WORKING TOGETHER, FINDING SOLUTIONS, IMPROVING LIVES
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Disclaimer This book is copyrighted. No part may be reproduced in any form or format by any means without the written permission of Alexander Forbes Financial Services (Pty) Ltd (Alexander Forbes) and the publisher. Unauthorised reproduction of this book, whether for profit or otherwise, without the permission of Alexander Forbes and the publisher will constitute a copyright infringement and will result in liability for any person involved in the copyright infringement under both civil and criminal law. The authors made every effort to ensure the information in this book is accurate, but use or reliance on any information in this book is entirely at the reader’s discretion and risk. The graphs and charts in this book are for illustrative and information purposes only. Alexander Forbes, its employees, representatives and agents, the publisher, the authors, editors and printers will not be liable for any damage or loss to any person as a result of relying on the information, conclusions or opinions in the book.
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BENEFITS BAROMETER
FOREWORD BY ALEXANDER FORBES GROUP CHIEF EXECUTIVE, EDWARD KIESWETTER When I first joined Alexander Forbes in 2010, what really struck me was the extraordinary depth of information and insights the Group had been able to build up over the years. As such I’ve made it a priority to find ways in which Alexander Forbes could share that wealth of knowledge. This book represents an important milestone in that knowledge-sharing with those who are faced with the challenge of ensuring that individuals maintain some level of financial viability throughout both their period of employment and their postretirement years. This book had three specific objectives for Alexander Forbes: • As a THOUGHT LEADER: to share the insights we have developed over many years. • As an INFORMED VOICE: to contribute to one of the most critical dialogues that will lay the foundation for social security reform by the government. • As a RESPONSIBLE CITIZEN: to raise the awareness of the important need to improve our savings culture as a nation. The last 30 years have been significant in the development of employee benefits. We have seen a shift from defined benefit (DB) to defined contribution (DC) arrangements, where individuals have greater input and accountability for their structures. There has been a development of more equitable and inclusive employee benefits systems that reach a far greater population of South Africans than ever before. And more recently, employees are being given greater choice and flexibility in their benefits. Edward Kieswetter Alexander Forbes Group Chief Executive
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As such, South Africa now stands as one of the few countries globally with such breadth and depth of experience around DC arrangements. This means that the lessons we have learned, and the lessons we continue to learn, should be of critical interest to any number of other economies, both developing and developed. We know the world is watching with interest. The questions this book addresses are: “How effective have these programmes been?” and, more importantly: “What should we do to make these outcomes more impactful?”. Without doubt we have made progress. But in truth, we still have some way to go before we can translate any gains we may be making into a more financially stable world for our workers. Despite the advances, South Africa still has one of the lowest savings rates in the world. But, if we can create a more effective linkage between employee benefits, employee wellness and engagement between employer and employee, then all parties stand to benefit financially. If we can begin to recognise the place of employment as being the natural environment for advancing financial education and effective budgeting and financial planning for the individual, we can begin to address the challenge that has seemed almost unachievable: “How can we get South Africans to save?”.
FOREWORD
The problems demand that we understand the complex social and cultural fabric underpinning the South African work environment. Our fragmented approach does not help to resolve these challenges.
Our research shows unequivocally that the problems go beyond purely financial issues. They demand that we understand the complex social and cultural fabric underpinning the South African work environment. Our fragmented approach does not help to resolve these challenges.
A more effective delivery to South Africans demands that the key stakeholders actively engage in dialogue and collaborate more constructively with the right people at the table, focused on the right issues, with a collective resolve and unified sense of purpose, we will get to the right answers.
The research highlights the critical interconnectedness of a number of defining considerations: • The need to balance current needs with future needs. • The need to balance contributions at the right levels to provide for retirement benefits, healthcare and risk benefits as part of a total rewards system. • The need to balance behavioural factors such as individual preference, age, culture, upbringing, educational background and lifestyle. • The need for a system that balances individual choice with certain minimum default options on design issues such as contributions and preservation. • The need to balance the interests of the employees, employers, trade unions, all taxpayers and the government through greater financial literacy and better benefits design.
We invite you to join us at that table. The time is now!
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BENEFITS BAROMETER: EDITORIAL
EDITORIAL: REMEMBERING THE HUMAN FACE OF THE EMPLOYEE BENEFITS SYSTEM The Benefits Barometer provides a comprehensive overview of the employee benefits system, highlighting the key problems and identifying some principles to address them.
What is the difference between 45 and 46? If we are referring to the number of people who died at Marikana, it is someone’s son, brother, husband or father. If we are referring to the age at which a construction worker is forced to stop work because of a back injury, it represents an additional year of financial hardship. If we are referring to thousands of rands in a retirement fund of a 25-year old office worker, it can mean a dignified retirement in a future he cannot even imagine for himself. The industrial action in the second half of 2012 highlighted to us all the impact that remuneration and employee benefits can have on our country, our employers and our workforce. But there is another side to employee benefits. If designed appropriately to address employees’ needs, they can unlock productivity and profitability through a happy, healthy workforce. If interests are aligned, we all win. If they are not, the consequences could be dire, now and in the future. Aligning these interests requires careful consideration of all stakeholders including trade unions, employers, workers and the government. The Benefits Barometer provides a comprehensive overview of the employee benefits system. It highlights the key problems as we see them and identifies some principles for addressing them.
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However, it also acknowledges the practical problems that arise when trying to apply these principles in the real world. So an analysis of the problems, principles and practicalities is presented at an economic sector level. This is not intended to be the definitive work on the issue. It is intended to be the catalyst for a national and inclusive discussion on how to use employee benefits in a way that benefits all stakeholders. Every effort has been made to ensure that the material presented is thoroughly researched and substantiated. We recognise that there may be various ways of interpreting data and material and would welcome any comments, criticism or queries that would further this national debate. However, even using the most high-level macro-economic view, it is important to remember that at the heart of this issue are real people working in real organisations, for whom the difference between 45 and 46 is very real indeed. Megan Butler Johannesburg January 2013
BENEFITS BAROMETER: EXECUTIVE SUMMARY
EXECUTIVE SUMMARY The major employee benefits of healthcare, risk benefits, retirement benefits and financial education could provide an effective catalyst for boosting employee well-being and stimulating employee engagement.
PART 1: THE EMPLOYEE BENEFITS SYSTEM There is a growing recognition that employee benefits should meet the needs of individual employees and not a hypothetical average employee. The financial services industry has applied some of its best thinking to the delivery of a new generation of needsfocussed benefits, and some progress has been made. However, for the employee benefits system to reach its full potential, the complex relationships between the issues, benefits and stakeholders need to be more deeply appreciated. Unless this is done, the outcome will remain ineffective in terms of meeting members needs, enhancing business imperatives and safeguarding the government from having to address the shortfall. Alexander Forbes believes that the employee benefits system still represents one of the most effective formal channels for creating a savings culture in South Africa, as well as ensuring that individuals have sufficient protection in place for events that put their earnings potential at risk. The focus of this book is to identify sources of inefficiency and slippage. More importantly, it sets out the framework for a dialogue that must occur between all stakeholders in the delivery chain if we are going to extract the best results for all concerned. The major employee benefits of healthcare, risk benefits, retirement benefits and financial education could provide an effective catalyst for boosting employee well-being and stimulating employee engagement. Currently, this opportunity is not being maximised. Healthcare benefits Contributions to medical schemes have been increasing faster than salaries due to rapid increases in the costs of healthcare.
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Very few employers still offer post-retirement medical benefits and individuals may find the ever-increasing contribution rates on medical schemes to be unaffordable. Employers should reconsider the current ways of communicating the importance and structure of medical scheme benefits to ensure that employees choose to participate in the most appropriate benefit options. Risk benefits Members’ risk benefits needs will differ according to their circumstances and over the course of their lives. However, the typical bundle of group risk benefits is static and structured for the average employee, not tailored for the individual. We propose that schemes offer choice in risk benefits or else set defaults that better match the members’ needs as they go through life. Retirement funding The current retirement savings environment is characterised by low contributions, low expected investment returns, climbing annuity prices and a culture of low preservation rates. The fact that emphasis is typically placed on asset returns and not on managing assets to deliver a reasonable retirement income has exacerbated the problem. The result is a retirement benefit that is insufficient to meet the needs of pensioners, and that many savers perceive as having little value relative to the satisfaction of their immediate needs. The contribution rates, investment strategies and preservation strategies all need to be re-examined. In addition, where choice is offered, employees should be nudged towards more responsible decisions. However, even with the best efforts of the trustees and the employer, the retirement fund may not be able to deliver levels of savings that will see
BENEFITS BAROMETER
We propose an integrated approach to employee benefits that is focused on what employees need, with a benefit structure that reflects the employer’s values. The benefits should be communicated effectively to employees and reviewed regularly.
employees through their retirement years. Where this is anticipated, employers should offer ‘financial wellness’ programmes that help members develop effective budgeting skills and financial literacy before they require debt counselling. Financial education Low and declining household savings rates illustrate the lack of engagement that individuals have with their future financial needs. This is a good indication of a lack of engagement with employee benefits generally. At the heart of the problem is the lack of financial advice relating to effective planning and budgeting on offer at the right place, and at the right price. For many individuals, the workplace will offer the best opportunity for receiving financial advice. Employers should be more actively involved in finding the right medium of delivery and the right messages. WHAT CAN BE DONE TO IMPROVE BENEFIT OUTCOMES? Recognising the inter-connectedness of benefits and managing them holistically The current fragmented approach to employee benefits does not lend itself to getting the best outcomes for employees or employers, as it does not take account of the connections between: • The various financial services products and safety nets that an individual may have privately, through the employer, through the union or through the government. • Physical, mental and financial health and employer profitability. • Employee benefits, employee engagement and employer profitability. We propose an integrated approach to employee benefits that is focused on what employees need, with a benefit structure that reflects the employer’s values. The benefits should be communicated effectively to employees and reviewed regularly. The approach also needs to take account of practical issues.
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This kind of employee benefits system will also benefit employers by increasing employee engagement and organisational commitment – two essential ingredients to boosting productivity. In addition, improving the well-being of employees should have direct and indirect impacts on productivity. Ensuring benefits meet individual needs more effectively For various reasons, the employee benefits provided are often different to what the individual needs. One reason this arises is a ‘one size fits all’ approach to the benefit design as opposed to tailoring benefits for the individual over their lifetime. In addition, the benefit structure should recognise that basic needs should be met first. Improving financial engagement at all levels A key finding of our research is that individuals are typically not engaged with financial issues ranging from savings to ensuring sufficient protection of their earning capacity from risk events. Over the years, the industry has tried to improve financial literacy through education programmes. Although it takes many years to see if these kinds of programmes work, indications are that the industry needs to do more to help improve financial awareness and behaviour. This publication sets out some changes that can be made to incentives, education, communication and access to advice to help improve individuals’ engagement with these critical issues and ultimately help them to make the right choices.
EXECUTIVE SUMMARY
PART 2: THE ISSUES Any solution has to be grounded in the practical reality in which employees and employers find themselves.
ISSUE
IN THEORY…
THE PRACTICAL REALITY IS THAT…
Unhealthy finances
Employees should focus on work in the workplace.
They are often distracted by their personal financial problems.
Low-income earners
Employees who earn enough should save for retirement and those who do not earn enough, should not.
It is sometimes difficult to tell who will benefit from saving and who won’t.
Absenteeism and incapacity
Employees who are able to come to work must do so and employers should take care of those who are unable to work due to ill-health or injury.
Employees often abuse sick leave, and the disability management processes are often inefficient. Employers seldom plan for workers being forced to retire early.
Incentives
People will save more if we incentivise them to do so.
They’re unlikely to behave any differently, particularly if the value of the incentive is not clearly understood.
Temporary and informal workers
Everyone has a job with benefits.
Many South Africans don’t, particularly temporary and informal workers.
Choice
Providing people with choice allows them to tailor solutions to meet their own needs.
People seldom choose at all and when they do, those choices rarely address their long-term financial needs. Financial education doesn’t always help.
Bricks and books
Everyone has a place to live and access to education for their children.
Many people need their employer to help them.
Strikes
You can always avoid industrial action.
Not always and when there is a strike, employees lose benefits coverage.
Young workers
Employees start saving early and get into responsible habits.
Young workers don’t appreciate benefits or get an opportunity to set those responsible habits.
Pensionable pay
If employees do all the right things, they will replace a reasonable percentage of their takehome pay in retirement.
If employees do all the right things, they might replace some of their pensionable pay in retirement – and too often this is much less than they need.
High salary inflation
High salary increases are a good thing.
They create shortfalls in retirement funding relative to salary at retirement.
Mass exits
No one is ever forced to leave their job.
