a robust assumption set. Conflicts of interest (as discussed above) also create perverse incentives. A standardised assumption set will improve the minimum standard of modelling seen in the industry and ultimately the quality of advice clients receive.

Reducing the technical governance burden and replication of work: Investors will be able to use the assumption set with confidence without the technically complex and onerous task of evaluating the reliability of the assumptions made. This will free up governance capacity and reduce wasted, replicated efforts. This does assume the standardised assumption set is of a high quality, sufficiently detailed and appropriate for use within advice.

Potential use within regulation: A standardised assumption set could provide the building blocks for improved guidance on best practices or regulation to trustees and advisers on the outcomes expected from their strategy design.

Insights into the impact of costs: Comparisons of cost are notoriously difficult within financial services as a result of complex fee structures, multiple layers of fees and varied timing of costs. Policymakers have been working towards more transparent disclosure of fees across the financial services industry. Typically fee comparisons require modelling and assumptions. An industry assumption set would bolster the credibility of any such calculations.

Chapter 2

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Drawbacks Now let’s consider some of the challenges associated with an industry-wide assumption set:

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It’s very difficult to set (and maintain) these assumptions and equally difficult to gain general acceptance: The subjectivity of assumptions and the difficulty of setting these assumptions mean ideally one requires the inputs of a large number of highly skilled individuals with varied technical backgrounds on an ongoing basis. Differences of opinion inevitably exist, making it difficult to agree on a common view. As a result, this is a costly, complex and contentious task. Obtaining the buy-in from financial advisers and consumers is equally challenging.

Challenges implied by the range of uses: An industry-wide assumption set necessarily gets applied to a variety of uses, often implying conflicting needs. Some products might require accurate one-year modelling and assumptions while others require 40-plus years. Meeting these varied needs with consistent, compatible approaches is challenging.

It isn’t clear who would be best placed to create and maintain the assumptions: The costs or resource opportunity cost of properly monitoring and maintaining a good assumption set will be a burden. Would a profession such as the Actuarial Society of South Africa be able to commit adequate resources to a project like this? The entity will also need to be perceived as unconflicted; industry bodies such as the Association for Savings and Investment South Africa (ASISA) might not be perceived this way. Would regulatory bodies such as the Financial Services Board (FSB) have adequate internal skills to earn the trust and acceptance of the industry and clients? The previous regulatory body in the United Kingdom, the Financial Services Authority (FSA), did attempt to maintain an assumption set for retail consumer modelling, though new regulations leave providers with flexibility in setting assumptions (for example in statutory money purchase illustrations).

There’s a lot more to consistent modelling than salary increases, asset class returns and mortality assumptions: Achieving absolute consistency (and being able to force accountability in comparison) requires consistent modelling techniques, calculations and metrics. Even with consistent modelling, consultants or firms might choose to illustrate the usefulness of different strategies using different measures. For example, one firm might show how their approach offers small probabilities of very poor outcomes. Another might show how their strategy ensures an attractive upside. Which is better? Clients continue to be vulnerable to the quality and integrity of interpretation and advice, even if the modelling is consistent.

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Chapter 2

HOW ASSUMPTIONS AFFECT REPLACEMENT RATIOS Replacement ratio projections provide pension fund members with insights into what percentage of their final annual income is likely to be replaced after retirement, given their pension fund savings. These projections are derived from current contribution rates, current fund credits, assumed retirement age and, importantly, assumptions about future salary increases, assumptions about asset class returns, and assumptions about inflation. These last three assumptions require a considerable measure of insight and experience to derive. Perhaps the one input that employers or trustees of pension funds could assess for themselves is the assumptions around salary increases. Note that not all companies ascribe to the same increase policies. But if the salary increase assumption applied for your company isn’t a material reflection of how salary increases are experienced in your company, this can have a material impact on the outcomes for members. The following example on the right illustrates this point. We have used a standard set of assumptions to calculate a projected replacement ratio for a 25-year-old male saving towards retirement at 65. In our base case, we have applied the standard houseview salary increase scale for Alexander Forbes. We have now varied this assumption by ±1%. Note the significant difference in replacement ratio outcomes.

25-year-old male A projected replacement ratio

Saving towards retirement at

Salary scale

Base

+1%

-1%

Replacement ratio

61%

50%

77%

By that same token, making assumptions about future investment returns is fraught with problems. Is the past likely to persist into the future? Usually any number of caveats apply to any projections. But we need to consider two types of return assumptions. The first is the projected long-term return on the range of asset classes reflected in

the strategy. Here industry convention has provided us with a number of valuation tools that allow us to examine very long-term histories of those asset classes (plus 50 years). There are many different valuation models that can be employed, and most analysts use combinations of models. As such, one can well imagine how much variation might be found throughout the industry. But what trustees should be looking for is a level of robustness in the final model so that the valuations seem sensible under a range of economic circumstances. But the second type of return assumptions that sometimes sneaks its way into performance projections relates to the persistence of the active management performance contributions. Take the last five years of sterling active outperformance and project that forward 35 years – in spite of the fact that there’s no way the same asset management team that produced that performance would still be on the job. Sadly, this is a favourite marketing trick, although most professional codes of conduct forbid this practice. In no way should these be allowed to be part of long-term projections.

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CONCLUDING THOUGHTS There are a number of obvious benefits to an industry-wide, standardised assumption set. Consumers of financial advice could make more meaningful comparisons between providers, with a reduced technical evaluation burden. Unfortunately there are also a number of challenges to creating, agreeing on and maintaining such a tool and limitations to its use. Modelling should be recognised as a tool for better understanding financial problems. Modelling is not a definitive guide to the future, nor is it the only input that should be considered when planning or making comparisons. The limitations of an industry-wide assumption set would arguably be acceptable, if understood and recognised by clients and advisers. Unfortunately that still leaves the challenge of who is best suited to creating and maintaining such an assumption set and whether it would gain widespread acceptance and trust. If we can’t arrive at a point of standardised assumptions, then our next best option is that consumers of financial advice, especially institutional investors such as pension funds and financial advisers, should make an effort to interrogate the reasonability of the assumptions used by the service provider. Ultimately these assumptions drive the advice they will provide. It’s far more important not to fall victim to unfounded, optimistic promises though. Avoid choosing an adviser or product purely on a more positive modelled outcome unless the advisor can explain (in terms you can understand) why the strategy is superior to a competitor’s advice or product. When in doubt, get a second opinion. In general though, reputable financial institutions will avoid this sales technique to protect their reputation.

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THE FINAL SAVING GRACE: THE UNDERAPPRECIATED ANNUITY

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OVERVIEW Now we need to ask a different question. If funding a minimum floor for retirement income is such a vital part of planning, why is it always such a thankless battle to get individuals to buy an annuity (pension)? This chapter is dedicated to getting to the bottom of that resistance.

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PRIORITISING RETIREMENT SAVINGS We started our discussion in this edition of Benefits Barometer with the February 2016 pause â&#x20AC;&#x201C; that moment when National Treasury announced that they were postponing the Taxation Laws Amendment Act of 2015. We then discussed how we could perhaps move beyond that impasse by allowing individuals to use these long-term savings to address more priorities than income protections. We are in no way suggesting that individuals should abandon retirement savings altogether. Even the Singapore model stressed that no matter how individuals prioritised their goals for long-term savings, the first port of call was to solve for that minimum income that would ensure that they didnâ&#x20AC;&#x2122;t become dependent. So how do we get people to see the value in these products?

Where we are with annuities Everyone can agree that South Africans do not have the best retirement outcomes. At the end of 2015 we found that individuals were retiring from our funds with an average

1 Alexander Forbes Research & Product Development, 2015 2 Sanlam Benchmark Survey, 2015

replacement ratio of 31.8%. Only 4.7% of the people retiring during 2015 had a replacement ratio of 75% or more1. Moreover, the 2015 Sanlam Benchmark Survey found that around 30% of the retirees surveyed had spent their retirement lump sum within two years2.

ONLY 4.7% of people retiring during 2015

had a replacement ratio of

of the retirees had spent their retirement lump sum

within 2 years

or more

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At the moment, the only disincentive that provident fund members have against taking their full benefit in cash is tax. The way that benefits are taxed on retirement should indicate to an individual what proportion of their benefits they should be annuitising (use to buy a pension). However, evidence from our Member Watchâ&#x201E;˘ database shows that people are more likely to take cash at retirement.

Number of retirees choosing to take cash rather than annuitise by benefit size

Number of members

2 500

2 000

1 500

1 000

500

R0 to R25 000

R25 000 to R100 000

R100 000 to R150 000

R150 000 to R200 000

R200 000 to R500 000

R500 000+

Benefit size at retirement Cash

Annuitise

Source: Alexander Forbes Member Watchâ&#x201E;˘ database, 2015

Poor retirement outcomes led the National Treasury to table draft default regulations on 22 July 2015, setting out the requirement for all funds to provide an annuity strategy that was appropriate for their membership. Once the law is enacted, we know that funds will have to comply and offer annuities. But unless we address the aversion issue that individuals face, the exercise is unlikely to get the desired results.

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WHY DON’T PEOPLE ANNUITISE?

? Making the decision to buy an annuity at retirement involves handing over funds which have taken years to build up to someone else: an insurer. Buying a guaranteed annuity carries the risk for the member that they die soon and so lose these funds to that insurer. They may actually view the purchase of an annuity as taking a gamble on their own life expectancy. The more risk-averse member may actually view buying an annuity as taking a certain, known amount of cash and swapping that for an uncertain and inflexible stream of much smaller payments3. In a joint study between Alexander Forbes and Just Retirement, we found that almost two-thirds of retirees are likely to decide for themselves what to do with their pension money, without advice4. But there are a multitude of reasons why someone may choose not to annuitise and to take cash instead:

What’s in a word? Compulsory annuitisation is scary on two fronts:

1 COMPULSORY effectively means that people lose their freedom to decide – something that South Africans have started to enjoy only recently, given our 20 years of democracy.

■ They don’t know what an annuity is. ■ They don’t understand the value of buying an annuity. ■ They don’t trust advisers or understand financial jargon. ■ They have a low level of financial literacy and aren’t confident in making financial decisions. ■ They simply aren’t interested in the retirement income problem.

3 Van Zyl, 2016 4 Alexander Forbes and Just Retirement, 2016 5 Investopedia, 2016

ANNUITISATION can be an even more daunting word than ‘compulsory’. Investopedia defines an annuity as a “contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitisation, pay out a stream of payments to the individual [at that] point in time”5. Ask the average person for a definition and they would struggle to get even the basic concept right. So what does this mean? Well, we believe that to demonstrate the value of annuitisation to an employee, you need to get them to understand the principles of annuities, starting with what they actually are.

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UNDERSTANDING THE VARIOUS TYPES OF ANNUITIES AND THE BENEFITS THEY OFFER There are five main types of annuities with variations of each available from insurers:

1 2 3 4 5 R

Level annuities: The pension income does not increase.

Fixed-increasing annuities: The pension income increases by a specified percentage each year.

Inflation-linked annuities: Annual pension income increases are linked to inflation, for example 75% of inflation.

With-profit annuity: Pension income increases are based on the performance of an underlying pool of assets.

Living annuity: An individual invests their capital value at retirement and draws on that and its investment income at a rate thatâ&#x20AC;&#x2122;s allowed by the South African Revenue Service (SARS). Besides the living annuity, most annuity types are guaranteed in that the insurer promises to pay an income stream for as long as you live. Of course thereâ&#x20AC;&#x2122;s the risk that the insurer goes out of business, but capital adequacy requirements make this highly unlikely. Individuals may never understand all the complexities around annuities, but the information they are shown when making their product choice often leads to most retirees selecting level annuities or living annuities because they provide the highest starting income.

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The following figure demonstrates how the income under the first four types of annuity can change over time. Notice that although a level annuity provides the highest initial income, it takes roughly eight years for the other annuity types to outstrip this level of income. Importantly, the other annuity types provide income thatâ&#x20AC;&#x2122;s intended to maintain an individualâ&#x20AC;&#x2122;s living standards over time and so the increase that they provide end up being very important.

Annual pension at age 60 (male) for R500 000 investment Annual pension

300 000

200 000

100 000 0 60

Age Index-linked (3.5% post-retirement rate, or PRI) Guaranteed escalation 5%

Inflation-linked

Level annuity

Source: Finweek, 2016

The graph also highlights an interesting issue for with-profit annuities. Over time these annuities may provide the highest level of income, but they are arguably the most complicated because of how bonuses (or interest payments) are added over time. Retirees need to understand both the benefits and the risks of the products they are taking up.

Retirees need to understand both the benefits and the risks of the products they are taking up.

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One of the other reasons people are inclined to opt for living annuities at retirement is to ensure that they leave something behind for their families.

One of the most commonly missold types of annuities is the living annuity. People donâ&#x20AC;&#x2122;t recognise how having a high drawdown rate can eat into their capital and put them at risk of running out of money long before they pass away. As a way to mitigate this risk, some providers set a minimum capital amount an individual needs to have to take up the product. One of the other means of mitigating this risk is to automatically switch people out of the living annuity and into a guaranteed annuity (or one that provides an income for the rest of their life) when the

individualâ&#x20AC;&#x2122;s fund account falls to a certain level. In fact, one of the recommendations in the draft regulations is to give the employer or trustees the right to automatically switch retirees out of living annuities when their fund values fall to a low level. The draft regulations also set out a series of age-related drawdown rates for living annuities, for example members younger than 60 may not draw more than 7% per year, members between the age of 60 and 65 may not draw more than 8% per year, and so on6. One of the other reasons people are inclined to opt for living annuities at retirement is to ensure that they leave something behind for their families. But what does a guaranteed annuity bring to the table that a living annuity does not?

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6 National Treasury, 2015

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Understanding the value of annuitising Employer-sponsored pensions are not uncommon. A total of 44% of the funds administered by Alexander Forbes, whether standalone or part of the umbrella fund, are pension funds7. Many of these funds outsource their pension liabilities to an insurer and have them pay benefits to members, thereby extinguishing any liability the fund and employer may have otherwise had. In keeping with the theme of our earlier chapter on the economic value of benefits, let’s unpack the value of employer-sponsored pensions:

A hedge against longevity risk

Retirees often don’t understand the risks they’re taking on, how to quantify them and how to hedge against these risks. Interest rate and demographic risks (particularly longevity risk) are the most important risks that individuals face in making their annuity decisions. From our joint study with Just Retirement, we found that three out of four working people surveyed rate their health as above average, and most think about their own life expectancy quite a bit when deciding how to use their pension amount. Overall, they anticipate they will live until approximately 85 years8. Annuities, whether provided by the employer or indirectly by an insurer, provide payments for as long as the person stays alive, hedging any uncertainty around life expectancy.

A point for reputation

Employers have an interest in making sure that their workers are adequately protected during their working years and after they retire, since this will help them attract and retain the highest quality candidates. In fact, research has found that workers with a pension tend to remain in a job for a longer period9. As such, employers ensure that funds deliver the best outcome to members.

Lower costs

Besides the benefits of lower investment fees on pooled assets in the pre-retirement fund accumulation phase, when buying annuities in bulk, the employer may receive discounts from the insurer that individuals might not be able to access in their personal capacity.

Annuity rates are guaranteed

One of the major benefits of occupational pensions is that the annuity rate given at retirement may be guaranteed in advance. For example, the individual’s employment contract may stipulate that they will receive a pension of R4 500 per month for every R1 million in retirement fund assets. This gives them the ability to plan better for retirement, and it also shifts the interest rate risk to the employer. If bond yields fall sharply over the period to retirement, resulting in an increase in the cost of annuities, the member is protected against a lower retirement income.

A HEDGE AGAINST LONGEVITY RISK

LOWER COSTS

7 Alexander Forbes Research & Product Development, 2015 8 Just Retirement and Alexander Forbes, 2016 9 McCarthy, 2006

Chapter 3

A POINT FOR REPUTATION

ANNUITY RATES ARE GUARANTEED

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CONCLUDING THOUGHTS Half the battle for acceptance involves getting people to understand the value of an idea. In this case, those values can apply to the individual, the employer and the country. Annuities make sense. It’s just not always that easy to get to the heart of that sense. While we’ve argued that employees should be given some freedom as to how to allocate their savings over their financial journey, we’ve still maintained that there should be a minimum income available for retirement. To that end, being able to purchase the right annuity is an important decision. Perhaps the lesson in relation to annuities is that the best ideas can be easily ignored if our communication with our members isn’t effective. In fact, getting our members’ attention and keeping it is the ultimate challenge if any of these recommendations are going to provide the results that are needed. Our next chapter tries to tackle this issue. Most specifically, it addresses the question of how we are going to provide what is effectively financial planning advice to a population that most likely will never use a financial planner or even have access to one.

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OVERVIEW Weâ&#x20AC;&#x2122;re moving steadily towards a world where more and more financial advice is needed by a population that has fewer and fewer resources to afford it. This leaves us with limited options. Digital advice must step up to the plate in providing a viable means of reaching a broader South African population. But this is an industry that also needs to come of age before it will be able to achieve this. In this chapter we set out how the potentially powerful tool of digital advice will need to evolve if weâ&#x20AC;&#x2122;re ever going to facilitate the sophisticated holistic benefits framework set out in this book.

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Chapter 4

SEEING THE DIGITAL WOOD FOR THE TREES The truth is that financial advice is often dispensed from a fairly short-sighted product-based perspective. A personâ&#x20AC;&#x2122;s financial goals are considered independently, each an opportunity to consider a different financial product. Rarely, though, is the complex interplay of these needs evaluated over time, or the outcomes optimised together to meet personalised goals. Viewed through a distorting product-centric prism, the clientâ&#x20AC;&#x2122;s overall financial well-being can remain a murky unexplored abstraction, a forest unseen amid an overgrown thicket of financial trees. We believe emergent digital technologies may hold the key to providing the kind of dynamic, holistic insights required to lead clients towards true financial well-being. The time appears to be ripe. The South African financial services industry is finally undergoing a much-anticipated digital

renaissance. Manual processes and outdated spreadsheets are giving way to sophisticated robo-advisers and the promise of a glittering, automated future where low-cost personalised advice is dispensed over the web without human intervention. A burgeoning FinTech IT-support industry is emerging to fulfil the emergent hunger for digital solutions. Financial technology, or FinTech, companies use technology to make financial services more efficient. Digital innovation is the great equaliser of the modern era. A clever algorithm replicated across the internet has the power to challenge time-honoured manual processes entrenched over decades. The tantalising promise of access to the web available to all on cheap smartphones holds the potential to democratise the dissemination of financial advice. No longer will this be the sole purview of the affluent or highly educated.

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This is a tremendously exciting idea, but is it simply wishful thinking? Can computergenerated advice ever match the nuanced guidance provided by skilled human beings? Over the past few years, astonishing strides have been made in data science and artificial intelligence (AI) research. Advances in neural nets, genetic algorithms and natural language processing are making their presence felt all around us. We’re in a new era of global connectivity that’s blurring the lines between the physical, digital and biological spheres.

Humanity has reached an inflection point. Consider a recent unprecedented artificial intelligence triumph: In March 2016, AlphaGo, Google’s cutting-edge deeplearning program, annihilated Lee Sedol, the best human player, in the ancient inscrutable game of Go (whose board contains more possible permutations than there are atoms in the known universe). Top human players say they rely on a measure of intuition in finding the best plays in Go. Surely intuition at least is the exclusive domain of humanity? For years, many believed a machine would never master this massively subtle game – or not in our lifetimes at any rate. But it has. There are now apparently three certainties: death, taxes and that machines are coming for our jobs. To understand how the digital revolution may reshape financial services, let’s examine first the highly publicised robo-adviser.

Rarely, though, is the complex interplay of these needs evaluated over time, or the outcomes optimised together to meet personalised goals. Viewed through a distorting product-centric prism, the client’s overall financial well-being can remain amurky unexplored abstraction, a forest unseen amid an overgrown thicket of fnancial trees.

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THE NEW ROBO-KID ON THE BLOCK So what is a robo-adviser, exactly? This trendy FinTech concept is bandied about indiscriminately in the media to such a degree that we can’t quite be sure. But, given the strident marketing hype around this new-fangled category of digital advice, financial services firms are understandably keen to jump on the bandwagon. Every type of online financial calculator and interactive website is therefore being rebranded as robo-advice, causing rampant confusion about what the term ultimately implies. For the sake of clarity, let’s examine the commonly accepted definition of robo-adviser1: It’s a digital financial adviser that provides web-based portfolio management with minimal human intervention. That is it. Note the specificity of this statement. A robo-adviser manages your investment portfolio. Contrary to popular belief, it won’t provide employee benefit advice, nor will it balance your budget or encourage you to preserve your pension savings.

1 Investopedia, 2016

These other types of digital advice are of obvious importance in a book about employee benefits, so for our purposes, the definition is artificially limiting, and we need to consider a more expansive category of digital advice providing contextual insights across the board.

The look-ma-no-hands model

This is a somewhat frightening and airless vision. Not only does it appear to disintermediate the traditional adviser by theoretically eliminating a need for them, but it also seems to give cursory attention to the client. The idea of automating the advice process to the point where human intervention is all but eliminated may sound superficially compelling, but it ultimately lacks viability when it comes to providing a holistic context.

Before we move on from the robo-adviser, let’s examine the sting in the tail of its definition: “... with minimal human intervention”.

Life is what happens

when digital advisers are making other plans.

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This is not to say that genuine robo-advisers such as Betterment, Vanguard or WealthFront don’t have value in the defined context of managing portfolios within predetermined parameters. These systems use automated routines to allocate, shift and rebalance investments dynamically. Such intelligent automation removes human biases and emotion from the equation, resulting in improved agility and decision-making. Cutting-edge individualised outcome optimisation approaches promise to dynamically fit investment strategies to associated goals in ways no human being might reasonably achieve. What this means is that we have now reached a point technologically where we can provide each retirement fund member with their own individualised solutions acknowledge their current fund credit, contribution rate and risk aversion in the context of changing market circumstances and years remaining until they require those funds. But the ingenuity of these algorithms is not justification enough to consider the elimination of all human intervention a practical end in itself. The reason for this is simple: our goals, values and priorities alter radically over time, and require constant maintenance. Someone just out of high school has no concept of the shape his or her life might take. Individuals’ world-view, beliefs, values, goals and motivations will naturally shift as they gain new experiences. No matter how smart the algorithm, a computer can’t make (or even predict) the subjective choices that inform our lives.

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There are no universally sound principles for making financial choices completely independent of our personal goals and ambitions. In money matters, one man’s meat is another man’s poison. Without guidance from the humans in question, how could a system possibly make the decision to, say, prioritise a child’s future education fund over its parents’ future retirement comfort - assuming some kind of Sophie’s Choice trade-off decision needs to be brokered between these goals? Consider the complex decisions a fully automated digital advice system needs to make with minimal human intervention. Is a young man’s dream of owning a Ferrari automatically foolhardy because it places him under burden of debt, or compromises his ability to pay off a future home? Under normal circumstances, his dream might well be deemed inadvisable, but what if he knows he’s likely to become heir to a family fortune one day? Does that change the character of the advice given? Or what if he believes he’s destined to be the CEO of a Fortune 500 company? Does his faith in a possible future salary scenario justify the financial risk now? What if he buys the object of his desire, and then in a moment of spiritual clarity opts to sell the flashy car and become a monk, as the self-help literature suggests? The possibilities are endless. How would an algorithm consistently make the right calls without human intervention offering guidance concerning the twists and turns in the person’s possible path?

The point here is any vision of a fully automated future in which human interventions are made redundant is not just utopian, it’s fundamentally wrong-headed. The nuances of social and cultural context that inform our attitudes to money, and the psychological complexity of our financial choices shouldn’t be underestimated. While we might contrive an artificial intelligence sophisticated enough to navigate these murky subjective waters some day, it’s certainly not on the immediate horizon. And even if we do achieve these science-fictional advances, how would the AI gain access to the required data to make appropriate choices? To paraphrase a beloved maxim, life is what happens while our digital advisers are making other plans. The challenge the world of digital-advice faces will be in whether it can effectively navigate the required demands of a genuine fiduciary, accommodating the various strictures of Treating Customers Fairly (TCF) regulations appropriately.