Industries shut down, companies liquidate and when companies retrench, employees lose both their jobs and benefits.
Longevity
The right retirement age is 60, 63 or 65.
The choice between 60, 63 and 65 is typically arbitrary and with increasing longevity, this is too early for some workers, unnecessarily reducing their benefits.
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BENEFITS BAROMETER
PART 3: SECTOR CASE STUDIES To gauge the employee benefits climate and whether the needs of individuals are being met, we have analysed various sectors of the economy and the delivery of employee benefits in those sectors. To do this, we created the Alexander Forbes Benefits Barometer – a tool that highlights the major issues in relation to employee benefits at a particular time in the specific sector. We identify the issues most pressing in each of the ten economic sectors and give practical suggestions on how to resolve them so that employee benefits can engage more and deliver better outcomes for all concerned.
HIGH PRIORITY FOR…
ACTION ITEM
WHO?
Unhealthy finances
Retail and wholesale
Integrate physical, mental and financial wellness initiatives.
Employers
Assess the appropriateness of including very low earners on the occupational retirement fund.
Employers and unions
Low-income earners
Construction, fishing, forestry and agriculture, personal services (security), retail and wholesale, hospitality
Remove the means-test on the government older person’s grant (OPG).
The government
Absenteeism and incapacity
Construction, energy, fishing, forestry and agriculture, mining, personal services (health), personal services (education), public sector, transport
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Incentives
Construction, fishing, forestry and agriculture, personal services (security), professional and business services, public sector, retail and wholesale, hospitality, telecommunications
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Temporary and informal workers
Construction, fishing, forestry and agriculture, mining, personal services (security), retail and wholesale, hospitality, telecommunications
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Choice
Energy, professional and business services, telecommunications
Reconsider the range of choices offered and have a plan to guide members to save responsibly.
Employers, trustees and unions
Expand employee benefits offering to include taxeffective housing and education benefits.
The government and employers
Bricks and books
Construction, fishing, forestry and agriculture, mining, personal services (education), professional and business services, public sector
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
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EXECUTIVE SUMMARY
HIGH PRIORITY FOR‌
ACTION ITEM
WHO?
Strikes
Fishing, forestry and agriculture, mining, personal services (health), personal services (education), public sector
Clarify the benefits to be forfeited in the event of a dispute.
Employers and unions
Young workers
Construction, mining, professional and business services, retail and wholesale, telecommunications
Improve financial education targeted at young people.
Employer, the government and unions
Pensionable pay
Fishing, forestry and agriculture, personal services (health), personal services (media and marketing), professional and business services, retail and wholesale, hospitality
Show projected retirement benefits in terms of rands and cents.
Trustees
High salary inflation
Mining, professional and business services, transport, telecommunications
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Employers, trustees and unions
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Promote re-skilling of workers in declining industries.
Unions and the government
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Mass exits
Longevity
Manufacturing, mining
Construction, personal services (health), personal services (education), personal services (media and marketing), professional and business services, public sector
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BENEFITS BAROMETER
HOW TO USE THIS BOOK The Benefits Barometer takes a comprehensive look at the employee benefits landscape. It’s intended to frame a discussion that will enhance the value of employee benefits to various stakeholders, including employees, employers, unions and policymakers. You would get the most out of the Benefits Barometer if you read it from cover to cover. However, you could also benefit from reading just those chapters that are most relevant to you. That said, we do recommend that you read the whole of Part 1 first, as this puts the rest of the Benefits Barometer into perspective.
PART 1: THE EMPLOYEE BENEFITS SYSTEM Part 1 sets out the framework for an improved employee benefits system. Here you will get a general overview of employee benefits in South Africa. We consider the various stakeholders and healthcare benefits, risk benefits, retirement funding and financial education in turn.
PART 2: THE ISSUES Here we go into the practical issues that make the improvement of the employee benefits system so difficult: Unhealthy finances can impact negatively on productivity. Low-income earners may be discouraged from saving for retirement, even when they should. Working lives can be short due to absenteeism and incapacity. Incentives don’t always encourage the behaviour they should. Employee benefits don’t always extend to temporary and informal workers. People want choice, but too many choices don’t always lead to better outcomes. Employees may need benefits like housing and education which are difficult and expensive to provide. Strikes can have serious employee benefits implications. Young workers often do not have good benefits habits. Pensionable pay levels can create unexpected benefits gaps. High salary inflation can result in under-funding for retirement. Retrenchments and mergers and acquisitions can disrupt benefits provision. Although people live longer, retirement ages have not been adjusted accordingly.
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HOW TO USE THIS BOOK
PART 3: SECTOR CASE STUDIES Part 3 provides an in-depth examination of ten different sectors and their employee benefits. When using Part 3 it is important to remember that both the classification of businesses to sectors and the classification of issues to different priority levels are not exact sciences. The characteristics of groups within a sector are also important in determining their needs and how best to meet them. For this reason, stakeholders should regard the Alexander Forbes Benefits Barometer as a rough guide to the burning issues in the industries.
HOW TO INTERPRET THE ALEXANDER FORBES BENEFITS BAROMETER
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– HIGH PRIORITY – These issues are
significant because they will have a large impact if they happen, are very likely to happen or both.
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– MEDIUM PRIORITY – These issues are important
but are less likely to happen, will have a smaller impact than high priority issues or both.
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– LOW PRIORITY – These issues are unlikely to happen or will have a small impact or both.
BENEFITS BAROMETER
TABLE OF CONTENTS Foreword by Alexander Forbes Group Chief Executive, Edward Kieswetter
2
Editorial: Remembering the human face of the employee benefits system
4
Executive summary
5
How to use this book
10
Table of contents
12
Introduction
14
PART 1: THE EMPLOYEE BENEFITS SYSTEM 15 Chapter 1: The employee benefits system and its inter-dependencies
19
Chapter 2: The outcomes of the employee benefits system
27
PART 2: THE ISSUES ISSUES
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Chapter 1: Unhealthy finances
51
Chapter 2: Low-income earners
57
Chapter 3: Absenteeism and incapacity
63
Chapter 4: Incentives
69
Chapter 5: Temporary and informal workers
75
Chapter 6: Choice
79
Chapter 7: Bricks and books
89
Chapter 8: Strikes
93
Chapter 9: Young workers
97
Chapter 10: Pensionable pay
105
Chapter 11: High salary inflation
111
Chapter 12: Mass exits
117
Chapter 13: Longevity
123
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TABLE OF CONTENTS
PART 3: SECTOR CASE STUDIES STUDIES
127
Chapter 1: Construction sector
131
Chapter 2: Energy sector
141
Chapter 3: Fishing, forestry and agriculture sector
153
Chapter 4: Manufacturing sector
163
Chapter 5: Mining sector
177
Chapter 6: Personal services sector - Health - Education - Media and marketing - Security
189 192 198 205 211
Chapter 7: Professional and business services sector
219
Chapter 8: Public sector
229
Chapter 9: Retail, wholesale and hospitality sector - Retail and wholesale - Hospitality
239 242 250
Chapter 10: Transport and telecommunications sector - Transport - Telecommunications
257 260 268
IN CLOSING
275
APPENDIX APPENDIX
277
Glossary 278 Abbreviations 285 References 286 Data 293 Thank you
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BENEFITS BAROMETER: INTRODUCTION
INTRODUCTION The employer remains the natural channel through which employed South Africans can save for their retirement, buy insurance cover, join a medical scheme and maintain control over their financial well-being throughout their working life.
On aggregate, the employee benefits model in South Africa is failing to deliver to its full potential. The level of retirement income secured with retirement fund savings typically lies far below the level of pre-retirement earnings. Levels of insured death benefits are often insufficient to meet the family’s needs following the death of a breadwinner and the cost of belonging to a medical scheme is taking up an increasing part of household budgets. All indications are that, without intervention, these outcomes will continue to deteriorate. Imminent reforms may help to some extent but action from other stakeholders is required to unlock the full potential of the employee benefits system. We firmly believe that employee benefits have a future and that the employer remains the natural channel through which employed South Africans can save for their retirement, buy insurance cover, join a medical scheme and maintain control over their financial well-being throughout their working life. Employee benefits systems can be designed to deliver value to employers, employees and society at large. However, an increased focus on highly interdependent relationships between everything and everyone in the employee benefits system is required.
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This book gauges the current state of the employee benefits system and sets out suggestions for its improvement. We have laid out the discussion in three parts: Part 1 explores the complex relationships in the employee benefits system and assesses significant employee benefits in greater detail. Part 2 delves into detail on practical issues that may cause poor benefits outcomes if not well managed. Many stakeholders may be unaware of these issues. Part 3 considers the problems, principles and practicalities at an economic sector level. Given the differences in their work requirements, working conditions and work priorities, each sector faces a different set of challenges in terms of how to create a more efficient and effective way of meeting their members’ very specific requirements. We introduce the Alexander Forbes Benefits Barometer as a way of gauging these challenges. Issues are prioritised in terms of high, moderate and low priority. As such, the Alexander Forbes Benefits Barometer can be used as a tool by stakeholders to focus their efforts.
PART PART1: 1 THE EMPLOYEE BENEFITS SYSTEM
PART 1
THE EMPLOYEE BENEFITS SYSTEM
CHAPTER 1
The employee benefits system and its inter-dependencies
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CHAPTER 2
The outcomes of the employee benefits system
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BENEFITS BAROMETER
CONNECTING THE STAKEHOLDERS, BENEFITS AND OBJECTIVES IN THE EMPLOYEE BENEFITS SYSTEM EMPLOYER
UNIONS
HOUSEHOLD
GOVERNMENT
ACCESS TO HEALTHCARE
MANAGING PHYSICAL AND MENTAL HEALTH
LEAVE SYSTEMS like sick leave, annual leave, absenteeism management
WORKPLACE ACCOMMODATION
BOTH MANAGING FINANCIAL HEALTH
TOTAL COST TO COMPANY PLUS BONUSES AND INCENTIVES
HOUSE AND OTHER MAJOR ASSETS
RETIREMENT SAVINGS
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SHORT-TERM INSURANCE
OLDER PERSON’S GRANT
PART 1: THE EMPLOYEE BENEFITS SYSTEM
DISEASE MANAGEMENT PROGRAMMES HEALTH PROMOTION ACTIVITIES like employee health, risk assessment, lifestyle programmes screening
EMPLOYEE ASSISTANCE INSURED DISABILITY BENEFITS
INSURED HEALTH BENEFITS
like disability income, lump sum disability
like medical schemes, health insurance, hospital cash plans
like medical advice, trauma counselling, financial advice
GOVERNMENT DISABILITY BENEFITS like COID, disability grants, Road Accident Fund
DREAD DISEASE COVER
DISCRETIONARY SAVINGS AND DEBT MANAGEMENT
INSURED DEATH BENEFITS like group life assurance, funeral cover
DISPOSABLE INCOME
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and similar stated benefits insurance
FINANCIAL EDUCATION
BENEFITS BAROMETER
Part 1 explores the complex relationships in the employee benefits system and assesses significant employee benefits in greater detail.
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PART 1: THE EMPLOYEE BENEFITS SYSTEM
1
THE EMPLOYEE BENEFITS SYSTEM AND ITS INTER-DEPENDENCIES By Megan Butler, Anne Cabot-Alletzhauser, Sandira Chaithram and Steve Watson
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1 Chapter 1
SUMMARY The employee benefits system consists of a number of inter-related benefits, including retirement benefits, death and disability benefits, medical scheme subsidies and financial education. The stakeholders in the system include households, the government, unions and employers and these too are connected. Employee benefits are typically designed to deliver physical, mental and financial well-being. These affect each other. If the employee benefits system is to work, we have to integrate the benefits and the stakeholders and we have to acknowledge the connection between different aspects of well-being.
A holistic approach is essential to improving the employee benefits system. This involves an increased focus on the integration between all stakeholders and all benefits. In addition, the understanding that physical, mental and financial health are inter-related is critical.
INTRODUCTION Say you are an employed South African. You have an employer that pays you a salary and offers you employee benefits. You have boards of trustees and the company’s human resources department looking after these benefits. You may belong to a union which protects your right to a fair remuneration package and your right to strike. You may even have taken out some of your own personal insurance policies and bought more savings products from a very large, and presumably very smart, financial services company. Finally, you have the government providing a safety net if everything goes horribly wrong. Certainly, you should have every expectation that this system will meet your financial needs. Think again. Financial health involves having enough income and net assets to meet your needs throughout your life with enough protection in place to ensure that you can maintain this, irrespective of what life throws in your path. The fact is that you, and many other employed South Africans, are probably not financially healthy, despite the efforts of employers, unions, financial services providers and the government.