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THE SELF-SERVICE MODEL Will brokers, consultants and financial advisers who provide outputs in the form of advice become increasingly disintermediated by a host of online self-service wizards, robo-advisers, holistic advice models and digital assistants?

This is harder to predict. Certainly, the market for specialist advisers is likely to shrink as tech-savvy millennials opt more and more for the convenience and cost-effectiveness of online self-service. Wherever ‘advice’ is a matter of routine mathematical projection, there’s no doubt that digital solutions trump human equivalents in speed, accuracy and efficiency. Consultants will have to raise their game substantially to remain relevant. Right now, the bulk of online digital advisers and robo-advisers in South Africa are simple calculators that offer a one-size-fits-all

solution without much personalisation or insight. It’s easy to dismiss these efforts as overly crude, but we should take heed of US-based robo-advisers such as WealthFront that are adopting increasingly sophisticated approaches, such as tax-optimised direct indexing for high net worth clients. It’s only a matter of time before South African digital efforts catch up. That said, human beings are neurobiologically hard-wired for social engagement with other human beings. Consultants can ask intimate, probing questions and tease out delicate information about debt, or talk clients down from a ledge if they’re contemplating an irrational investment move underpinned by toxic emotion. No matter how elegant, user-friendly or smart a computer program may be, it cannot engage in the same way. It’s a behavioural reality that people are more likely to honour a commitment if they communicate it publicly to another person. Clients are therefore more likely to find the time to arrive for appointments with flesh-and-blood consultants than heed an email request from a digital adviser. It’s also psychologically easier to ignore or click away critical advice on a screen than debate a living person who has your best interests at heart.

Digital solutions trump human equivalents in speed, accuracy and efficiency. Consultants will have to raise their game substantially to remain relevant.

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THE CYBORG MODEL It seems, therefore, that obsolescence by computer automation should not trouble human consultants in the short- to mediumterm. For a variety of reasons, it’s likely that clients will still seek human assistance in money matters for a while yet. Robo-advisers and other digital assistants are simply sophisticated tools, not adversaries, and human consultants should ideally harness their considerable power in their engagement with clients. It is an either/or fallacy to assume that human and digital advisers cannot work side by side. In the world of chess, centaur teams of human and computer chess players working in unison beat solo competitors of either the fleshy or silicon persuasion. We believe that in the context of employee benefits, a human-machine hybrid advice model would be similarly potent, using the strengths of both. It’s true that the consultant’s role in the process may shift from financial expert to financial coach or therapist2. For a more detailed discussion about the role of financial therapy, see Chapter 4 of Benefits Barometer 2015. Matters of pure mathematical projection or investment advice are best answered by a laser-focused machine algorithm not subject to fatigue, boredom or human cognitive biases. More importantly,

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2 Cooper, 2004

the raw power of modern computational approaches will offer dynamic, holistic optimisations across multiple goals in ways that would’ve been impossible before. Handing over the complex mathematical problems to the digital advisers will allow the human consultant space to engage with clients about their goals, dreams and life aspirations, and provide emotional support where needed if the client has a toxic relationship with debt, for example. The human consultant can help clarify and articulate situationally appropriate questions, while the cutting-edge digital advice algorithms of the future can provide the best answers. While computers will largely offer the answers, human consultants may supplement the advice with personalised notes that augment the experience with real-world context or empathy. Through the internet, they can also provide live support to clients who live in rural areas or geographically remote locations. The human-machine hybrid model can offer omnipresent, personalised self-service advice to a vast African audience, bolstered by cutting-edge holistic projections that show the complex interplay of multiple goals over time. Where digital algorithms require additional insight or practical context to find

an appropriately nuanced solution, users may reach out to human consultants online who are well versed in helping individuals clarify or prioritise their financial goals in real-world settings.

Humanising digital financial advisers We are unfortunately still some distance from achieving this vision. It’s not that we lack the technology or skills to build next-generation digital frameworks. Rather, it’s that the industry has yet to update its thinking and tends to release its tools to clients without considering human psychology or a coherent holistic well-being philosophy. In Alan Cooper’s classic work, The inmates are running the asylum, he describes why user-interface decisions should not be left to software developers:

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NEXT-GENERATION DIGITAL FINANCIAL ADVISER

Chapter 4

To be a good programmer, one must be sympathetic to the nature and needs of the computer. But the nature and needs of the computer are utterly alien from the nature and needs of the human being who will eventually use it. The process of programming subverts the process of making easy-to-use products for the simple reason that the goals of the programmer and the goals of the user are dramatically different 3. In the world of finance, the cognitive divide between end users and software engineers is even greater, as the underlying interaction models are provided by actuaries, accountants or chartered financial analysts who are wizards with numbers, but are not necessarily natural communicators. Ironically, the trouble with most digital advisers today is that they lack humanity. In conclusion then, here are 10 quick tips for crafting a next-generation digital financial adviser:

Create a holistic framework for advice

This is critical. Thousands of online financial calculators and wizards have been written to take the user through a series of steps and solve for a particular goal. But these wizards typically exist independently of each other, rarely considering the interplay of outcomes. The danger in offering these self-contained advice modules is that the user fails to see the implicit trade-offs involved in the big picture. For example, a retirement calculator

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in isolation might suggest increasing monthly contributions as a solution, but would fail to highlight that the additional amount deducted from salary could cause the individual to fail to qualify for a desperately needed home loan. It’s imperative that we build a holistic tool that considers a person’s well-being across a variety of budgeting, investment and insurance dimensions. It’s easy to counsel a family to plan for the purchase of a house and consider their own future retirement sufficiency. But what if they simply don’t have adequate capital to fund both goals? What if they have to choose? It’s not always possible to dispense glib wisdom about which solution is preferable. But a digital adviser can certainly offer clarity about the likelihood of achieving both goals and the impact of financing them both on longterm cash flow. Fully informed, an individual may rationally choose to channel assets in one direction or the other. Alternatively, they might revise their goals, choosing cheaper accommodation or lowering their expectations for their post-retirement lifestyle.

Offer a goals-centric methodology

Most digital advisers are built from the ground up to push investment or insurance products as solutions to financial problems. There’s nothing inherently wrong with this, but from

4 MIT News, 1996

a user perspective, it’s a flawed approach. We need to rather build a process where users can map out their life goals, freed from attendant money stresses. Then, where appropriate, the adviser can assign financial values to these goals and offer guidance about the best ways to achieve them, given the current situation and future needs.

Gamify the dreary data collection process

When using digital tools, users often end up filling in endless forms. This has an alienating effect, and most users opt to close the window or hop over to Facebook instead. To keep users engaged, ensure data questions are short and contextually relevant. Never ask the same question twice. Show progress in graphical ways, for example by building up a dynamic picture of the person’s life as they add or amend information. Reward the user at the end of a set of questions with a graphical nudge or a useful calculated result. Don’t mine randomly for data you might potentially use later but don’t need right away. Users will see right through this and you will lose their trust. People are generally happy enough to be led through a maze – just be sure to give them some cheese at the end.

C reatively reinterpret and visualise financial data in stimulating new ways

Recent studies estimate that over 50% of the human brain is dedicated to visual

processing4. The same basic wiring that helps us spot a predator camouflaged in long grass lets us easily recognise outliers and discern subtle patterns in visual data that would otherwise remain invisible were the data presented to us in raw numeric form. Use these cognitive tendencies to engage with and educate your audience. Find creative data visualisation strategies to reinvent tired financial graphs and charts that typically bore or intimidate users. Use colour to highlight areas of concern or interest. Find creative visual ways to surprise and delight the user.

Make it sticky

Many online tools offer useful advice, but ultimately are only tried once, then discarded. This is fatal. The advice process should be an ongoing, ever-evolving journey. We need to build a tool from the ground up to change dynamically based on new information, and encourage users to regularly check in for an update. And it should create an ongoing relationship with users, sending them regular personalised emails or SMSes with information, and encouraging them to log in and continue the journey. We need to show them the value of holistic, evolving advice and develop an active, engaging user interaction strategy with a schedule of digital appointments and reminders.

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Show users their goals over time

Human beings are naturally predisposed to prioritise their current financial struggles over future outcomes. An ideal digital platform should counter this psychological tendency by clearly ordering all our goals on a life timeline or slide deck that shows their relative impact over the course of a lifetime. By presenting goals in an ordered temporal context, we encourage users to consider the longer view and overcome the distortions caused by pesky errors of parallax.

Allow users to explore scenarios

A common failing of digital advisers is that they give users the ability to perform deterministic projections based on entered parameters, but do not adequately explore the impact of alternative scenarios on outcomes. The future is uncertain, yet our software often only shows us a view of how things might turn out if all goes exactly according to plan. A quick simulation of a catastrophic market crash might graphically illustrate for a user why insisting on a portfolio with the highest return target could have unwelcome and irreversible consequences. A scenario modelling a disabling injury from a particular point in the future might pressuretest over-simplified assumptions about how much replacement income one might need in adverse circumstances.

Eliminate jargon

The design brains behind our digital advisers are typically adept at crunching data matrices, building intricate stochastic models and running simulations – and they have developed a specialised language for describing these mathematical landscapes. But this language is unknown to the broader public, and its speakers are not artful at translating for the ordinary person. The unhappy results are interfaces thick with impenetrable jargon and technical lingo. Bewildered users don’t want to appear stupid, so click hastily through without understanding much or properly engaging with the experience. As much as possible, we need to simplify or remove technical language. Users don’t care about the intricate mathematical underpinnings or theoretical assumptions. They just want answers delivered in crisp, clear, easily digestible form.

Chapter 4

C reate a safe, secure space for sharing (and hiding)

What is often overlooked in the design of digital advisers is the bitter reality of shame that swirls around a person’s wealth or lack thereof. People often measure their value by their earning capacity, and many people are crippled by embarrassment at the very idea that their true financial position might be exposed to others. A digital platform must therefore establish the user’s trust that private information will never be revealed, even to a spouse or financial adviser, without their express permission. A user must feel secure that they control the visibility and privacy of their own data. If they have any doubt, they may not be entirely honest or forthcoming about debt or other perceived financial shortcomings.

A dvance gender relations out of the Mad Men era

Many digital wizards have embedded in them an oddly retrograde, conservative 1950s perspective. The default assumption is that each household has one (likely male) breadwinner with a hapless spouse who must be protected with insurance and joint life annuity products. Married couples who both work and have individual financial needs or goals distinct from that of the family unit are generally overlooked. Homosexual unions, polygamous relationships, extended family dependencies, divorced or separated partners who share the responsibilities of child-rearing, collective ownership schemes or trusts – these and many other arrangements need to be catered for going forward.

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CONCLUDING THOUGHTS The simplest truth is that to avoid making these mistakes, we need to treat users like the modern adults they are, with their multiplicity of complex goals, relationships and financial entanglements. The financial world believes that digital platforms will offer the ultimate solution to providing advice to the underserviced (or more likely, un-serviced). We believe a hybrid of human and digital advice is the answer. But this can only happen if the underlying philosophy and user experience is carefully considered to reflect the userâ&#x20AC;&#x2122;s real-world financial challenges. Ultimately itâ&#x20AC;&#x2122;s not so much about providing prescriptive advice as it is about creating clarity about the trade-offs and long-term impact of the choices they might make.

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TIME FOR A BENEFITS PROGRAMME FOR SOUTH AFRICANS

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OVERVIEW For South Africa to create the perfect system for promoting both social security and social mobility, much work still has to be done in both the public and private sectors. From policymakers, we need a stronger focus on eliminating the inefficiencies, overlaps and gaps that currently exist in first pillar government initiatives. We need a stronger focus on whether we have provided a minimum floor to both employed and unemployed. This is an enormous project and, as such, progress is likely to be slow. But the private sector can do far more in picking up the slack. It’s about recognising that a programme that truly addresses employee needs has to go significantly beyond retirement savings. To achieve it though means that we need the employer to re-engage with what constitutes ‘employee benefits’.

HEALTH

HOUSING

EDUCATION RISK BENEFITS

RETIREMENT SOLUTIONS

EMERGENCY SAVINGS R

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MOVING BEYOND THE WAITING GAME Boards of trustees focus on retirement funding. To a limited extent they also consider what risk benefits would be appropriate for members. Employers, by contrast, consider what’s required to underpin the overall well-being of the employee. They are the real point of contact for determining what would be required from a full package of benefits. And policymakers try to assess what underpins are required in the form of grants and subsidies to ensure that individuals don’t become dependants. What we’ve created here has now become so complex and fragmented that it’s quite likely that what the employee really needs might be falling through the cracks. We’ve described in this book a compulsory savings programme that could target as much as 40% of an individual’s income if it were to target the full range of savings needs for an individual. This is 12.5% more than

what government currently allows as a tax deduction for contributions to retirement savings and certain income protections. But perhaps that tax-deductible status is a bit of a distractor. What may seem like an absurdly high percentage of income to allocate to ‘savings’ is in fact still less than what most families are currently contributing to such priorities as housing, education, health, retirement savings, income protections (including funeral benefits) and short-term savings. What we are proposing, is a way to help individuals dynamically optimise their lifecycle of savings in a way that would offer them greater efficiencies from these savings. Additionally, and perhaps more importantly, we could gradually take individuals and households on learning curves to greater fiscal responsibility as they address each of these life-changing funding requirements.

We see these as seeds which, if planted today, could soon prove to become valuable for the future of South African families, and the economy. The success of our vision will depend on our ability to convince employers that these are worthwhile benefits to make available to their employees, they can be integrated simply and holistically without too many moving parts, and importantly, this programme can be made available to umbrella and standalone funds alike.

What we are proposing, is a way to help individuals dynamically optimise their lifecycle of savings in a way that would offer them greater efficiencies from these savings.

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In summary, what would be required for such a benefits programme? It must: ■■ provide a meaningful array of key financial and social protections, including housing, education, long-term savings for retirement, risk benefits, additional after-retirement healthcare support and short-term savings for emergencies ■■ provide individuals with at least a floor or core benefit in each instance ■■ be flexible enough to allow them to prioritise certain savings contingencies above others and then switch these priorities as they move through time ■■ provide guidance on where they might need additional savings support and where they don’t ■■ be simple to understand ■■ appeal to the full spectrum of employed individuals ■■ be cost-effective and doable ■■ limit the administrative burden on the employer (and employee if possible)

■■ leverage economies of scale to provide a significant cost advantage above retail rates ■■ be mandatory, or a condition of employment. ■■ In other words, the programme provides a guided architecture for an individual that allows them to address a lifetime of financial needs. The individual should be able to maintain their membership in this programme even if they have left their current employer.

How could such a concept be introduced? Umbrella retirement funds give us a starting point. These multi-employer funds aim to minimise the administration burden and achieve some economies of scale. These funds typically provide or facilitate longterm savings benefits for retirement and risk benefits for death, disability, dread disease or funeral cover. Many provide a pension option on retirement. Furthermore, there’s

typically a minimum contribution rate, and a core level of risk benefit cover – these provide the floors. In many cases individuals can increase contribution rates or risk benefit cover levels depending on their priorities. Participation is mandatory for eligible employees once the employer has decided to participate. Some funds allow the benefits to be used as security for pension-backed housing loans. Seemingly then, umbrella funds tick many of the required boxes for the design of the envisaged new benefits model. However, certain benefits, as noted in our survey, are either inadequate or missing. Existing umbrella fund legal structures don’t or can’t easily facilitate saving for housing, education, post-retirement medical needs and short-term emergencies. While the similarities suggest that the umbrella fund model is a good starting point, here is where the concept of a benefits platform appears to fill the gap.

The programme provides a guided architecture for an individual that allows them to address a lifetime of financial needs.

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Chapter 5

Such a platform would encompass four broad pillars: The way this could work as a new world benefits platform is that an employee would select an overall contribution rate, which would be deducted from payroll and paid across to the benefits platform. The contribution would then be allocated into the four broad pillars, based on when the member’s priorities were due and according to their individual preferences (subject to minimum limits). In the absence of preferences, the contribution would follow a default lifecycle approach, as is already used effectively for retirement and risk benefits.

Tax-incentivised savings through the traditional umbrella retirement fund – a legal construct under the Pension Funds Act, with tax advantages as set out in the Income Tax Act.

Post-tax discretionary savings – a mixture of traditional unit trust savings and tax-free savings accounts whose limits are too small and prescriptive to facilitate the full provision of shorterterm savings.

Banking products – loans supported by the retirement fund and other loans.

Insurance products – to prevent catastrophe in the event of certain contingent events.

Note this: all these pillars exist currently. They just do so independently of each other.

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A key feature of the platform would be to show the person the bigger, aggregate picture of the four pillars. Once a year, or after specified life events, the individual would be able to redirect the spend if required, within the constraints. For example, we wouldn’t want a person allocating 100% of their spend to retirement savings if they had no emergency savings, because the first time an emergency happens, they would be forced to access their retirement capital. As we saw in the Singaporean model, the concept of a minimum sum is also important to ensure that no matter what the member prioritises, there will still be some income available at retirement – not as a lump sum, because in theory, they’re not likely to need the lump sum if they’ve used their additional savings to acquire other priority assets along the way. At the heart of it all this is a trade-off problem – every rand not allocated to retirement savings reduces the retirement outcome – but now we at least know that in this managed environment we can extend our

long-term savings coverage. The truth is that an individual’s financial well-being is about more than simply maximising one variable. And while it would be nice to maximise all outcomes, this is unlikely in all but exceptional cases. Are there risks and unforeseen outcomes? Quite possibly. As with most arrangements designed to operate at scale, the design and outcomes may not be optimal for every individual. But the same is true, even more so, of the current fragmented system. That said, there may also be some less obvious risks to consider: ■■ Portability when changing jobs – the structure needs to be able to remain with the individual throughout their working life to have maximum effectiveness. Realistically this means that the system should be as modular as possible, allowing any employer-sponsored benefits to be plugged in or allowed for. This could be challenging. It demands a complete change in mindset on how employee benefits work.

■■ We would need to design against inappropriate leakage from the system when changing jobs. Maintaining a compulsory savings programme that could be transferred between employers would be invaluable here. ■■ Long-term loss of employment or systemically shortened periods of employment would affect the outcomes considerably. Emergency savings programmes would help bridge some of the gap, but not for prolonged periods. ■■ Ideally the system should look at households rather than individuals – but this often poses a data challenge. Household structures are also prone to rapid and significant changes. The chart on the next page shows how the overall contribution remains the same, but the allocations may vary to the priorities at a point in time. The shown split is purely illustrative.

A key feature of the platform would be to show the person the bigger, aggregate picture of the four pillars.

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Total contribution to the platform

Legal vehicles

Retirement fund and insurance benefits

Banking (access to credit)

Non-retirement savings

Umbrella pension or provident fund

Pension-backed housing loans – direct from the fund and the member pays the fund back (this became unpopular after the National Credit Act was introduced) or indirect with the fund providing a guarantee for the loan provided by a third party such as a bank.

Tax-free savings account according to the Income Tax Act

Group life policy (approved or unapproved for tax purposes) Other risk benefits (unapproved)

Access to credit or personal loans for shortterm needs at favourable terms – this would require registration under the National Credit Act and possibly the Banks Act. Tax status

Contributions are deductible up to 27.5% of payroll (or R350 000 per year). Growth is tax free. Benefits are taxable (with some minimum tax-free amounts).

The loan capital is not taxed. The repayments are made from post-tax contributions or earnings. There are no tax implications.

Group life policy is approved or unapproved for tax purposes. Approved benefits are part of the fund and included in the fund rules and are therefore approved as funds are approved for tax purposes. This means that the premiums are tax deductible within the retirement fund limits and the benefits taxed as lump sums from a retirement fund. Unapproved benefits are not part of the fund but rather provided by the employer through a separate policy with an insurer.

Discretionary unit trust under the Collective Investment Schemes Control Act Endowments

Tax-free savings account: the contributions up to R30 000 per year and R500 000 in lifetime are made with post-tax money, but there’s no tax on the investment returns or payout. Discretionary unit trusts are set up with post-tax money. The investment returns are taxed. Payouts are not taxed.

Other risk benefits are unapproved for tax purposes.

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Total contribution to the platform

Administration

Retirement fund and insurance benefits

Banking (access to credit)

Non-retirement savings

Umbrella fund is administered by an administrator in terms of 13B of the Pension Funds Act. This means contributions are compulsory and must be paid by the 7th of the month after they’re due.

Administered by the lender (or fund if that is the lender), but outstanding balances and transactions must feed back to the platform administrator to provide the aggregate view.

Tax-free savings accounts may be administered by a range of financial services providers.

Administered by the lender (or fund if that is the lender), but outstanding balances and transactions must feed back to the platform administrator to provide the aggregate view.

Unit trusts are administered by registered companies.

Loans are often settled on exit from the fund using the accumulated benefits. This is not ideal. Loans can, however, continue on an individual basis.

The tax-free savings account is fully portable and in the individual’s name.

Any other short-term unsecured loans would be fully portable and attached to the individual.

The unit trust is fully portable and in the individual’s name.

Group life policies are typically administered by the same pension fund administrator. Other risk benefits are often facilitated by the retirement fund administrator even though they’re not strictly fund benefits. Otherwise the employer administers them directly. Portability

Fund benefits are payable on resignation, dismissal, death and retirement. We would want the membership to continue after the individual leaves the service of an employer – this is being facilitated through in-fund preservation and annuity strategies. We need to find mechanisms to allow individuals to continue contributing. There’s no surrender value. The policy can be converted to an individual policy on exit if selected, so this would be an important design feature.

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CONCLUDING THOUGHTS Again, while all of the required elements already exist in the market, what we need now is the ability to see the bigger picture. we need to provide individuals with a combined view so that they can see how all the components fit together, and make the right allocations for their combined, lifetime, long-term savings needs. One way to do this could be through a digital platform. We also need to rethink communication and the mindset that these benefits instil in individuals â&#x20AC;&#x201C; to realign members towards a goals-based investment philosophy rather than a competitive investment philosophy. Finally, we need to provide the benefits at scale, and at relatively low costs, to ensure maximum efficiency. Perhaps the greatest risk we face with this concept is getting people to grasp how powerful this is. As such the first impression will be that we are asking far too much of individuals. It will take time for people to understand that this is money that is already being allocated in this way â&#x20AC;&#x201C; but employed extremely inefficiently. Our best hope is to start with the youth of tomorrow and let these concepts become entrenched in the way they approach their life planning. Finally, achieving this will demand commitment from employers to facilitate a holistic savings programme. If employers commit to making these services available to their employees, the savings industry will in turn commit to creating the type of benefits platform that makes such an initiative feasible. And it will greatly reduce the problems government faces.

To us, that sounds like a win-win-win. As startlingly different as these concepts may appear to be at first, we believe they herald an entirely new era of delivery in financial planning for individuals. Itâ&#x20AC;&#x2122;s one that truly aligns a holistic investment strategy with the long-term financial goals of individuals and their families.

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PART 4 THE ISSUES, THE BAROMETER AND THE DATA Chapter 1: The issues Chapter 2: The sector case studies

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PART 4 Chapter 1

THE ISSUES

OVERVIEW This chapter provides a summary update of the 14 issues that we identified in our first Benefits Barometer in 2013. These issues captured the essence of the challenges South African employers face. In effect, these are the issues that undermine the best efforts of employers to create a meaningful employee benefit programme. While we commented in detail on these issues in the 2013 edition, we felt it might be useful to understand whether circumstances relating to these issues might have changed in any way since that first analysis. This year simply provides a high-level description of each issue, so we urge you to look at the full discussion in previous editions for the full context. Some of these issues relate to structural factors that trustees and employers need to be aware of because they often explain why outcomes might be considerably lower than

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expected. Pensionable pay and variability in salary inflation would be cases in point. Other issues that can impact on outcomes include choices, unhealthy finances, absenteeism and presenteeism, incapacity, young workers, and longevity. Weâ&#x20AC;&#x2122;ve looked at who should be in these funds and whether the benefit to them is adequate or appropriate: temporary workers, informal workers, low-income earners and incentives, and bricks and books and beyond. Finally, two external issues that needed addressing: mass exits and strikes.

PART 4

THE ISSUES

1 Unhealthy finances Unhealthy personal finances can lead to unhealthy employer finances. This is essentially all about employee financial well-being. Problems highlighted were: ■■ high employee turnover ■■ increased levels of absenteeism and presenteeism ■■ low employee morale ■■ employee healthcare problems ■■ increased levels of fraud, theft and on-the-job accidents. In Benefits Barometer 2015 we catalogued the programmes that are emerging in the workplace to deal with debt, financial well-being and financial capability. We further detailed what appeared to be working and what didn’t. Most importantly, we identifed what the financial services industry need to do to better address these needs.