1 South African Reserve Bank, KBP6287L, Household Savings Rate as a Percentage of Disposable Income, Seasonally Adjusted Data 2 Butler & Van Zyl (2012b) 3 Garman et al (1996) 4 O’Neill et al (2006)
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South African Reserve Bank (SARB) data indicate that between the fourth quarter of 2005 and the first quarter of 2012, South African households had more debt than savings1. There has not been such a sustained period of household indebtedness since the Reserve Bank began recording this data in 1960. The average retirement fund member is projected to replace just 39% of their gross income relative to an ideal target of 100%2 they need if they want to cater for their healthcare and other needs in retirement. This poor financial health may be placing additional pressure on other aspects of well-being. When considering people in poor financial health, 82.5% reported a deterioration in physical and mental health3. In turn, poor physical and mental health can jeopardise job security4 and be extremely costly. These two factors impact negatively on financial well-being. This is explored in greater detail in Part 2: Chapter 1. While individuals must bear much of the responsibility for their financial well-being, improving the employee benefits system requires a broader outlook with input from all stakeholders.
CHAPTER 1: THE INTER-DEPENDENCIES
THE IMPORTANCE OF INTEGRATION South African employers have long offered employee benefits, such as retirement funds, group risk benefits, healthcare subsidies and financial education. However, given the increasing financial pressures on employers, we need to pay more attention to designing
benefits that better meet both the employers’ and employees’ needs. Employees may try to address potential shortfalls in their overall personal wellness by buying additional financial products and services. These may be bought either by the
household directly or through affinity groups such as unions. But even with additional products and services, expectations might still not be met because of a lack of integration. These interdependencies are illustrated below.
PART 1 Chapter 1
CONNECTING THE STAKEHOLDERS, BENEFITS AND OBJECTIVES IN THE EMPLOYEE BENEFITS SYSTEM
DISEASE MANAGEMENT PROGRAMMES
ACCESS TO HEALTHCARE
HEALTH PROMOTION ACTIVITIES
MANAGING PHYSICAL AND MENTAL HEALTH
LEAVE SYSTEMS
EMPLOYEE ASSISTANCE INSURED DISABILITY BENEFITS
WORKPLACE ACCOMMODATION
BOTH MANAGING FINANCIAL HEALTH
SHORT-TERM INSURANCE
TOTAL COST TO COMPANY PLUS BONUSES AND INCENTIVES
EMPLOYER
HOUSEHOLD
GOVERNMENT
GOVERNMENT DISABILITY BENEFITS
HOUSE AND OTHER MAJOR ASSETS
RETIREMENT SAVINGS
INSURED HEALTH BENEFITS
DREAD DISEASE COVER DISCRETIONARY SAVINGS AND DEBT MANAGEMENT
OLDER PERSON’S GRANT
DISPOSABLE INCOME
UNIONS
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INSURED DEATH BENEFITS
FINANCIAL EDUCATION
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1 Chapter 1
The ripple effect from a single change of one aspect of the complex system of benefits provision can be significant, particularly if not understood or managed.
A holistic approach is essential to improving the employee benefits system. This involves an increased focus on the integration between all stakeholders and all benefits. In addition, the understanding that physical, mental and financial health are inter-related is critical. Ignoring the interactions between the various components creates inefficiency in the employee benefits system. For example, the government’s older person’s grant (OPG) may be enough to meet the basic needs of a low-income earner. Requiring this individual to contribute to a compulsory employer-based retirement fund while working may reduce their standard of living due to the contributions payable, as well as cause them to lose access to the OPG for which they may otherwise have qualified. This is discussed in Part 2: Chapter 2. By way of a second example, trustees of a retirement fund may try to increase the portion of contributions directed towards retirement funding by reducing the amount paid for disability insurance. One way of reducing the cost is to increase the waiting period that must elapse before the benefit starts. However, an employee with a disability claim may then run out of paid leave before the disability benefit starts, resulting in a break in income. This in turn may leave them unable to afford continued medical scheme membership at a time when they need it the most. The irony is there may be cases where early intervention triggered by an absenteeism management programme could have kept the employee productive. Absenteeism and incapacity are discussed more in Part 2: Chapter 3. Hence, the ripple effect from a single change of one aspect of the complex system of benefits provision can be significant, particularly if not understood or managed. This inter-connectedness can also be used to effect positive change. An employee assistance programme can offer employees
5 Alexander Forbes Research and Product Development 6 Gallup Organisation (2006)
22
financial advice, which can help with their levels of indebtedness, which in turn frees up more money for saving or buying risk benefits as a household. Integrating this with a wellness programme that allows employees to track and be rewarded for their progress may support these positive changes. Incentives are discussed in more detail in Part 2: Chapter 4. THE EMPLOYER AS A STAKEHOLDER Many employers have not reviewed their employee benefits structure in over a decade5, despite the rapid changes in the economic climate. Now might be a good time to stand back and consider what benefits are offered to which employees and the objectives of such a programme. Employers may not extend benefit coverage to all employees. Informal and temporary workers may be excluded, as discussed in Part 2: Chapter 5. Employee benefits can also benefit the employer when they are structured in such a way that they improve organisational performance, as discussed next. The impact of employee benefits on organisational performance is twofold: • Employee benefits stimulate employee engagement, which is highly correlated with organisational performance. • Employee benefits impact directly on physical, mental and financial health, which impact on productivity. Employee engagement and organisational performance An engaged work unit is 38% more productive and 27% more profitable than a disengaged one6. In addition, organisations with top quartile employee engagement levels have enjoyed a growth in earnings per share 2.6 times greater than organisations with below average employee engagement levels6. Another study found that over a 12 month period, organisations with high levels of employee engagement showed an
CHAPTER 1: THE INTER-DEPENDENCIES
Wellness programmes and initiatives to boost employee engagement may yield mediocre results unless education and communication strategies support them.
improvement in operating income of 19.2%7. In contrast, organisations with poor employee engagement levels saw a decline in operating income of 32.7%7. So there is a clear relationship between employee engagement and financial results. The precise role of employee benefits in stimulating employee engagement is difficult to quantify but is relatively intuitive. In an Alexander Forbes Survey8 all respondents stated that the wrong employee benefits could lead to disengagement. When asked if employee benefits were important for employee engagement, 84% of the employers responded ‘yes’ with just 13% stating that other aspects of the work environment were more important and 3% of employers stating that they were uncertain. Physical, mental and financial health and organisational performance Holistic employee benefits programmes that are structured to address physical, mental and financial health can offer employers a significant return on their investment. For every rand invested, returns can range from R4.50 to R23.009. This return is delivered through improved financial health and savings on absenteeism, retraining costs and the cost of insured benefits.
THE PRINCIPLES FOR EMPLOYEE BENEFITS STRUCTURING Clearly, offering the ‘right’ employee benefits package is important. This involves finding the right mix of pay, employee benefits and other benefits like training. These three components form the total rewards system. There are five factors that can assist in determining employee benefits structures that deliver value for employers and employees: • Integration • Education • Focus on needs • Organisational value consistency • Regular review. Integration Statistics suggest that, to date, South African employers have not been successful at offering a full spectrum of wellness benefits, let alone integrating them. Although 92% of the employers we surveyed agreed that looking after the financial, physical and mental wellness of their employees would boost productivity, only 28% of them incorporated all three into their wellness programmes10.
INTEGRATION OF ELEMENTS OF WELLNESS PROGRAMMES n ONLY PHYSICAL AND MENTAL WELLNESS n PHYSICAL, MENTAL AND FINANCIAL WELLNESS n NOTHING OFFERED n ONLY FINANCIAL WELLNESS Source: Hot Topics Summit Employer Survey 2012
51%
28%
7 Towers Perrin – ISR (2006) 8 Future of Employee Benefits Employer Online Survey 2012 9 Data from Alexander Forbes Health Management Services for a large client 10 Hot Topics Summit Employer Survey 2012
23
19%
2%
PART 1 Chapter 1
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1
MASLOW’S HIERARCHY OF NEEDS
Chapter 1 AN ACHIEVEMENT NEED WHICH INCLUDES RECOGNITION BY OTHERS AND REALISATION OF PERSONAL GOALS SUCH AS A COMFORTABLE RETIREMENT
ACHIEVEMENT NEED BELONGING NEED
A NEED FOR BELONGING WHICH INCLUDES CULTURAL NEEDS LIKE BEING ABLE TO AFFORD A DIGNIFIED FUNERAL A SAFETY NEED SUCH AS HOUSING, SECURE WORK CONDITIONS OR THE ABILITY TO AFFORD HEALTHCARE
SAFETY NEED
A PHYSIOLOGICAL NEED SUCH AS BEING ABLE TO AFFORD FOOD OR CLEAN WATER
PHYSIOLOGICAL NEED
Adapted from Maslow, A (1943). A Theory of Human Motivation. Psychological Review, 50(4), 370-396
Perhaps employers are reluctant to invest more in their wellness programmes because of the poor uptake of these interventions. Almost two-thirds of employers surveyed reported that their wellness programmes were used by less than half of their workforce, mainly due to a lack of interest or awareness10. Wellness programmes and initiatives to boost employee engagement may yield mediocre results unless education and communication strategies support them. Educate and communicate Where the default employee benefit arrangements are not appropriate to employees’ needs, individuals may make certain choices to try to rectify this. These might be choices exercised within the employee benefits system or decisions to buy additional products. Unfortunately, employees are seldom proactive and when they do make choices, they can often be inappropriate. This may be because they do not understand their overall financial state or the impact of 10 Hot Topics Summit Employer Survey 2012 11 Maslow (1943) 12 Future of Employee Benefits Employer Online Survey 2012
24
their decisions. The dynamics of choice are discussed in more detail in Part 2: Chapter 6, but part of the problem is the lack of a benefits education strategy, which includes meaningful and adequate communication. Focus on needs Understanding Maslow’s Hierarchy of Needs11 helps guide the discussion as to how employer benefits packages could be more effectively structured. Maslow argues that a specific need cannot be met until the needs lower down the hierarchy are met. We can see that medical scheme subsidies may meet an employee’s need for health security but this benefit would have considerably less value to an employee without access to the more basic need of clean water. Another example of an employee benefit interpretation of Maslow’s Hierarchy of Needs can be seen in a pilot survey12 conducted by Alexander Forbes. The survey shows that the most popular benefits for blue-collar workers
CHAPTER 1: THE INTER-DEPENDENCIES
If a company is conveying an image of ‘quality’ externally, it would be somewhat jarring if its employee benefits were ‘cheap and cheerful’.
correlated with physiological and safety needs, whereas management had greater achievement needs as indicated by the graph below. This demonstrates the dangers of a ‘one size fits all’ approach to employee benefits design. Organisational value consistency Every organisation requires a brand that speaks to their values. Millions of rands are spent on building and maintaining brand messages to generate current and future
revenues. But are those same messages being conveyed to employees through the employee benefits system13? If a company is conveying an image of ‘quality’ externally, it would be somewhat jarring if its employee benefits were ‘cheap and cheerful’. All communication about employee benefits should continue to promote the organisation’s values. The result is the feeling of a bespoke programme that is part of the organisation that the employee belongs to.
WHO CONSIDERS WHAT BENEFITS MORE IMPORTANT 100%
Percentage of employees
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Healthcare
Management
Retirement
Funeral cover
Office workers
Death cover
Disability cover
Take-home pay
Housingrelated
Blue collar workers
Source: Future of Employee Benefits Employer Online Survey 2012
13 Hunt & Landry (2011)
25
Meals at work
Educationrelated
Educationrelated (children)
Uniform allowance
Free or subsidised transport to work
Other
PART 1 Chapter 1
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1 Chapter 1
HOW FREQUENTLY DO EMPLOYERS REVIEW THEIR BENEFITS PROGRAMMES?
46%
14%
YEARLY
EVERY 3 YEARS
6% EVERY 5 YEARS
34%
SELDOM
Source: Hot Topics Summit Employer Survey 2012
Regular reviews Given the rapid pace of change for both employers and individuals, it is unlikely that a static package will meet everyone’s needs over time. However, while almost half of employers perform some level of review of their benefits programme annually, a further 34% seldom review their programme14, as shown in the graphic above. A survey of over 1 000 funds in 2011 confirmed that 94% of retirement funds had not reviewed their death benefits in a decade15. Clearly, more needs to be done to ensure benefits keep pace with economic and demographic changes. The below protocol can be used to perform this regular review.
CONCLUSION Employee benefits systems can improve the overall well-being of employees as well as raise employee engagement levels. However, unless the inter-dependencies between different aspects of well-being, different stakeholders and different benefits are recognised, the system is unlikely to deliver to its full potential. At a high level, if the system is integrated and the benefits structures are needs-based, regularly reviewed, valuesconsistent and coupled with an education strategy, this should improve employee welfare and employer profitability.