2 Low-income earners

and incentives

In examining benefits for low-income earners in the South African system we found that: ■■ because of the means test for the older person’s grant, saving for retirement simply doesn’t make sense for many low-income earners ■■ low-cost risk benefits through a group arrangement are important for workers who support a large number of dependants ■■ joining a medical scheme doesn’t make sense for workers earning under R72 000 per year because they lose access to free hospital treatment at government facilities. Beyond government-provided benefits, retail products available to individuals are not costeffective for low-income earners. Employers may need to include lower-income earners on occupational funds if they’re not catered for by the government. In examining the incentive structure for savings, we discuss that in an optimal benefit structure for low-income earners, the government should also match contributions. Not only is this easier for workers to understand, but it also fosters partnership with the government.

Chapter 1

3 Absenteeism

and presenteeism

Absenteeism in the workplace is a direct cause of lost productivity for an employer. When absenteeism is not managed correctly, employees tend to view their sick leave as an entitlement, using their full benefit. Monitoring and managing sick leave effectively is critical to detect disability claims before they occur, since temporary absence may be a sign of a disability claim that could become protracted. Presenteeism is the practice of employees coming to work despite illness, injury or anxiety over personal issues. Presenteeism can also have a direct impact on productivity since, despite physically being at work, the employee produces sub-standard work, if any work at all. Recent research shows a strong link between unhealthy finances and presenteeism.

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4 Incapacity The strain experienced from incapacity in some industries may warrant early retirement. Key indicators include physical strain, emotional strain and use of physical strength and flexibility. Companies that manage incapacity in the workplace correctly can better mitigate cross-over into disability benefits and manage benefit premiums.

5 Temporary workers Temporary or contract workers include fixed-term contractors, project contractors and casual workers who work no more than 24 hours in a month. Their shared characteristics include: ■■ volatile and non-continuous pay ■■ high turnover ■■ varying employment periods ■■ temporary relationship with a given employer. These characteristics make providing access to retirement funds and risk benefits extremely tricky.

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6 Choice Individuals face a multitude of choices but don’t have a clear grasp of the interconnectedness and implications of these decisions, particularly when it comes to their finances. The challenge is to identify which decisions individuals need to make and how many are best managed by defaults, which preserve an individual’s sovereignty but guide outcomes more carefully. The impetus is building from National Treasury for pension funds to include defaults for investments, preservation and annuitisation as a means to better address the choice dynamic.

PART 4

THE ISSUES

7 Bricks and books

and beyond

South Africans value in-kind benefits from employers greatly in two areas: housing (bricks) and education (books), and both act as partial substitutes for retirement savings (beyond). Given their importance, there may be reason to allow both pension-backed lending and pension fund withdrawal for these two purposes. Other ways employers could help employees with these two areas include subsidies and education trusts. The challenge here is to consider the tax implications of fringe benefits.

8 Strikes Strikes are a primary issue because of the unintended consequences for employee benefits. When members canâ&#x20AC;&#x2122;t pay contributions towards group risk benefits or medical aid, these safety nets can vanish when workers need them the most. Another issue is if employees are dismissed, during the heat of negotiations they might potentially withdraw retirement savings to cover their lost income.

Chapter 1

9 Young workers We see an increasing need to change the conversation between employers and new members from one of debating contract terms to one of establishing an agreement. Instead of focusing on what the take-home pay will be, the new entrant needs to understand and appreciate that the employer will make available the means for the worker to maintain a certain level of mental, physical and financial well-being through their employee benefits offering. In turn, the employee needs to commit to maintaining those levels.

This edition of Benefits Barometer describes a new way we could more effectively integrate housing and education into a long-term savings framework.

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10 Pensionable pay Pensionable pay is embedded in many individuals’ contracts, but often goes completely unnoticed, or is misunderstood. The key problem with this is the gaps it creates in employee protection – both for retirement and risk. For instance, if an employee’s pensionable pay is 70% and their fund’s replacement ratio target is 75%, this means the fund is only aiming to provide a post-retirement income that is 52.5% of the employee’s pre-retirement income. From a tax perspective, the concept of pensionable pay has fallen away. But employers might still decide to retain the concept as it allows them to provide employees with higher take-home pay. If this is the case, companies will need to find more effective ways to communicate the concept as employees continue to find it particularly confusing.

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11 Variability in

salary inflation

In previous years, real salary increases were above 9% for younger members. Salary increases raise an employee’s standard of living, but often translate into increased borrowing and consumption rather than savings. The result is that retirement savings don’t keep pace with lifestyles. Another problem with high salary inflation is that it may well exceed the assumed rate used to calculate projections of replacement ratios. Unless members adjust their contribution rates or benefit expectations, there’s likely to be a shortfall at retirement.

12 Mass exits When a significant number of employees leave the company either through retrenchments or corporate activity, there’s typically enough lead time for more contingency planning, unlike strike action. Being retrenched when the prospect of a new job is poor can lead to individuals using their retirement savings to fund their lifestyles. In the case of transfers, members sometimes have the option of accessing their funds even though they will likely join the new employer’s fund. This would not be a bad thing if members acted responsibly, but low preservation rates indicate the opposite.

PART 4

THE ISSUES

13 Longevity

14 Informal workers

15 High employee turnover

Men and women retiring at 65 can expect to live another 16 and 20 years respectively, of which seven to nine of those years will be spent in relatively good health. However, on average, defined contribution fund members could expect to retire on 39% of their final pensionable income.

This group includes informally employed domestic workers and gardeners, some types of construction workers, and hawkers and traders. In providing benefits for informal workers, the fund sponsor would have to deal with the following challenges: ■■ Cost, which must be rock bottom ■■ Administration, which must address the demands of a transient population of no particular fixed address or employment ■■ Intermittent employment of indeterminate length

This is a structural issue in a sector where large proportions of employees exit regularly as a result of either cyclical requirements in an industry with boom-bust dynamics or high levels of competition for skills.

We are slowly moving towards a world where the concept of retirement may be dramatically altered, not only because people find themselves too financially strapped to retire, but also because improvements in our health mean we will be able to contribute meaningfully for significantly longer.

Chapter 1

Long-term investment strategies or dynamic benefit structures that shift members’ benefit exposures according to their lifecycle requirements are interrupted when members transfer to new funds or strategies. Similarly, high employee turnover undermines such compelling strategies as auto-escalation where employees’ contribution rates are gradually increased when their salaries are adjusted. If an employee is constantly switching companies, they would also always be on the lowest contribution band.

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PART 4 Chapter 1

THE BAROMETER

OVERVIEW The concept behind the benefits barometer is to provide a constant ‘barometric reading’ of the state of employee benefits in South Africa. To some extent this can be achieved by simply looking at the data. The Alexander Forbes Member WatchTM database gives a comprehensive view of the employee benefit offerings for all our 1 797 employer clients, covering 840 867 members. But the data can only take us so far. We also need to keep abreast of both the external and internal challenges that limit the opportunities for, on the one hand, employers to do more, and on the other, employees to extract the full value of what’s on offer. These external dynamics incorporate the state of the nation – from an economic, political and social perspective. They relate to policy changes around labour law, pension reform, and reporting on environmental, social and governance issues. While these dynamics may be out of an employer’s control, they certainly demand that employers stay abreast. Our discussions in the Issues segment of this chapter refer to some of those developments.

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Then there are the internal dynamics – the aspects of corporate policy that reflect how employers are responding to their marketplace, the competition for talent, and the need for employee engagement. These choices also produce knock-on issues that may have far-reaching consequences for a company’s sustainability. What the benefits barometer provides is a comprehensive collection of all these elements: the data, the insights, and the measurement of impact so that employers can make better–informed decisions.

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THE BAROMETER

The Alexander Forbes benefits barometer provides a measurement of which issues are likely to create the greatest impediments to implementing an employee benefits programme. Typically we indicate whether a specific issue would be categorised as high priority, medium priority or low priority. This year we felt it would be useful to get an aggregate picture of the high-priority issues for the different South African sectors.

CONSTRUCTION

Bricks and books and beyond High employee turnover Incapacity Low-income earners and incentives Unhealthy finances

EDUCATION

Absenteeism and presenteeism Bricks and books and beyond Longevity Strikes Unhealthy finances

ENERGY

Absenteeism and presenteeism Choice Variability in salary inflation Incapacity

FISHING, FORESTRY AND AGRICULTURE Absenteeism and presenteeism Bricks and books and beyond Incapacity Low-income earners and incentives Pensionable pay Strikes Temporary workers Informal workers Unhealthy finances

Low-income earners and incentives Mass exits Pensionable pay Absenteeism and presenteeism Strikes Unhealthy finances

MINING

Absenteeism and presenteeism Bricks and books and beyond Variability in salary inflation Incapacity Mass exits Strikes Temporary workers Informal workers Unhealthy finances

BAROMETER PRIORITIES

MEDIA AND MARKETING High employee turnover Longevity Young workers Unhealthy finances

HOSPITALITY SECURITY

High employee turnover Low-income earners and incentives Temporary workers Informal workers Unhealthy finances

PROFESSIONAL AND BUSINESS SERVICES MANUFACTURING

Chapter 1

Choice Variability in salary inflation Inflation Longevity Personable pay Young workers

PUBLIC SECTOR

Low-income earners and incentives Temporary workers Young workers Absenteeism and presenteeism Informal workers Unhealthy finances

TRANSPORT

Incapacity Absenteeism and presenteeism

TELECOMMUNICATIONS Choice Temporary workers Informal workers Young workers Unhealthy finances Pensionable pay

Absenteeism and presenteeism Bricks and books and beyond Longevity Strikes Unhealthy finances

RETAIL AND WHOLESALE

HEALTH

Absenteeism and presenteeism Incapacity Longevity Strikes Unhealthy finances

High employee turnover Low-income earners and incentives Pensionable pay Temporary workers Young workers Informal workers Unhealthy finances

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CONCLUDING THOUGHTS This year our story is fairly clear. If there is one high priority issue that stands out as a potential disrupter to any employee benefits scheme it is unhealthy finances. Phrased differently: an individualâ&#x20AC;&#x2122;s financial well-being. Twelve out of fifteen sectors identified this as a problem. Indeed addressing this specific issue could well become an important employee benefit in its own right. The second most frequent high priority issue identified was absenteeism and presenteeism. Interestingly, there appears to be a strong link between these two issues and unhealthy finances. Beyond this, the issues were fairly evenly distributed among the sectors, generally splitting into two relatively predicable broad camps: sectors that were predominantly blue collar had issues with strikes, temporary workers, low income and incentives, mass exit and incapacity. For industries that had a white collar bias, the issues tended to be choice, longevity, pensionable pay, and high salary inflation. An issue such as bricks and books and beyond tended to be significant for both groups. Finally, the issues mentioned least turned out to be high employee turnover and choice. Perhaps this provides a bit of an insight into our current state of employment and how it has evolved over the last few years.

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THE SECTOR CASE STUDIES

PART 4 Chapter 2

THE SECTOR CASE STUDIES

OVERVIEW This section provides summary infographics and data for our entire Alexander Forbes Member WatchTM database and for each of the 10 basic industry sectors. In each sector we summarise the employee benefits offered, the percentage of employers offering each benefit and details of the projected replacement ratio benefits for each sector. Over the last four years of Benefits Barometer, weâ&#x20AC;&#x2122;ve found that our audience has slowly become more focused on the commentary at the front of the book and less on the aggregate data recorded at the back. The data is still critical, but making it available through our online research portal is perhaps a more effective way to engage with it (and keep our forests intact1). This year we provide the data as an aggregate infographic based on the full Member WatchTM 2015 data set. We then provide summary infographics for each of the sectors and several of the underlying

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1 See www.alexanderforbes.co.za 2 Benefits Barometer, 2014, Part 1: Chapter 1

subsectors. We include a demographic profile of each sector (number of employees, gender split, average age, average actual retirement age, average exit rate, average preservation rate and projected replacement ratio for a member aged 25) to contextualise the main focus of the data presented for each sector: a representation of the current risk and retirement benefit structures and how well they meet the needs of employees in these sectors. We also include statistics on the average replacement ratio retirees achieved and the annuitisation rate in each sector to highlight exactly how well members are faring.

Our final addition to each chapter is a graph summarising how prevalent each type of risk benefit is in the sector. Common benefits include lump-sum death benefits, income disability policies and funeral cover. An employer interested in at least matching the offering of their competitors should find this graph useful. An employer looking to become an employer of choice should consider what they can offer beyond the commonly offered benefits. We also included a broader discussion on this topic in Benefits Barometer 20142.

PART 4

THE SECTOR CASE STUDIES

AGGREGATE DATA FROM MEMBER WATCH 2016 TM

R223 401

Average projected replacement ratios of active members

Average fund credit of active members

Average employer contribution towards retirement funding

0.7

Average expense allocation rate

R301 242

Average pensionable salary

Average member contribution towards retirement funding

Chapter 2

Average replacement ratio achieved by retirees

63.6 years Average normal retirement age

Exit rate

Total average contribution rate towards retirement funding

Preservation rate (excludes Section 14 transfers)

61.4 years Average actual retirement age

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CONSTRUCTION SECTOR

DEMOGRAPHIC PROFILE

22 060

Number of employees

Average pensionable salary

R217 712 Average age

38.5 years

Male 76.95% Female 23.05%

Companies involved in the construction of residential and commercial buildings as well as infrastructure projects. Examples: Tiber Group and WBHO Construction

Average normal retirement age

62.9 years

Average actual retirement age

62.3 years

Average exit rate Average preservation rate

22.7% 5.9%

Projected replacement ratio for a member aged 25

56% Source: Member Watchâ&#x201E;˘ 2015 data set

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CONSTRUCTION

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.1%

Member contribution towards retirement savings as a percentage of pensionable pay

3.9%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.2%

Contribution to retirement funding costs as a percentage of pensionable pay

0.9%

Contribution to death benefits as a percentage of pensionable pay

2.4%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

13.3%

Average fund credit of active members

R207 567

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90% 80%

Proportion of members

77.6% 63.8%

63.8%

70% 60% 50% 40% 30% 20%

5.2%

1.7%

3.4%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

257

ENERGY SECTOR

DEMOGRAPHIC PROFILE

12 043

Number of employees

Average pensionable salary

R415 020 Average age

41.7 years

Male 65.86% Female 34.14%

Companies involved in the extraction, refinement and supply of oil and gas products throughout the country. Water services and energy utility companies have also been included. Examples: Engen Petroleum and Eskom Holdings

Average normal retirement age

63.1 years

Average actual retirement age

61.4 years

Average exit rate Average preservation rate

10.1% 26.7%

Projected replacement ratio for a member aged 25

52% Source: Member Watchâ&#x201E;˘ 2015 data set

258

PART 4 Chapter 2

ENERGY

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.0%

Member contribution towards retirement savings as a percentage of pensionable pay

1.9%

Employer contribution towards retirement savings as a percentage of pensionable pay

12.1%

Contribution to retirement funding costs as a percentage of pensionable pay

0.5%

Contribution to death benefits as a percentage of pensionable pay

1.3%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Average replacement ratio achieved by retirees

36.6%

Average fund credit of active members

R725 142

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100%

97.3%

90% 80%

78.4%

Proportion of members

67.6%

70% 60% 50% 40% 30% 20%

8.1%

2.7%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

259

FISHING, FORESTRY AND AGRICULTURE SECTOR

DEMOGRAPHIC PROFILE

14 808

Number of employees

Average pensionable salary

R147 746 Average age

40.7 years

Male 69.48% Female 30.52%

Companies involved in farming of crops, fishing and various stages of production and supply of paper products. Food producers in this sector are farmers involved in the earliest stage of food production. Examples: Pride Milling Company and Oceana Group

Average normal retirement age

64 years

Average actual retirement age

61.6 years

Average exit rate Average preservation rate

9.4% 12.4%

Projected replacement ratio for a member aged 25

58.7% Source: Member Watchâ&#x201E;˘ 2015 data set

260

PART 4 Chapter 2

FISHING, FORESTRY AND AGRICULTURE

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

15.8%

Member contribution towards retirement savings as a percentage of pensionable pay

6.0%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.6%

Contribution to retirement funding costs as a percentage of pensionable pay

1.2%

Contribution to death benefits as a percentage of pensionable pay

Contribution to disability benefits as a percentage of pensionable pay

1.0%

Average replacement ratio achieved by retirees

30.0%

Average fund credit of active members

R174 578

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90% 80%

Proportion of members

73.0% 61.9% 54.0%

70% 60% 50% 40% 30% 20%

7.9% 0%

3.2%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

261

MANUFACTURING SECTOR

DEMOGRAPHIC PROFILE

129 491 Number of employees Average pensionable salary

R244 095 Average age

41.5 years

Male 65.88% Female 34.12%

This includes various industries, chemical and plastics, electrical and components, technological products, food and beverages, metals, motor vehicles, pharmaceuticals and textiles. Companies that produce consumer durables and non-durables from raw materials and chemicals, and food and beverage producers involved in the intermediate stages of food production and distribution are also included. Examples: NestlĂŠ, Tiger Brands, Macsteel and BMW 262

Average normal retirement age

64 years

Average actual retirement age

61.3 years

Average exit rate Average preservation rate

11.1% 12.4%

Projected replacement ratio for a member aged 25

58% Source: Member Watchâ&#x201E;˘ 2015 data set

PART 4 Chapter 2

MANUFACTURING

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.8%

Member contribution towards retirement savings as a percentage of pensionable pay

4.6%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.2%

Contribution to retirement funding costs as a percentage of pensionable pay

0.9%

Contribution to death benefits as a percentage of pensionable pay

1.5%

Contribution to disability benefits as a percentage of pensionable pay

1.0%

Average replacement ratio achieved by retirees

34.2%

Average fund credit of active members

R402 199

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100%

88.5%

90%

80.6%

Proportion of members

80%

60.6%

70% 60% 50% 40% 30% 20%

3.5%

0.6%

0.3%

3.2%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

263

MINING SECTOR

DEMOGRAPHIC PROFILE

22 036

Number of employees

Average pensionable salary

R285 456 Average age

39.7 years

Male 82.81% Female 17.19%

Companies involved in the extraction and supply of basic raw materials throughout the economy, including coal, steel and precious metals. Companies providing maintenance and technological services solely to mines have also been included. Examples: BHP Billiton and Xstrata

Average normal retirement age

62.9 years

Average actual retirement age

60.6 years

Average exit rate Average preservation rate

11.1% 4.3%

Projected replacement ratio for a member aged 25

59.0% Source: Member Watchâ&#x201E;˘ 2015 data set

264

PART 4 Chapter 2

MINING

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

15.4%

Member contribution towards retirement savings as a percentage of pensionable pay

3.1%

Employer contribution towards retirement savings as a percentage of pensionable pay

12.4%

Contribution to retirement funding costs as a percentage of pensionable pay

0.6%

Contribution to death benefits as a percentage of pensionable pay

1.7%

Contribution to disability benefits as a percentage of pensionable pay

1.6%

Average replacement ratio achieved by retirees

16.5%

Average fund credit of active members

R317 895

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90%

87.5%

80%

Proportion of members

75.0%

57.5%

70% 60% 50% 40% 30% 20%

5.0%

2.5%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

265

PERSONAL SERVICES SECTOR

DEMOGRAPHIC PROFILE

108 436 Number of employees Average pensionable salary

R236 177 Average age

40 years

Male 35.54% Female 64.46%

This sector includes four industries: health, education, media and marketing, and security. This is a labour-intensive sector that involves supplying services to consumers. Producers of equipment and suppliers of services intended solely for use by the industries mentioned have also been included. Examples: Life Healthcare, University of Johannesburg, Primedia and Chubb

Average normal retirement age

63.6 years

Average actual retirement age

61.8 years

Average exit rate Average preservation rate

11.4% 10.1%

Projected replacement ratio for a member aged 25

51% Source: Member Watchâ&#x201E;˘ 2015 data set

266

PART 4 Chapter 2

PERSONAL SERVICES | HEALTH

Health industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

12.7%

Member contribution towards retirement savings as a percentage of pensionable pay

4.7%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.1%

Contribution to retirement funding costs as a percentage of pensionable pay

0.7%

Contribution to death benefits as a percentage of pensionable pay

1.2%

Contribution to disability benefits as a percentage of pensionable pay

1.1%

Average replacement ratio achieved by retirees

15.9%

Average fund credit of active members

R211 073

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90% 80%

Proportion of members

78.0% 65.9% 53.7%

70% 60% 50% 40% 30% 20%

7.3%

4.9%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

267

PART 4 Chapter 2

PERSONAL SERVICES | EDUCATION

Education industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

17.3%

Member contribution towards retirement savings as a percentage of pensionable pay

5.4%

Employer contribution towards retirement savings as a percentage of pensionable pay

11.9%

Contribution to retirement funding costs as a percentage of pensionable pay

0.6%

Contribution to death benefits as a percentage of pensionable pay

2.2%

Contribution to disability benefits as a percentage of pensionable pay

0.6%

Average replacement ratio achieved by retirees

27.7%

Average fund credit of active members

R880 702

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90% 80%

Proportion of members

71.8% 59.0% 53.8%

70% 60% 50% 40% 30% 20%

7.7%

2.6%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

268

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

Source: Member Watch™ 2015 data set

30% to 60%

0% to 30%

PART 4 Chapter 2

PERSONAL SERVICES | MEDIA AND MARKETING

Media and marketing industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.8%

Member contribution towards retirement savings as a percentage of pensionable pay

5.8%

Employer contribution towards retirement savings as a percentage of pensionable pay

9.0%

Contribution to retirement funding costs as a percentage of pensionable pay

0.4%

Contribution to death benefits as a percentage of pensionable pay

1.0%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

57.1%

Average fund credit of active members

R318 994

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90%

80.8%

80%

Proportion of members

76.9%

46.2%

70% 60% 50% 40% 30% 20%

7.7%

3.8%

7.7% 0%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

269

PART 4 Chapter 2

PERSONAL SERVICES | SECURITY

Security industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

12.8%

Member contribution towards retirement savings as a percentage of pensionable pay

5.0%

Employer contribution towards retirement savings as a percentage of pensionable pay

7.8%

Contribution to retirement funding costs as a percentage of pensionable pay

0.5%

Contribution to death benefits as a percentage of pensionable pay

1.3%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Average replacement ratio achieved by retirees

14.8%

Average fund credit of active members

R96 772

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits

100%

90% 83.3%

Proportion of members

80% 70% 60% 50% 40% 30% 20% 0%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

270

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

Source: Member Watch™ 2015 data set

30% to 60%

0% to 30%

PART 4

THE SECTOR CASE STUDIES

Chapter 2

Within the personal services sector, the media and marketing industry has the highest average member contributions at 5.81%.

271

PROFESSIONAL AND BUSINESS SERVICE SECTOR

DEMOGRAPHIC PROFILE

175 721 Number of employees Average pensionable salary

R274 113 Average age

36.9 years

Male 50.52% Female 49.48%

This sector includes financial services providers (like banks and insurance companies), legal and accounting firms, engineering and recruitment consultancies and the real estate industry. Examples: Bowman Gilfillan, Alexander Forbes, Investec and Pam Golding

Average normal retirement age

63.3 years

Average actual retirement age

61.4 years

Average exit rate Average preservation rate

15.6% 12.8%

Projected replacement ratio for a member aged 25

44% Source: Member Watchâ&#x201E;˘ 2015 data set

272

PART 4 Chapter 2

PROFESSIONAL AND BUSINESS SECTOR

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

11.7%

Member contribution towards retirement savings as a percentage of pensionable pay

4.2%

Employer contribution towards retirement savings as a percentage of pensionable pay

7.0%

Contribution to retirement funding costs as a percentage of pensionable pay

0.6%

Contribution to death benefits as a percentage of pensionable pay

1.8%

Contribution to disability benefits as a percentage of pensionable pay

1.3%

Average replacement ratio achieved by retirees

36.9%

Average fund credit of active members

R331 723

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90%

89.4% 80.6%

Proportion of members

80%

42.2%

70% 60% 50% 40% 30% 20%

9.4% 1.7%

0.6%

1.1%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

273

PUBLIC SECTOR

DEMOGRAPHIC PROFILE

35 595

Number of employees

Average pensionable salary

R239 002 Average age

41.3 years

Male 62.78% Female 37.22%

This sector includes various government municipalities, departments and government-funded industries, but not parastatals.