REVIEW PROTOCOL STEP
ACTION
REQUIRED OUTCOME
1
Internal analysis
Identify business outcomes and external brand messaging
2
Employee analysis
Identify employee demographics, needs and aspirations
3
External analysis
4
Existing benefits audit
Increased employee engagement Increased organisational commitment Correct benefit structure and mix Correct communications structure
Competitor analysis
Be able to recruit and retain
Identify minimum regulatory requirements
Compliance
Review current structure, costs and costs of any changes
14 Total Rewards Perspective Survey 2010 15 Alexander Forbes Research & Product Development
26
Value for money Benefits that work
PART 1: THE EMPLOYEE BENEFITS SYSTEM
2
THE OUTCOMES OF THE EMPLOYEE BENEFITS SYSTEM This chapter considers why four of the key employee benefits – healthcare, risk benefits, retirement funding and financial education – need improvement. This is not an exhaustive list of employee benefits, for example, it excludes housing and education benefits, which are discussed in Part 2: Chapter 7.
PART 1: THE EMPLOYEE BENEFITS SYSTEM
HEALTHCARE BENEFITS By Kristin-Ann Cronjé PART 1 Chapter 2
SUMMARY Contributions to medical schemes have been increasing faster than salaries due to rapid increases in the costs of healthcare. Very few employers still offer post-retirement medical benefits and individuals may find the everincreasing contribution rates on medical schemes to be unaffordable. Employers should reconsider the current ways of communicating the importance and structure of medical scheme benefits to ensure that employers choose to participate in the most appropriate benefit options.
During the individual’s retirement years, income is likely to reduce but their required level of medical cover is expected to increase.
INTRODUCTION Adequate healthcare cover is a crucial contributor to financial, physical and mental health. However, over the last few years, the annual increases in medical scheme contributions have been well in excess of the Council for Medical Scheme’s (CMS) guideline increase of CPI + 3%. This means that consumers are in a situation where their medical expenses, which include both medical scheme contributions and out-of-pocket payments, are using up a larger proportion of their income each year. A household paying 15% of their household budget towards medical expenses today may well be paying 22% in 20 years time, all other things equal16. THE IMPLICATIONS OF THE HIGH INCREASES These high increases have a significant impact on the level of take-home pay and limit the current levels of other employee benefits due to affordability constraints. The increases may also make medical scheme contributions themselves unaffordable, particularly for low-income earners, those with volatile incomes or those without an income due to strike action, as discussed in Part 2: Chapter 8. If contributions
16 Alexander Forbes Health
28
are unpaid, membership may be suspended or terminated. Membership can only be reinstated if the outstanding contributions are paid in full within 90 days of the lapse. If the individual later joins a medical scheme they may be subject to: • Reduced cover for certain conditions for a limited time period. • A permanent increase to the contribution rate via late joiner penalties. There are also long-term implications for retirement funding. During the individual’s retirement years, income is likely to reduce but their required level of medical cover is expected to increase. By 2032, a married man retiring at the age of 60 would need to have saved R1.6 million in today’s terms by his retirement date to fund medical scheme contributions on a comprehensive benefit option for himself and his wife throughout the retirement period. If he only has R900 000 available, he may be able to afford an intermediate option. However, even the most basic option would require savings of R650 000. When many South African defined contribution (DC) funds were designed, the employees’ post-retirement medical costs
CHAPTER 2: THE OUTCOMES
ACCUMULATED SAVINGS NEEDED TO FUND MEDICAL SCHEME CONTRIBUTIONS IN RETIREMENT
PART 1
R900 000
Source: Alexander Forbes Health
R1.6 million
Intermediate
Comprehensive
R650 000 Basic
were funded separately by the employer. This is no longer the case, and retirement funds have not been adjusted accordingly, leaving the employee to fund this cost themselves. WHY MEDICAL SCHEME MEMBERSHIP IS SO EXPENSIVE It is important to remember that medical schemes, as distinct from their administrators, are non-profit entities. Therefore higher than anticipated costs and expenses on medical schemes need to be funded through benefit cuts or higher contribution increases. The fact that medical scheme contributions are increasing so rapidly is a reflection of the losses that some medical schemes are experiencing. However, in addition to this, some of the regulatory requirements are also driving up costs. Firstly, prescribed minimum benefits (PMBs) are required to be paid in full, and this system is open to abuse. PMBs are a list of 270 medical conditions, 27 chronic conditions and any emergency medical conditions, for which
all medical schemes must pay claims in full without co-payments or the use of deductibles for all members17. The current interpretation of the PMB regulations means that the medical scheme must pay the full cost of the treatment, whatever is charged. This is open to abuse and fraud and although the use of designated service providers (DSPs) or other managed care initiatives can reduce this risk, this might be costly to set up and inconvenient for the employee. On a second and related note, there has not been an official tariff guideline in place since 2010 when the Department of Health’s Reference Price List (RPL) was declared invalid and uncompetitive by the North Gauteng High Court18. This has allowed medical service providers to repeatedly increase their fees. In the case of PMBs, the scheme may be forced to pay these costs in an emergency or if DSPs are not in place. Thirdly, technological advances mean patients are being diagnosed with conditions that may previously have gone completely
17 Regulation 8 to the Medical Schemes Act, No 131 of 1998 18 Hospital Association of South Africa and others v. Minister of Health and others 2010 (10) BCLR 1047 (GNP)
29
undetected or undetected for a much longer period. This results in more patients being treated and sometimes for longer periods of time. In addition, new treatments can be very expensive. For example, biological drugs for the treatment of conditions such as cancer can cost hundreds of thousands of rands for a single patient. Fourthly, the CMS requires that solvency reserves of no less than 25% of the gross contribution income are held. This is a rather crude measure that takes no account of the size of the scheme or its risk profile. In addition, schemes that are growing their membership will have particularly large solvency requirements. These solvency requirements need to be met through contributions. Finally, high levels of non-healthcare expenditure, particularly fees to administrators, are also driving the contribution increases.
Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1
Individuals trying to manage costs should consider whether their current benefits are appropriate for their current needs.
Chapter 2
WHAT CAN BE DONE? Reducing the costs At present, there are a number of systematic flaws that contribute to the high costs of medical scheme cover, many of which need to be addressed by policymakers and regulators. A more realistic solvency framework may reduce the burden on large, growing schemes. In addition, the implementation of a risk equalisation fund (REF) would eliminate or reduce the difference in contribution rates arising across different medical schemes simply because of different age and gender profiles. However, as much as this may assist in the open medical scheme environment, it may result in closed schemes with favourable risk profiles offering less value for money. Mandatory medical scheme membership for all who could afford it would broaden the risk pool and avoid members joining schemes only when they know they are ill, which worsens the profile of the current membership pool. On an individual basis, it does not make sense to participate in a benefit option that provides greater benefits than necessary for two main reasons: • Medical schemes are priced on an annual basis. • Unused contributions cannot be set aside to help the individual in later years when more comprehensive cover is required. This means individuals trying to manage costs should consider whether their current benefits are appropriate for their current needs. For example, younger individuals may only require basic hospital cover with older individuals requiring more comprehensive cover.
19 Act No 131 of 1998
30
Education Along with the increasing costs associated with medical care, the medical scheme environment is becoming increasingly complicated. This makes it difficult for a member to choose their option and to understand their benefits. In order to help their employees, the employer may feel compelled to help interpret the benefits, which could introduce legal risks if the interpretation is not correct. Using alternative products Alternatives to medical scheme cover include hospital cash plans or occupational health products. These medical insurance products are not subject to the Medical Schemes Act19, and as such are not obliged to offer the package of PMBs. This therefore allows the product design to focus on essential cover, usually including basic stated hospital benefits and primary level day-to-day benefits, which can be offered at much lower rates than the PMB package and are therefore accessible to lower income earners. CONCLUSION Healthcare benefits are costly and complex. While it may be necessary for the regulatory authorities to address some of these issues inherent within the system, employees should also consider benefit efficiency levels and trustees should consider how post-retirement healthcare costs are factored into the objectives of the retirement fund. Appropriate communication of healthcare benefits will also be critical to ensure engagement.
CHAPTER 2: THE OUTCOMES
RISK BENEFITS
By John Anderson and Belinda Sullivan PART 1
SUMMARY An individual’s risk benefits needs will differ according to their circumstances and will change over the course of their lives. However, the typical bundle of group risk benefits is static and structured for the average employee rather than being tailored for the individual. We propose that schemes offer choice in risk benefits or set defaults that better match the members’ needs as they go through life.
Risk benefit costs are typically deducted from the employer’s contribution to the retirement fund, which is typically fixed as a percentage of salary to manage the employer’s cost and employees’ take-home pay levels. This results in a trade-off between risk and retirement benefits.
INTRODUCTION It can be argued that risk benefits are failing to meet employees’ needs because the benefits themselves may be inefficiently structured. Risk benefit costs are often deducted from the employer’s contribution to the retirement fund, which is typically fixed as a percentage of salary to manage the employer’s cost and employees’ take-home pay levels. This results in a trade-off between risk and retirement benefits. This trade-off means that risk benefits may be selected on price as opposed to need. On the other hand, employees and their families have an expectation that the risk benefits will be enough to meet their needs in the event of disability and those of their dependants in the event of death. Anecdotal evidence suggests inappropriate risk benefits can lead to significant reputational risk for the employer. THE RIGIDITY OF BENEFIT STRUCTURES Most employers offer approved life assurance, monthly disability income benefits and funeral benefits. In some sectors, employees also have access to additional benefits such as: • Dread disease or critical illness benefits • Spouse’s death benefits • Lump sum death benefits offered outside the retirement fund, termed ‘unapproved’ cover.
20 Risk Benefits Survey 2012
31
However, these additional benefits are offered by fewer than 10% of the employers reviewed20. The total death benefit in DC funds is the sum of these insured benefits and the accumulated credit. The level of insured cover is usually the same for all employees. The average, minimum and maximum insured benefits, expressed as a multiple of salary, vary across the retirement funds industry as shown in the table on the next page. This rigid bundle of benefits and the fixed benefit amounts are not necessarily appropriate for the needs of different employees with varying jobs and demographic characteristics. For example, younger employees may be under-insured due to lower salaries at the outset of a career, lower accumulated benefits within a retirement fund, a potentially greater number of dependants and more debt. Conversely, older employees may be over-insured, resulting in a lower than necessary allocation to retirement savings.
Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
RISK BENEFITS PER SECTOR MINIMUM DEATH MULTIPLE
PART 1 Chapter 2
MAXIMUM DEATH MULTIPLE
AVERAGE DEATH MULTIPLE
Construction
1.0
6.0
3.6
Energy
1.0
13.0
3.8
Fishing, forestry and agriculture
0.0
6.0
3.2
Manufacturing
1.0
7.3
3.4
Mining
1.0
12.6
3.9
Personal services
1.0
5.0
3.0
Professional and business services
0.0
6.0
3.4
Public sector
2.0
15.0
5.4
Retail, wholesale and hospitality
1.0
6.1
3.2
Transport and telecommunications
2.0
5.0
3.4
Retirement funds industry
0.0
15.0
3.4
Source: Member WatchTM 2012 data set
There’s a delicate balance between having both the required level of risk cover and the required level of retirement funding at every age while ensuring that both the member and the employer can afford the total contributions.
WHAT CAN BE DONE? There’s a delicate balance between having both the required level of risk cover and the required level of retirement funding at every age while ensuring that both the member and the employer can afford the total contributions. The closer the member is to having both their risk and retirement needs met, the more efficient the allocation of the contribution is deemed to be. Put differently, efficiency involves maximising benefits that engage the employee at that period of their life cycle, while providing minimum levels of cover on other benefits. There are ways to improve efficiency, such as increasing the contribution rate, offering choice in risk benefits, setting more appropriate defaults or using a combination of all three. A sample of South African funds suggested that only 14% offered choice in risk benefits21.
21 Sanlam Employee Benefits (2012)
32
Funds could create more efficient solutions by considering life cycle solutions that tailor risk benefits and retirement fund contributions according to demographic profiles. This provides a default ‘ball-park’ balance between risk and retirement benefits that the individual can then tailor to meet their individual needs. By improving the efficiency of a member’s allocation at critical points in their life cycle, retirement and death-in-service outcomes can be improved. Creating this type of default option involves weighing up the relative importance of retirement and risk benefits over the employee’s life cycle. The allocation to the more important benefit is then maximised subject to a minimum level of the others. The following exercise helps highlight the ways in which default options are not created equal.