Average normal retirement age

63.5 years

Average actual retirement age

61.3 years

Average exit rate Average preservation rate

3.0% 11.0%

Projected replacement ratio for a member aged 25

85% Source: Member Watchâ&#x201E;˘ 2015 data set

274

PART 4 Chapter 2

PUBLIC SECTOR

Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

22.6%

Member contribution towards retirement savings as a percentage of pensionable pay

7.2%

Employer contribution towards retirement savings as a percentage of pensionable pay

15.4%

Contribution to retirement funding costs as a percentage of pensionable pay

0.1%

Contribution to death benefits as a percentage of pensionable pay

1.9%

Contribution to disability benefits as a percentage of pensionable pay

0.7%

Average replacement ratio achieved by retirees

46%

Average fund credit of active members

R600 438

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90% 80%

Proportion of members

78.9%

55.3% 47.4%

70% 60% 50% 40% 30% 20%

7.9%

5.3%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

275

RETAIL, WHOLESALE AND HOSPITALITY SECTOR

DEMOGRAPHIC PROFILE

168 268 Number of employees Average pensionable salary

R120 591 Average age

36.5 years

Male 45.92% Female 54.08%

Companies include food, drug and clothing retailers and companies in the travel and leisure industries. This group also includes hotels and restaurants. Examples: Clicks Group, Truworths and Tsogo Sun Holdings

Average normal retirement age

63.5 years

Average actual retirement age

60.5 years

Average exit rate Average preservation rate

16.6% 2.5%

Projected replacement ratio for a member aged 25

55% Source: Member Watchâ&#x201E;˘ 2015 data set

276

PART 4 Chapter 2

RETAIL, WHOLESALE AND HOSPITALITY | RETAIL AND WHOLESALE

Retail and wholesale industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

15.1%

Member contribution towards retirement savings as a percentage of pensionable pay

6.5%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.6%

Contribution to retirement funding costs as a percentage of pensionable pay

0.8%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

1.0%

Average replacement ratio achieved by retirees

29.6%

Average fund credit of active members

R157 575

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90%

80.6%

80%

Proportion of members

72.6% 59.7%

70% 60% 50% 40% 30% 20%

8.1% 0%

1.6%

6.5.%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

277

PART 4 Chapter 2

RETAIL, WHOLESALE AND HOSPITALITY | HOSPITALITY

Hospitality industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.0%

Member contribution towards retirement savings as a percentage of pensionable pay

5.0%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.7%

Contribution to retirement funding costs as a percentage of pensionable pay

0.5%

Contribution to death benefits as a percentage of pensionable pay

1.1%

Contribution to disability benefits as a percentage of pensionable pay

0.6%

Average replacement ratio achieved by retirees

18.5%

Average fund credit of active members

R196 017

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100%

90.9%

90% 84.8%

Proportion of members

80%

63.6%

70% 60% 50% 40% 30% 20%

12.1% 3.0%

3.0%

6.1%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

278

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

Source: Member Watch™ 2015 data set

30% to 60%

0% to 30%

PART 4

THE SECTOR CASE STUDIES

Chapter 2

The retail and wholesale industry's average total contributions towards retirement savings has increased to 15.1% from 14.4% in 2013.

279

TRANSPORT AND TELECOMMUNICATIONS SECTOR

DEMOGRAPHIC PROFILE

12 196

Number of employees

Average pensionable salary

R336 397 Average age

38 years

Male 55.29% Female 44.71%

Telecommunications companies are providers of fixed-line and mobile phone services, while transport companies are involved in both commercial logistics and distribution of consumer goods and passenger transport. Examples: Cell C, Grindrod and ACSA

Average normal retirement age

63.2 years

Average actual retirement age

61.5 years

Average exit rate Average preservation rate

14.1% 27.0%

Projected replacement ratio for a member aged 25

52% Source: Member Watchâ&#x201E;˘ 2015 data set

280

PART 4 Chapter 2

TRANSPORT AND TELECOMMUNICATIONS | TRANSPORT

Transport industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

16.6%

Member contribution towards retirement savings as a percentage of pensionable pay

6.0%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.6%

Contribution to retirement funding costs as a percentage of pensionable pay

Contribution to death benefits as a percentage of pensionable pay

1.5%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Average replacement ratio achieved by retirees

56.3%

Average fund credit of active members

R227 471

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100% 90%

88.1%

80% 72.9%

Proportion of members

67.8%

70% 60% 50% 40% 30% 20%

8.5% 1.7%

1.7%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

30% to 60%

0% to 30%

Source: Member Watch™ 2015 data set

281

PART 4 Chapter 2

TRANSPORT AND TELECOMMUNICATIONS | TELECOMMUNICATIONS

Telecommunications industry Benefits overview – a high-level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

11.0%

Member contribution towards retirement savings as a percentage of pensionable pay

2.7%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.3%

Contribution to retirement funding costs as a percentage of pensionable pay

0.3%

Contribution to death benefits as a percentage of pensionable pay

0.8%

Contribution to disability benefits as a percentage of pensionable pay

0.5%

Average replacement ratio achieved by retirees

25.6%

Average fund credit of active members

R411 498

Source: Member Watch™ 2015 data set

Breakdown of benefits offered

Retirement benefit analysis

Percentage of employers offering each type of benefit

Percentage split of members’ projected replacement ratio benefits 100%

88.9%

90%

88.9%

Proportion of members

80%

55.6%

70% 60% 50% 40% 30% 20%

3.7%

10% 0%

FUN

GLA

DD: Dread disease cover FUN: Funeral cover GLA: Approved lump-sum death cover PHI: Disability income benefits

282

PHI

PTD

TTD

UGL

PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Age band 75% +

60% to 75%

Source: Member Watch™ 2015 data set

30% to 60%

0% to 30%

REFERENCES

APPENDIX References

APPENDIX: REFERENCES

REFERENCES Executive summary Alexander Forbes Research & Product Development. 2015. Member WatchTM Survey 2015. Johannesburg: Alexander Forbes. ReThink Africa. 2016. Alexander Forbes Whatâ&#x20AC;&#x2122;s top of mind? survey. Sandton: Alexander Forbes.

Part 1: Setting the scene

Chapter 1: The context Kerrigan, GW. 1991. The role of Cosatu affiliated unions in retirement provisions in South Africa. Transactions of the Actuarial Society of South Africa: 9(1) 177â&#x20AC;&#x201C;198. Ramabulana, MR. 2016. Sides are talking past each other on pensions. www.bdlive.co.za. Accessed June 2016.

Chapter 2: What is the right social need? Financial Services Board. 2015. 2014 Annual Report of the Registrar of Friendly Societies. Pretoria: Financial Services Board. Mercer. 2015. Melbourne Mercer Global Pension Index. Melbourne: Mercer. Spaull, N and Kotze, J. 2014. Starting behind and staying behind in South Africa: The case of insurmountable learning deficits in mathematics. University of Stellenbosch working paper 27/2014. World Bank. 2008. The World Bank pension conceptual framework. World Bank pension reform primer series. Washington, DC: World Bank.

Chapter 3: What is the value of employee benefits? Charles River Associates. 2011. Financial security for working Americans: An economic analysis of insurance products in workplace benefits programs. Boston: Charles River Associates.

284

APPENDIX

APPENDIX: REFERENCES

References

Department of Labour. 2015. Compensation of Occupational Injury and Disease Fund Annual Report 2014/15. Pretoria: Department of Labour. Department of Labour. 2015. Unemployment Insurance Fund Annual Report 2015. Pretoria: Department of Labour. Financial Services Board. 2015. 2014 Annual Report of the Registrar of Long-term Insurance. Pretoria: Financial Services Board. Financial Services Board. 2015. 2014 Annual Report of the Registrar of Pension Funds. Pretoria: Financial Services Board. Gardner, J and Nyce, S. 2014. The strategic value of retirement benefits: a global focus. Results from Towers Watson 2013/2014 Global Benefit Attitudes Survey. www.towerswatson.com/en/Insights/Newsletters/Americas/insider/2014/the-strategic-value-of-retirementbenefits-a-global-focus. Accessed June 2016. McCarthy, D. 2006. The rationale for occupational pensions. Oxford Review of Economic Policy. 22(1): 57–65. National Stokvel Association of South Africa. 2016. Home page. www.nasasa.co.za. Accessed May 2016. National Treasury. 2015. National Budget Review 2016. www.treasury.gov.za. Accessed June 2016. Rappaport, AM. 2013. Business case for employee benefits. Benefits Quarterly 29(1) 8–14. Road Accident Fund. 2015. Road Accident Fund Annual Report 2014/15. Centurion: Road Accident Fund. Rossouw, J, Joubert, F & Breytenbach, A. 2013. South Africa’s fiscal cliff: A different meaning to a well-known concept. Proceedings of the Economic Research Southern Africa (ERSA) Public Economics work group meeting, 16 and 17 May 2013. South African Revenue Services and National Treasury. 2015. 2014 tax statistics. Pretoria: South African Revenue Services. Statistics South Africa. 2014. Labour market dynamics in South Africa, 2014. Pretoria: Statistics South Africa. Statistics South Africa. 2016. Quarterly Labour Force Survey: Quarter 1, 2016. Pretoria: Statistics South Africa. True South Actuaries and Consultants. 2013. The South African insurance gap in 2013: Quantifying the insurance gap by reference to the financial impact on South African households of the death or disability of an active earner in the household. Cape Town: True South Actuaries and Consultants.

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Chapter 4: The flip side of the coin: learning from the informal sector Aliber, M. 2002. Informal finance in the informal economy: Promoting decent work among the working poor. International Labour Office Employment Sector working paper on the informal economy 2002/2014. De Clerq, B, Venter, JMP & Van Aardt, CJ. 2012. An analysis of the interrelationship between savings product usage and satisfaction using a SERVQUAL framework. Southern African Business Review 16(2). Financial Services Board. 2015. 2014 Annual Report of the Registrar of Friendly Societies. Pretoria: Financial Services Board. FinMark Trust. 2016. FinScope South Africa Consumer Survey 2015. www.finmark.org.za. Accessed May 2016. Jeneker, E, Pieterse, T, Gasa, M, Zwane, S, Mazibuko, K, Seete, D & Naidoo, V. 2012. Investigate vehicles for banking the unbanked. Midrand: Banking Sector Education and Training Authority (Bankseta) International Executive Development Programme. Roth, J, Rusconi, R & Shand, N. 2007. The poor and voluntary long term contractual savings: Lessons from South Africa. International Labour Office Social Finance Programme working paper 48.

Chapter 5: What do our members want? FinMark Trust. 2016. FinScope South Africa Consumer Survey 2015. Survey. www.finmark.org.za. Accessed May 2016. Finn, A. 2015. A national minimum wage in the context of the South African labour market. A Southern Africa Labour and Development Research Unit working paper 153. Cape Town: SALDRU, University of Cape Town.

Part 2: Fleshing out the vision Chapter 1: A better model Loke, V and Cramer, R. 2009. Singapore’s Central Retirement Fund: A national policy of life-long asset accounts. New America Foundation working paper, March/April 2009. Ministry of Finance. 1964. State of Singapore Development Plan 1961–1964. Singapore: Singapore Ministry of Finance. Ng, E. 2000. Central Provident Fund in Singapore: A capital market boost or a drag? Asian Development Bank working paper series: Rising to the challenge in Asia: A study of financial markets 3 – Sound practices.

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References

Sherraden, M. 2009. Building assets to fight poverty. www.shelterforce.com. Accessed March 2016. Ssewamala, F, Sperber, E, Zimmerman, JM & Karimli L. 2010. The potential of asset-based development strategies for poverty alleviation in Sub-Saharan Africa. International Journal of Social Welfare 19(4): 433–443. Tan, SS. 2004. The Central Provident Fund: More than retirement. www.cscollege.gov.sg. Accessed March 2016. Vasoo, S and Lee, J. 2001. Singapore: social development, housing and the Central Provident Fund. International Journal of Social Welfare 10: 276–273.