CHAPTER 2: THE OUTCOMES
Let‘s consider four death benefit structures: • A fixed, flat multiple of salary • Life cycle default • Life cycle affordable • A fully flexible benefit without increase to the total contribution towards risk and retirement. A life cycle death benefit pays a flat multiple of salary dependent on the member’s age. The death benefits are provided together with: • A disability income benefit that replaces 75% of the employee’s income while they are occupationally disabled or a lump sum permanent disability benefit. • Retirement fund membership.
The life cycle affordable structure allows for cover multiples of between 2x and 5x annual salary.
The life cycle default structure allows for cover multiples of between 3x and 7x annual salary.
33
A 100% efficient outcome would mean that individuals match their disability, death and retirement needs throughout their life cycle. This is generally not possible due to the fact that the total of retirement and risk contributions is usually fixed. Therefore the goal is to maximise the efficiency subject to this constraint. Because disability benefits are vital to sustaining the employee and their family through illness and injury, it is assumed that this benefit would always be prioritised and secured before allocating the remainder to retirement and death benefits. Let’s consider a male member aged 25 with a wife aged 21 with no children. Taking into account future events in the member’s life such as having children, one can generate efficiency scores for each of the four risk benefit structures. The efficiency score reflects the extent to which retirement and death benefits can be met from current contribution levels after buying disability income cover. Efficiency scores can be generated for the different sectors as illustrated on page 34.
PART 1 Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
Chapter 2
With fully flexible benefits, the public and mining sectors can achieve a relatively high level of efficiency while the professional and business services sector would be relatively less efficient. The professional and business services sector performs so poorly because total contribution rates are relatively low at 13.3%. By contrast, the contribution rate in the public and mining sectors are 17.7% and 17.2% respectively, which provides considerably more scope to structure benefits more efficiently. A fixed benefit structure in the mining sector delivers an inefficient result, as risk benefits are relatively expensive in this sector and so contributions towards death benefits are usually inadequate.
This has important implications. If contribution rates are too low, complex structuring will not make the benefit design truly efficient even though improvements in efficiency are possible. But conversely, a higher contribution rate does not guarantee greater efficiency. What is important is to allocate contributions to the areas where they are most needed. CONCLUSION Risk benefits are not only about paying death claims. They also offer important ‘living benefits’, such as accelerated death benefits in the event of total and permanent disablement, serious illness benefits in the event of a dread disease, education benefits for minors and a waiver of premium benefits in the event of temporary and total disability.
providing minimum levels of cover on other benefits. Efficiencies can be improved for the same total contribution level by having default options that are more tailored to the individual’s position in their life cycle. However, this improvement can be very limited where the total contribution rate is grossly inadequate. So while there is always some benefit in moving to a more tailored default option, the hard truth is that in many cases higher contribution rates are required first. In addition, whatever level of benefits and flexibility are provided, individuals must assess their personal needs and address any gaps or shortfalls in their personal capacity where the employee benefits arrangement cannot cater for these fully.
As previously stated, efficiency involves maximising benefits that engage the employee at different life cycle stages, while
EXAMPLE: EFFICIENCY OF BENEFIT STRUCTURES ACROSS THE SECTORS 100% 90% 80%
Efficiency score
PART 1
The chart highlights the varying efficiency levels in the different sectors. In this example, life cycle and fully flexible death benefit structures offer more efficiency for this member than the fixed benefit structures.
70% 60% 50% 40% 30% 20% 10% 0% Construction
Fully flexible benefits
Energy
Fishing, forestry and agriculture
Life cycle default
Manufacturing
Mining
Life cycle affordable
Source: Alexander Forbes Research & Product Development
34
Personal services
Professional and business services
Fixed benefit structure
Public sector
Retail, wholesale Transport and and hospitality telecommunications
CHAPTER 2: THE OUTCOMES
RETIREMENT FUNDING
By Megan Butler, Anne Cabot-Alletzhauser and Michael Prinsloo PART 1
SUMMARY The current retirement savings environment is characterised by low expected investment returns, climbing annuity prices, inadequate contributions and a culture of low preservation rates. The fact that emphasis is typically placed on asset returns and not on managing assets to deliver a reasonable retirement income has exacerbated the problem. The result is a retirement benefit that is insufficient to meet the needs of pensioners, and that many savers perceive as having little value relative to the satisfaction of immediate needs. Contribution rates, retirement ages, investment strategies and exit processes all need to be revisited to address this. Employers should be more involved in guiding employees towards more responsible decisions.
The average retirement fund member retiring at 65 is on track to replace just 39% of their pensionable pay.
INTRODUCTION The ultimate aim of retirement funding is to save during your working life to finance consumption when you are too ill or too old to work. From an employee’s perspective, this is not an exciting prospect. Young workers have tremendous difficulty with the long-term commitment required, as discussed in Part 2: Chapter 9. Older workers, however, become discouraged by poor projected retirement benefits22. And projected retirement benefits are very poor indeed. Projected retirement benefits are typically expressed as a replacement ratio, defined as the ratio of income in the year after retirement to income in the year before retirement.
22 Townsend & Lui (2012) 23 Butler & Van Zyl (2012b)
35
According to the Member WatchTM 2012 data set, the average retirement fund member retiring at 65 is on track to replace just 39% of their pensionable pay. This is relative to a replacement ratio target of 100% if they want to cater for all their needs including their healthcare needs in retirement23. As the chart on the next page shows, many South Africans may be en route to very reduced circumstances.
Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
DISTRIBUTION OF MEMBERS’ PROJECTED REPLACEMENT RATIOS PER AGE BAND: RETIREMENT FUNDS INDUSTRY PART 1 Chapter 2
0% - 30%
30% - 45%
45% - 60%
60% - 75%
75%+
Source: Member WatchTM 2012 data set
It is important to note that this projection: • Uses actual retirement fund member data and member-specific contribution rates and reflects projected outcomes for real members. • Does not take into account other savings outside the current retirement fund that may have been preserved from a previous fund. However, given low preservation rates, these other savings are unlikely to be significant. • Does not factor in any future non-preservation and so may even be regarded as optimistic. It is troubling that only 5% of workers under the age of 40 are expected to have replacement ratios of 75% or more when they retire at age 65. People in this age group are also the least likely to have additional savings and have the most opportunity to make bad benefits decisions later in life.
36
Recent retirements reflect low retirement incomes that are consistent with the projections for the next generation. Overall, the actual average replacement ratio for retirements during 2011 was 31.7% with lower income earners having the worst outcomes. In theory, having enough income in retirement requires: • Sufficient contributions net of expenses. • An investment strategy geared to delivering an adequate pension income, as opposed to just a high return. • Benefits being preserved when changing jobs rather than taking cash. • Choosing an appropriate annuity at retirement. But why do South Africans struggle in each of these four areas?
CHAPTER 2: THE OUTCOMES
It is troubling that only 5% of workers under the age of 40 are expected to have replacement ratios of 75% or more when they retire at age 65. People in this age group are also least likely to have additional savings and have the most opportunity to make bad benefits decisions later in life.
THE CONTRIBUTION CRUNCH The average member contributes 16.4% of their pensionable salary towards their retirement fund24. Foregoing 16.4% of pensionable salary may sound like a big sacrifice but after paying for risk benefits and expenses only 13.5% makes its way into retirement savings24. The global transition to a lower interest rate and lower investment return environment means that savings accumulate more slowly. This means pension pots are expected to be smaller at retirement. In addition, lower interest rates lead to more expensive annuities, so the income you can buy with the pension pot is even smaller. Ten years ago, a 13.5% contribution rate from the age of 25 to 65 would have been more than enough to secure a pension of around 75% of your pre-retirement salary. Based on this contribution rate, a 25-year old entering a retirement fund in September 2012 has an expected retirement income of only 38% of his pre-retirement pensionable salary if he retires at 6525. To make matters worse, the pensionable pay is usually lower than the full salary and high salary inflation levels expected in future years will also reduce replacement ratios. The implications of these factors are discussed in more depth in Part 2: Chapter 10 and Part 2: Chapter 11 respectively, but note that the actual drop in income experienced may be significantly larger than what our modelled results suggest.
24 Member WatchTM 2012 data set 25 Alexander Forbes Research and Product Development
37
INVESTMENTS: THE REALITY OF LIABILITY MANAGEMENT The impact of low contribution rates is exacerbated by the fact that investing for a DC fund is largely regarded as an assetmanagement problem as opposed to an asset-liability problem. Common investment objectives in DC retirement funds include: • Preservation of capital, which may appeal to funds with low-income earners. • Maximising risk-adjusted return. Ultimately, both can be ineffective when you are investing for an individual trying to secure an adequate income stream to replace their salary income when they retire. It is this postretirement income stream requirement that constitutes the member’s liability. The interesting dynamic is that the retirement income is a function both of the accumulated credit at retirement and the cost of the annuity to provide the income stream. Annuity prices change with long-term bond yields and longevity assumptions. So funds could provide the best possible inflation-beating returns and still miss the target, if inadequate attention is paid to the pricing of annuities. Let’s use the Pensions Index to illustrate this point.
PART 1 Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1 Chapter 2
The Pensions Index considers three savers, one born on 1 January 1972, another on 1 January 1962 and the third on 1 January 1952, making them 30, 40 and 50 years old respectively on 1 January 2002. As the index moves through time, it captures several dynamics: • The returns of the median Large Manager Watch asset manager. • Salary inflation over the time period • The projected cost of buying an annuity that is managed with the aim of providing inflationary increases in income, but does not guarantee these increases. The Pensions Index indicates the percentage of each individual’s income they are projected to be able to replace at retirement at age 65. On 1 January 2002, all three were expected
to afford a pension providing them with 75% of their pre-retirement income when they retired and so they had index values of 75. All three contributed 13.3% of their pensionable earnings to the retirement fund. And yet, despite excellent market returns between 2002 and 2012, the Pensions Index continued its downward slide in the third quarter of 2012. As at 30 September 2012, the index values were 53.7, 40.5 and 33.1 respectively. In other words, the 40 year old saver born in 1972 now has an expected replacement ratio of 33.1%. The South African stock market was at all time highs at the end of September 2012. How could the Pensions Index possibly be going down if markets were so strong?
PENSIONS INDEX AS AT 30 SEPTEMBER 2012
Savers’ years of birth: Source: Alexander Forbes Research & Product Development
38
Simply put, because assets and liabilities were not managed together, accumulated credits grew, but by less than the cost of securing an adequate income in retirement. This analysis throws into question exactly what form of member choice, if any, retirement funds should offer. Member choices that allow investors to pick which ‘manager of the moment’ they believe can offer them the highest returns would completely miss the point of liability management.
CHAPTER 2: THE OUTCOMES
Low preservation combined with higher withdrawal rates at younger ages can have dire consequences for retirement income levels. Factoring in actual preservation rates would halve projected retirement incomes for members under 35.
THE PRESERVATION PROBLEM Under South African law, members of a retirement fund only have access to their retirement savings before retirement if they withdraw from their current employer fund through resignation, dismissal or retrenchment. Alternatively, as part of a divorce order, some or all of the retirement savings may become due to a former spouse. At this point, benefits could be taken in cash or kept earmarked for retirement through transfer to another retirement fund or to a preservation fund designed as a ‘parking bay’ for these benefits until retirement. However, despite the limited circumstances under which members have access to their accumulated benefits and the choice available to preserve, there is still significant value destruction occurring through non-preservation.
the early years contribute significantly towards retirement income levels due to the effect of compounding on investment returns. Low preservation combined with higher withdrawal rates at younger ages can have dire consequences for retirement income levels. None of the projected retirement benefits in this book account for benefits leakage. Factoring in actual preservation rates would halve projected retirement incomes for those members under 35. At higher ages, where withdrawal rates are lower, the preservation rate is still relatively modest, with over two-thirds of retirement savings being lost. The higher the turnover rate the more relevant the preservation statistic is. The withdrawal and preservation rates are charted below.
Younger members are most likely to withdraw their retirement savings26. They are also the least likely to preserve. Retirement savings in
WITHDRAWAL AND PRESERVATION RATE FOR THE RETIREMENT FUNDS INDUSTRY
Source: Member WatchTM 2012 data set 26 Member WatchTM 2012 data set
39
PART 1 Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1 Chapter 2
The preservation rate of retrenchments over the 18 months to June 2011 was around 10% and for non-member spouses on divorce, who should have less pressing needs, this was only around 3%.