Chapter 2: Could we do it in South Africa? Dempster, MAH, Kloppers, D, Medova, E, Osmolovskiy, I & Ustinov, P. 2016. Life cycle goal achievement or portfolio volatility reduction? Cambridge, UK: Cambridge Systems Associates Limited.

Chapter 3: It’s an emergency Collins, JM and Gjertson, L. 2015. Emergency savings for low-income consumers. Focus 30(1) 12–17. Cronqvist, H and Siegel, S. 2013. The origins of savings behavior. American Financial Association. AFA 2011 Denver Meetings Paper. Lusardi, A, Schneider, DJ & Tufano, P. 2011. Financially fragile households: evidence and implications. National Bureau of Economic Research working paper 17072. Madrian, BC. 2012. Matching contributions and savings outcomes: a behavioural economics perspective. National Bureau of Economic Research working paper 18220. Mischel, W. 2014. The marshmallow test: Mastering self-control. New York, NY: Hachette Book Group. Old Mutual South Africa. 2015. 2015 Old Mutual Savings and Investment Monitor. Cape Town: Old Mutual South Africa. The Pew Charitable Trusts. 2016. The role of emergency savings in family financial security: Barriers to saving and policy opportunities. www.pewtrusts.org. Accessed May 2016.

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Chapter 4: Housing as a stepping stone to financial well-being FinMark Trust. 2004. Township residential property markets. Midrand: FinMark Trust. Lipietz, B. 1999. International experience: Second draft. National Savings Initiative – delivery of housing services to the savers/consumers. National Urban Reconstruction and Housing Agency, NURCHA, Johannesburg. Manturuk, K, Riley, S & Ratcliffe, J. 2012. Perception vs. reality: The relationship between low-income homeownership, perceived financial stress, and financial hardship. Social Science Research 41(2): 276–286. Melzer, I. 2015. Housing sector performance: Overview of demand. Human Settlements and Banking Association Plenary Session 2015. Rust, K. 2012. Perspectives on South Africa’s affordable housing market: current trends and issues. www.housingfinanceafrica.org. Accessed June 2016. Shisaka Development Management Services. 2006. Home based entrepreneurs: Research findings and recommendations. Midrand: FinMark Trust. Sing, L. n.d. Pension secured loans, facilitating access to housing in South Africa? Midrand: FinMark Trust. Smith, A-M. 2013. First time buyer subsidy: its progress and teething problems. www.moneyweb.co.za. Accessed March 2016. Statistics South Africa. 2016. Quarter Labour Force Survey March 2016. Pretoria: Statistics South Africa. The Economist. 2009. Home ownership: shelter, or burden? www.economist.com. Accessed March 2016. FinMark Trust, 2006. ACCESS Housing: July 2006. http://hic-gs.org. Accessed March 2016. BusinessTech. 2015. 7 things you need to know about debt in South Africa. www.businesstech.co.za. Accessed March 2016.

Chapter 5: Education – the engine room for social mobility Behrman, Birdsall & Szekely. 1998. Intergenerational schooling mobility and macro conditions and schooling policies in Latin America. InterAmerican Development Bank Office of the Chief Economist working paper 386. Finn, A. 2015. A national minimum wage in the context of the South African labour market. A Southern Africa Labour and Development Research Unit working paper 153. Cape Town: SALDRU, University of Cape Town.

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References

Mayer, MJ, Gordhan, S, Manxeba, R, Hughes, C, Foley, P, Maroc, C, Lolwana, P and Nell, M. 2011. Towards a youth employment strategy for South Africa. Development Planning Division working paper series 28. Spaull, N. 2015. South Africa’s education crisis: the quality of education in South Africa 1994–2011. Johannesburg: Centre for Development & Enterprise. Van der Berg, S. 2013. Education, poverty and affluence – a South African perspective. Research on Socio-Economic Policy (ReSEP). Keynote Address, Conference of the Economic Society of South Africa. Von Fintel, M. 2015. Social mobility and cohesion in post-apartheid South Africa. Doctoral dissertation, University of Stellenbosch.

Chapter 6: We can make it if we really try – controlling health costs Bloom, DE, Cafiero, ET, Jané-Llopis, E, Abrahams-Gessel, S, Bloom, LR, Fathima, S, Feigl, AB, Gaziano, T, Mowafi, M, Pandya, A, Prettner, K, Rosenberg, L, Seligman, B, Stein, AZ & Weinstein, C. 2011. The global economic burden of noncommunicable diseases. Geneva: World Economic Forum. Child, K. 2016. Sweet and sour of dreaded sugar tax. www.timeslive.co.za. Accessed March 2016. Council for Medical Schemes. 2015. The Council for Medical Schemes Annual Report 2014/2015. Pretoria: Council for Medical Schemes. Discovery Health. 2016. Research paper. https://www.discovery.co.za/discovery_coza/web/linked_content/pdfs/employers_and_group_admin/ journal_non_communicable_diseases.pdf. Accessed June 2016. Donders, NCGM, Bos, JT, Van der Velden, K & Van der Gulden, JWJ. 2012. Age differences in the associations between sick leave and aspects of health, psychosocial workload and family life: a cross-sectional study, BMJ 2(4). Hofman, K. 2014. Non-communicable diseases in South Africa: A challenge to economic development. South African Medical Journal 104(10). PwC Health Research Institute. 2016. Medical cost trend: behind the numbers 2016. www.pwc.com/us/en/health-industries/health-researchinstitute.html. Accessed June 2016. World Bank. 2016. Health expenditure – total (as percentage of GDP) in South Africa. http://data.worldbank.org. Accessed March 2016. World Health Organization. 2005. Preventing chronic diseases: a vital investment: WHO Global Report. Geneva: World Health Organization.

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Chapter 7: Risk is in the eye of the beholder Sanlam. 2015. Sanlam Benchmark Survey 2015. www.sanlambenchmark.co.za. Accessed May 2016.

Chapter 8: Investing in the face of scarcity Oxfam. 2016. An economy for the 1%. Oxfam Briefing Paper 210. World Economic Forum. 2015. Outlook on the global agenda 2015. Geneva: World Economic Forum.

Part 3: An answer Chapter 1: A new approach to solving for savings Republic of South Africa. 2006. South African Schools Act, No. 84 of 1996 Regulations relating to the exemption of parents from payment of school fees in public schools. Government Gazette 29311. www.education.gov.za. Accessed June 2016.

Chapter 2: Knowing your assumptions from your elbow The New York Times. 2012. The weatherman is not a moron. www.nytimes.com. Accessed February 2016.

Chapter 3: The final saving grace: the underappreciated annuity Alexander Forbes Research & Product Development. 2015. Member WatchTM Survey 2015. Johannesburg: Alexander Forbes. Investopedia. 2016. What is an ‘annuity’? www.investopedia.com/terms/a/annuity.asp. Accessed June 2016. McCarthy, D. 2006. The rationale for occupational pensions. Oxford Review of Economic Policy 22(1) 57–65. Just Retirement and Alexander Forbes. 2016. Quantitative research results March 2016. Joint internal research project between Alexander Forbes and Just Retirement. Sandton Alexander Forbes. National Treasury. 2015. Draft default regulations: Draft amendments to the regulations issued in terms of section 36 of the Pension Funds Act, 1956 (Act 24 of 1956). www.treasury.gov.za. Accessed June 2016.

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References

Sanlam. 2015. Sanlam Benchmark Survey. http//www.sanlambenchmark.co.za. Accessed June 2016. Van Zyl, N. 2016. Whatâ&#x20AC;&#x2122;s the issue with annuities? Finweek, 21 April 2016.

Chapter 4: Dawn of the digital adviser Cassidy, M. 2015. Centaur chess shows power of teaming human and machine. www.huffingtonpost.com. Accessed June 2016. Cooper, Alan. 2004. The inmates are running the asylum: Why high-tech products drive us crazy and how to restore the sanity. Indianapolis, IN, USA: Sams. Egan, M. 2015. Robo advisors: The next big thing in investing. http://money.cnn.com. Accessed June 2016. Investopedia. 2016. Roboadvisor. www.investopedia.com. Accessed June 2016. Massachusetts Institute of Technology. 1996. MIT research â&#x20AC;&#x201C; Brain processing of visual information. http://web.mit.edu. Accessed June 2016.

Chapter 5: Time for a benefits programme for South Africans Republic of South Africa. 2006. Income Tax Act 58 of 19 62 as amended. www.acts.co.za. Accessed June 2016. Republic of South Africa. 2006. Pensions Funds Act 24 of 1956 as amended. www.acts.co.za Accessed June 2016.

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APPENDIX Data

APPENDIX: DATA

DATA Member Watchâ&#x201E;˘ 2015 Data Set The Member Watchâ&#x201E;˘ data set is a database containing information of individual members of retirement funds administered by Alexander Forbes Financial Services. The analysis prepared for Benefits Barometer 2016 used data as at 31 December 2015. The number of funds in each sector was large enough to give credible results.

Number of funds per sector Transport and telecommunications

61 138

Retail, wholesale and hospitality Professional and business services

276

Personal services

209

Public sector

Mining

61 471

Manufacturing Fishing, forestry and agriculture

276

Energy

34 61

Construction 0

100

150

200

250

300

350

400

450

500

Note that public sector funds in our analysis include a small number of municipalities that sit outside of the Government Employees Pension Fund. Comments made about funds in the public sector are not necessarily applicable to members in the Government Employees Pension Fund.

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APPENDIX: DATA

Data

Number of members per sector Transport and telecommunications

11 555

Retail, wholesale and hospitality

157 060

Professional and business services

156 298

Personal services

103 732

Public sector

35 610

Mining

20 173

Manufacturing

115 139

Fishing, forestry and agriculture

31 417

Energy

11 095

Construction

19 417 0

20 000 40 000 60 000 80 000 100 000 120 000 140 000 160 000 180 000

The large number of members in each sector suggests the data around member behaviour is likely to be relatively credible. The retirement fund consists of 840 867 members and 1 797 funds. We combined this data with fund data where we could not find an appropriate sector classification or where the clientâ&#x20AC;&#x2122;s operations were diversified in holding companies, for example.

293

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APPENDIX: DATA

THANK YOU Benefits Barometer 2016 is the product of Alexander Forbes Research, headed up by Anne Cabot-Alletzhauser. Through extensive dialogue with industry experts and comprehensive analysis of industry data, the team identifies how the industry needs to change to better meet client needs. We would like to thank the following people who contributed to making this publication the great work in service to the people of South Africa that it is: Deon Viljoen Alison Counihan Michael Kirkpatrick Deslin Naidoo Lynn Stevens

Stefan Bekker Youri Dolya Dwayne Kloppers Michael Prinsloo Ann Streak

Roshan Bhana Anton Engelbrecht Vickie Lange Jean Rossouw Belinda Sullivan

Joretha Bothma Alex Forsyth Kelsy Moodley Matthew Ryder Carla van Heerden

Megan Butler Remember Khosa Lettah Mpanza Myrna Sachs

Limukani Mathe

Siyanda Mavuso

External parties who contributed special articles and special insights from Rethink Africa: Ayabonga Cawe Frans Mothupi

Gillian Chigumira Lundi Ndudane

Sinazo Krwala Bandile Ngidi

Shisaka Development Management Services (Pty) Ltd: Ros Gordon

Matthew Nel

External experts who shared their thoughts and insights: Andrew Lukhele National Stokvel Association of South Africa

Rob Rusconi TRES Consulting

Kecia Rust Centre for Affordable Housing Finance

And a special thanks to the participants in our Alexander Forbes ‘What’s top of mind? ’ survey and focus groups from the Alexander Forbes Retirement Fund.

Alexander Forbes Communications team: Nkgomo Bojosinyane Art Director

Sharmaine Chanee Production Manager

Celine Colpo Senior Writer

Kim Jonson Designer and DTP

Simone Sallie Project Manager

Shireen Singer Editor

Sharon Stephen Digital Designer

Irene Stotko Senior Copy Editor

Elmarie van der Riet Editor

Danielle Wright Designer

To the clients who allow us to analyse their data on an ongoing basis. Thank you!

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BENEFITS BAROMETER 2016

BENEFITS

BAROMETER 2016

Visit benefitsbarometer.co.za to view and download the Benefits Barometer.

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