On average, members preserved only 7.7% of their benefit on withdrawal. Interestingly, even after age 55 approximately 5% of members withdraw from the fund instead of retiring, which may have a significant tax implication for them. This could indicate that members choose to resign rather than retire to take their full benefits in cash. Although it is understandable that individuals in a financial crisis may need the cash benefit, the reality suggests that the low preservation rates have little to do with financial need. The preservation rate of retrenchments over the 18 months to June 2011 was around 10% and for non-member spouses on divorce, who should have less pressing needs, this was only around 3%27. We do know from Alexander Forbes withdrawal data that members who do not preserve tend to: • Come from funds with high turnover, reflecting either poor job security or fake withdrawals by members to access retirement funds. • Have low retirement fund credits, which tend to be costly to preserve in terms of both fees and time. • Have low income levels. • Come from funds where there is little or no member financial education activity. In some funds, not a single member preserves on withdrawal! Various solutions have been proposed including compulsory preservation of all or part of the benefit on withdrawal or allowing leakage only in certain life events. The focus has prompted the National Treasury to publish a technical discussion paper setting out policy proposals to improve preservation28.
27 Alexander Forbes Research & Product Development 28 National Treasury (2012c) 29 Member WatchTM 2012 data set
40
Steps can also be taken at a fund level to improve the preservation experience. These include: • Making use of default preservation options. • Showing withdrawing members the impact of non-preservation using their specific personal information. • Education campaigns around preservation. • Working together with HR personnel to review and improve the resignation, retrenchment and dismissal processes. • Reviewing options to make financial advice more accessible to members. • Reviewing options to make preserving benefits easier for members. Employers may need to consider their strategies with care, particularly in light of the reason for withdrawal. Withdrawal because of retrenchments, liquidation of the employer or other mass withdrawal will require special consideration, as discussed in Part 2: Chapter 12. THE RETIREMENT AND ANNUITISATION DECISION During retirement, many people rely solely on their retirement fund income to sustain them. DC members can choose to retire at any age after 55 without penalty. At retirement, members choose how much income to annuitise subject to statutory requirements, tax considerations and which type of annuity to buy. The average age at retirement during 2011 was 60.9 years29. This is slightly higher than the 60.4 average during 2008 and this may reflect the deteriorating retirement outcomes that members experience, which may have reduced instances of early retirement.
CHAPTER 2: THE OUTCOMES
Nearly a third of retirees exited before the age of 60. There is an approximate 6% to 8% increase in the buying power of a pension for every year that retirement is delayed, so someone retiring at age 55 and not 60 may have sacrificed an increase of 25% to 30% to their pension in real terms. This is due to making contributions for longer, earning investment returns for longer and the cost of annuity benefits decreasing with age. Given the generally low retirement benefits and projected retirement incomes, members should be encouraged to delay retirement as much as possible and employers should be encouraged to facilitate this as discussed in Part 2: Chapter 13. Currently, at retirement, pension fund members can take up to a third of their retirement fund benefit as cash while provident fund members can take the full benefit as cash30. They must use the balance to buy a conventional life or living annuity. The decisions as to the amount of cash to take and which annuity to buy are often irrevocable. However, most members have not made a single decision about their retirement funding before this point!
People retired six months later, on average, in 2011 than in 2008
Despite the limits on the size of the cash benefits, if we considered pension and provident fund members together, the average member takes about 60% of their benefits in cash at retirement. This is due to the tax incentive structure, the OPG meanstest that encourages cash benefits and simply not understanding their options. Members need advice and guided processes to nudge them towards responsible choices or appropriate defaults if they are unable to choose for themselves.
30 Income Tax Act, No 58 of 1962, as amended
41
CONCLUSION The current retirement savings environment is characterised by retirement benefits that are insufficient to meet the needs of pensioners and that many savers perceive as having little value relative to the satisfaction of immediate needs. This is despite the many hours employers and retirement fund trustees invest in managing and monitoring retirement benefits. To avoid this time and energy going to waste and the employees depending on the government in old age, employers should be more involved in the decision-making process and guide or even default employees towards responsible decisions. Where it is clear that the retirement fund alone will not meet members’ requirements, trustees and the employer should consider ways to change these outcomes, including: • Increasing the retirement age • Increasing the contribution rate • Increasing the pensionable pay percentage • Automatic preservation • Automatic annuitisation. In addition, retirement savings investments should better match the way in which liabilities move. Where the situation cannot be resolved by the retirement fund alone, employers should offer ‘financial wellness’ programmes that help members who realise their level of savings is not going to see them through their retirement years to develop effective budgeting skills and financial literacy.
PART 1 Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
FINANCIAL EDUCATION
By John Anderson, Megan Butler and Michael Kirkpatrick PART 1 Chapter 2
SUMMARY Low and declining household savings rates illustrate the lack of engagement that individuals have with their future financial needs. At the heart of the problem is the lack of financial advice relating to effective planning and budgeting on offer at the right place, and at the right price. For many individuals, financial education will be accessed only through the workplace. Employers should be more actively involved in finding the right medium of delivery and the right messages.
2.7 million of the 19 million creditactive South Africans have court judgments and administration orders against them.
INTRODUCTION 2.7 million of the 19 million credit-active South Africans have court judgments and administration orders against them31, indicating that they cannot manage their debt. Reserve Bank data shows that for the last seven years, South African households have had more debt than savings32. Low levels of savings relative to debt is a global problem and the reasons for this phenomenon are complex. However, Australian research33 offers some possible reasons including: • Living for today. • Aspirational spending. • Spending to feel better. • Financial disengagement, defined as no interest in managing finances and a lack of monitoring or responsibility. • The use of credit as an additional income. • The attitude that credit is ‘mine’ as opposed to money that needs to be repaid. Financial education is one of a complex web of factors that can assist in changing attitudes and behaviours that result in indebtedness and distress33. One of the recommendations of the organisation for Economic Cooperation and Development (OECD) around financial education is that all stakeholders, including unions, employers
and the government, contribute to improve levels of financial education. WHAT IS ‘FINANCIAL EDUCATION’? The definition of ‘financial education’ as per the OECD (2005) is the process by which consumers: • Improve understanding of financial products, concepts and risks. • Through information, instruction and objective advice, develop the skills and confidence to: ▪ Become more aware of financial risks and opportunities. ▪ Make informed choices. ▪ Know where to go for help. ▪ Take other effective actions to improve their financial well-being. Offering objective advice and communicating this information effectively, so that employees can make informed choices, are key components of education. HOW WELL ARE EMPLOYERS DELIVERING ON FINANCIAL EDUCATION? Financial education is a long-term process and the world is constantly changing, so it is often difficult to assess what makes an education programme effective at changing behaviour34.
31 M alcolm Rees: Credit Regulator Shocked by Loan Abuse. Money Web 27 September 2012. http://www.moneyweb.co.za/moneyweb-special-investigations/credit-regulator-shocked-by-loan-abuse?sn=2009+Detail 32 South African Reserve Bank, KBP6287L, Household Savings Rate as a Percentage of Disposable Income, Seasonally Adjusted Data 33 Nash (2008) 34 O’ Connell (Unpublished)
42
CHAPTER 2: THE OUTCOMES
“Email as a form of communication is just not working, even though it’s the easiest way to communicate these days.”
A number of studies have shown that education and individual counselling are helpful in combating employee behaviour that could lead to financial distress35. For this approach to be effective, what is said and how it is said need to be carefully considered. CONTENT Statistics from over 1 100 member education seminars conducted by Alexander Forbes’s Member Education department during 2011 indicate that employers are offering financial education but this centres around employee benefits instead of the more basic and important topics of financial literacy. Only 16% of the seminars related to general financial wellness. Almost three-quarters of the seminars were focused on the retirement fund, giving an overview of employee benefits or preservation. DELIVERY Education can take the form of group seminars, online tools and printed material. Employers need to concern themselves with improving the use of the most effective means of delivering this content. When we asked employees at some of our larger clients about their employee benefits communication, a number bluntly stated that they were aware of communication but did not read any of it36. Why is financial education and communication so ineffective? Firstly, the medium used to convey messages may make a significant difference to their
35 Joo & Grable (2000) 36 Future of Employee Benefits Member Interview Survey 2012 37 Symantec report finds that more than a third of global targeted attacks are aimed against small businesses, 10 July 2012, http://www.symantec.com/about/news/release/article.jsp?prid=20120710_01, 26/11/2012 38 Polak (2008)
43
usage. Email communication is prevalent but 66.8% of email traffic in South Africa is spam37. So, given that employees are bombarded with irrelevant emails, it is no surprise that they seldom read employee benefits communication. One member complained about the ‘plenty emails’ received about the benefits while another summed it up as “email as a form of communication is just not working, even though it’s the easiest way to communicate these days36.” Younger members who were interviewed for our survey were particularly critical of current modes of delivery36. With the growing recognition that people learn at different paces and in different ways and that it’s critical to repeat messages, experts recommend using a variety of different media to convey consistent messages38. A number of pilot programmes in Poland38 have shown that short television segments featuring celebrities and an online film portal featuring threeminute segments were particularly effective at reaching younger and older people. In addition, levels of financial understanding continued to improve after viewings, possibly due to the discussions that they provoked38. Secondly, understanding was a key problem. One respondent told us that because the initial communication about benefits was so poor, employees did not bother to open subsequent messages.
PART 1 Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
39.8%
PART 1 Chapter 2
Retirement funds Wills and dependants 5.3%
MEMBER EDUCATION SEMINARS BY TOPIC, 2011
Other financial literacy 1.5%
25.4%
Source: Guardbook data set 2011
Overview of employee benefits
13.4%
Preservation Retirement fund portfolio choice 2.5% Life and disability cover 2.3% Other employee benefits topics 1.2%
Budgeting 8.7%
44
CHAPTER 2: THE OUTCOMES
“People trust me with [my job] and I trust [my employer] with my provident fund.”
Thirdly, there was not clarity on responsibility for the benefits and there were high levels of financial disengagement. One woman working in professional and business services summed it up as, “People trust me with [my job] and I trust [my employer] with my provident fund.” Further investigation revealed that she was a member of a DC fund with choice as to the level of the contribution rate and the investment portfolio. Her comments revealed that not only did she not know that the trustees, not the employer, set the defaults and make other decisions about her savings, but more importantly, it suggested she was not aware of the risks she could face. When we asked employees about employee benefit communication, they invariably referred to their annual benefit statement, which is consistent with UK research that suggests this is the primary source of information about retirement funding39. Recent research on benefit statements suggests that they are largely ineffective in stimulating financial engagement or communicating risks to employees40. Changing this would require the administrator to change the benefit statement design.
INCORPORATING ADVICE Although education and communication might provide the worker with enough information to make informed financial decisions, some workers may wish to seek advice. In addition, counselling has been shown to play a powerful role in helping employees with financial distress. However, most South Africans do not seek advice formally. When it comes to general financial products, 54% receive advice from TV or radio or from friends and family who do not work in financial services. About 53% use TV, radio and the internet to make choices about private retirement savings41. Across all products, advice from the employer was found to be consistently important, with 11% using their employer for financial decisions, more than those approaching financial advisers. However, the Financial Advisory and Intermediary Services Act (FAIS)42 requires that advice is provided by accredited advisers only. This makes the continued provision of advice in the workplace unlawful if the advisers are not accredited. Inevitably, there’s a cost implication in getting accredited advice.
The current approach to communication is not working: • Email ineffective and often not read • Messages need to be repeated • Must use variety of media to convey messages
39 Sykes et al (Unpublished) 40 Murray (Unpublished) 41 Roberts & Struwig (Unpublished) 42 Act 37 of 2002, as amended
45
PART 1 Chapter 2
PART 1: THE EMPLOYEE BENEFITS SYSTEM
PART 1 Chapter 2
Individuals tend not to follow advice, but when they do, the after-fee improvement in benefit outcome can be equivalent to 1.8% per year in additional returns. However, any benefit depends on getting the right advice at a reasonable price.
Paying for advice is somewhat controversial: there is an obvious benefit for the adviser, but the benefit to the person getting advice is more difficult to quantify. This is partly because individuals tend not to follow advice43, but when they do, the after-fee improvement in benefit outcome can be equivalent to 1.8% per year in additional returns44. However, any benefit depends on getting the right advice at a reasonable price. The National Treasury has raised concerns about the cost and bias involved in advice in the retail market45. The challenge is ensuring the right advice is offered in a place where employees will look for it, and at the right price. The Financial Services Board (FSB) is responsible for financial advice and education in South Africa. However, despite initiatives in banking and short-term insurance, little progress has been made on the broader savings and debt environment. Given the scarcity of funding, corporate sponsorship is needed, without expectation of marketing or significant brand exposure in return.
43 Bhattacharya et al (2012) 44 Blanchett & Kaplan (2012) 45 National Treasury (2012b) 46 OECD-US Treasury (2008)
46
CONCLUSION Improving benefits outcomes through education, communication and advice will require a number of stakeholders, such as the government, financial services providers, unions and employers46, to focus their attention on this area. For their part, employers and unions, retirement fund administrators and boards of retirement fund trustees need to reconsider their communication strategies in a way that incorporates the FSB’s public service financial education messages. New strategies need to ensure that the content covers basic financial literacy topics as well as employee benefits and that it is presented in an engaging way. Employers and the FSB will have to address offering advice in the workplace to ensure appropriate, regulated advice at the right price.
PART 2 THE ISSUES
PART 2
THE ISSUES
CHAPTER 1
Unhealthy finances
CHAPTER 2
Low-income earners
CHAPTER 3
Absenteeism and incapacity
CHAPTER 4
Incentives
CHAPTER 5
Temporary and informal workers
CHAPTER 6
Choice
CHAPTER 7
Bricks and books
CHAPTER 8
Strikes
CHAPTER 9
Young workers
CHAPTER 10
Pensionable pay
CHAPTER 11
High salary inflation
CHAPTER 12
Mass exits
CHAPTER 13
Longevity 47
51 57 63 69 75 79 89 93 97 105 111 117 123
BENEFITS BAROMETER
CONNECTING PERCEPTIONS ABOUT EMPLOYEE BENEFITS WITH REALITY
PERCEPTION 1
Unhealthy finances don’t affect productivity
2
Low-income earners don’t need to save for retirement
3
Absenteeism and incapacity are infrequent and unmanageable things
4
Incentives encourage people to save
5
Temporary and informal workers don’t need benefits Choice means better-tailored benefits
6
Bricks and books are within reach of all South Africans
7
Strikes are about take-home pay
8 9
Young workers want the same things as older workers
10
Pensionable pay is just a tax issue
11
High salary inflation is a good thing for workers
12 13
Mass exits happen to others Longevity means a longer retirement 48
PART 2: THE ISSUES
REALITY 1
Many employees focus on their financial troubles while at work
2
It’s sometimes hard to tell who should save Abuse of sick leave can be managed and some disability claims can be managed or prevented
3
People might not change their behaviour if they don’t understand the incentive
4 5
Many people may need benefits, but this need is not being met
6
People may not choose what’s best for their long-term financial well-being
7
Many people need their employer’s help to access housing and education Employees lose benefits coverage while on strike They view benefits differently
8 9
Pensionable pay levels have a direct impact on benefits
10
High salary inflation creates shortfalls in retirement savings
11
Mass exits are common and have big benefit implications Employees may be retiring too early 49
12 13
BENEFITS BAROMETER
Part 2 delves into detail on practical issues that may cause poor benefits outcomes if not well managed. Many stakeholders may be unaware of these issues.
50
PART 2: THE ISSUES
1
UNHEALTHY FINANCES EMPLOYEES ON THE EDGE By John Anderson, Megan Butler, Sandira Chaithram and Michael Prinsloo
PART 2: THE ISSUES
PART 2 Chapter 1
SUMMARY Unhealthy personal finances can have negative effects on productivity, both directly and indirectly, due to negative health consequences, absenteeism, low morale and fraud. It is estimated that this could cost employers up to 10% of their salary bill. A number of aspects of financial health are within the control of the employer. In addition the employer may be able to influence the employee in other aspects. Sustained education combined with personal financial coaching appears to be the most effective manner of influencing financial health. These interventions should also be integrated with initiatives to improve physical and mental health.
“There is no dignity quite so impressive, and no one independence quite so important, as living within your means.” Calvin Coolidge, US President 1923-1929
INTRODUCTION Although financial markets have become more sophisticated and employees better educated, South Africans seem to find being financially healthy every bit as challenging now as it was when Coolidge penned this quote in his 1929 autobiography. About 15% of employees are subject to garnishee orders47 and almost 50% of South Africans have impaired credit records48. DEFINING HEALTHY FINANCES Financial health involves having enough income and net assets to meet your needs throughout your life with enough protection in place to ensure that this is maintained irrespective of what life throws in your path.
The employer has an important role to play in facilitating financial health. In doing so, employers need to recognise that benefit packages of the same rand value can have very different effects on an employee’s financial health. In other words, how the benefit package is structured can be as important to financial health as the monetary cost of the package itself. Elements of a balanced total rewards system (TRS) are illustrated on the next page. But why should the employer be concerned with personal finances at all?
SOUTH AFRICANS
50% have impaired credit records
47 http://www.hrfuture.net/reward-finance-tax/national-credit-actnational-credit-act.php?Itemid=271 48 http://mg.co.za/article/2011-10-13-sa-consumers-feel-more-vulnerable-in-second-quarter
52
CHAPTER 1: UNHEALTHY FINANCES
THE INTERDEPENDENCE OF PERSONAL FINANCE AND EMPLOYEE BENEFITS
DISPOSABLE INCOME
INSURED DEATH BENEFITS DREAD DISEASE COVER
like group life assurance, funeral cover
DISCRETIONARY SAVINGS AND DEBT MANAGEMENT
and similar stated benefits insurance
TOTAL COST TO COMPANY PLUS BONUSES AND INCENTIVES
INSURED HEALTH BENEFITS like medical schemes, health insurance, hospital cash plans
INSURED DISABILITY BENEFITS
SHORT-TERM INSURANCE
like disability income, lump sum disability
GOVERNMENT DISABILITY BENEFITS
RETIREMENT SAVINGS
like COID, disability grants, Road Accident Fund
EMPLOYER
HOUSEHOLD
HOUSE AND OTHER MAJOR ASSETS
GOVERNMENT
OLDER PERSON’S GRANT
UNIONS
53
PART 2 Chapter 1
PART 2: THE ISSUES
PART 2 Chapter 1
In the longer term, unhealthy finances can create physical and mental health problems due to stress, distraction from work and not receiving appropriate medical treatment.
WHOSE PROBLEM IS THIS, ANYWAY?
THE DIRECT EFFECTS
Unhealthy personal finances can lead to unhealthy employer finances. This effect is likely to be felt on two fronts.
Absenteeism is closely linked to unhealthy finances and results from poorer physical and mental health and the fact that employees often need a considerable amount of time to address their financial problems49. Even if employees with unhealthy finances make it into the workplace, they spend a considerable amount of their workday dealing with their personal finances. One study suggested that 53.9% of employees use work-time to address financial problems50. Another indicated that those with very poor financial health spend 26% more work-time than average attending to personal financial matters51.
Firstly, unhealthy finances have a direct impact on productivity due to distraction from work. In the longer term, unhealthy finances can create physical and mental health problems due to stress and not receiving appropriate medical treatment. Secondly, these health problems themselves create further financial distress for employees as well as increasing absenteeism, both of which serve to decrease productivity further. Thirdly, it is also possible that unhealthy personal finances can increase workplace fraud and theft of company property.
DIRECT EFFECTS OF UNHEALTHY FINANCES
53.9% of employees use work-time for personal financial problems
49 Garman et al (1996) 50 Schaitberger & Dell (2007) 51 Jenkins (2005)
54
CHAPTER 1: UNHEALTHY FINANCES
The implication is that reducing deductions for things such as pension fund contributions will not lift employees out of financial distress, no matter how great the appeal may be to the worker.
THE INDIRECT EFFECTS Financial distress is known to cause health problems and vice versa. The links between unhealthy finances and stress have been documented for thirty years or more. Financial distress is a key determinant of overall stress levels and stress is a well-known contributor to heart disease and ulcers52. In one study, 82.5% of employees stated that financial worries had a negative impact on their physical health53. However, this may represent the tip of the proverbial iceberg. US research indicated that unhealthy finances impact on physical health in a number of ways54. Poor money management can result in people delaying medical treatment or not receiving any at all. Alternatively, people may choose cheaper public sector care, which may be of lower quality. This may be particularly true in cases where individuals allow their medical scheme membership to lapse or reduce their coverage level to increase their take-home pay. In the longer term, a lack of money may prevent individuals from taking preventative health measures such as eating well and going for healthcare screening, although corporate wellness initiatives can reduce this effect. This can be exacerbated by employees in financial distress letting insurance policies lapse, which makes them vulnerable to life events including illness or injury. Financial distress has also been linked to increased accident rates both at work and outside the workplace52, which means that one employee’s financial problems may impact negatively on the health of their co-workers, their company’s safety record or society as a whole.
52 Garman et al (1996) 53 Schaitberger & Dell (2007) 54 O’Neill et al (2006) 55 Joo & Grable (2000)
55
While financial health can impact on physical health, poor physical health can also contribute to poor financial health. A 2005 study indicated that health crises contributed to almost half of all personal bankruptcies in the US. This is not only due to the medical bills themselves but the concurrent loss of income that can arise when poor health jeopardises job security54 and performance. HOW BIG A PROBLEM IS FINANCIAL HEALTH FOR EMPLOYERS? In 1979, Brown estimated the cost to the employer as a result of reduced productivity to be about 10% of total salary bill and this is still the most quoted estimate of the cost of financial distress52. However, it doesn’t capture all the indirect costs such as higher health insurance costs and fraud, as well as lost productivity due to secondary ill-health brought on by financial distress55. HOW HAVE EMPLOYERS RESPONDED? Employers may be pleased to note that research shows that simply increasing salaries is not the solution52. The implication is also that reducing deductions such as pension fund contributions will not lift employees out of financial distress, no matter how great the appeal may be to the worker. American employers have found a number of creative ways to assist employees who may be in financial distress but the evidence suggests that education coupled with counselling may be the solution52.
PART 2 Chapter 1
PART 2: THE ISSUES
Taking positive action to reduce financial distress, such as enrolment in a debt counselling programme, has been shown to improve financial status and this also has a positive knock-on effect on health54. However, interventions need to be sustained and it can take 18 months for the effects to be felt54. This requires commitment both from the employer and the employee.
PART 2 Chapter 1
For programmes to be successful, they need to integrate physical, mental and financial wellness initiatives. When we surveyed employers, we found that of employers who believed wellness programmes could improve productivity, only 30% had financial wellness programmes in place56.
54 O’Neill et al (2006) 56 Hot Topics Summit Employer Survey 2012
56
IMPLICATIONS Most employers have wellness initiatives to improve physical and mental health. However, financial health should be dealt with concurrently and with more emphasis if employers want to help employees become more productive. This could start with the employer reviewing their benefit programme as a whole, considering all aspects of financial health and taking into account their specific demographics and the identified gaps or shortfalls in benefits. But it should go further to have real impact. Employers looking to introduce financial wellness initiatives should consider faceto-face education initiatives together with personal financial coaching through workplace programmes. They may be surprised by the return on investment.
PART 2: THE ISSUES
2
LOW-INCOME EARNERS CAN YOU EARN TOO LITTLE TO SAVE? By Megan Butler, Kristin-Ann Cronjé, Kelsy Moodley and Anthony Steen
PART 2: THE ISSUES
SUMMARY PART 2 Chapter 2
Any income derived from personal savings may reduce the older person’s grant (OPG) that lower-income earners would otherwise freely receive. Although savings may result in a higher combined income, savers will not always be better off. Any saving would need to take place in low-cost savings vehicles. These vehicles may be provided by the government but employers or unions may need to consider how to include lower earners in occupational funds. Low-income earners tend to have a need for high levels of risk cover. Group cover provides cost-effective insurance but any insurance arrangements should be set taking into account government benefits and the cost of the insurance. Workers earning under R72 000 per year lose their free hospital treatment in government facilities if they join medical schemes. Given the high cost of medical scheme membership, low-income earners may wish to consider hospital cash plans as an alternative.
INTRODUCTION When it comes to retirement, risk and healthcare benefits, low-income earners find themselves in a quandary. Not having benefits in place might expose them to hardship in the near or distant future but paying for these benefits may make even the most basic goods and services unaffordable now. However, their specific needs and their entitlements to government benefits are seldom taken into account when designing employee benefits systems.
OPG
older person’s grant
RETIREMENT Not saving at all may leave workers dependent on the older person’s grant (OPG), more commonly known as the state pension, which is revised at least annually and was set in March 2012 at R14 400 per year for persons aged 60 to 74 and R14 640 per year for recipients aged 75 and over57.
57 Government Notice 256 (2012). Increase in Respect of Social Grants. Government Gazette 35189, 29 March 2012, 58 Annexure A of the Social Assistance Act, Act no 13 of 2004
58
However, those with low levels of retirement savings may still receive a partial OPG to supplement their income, according to the means-testing rules. The OPG is means-tested in two ways58. Firstly there is an asset test, which means the OPG is not paid if the assets for each person exceed 55 times the annual OPG value. Using current OPG levels, this suggests an asset threshold of R792 000 per person aged between 60 and 74. If the assets fall below this threshold, then the income-test is applied. The income-test involves a relatively complex formula. When the older person’s personal income is R14 400 per year or less, they receive the OPG in full. However, as soon as it exceeds R14 400, every R1 of additional income reduces the OPG by 40c. When income exceeds R47 400 per year no OPG is paid.
CHAPTER 2: LOW-INCOME EARNERS
The income-test may create disincentives for low earners to save, since saving means giving up income during their working lives to provide for retirement, and any income derived from these savings will reduce the OPG that would otherwise have been freely received. Although saving may result in a higher combined income, the graph on the right illustrates that savers will not always be better off.
THE IMPACT OF SAVINGS ON THE OLDER PERSON’S GRANT RECEIVED R60 000 1 200
R50 000 47 400
PART 2 Chapter 2
48 600
R40 000
47 401 R30 000 47 401
28 800
14 400 R20 000 R10 000 14 400 0 Post-retirement income from own savings (per year)
Finding the income level below which saving becomes inadvisable is a mathematically challenging exercise and a number of factors come into play, including: • The percentage of pay that is pensionable • Deductions from the salary for other benefits • Costs • Expectations of investment returns • Salary inflation • The future levels of the OPG • Gender, as women’s annuities cost more than men’s annuities due to the fact that women live longer.
Older person’s grant (per year)
However, if you assume that the OPG’s real value remains constant and that pensionable salaries are set at 75% of the total income level and contribution rates are 13.5%, a 25 year old man earning R42 100 per year and a 25 year old woman earning R50 555 per year would have just enough income in retirement to get no OPG at all. Their own personal income secured through an annuity would be around R4 000 per month, almost R2 800 higher than the OPG on which they would have to rely if they had not saved at all. So, there are definite benefits to saving for retirement despite losing the OPG! The table below illustrates this example.
Total income (per year)
At lower levels of income, saving becomes increasingly difficult because individuals are living close to the breadline. Consideration of the municipal indigence lines suggests that people earning under about R21 000 per year should not consider any form of saving for retirement59. For young people with incomes around twice this income level, the argument for saving begins to become compelling. However, between these extremes is a grey area caused by the means-test.
SALARY AT AGE 25 (PER YEAR)
SALARY AT AGE 25 (PER MONTH)
CONTRIBUTION AT AGE 25 (PER MONTH)
INCOME FROM SAVINGS AT AGE 60 (PER MONTH)
OPG (PER MONTH)
Women
R50 555
R4 212.92
R426.56
R3 950.27
R0
Men
R42 100
R3 508.33
R355.22
R3 951.37
R0
59 Moodley (Unpublished)
59
PART 2: THE ISSUES
PART 2 Chapter 2
High charges, particularly high fixed costs, are a key challenge for low-income savers. In funds run by employers, insurers and unions, charges are equivalent to 1% per year of total assets60. However, for products available to individuals, the total charges start at around 1.8% per year and increase to over 6% per year61. Higher than expected expenses mean that low-income earners receive less income from their own savings. This means that they may be partially reliant on the OPG despite their sacrifices during employment. It may be difficult for such savers to appreciate that they are still better off having saved for retirement and receiving some supplementation from the OPG rather than being fully reliant on the grant. This message requires careful communication both from employers and the government to encourage savings for retirement if the income-test is to be retained. The asset test will also need to be updated over time as annuity prices increase, to ensure that those who require income-support in retirement receive it.
RISK BENEFITS Apartheid labour practices created a migrant labour system, which in turn created patterns of income transfers from working individuals to non-working family members. Together with the asset-test for the OPG, this pattern created a preference for cash benefits to support dependants. On average, working households earning under R60 000 per person per year support two to three other people outside the household62. In extreme cases, a worker may have more than twenty dependants, including their own household. This means that lower-income earners may have relatively high risk benefit needs, which may not be affordable in full. All workers have some form of recourse to benefits if they are injured or killed in the workplace or while on duty through the Compensation for Occupational Injury and Diseases Act (COIDA)63. However, this may prove inadequate given that the disability or death of a low-income worker may have an impact beyond their own immediate family. This points to the fact that cost-effective risk benefits are essential and any benefits offered by an employer, union or the governmentsponsored National Social Security Fund must integrate with the basic government benefits. Group risk arrangements tend to be substantially cheaper for lower-income earners than retail offerings. So it makes more sense for employers to try to obtain this type of cover on a group basis than to leave it to individuals to secure cover privately.
lower-income earners often have high risk benefit needs as they could support more than twenty dependants 60 Alexander Forbes Research and Product Development (2012) 61 Zubi (Unpublished) 62 Income and Expenditure Survey 2005/2006, author’s own calculations 63 Act no 130 of 1993, as amended
60
CHAPTER 2: LOW-INCOME EARNERS
Primary healthcare may be within geographic reach of most South Africans, but many find that public primary healthcare facilities have long waiting times and are beset by drug shortages.
HEALTH BENEFITS Low-income earners can rely to some extent on government healthcare facilities. Primary healthcare may be within geographic reach of most South Africans, but many South Africans, particularly in urban areas, find that public primary healthcare facilities have long waiting times and are beset by drug shortages64. From an employee wellness perspective, this may translate to more time spent away from work to get a diagnosis and then a longer recovery time. It is perhaps unsurprising that a number of South African employers, particularly in the mining sector, run their own on-site primary healthcare facilities. In terms of more serious ailments, Annexure H of the Uniform Patient Fee Schedule published by the Department of Health sets out the rules for receiving subsidies for treatment in government hospitals. The subsidy thresholds are set at levels that would allow for 90% of employed South Africans to receive at least some discount and so provide some protection against catastrophic health expenditure. However, earning over R72 000 per year or belonging to a medical scheme would automatically remove any subsidy65. Providing low-income workers with affordable medical cover remains a key challenge for employers and the government. A consultative investigation into creating a medical scheme for low-income earners (LIMS) was launched in 2005 and while opinions differed on how to deliver a solution, the consensus was that traditional medical schemes were unaffordable for low-income earners66. According to the Medical Schemes Act67, every medical scheme plan must include a core package, termed ‘prescribed minimum benefits’ (PMBs). The cost of these benefits
64 Plaks & Butler (2012) 65 Department of Health (2012) 66 Magennis & Van Zyl (2009) 67 Act no 131 of 1998, as amended 68 McLeod et al (2003) 69 Eighty20 (Unpublished) 70 http://www.ocsacare.co.za/AboutUs.aspx and www.essentialmed.co.za
61
means that even the lowest cost plans would still represent a significant part of a low income earner’s budget. This is particularly so for workers earning only slightly more than the current subsidy cut-off level of R72 000 per year. Some research suggested that some low income families were spending about a quarter of their income on medical scheme contributions alone68. Certain experts suggest that South African households should not be spending more than 10% of household budgets on healthcare69. Lower-cost alternatives include health insurance in the form of hospital cash plans or occupational health products. These medical insurance products are not subject to the Medical Schemes Act 67 and as such, are not obliged to offer the package of PMBs. This therefore allows the product design to focus on essential cover, usually including basic stated hospital benefits and primary level dayto-day benefits, which can be offered at much lower rates than the PMB package applicable to medical schemes. During 2012, these types of products could be bought at between R120 to R290 per month for a single member70. These products provide a more affordable alternative to medical scheme cover. However many occupational health products can only be bought on a group basis, with cover often applicable to the main member only. This therefore excludes cover for the employee’s family. This could be seen as a weakness to the alternative cover, but providing cover for the employee should maintain their health for longer and more sustained periods, thereby allowing them to continue to earn an income and support their dependants. In the absence of any cover, they may have been forced to take time off work or possibly even terminate their services due to ill-health.
PART 2 Chapter 2
PART 2: THE ISSUES
PART 2 Chapter 2
The government needs to clarify and simplify the interplay between retirement savings and the older person’s grant (OPG) to encourage low-income workers to save.
IMPLICATIONS The government is proposing reforms to the retirement industry. As things currently stand, these reforms may offer retirement and risk benefits to low-income earners, particularly if they use either auto-enrolment or a National Social Security Fund. However, the government needs to clarify and simplify the interplay between retirement savings and the OPG to encourage low-income workers to save. They should also explicitly deal with the complexity introduced by gender-specific annuity rates to reduce old age poverty among women. The government should consider removing the means test for access to the OPG, given the disincentive to save for low-income earners and the administration costs of the means test. This would mean that all South Africans above the age of 60 would qualify for the OPG. This could be made fiscally neutral by varying the income tax threshold for older South Africans with other sources of income, so that their income tax increases by the value of the OPG. A top-up savings plan for individuals appropriately incentivised through tax or co-payment by the government, where the proceeds are exempt from the means-test, could improve the long-term savings culture among low-income earners. It is also critical that careful consideration is given to the income threshold if workers earning above a certain income are to be auto-enrolled into retirement funds. This threshold should not unnecessarily exclude low-income earners who should save for retirement. For people with earnings close to the poverty line, however, a governmentsponsored wage subsidy may be required to prevent the retirement funding contribution creating hardship.
62
Currently, products available to individuals are not cost-effective for low-income earners and employers may need to include lowerincome earners on the occupational funds if they are not catered for by the government. Consideration of how to treat expense allocations for different members will be critical to ensure that lower-income earners are not bearing too high a share of these expenses. As illustrated previously, lowincome earners do not always benefit from saving for retirement and so workers who are better off not saving for retirement should not be forced to join the employer fund. The risk benefit needs of high- and lowincome earners are very different, as are the premiums that each group could be charged. Managing the benefit package and crosssubsidies will be a key issue. National Health Insurance may improve healthcare delivery in the public sector, but this is a long term project and employers will need to address the healthcare needs of their low-income workers for the foreseeable future. In the absence of any changes to the PMB package, access to alternative products and hospital cash plans should help to meet the healthcare needs of these employees to some extent.
PART 2: THE ISSUES
3
ABSENTEEISM AND INCAPACITY GETTING EMPLOYEES BACK TO WORK OR COPING WITH THE FACT THAT THEY WILL NEVER RETURN By Megan Butler and Myrna Sachs
PART 2: THE ISSUES
SUMMARY Absenteeism costs the South African economy about R3.9 billion per year and at least 3% of workers retire early due to ill-health. Absenteeism management not only cuts down on sick leave abuse and can prevent unnecessary disability claims, but assists with legislative compliance and the reputational risk associated with the handling of disability claims. PART 2 Chapter 3
Most disability cases relate to musculoskeletal conditions, which can be managed through appropriate interventions and rehabilitation. Certain jobs, particularly those which entail heavy manual labour or involve high stress levels, lend themselves to early retirement for health reasons. The shorter working lives of these employees coupled with high healthcare costs in retirement mean that employers may need to review their benefit packages to ensure that employees have appropriate cover in their retirement years.
During 2011, 9.2% of workers in the private sector and 33.6% of public sector workers took sick leave. Over the three-year cycle ended December 2011, one out of every four employees took their full sick leave benefit.
INTRODUCTION Lost productivity due to absenteeism and ill-health represents an enormous challenge to South African employers. At any given time 3.4%71 of the South African workforce is on sick leave. For some, this is a temporary absence while for others it may be a sign of a possibly protracted disability claim. In addition, at least 3% of retirements on funds administered by Alexander Forbes occurred before the age of 55 and are likely to be early retirements due to ill-health. Absent workers have a direct negative effect on productivity, which was estimated to be R3.9bn in 201171. So, how should employers manage absenteeism and incapacity? ABSENTEEISM, INCAPACITY AND DISABILITY CLAIMS During 2011, 9.2% of workers in the private sector and 33.6% of public sector workers took sick leave71. Over the three-year cycle ended December 2011, one out of every four employees took their full sick leave benefit71. When absenteeism is not managed correctly, employees tend to view sick leave as an entitlement and use, or rather, abuse their full
71 Adcorp Employment Index, April 20012 72 Act no. 66 of 1995, as amended
64
benefit. Therefore it is important to ensure sick leave is only taken for valid reasons. Monitoring and managing sick leave effectively is also critical to detect disability claims before they occur. In some cases, appropriate cost-effective interventions, such as employee assistance programmes or absenteeism monitoring can help prevent an illness or injury from turning into a permanent disability claim. However, for those workers genuinely unable to continue working, the disability claims process can be expedited. Poor handling of the disability claims process can result in workers going without any income if both sick leave and annual leave run out before the disability benefit can be paid. In extreme cases, the disability claim may be repudiated due to late notification. This may result in reputational risk or possible financial liability for the employer. In line with the disability claims process, it is important to remember that not every employee with medical conditions that hamper their productivity would qualify for a disability insurance benefit. Nevertheless, Schedule 8 of the Labour Relations Act72
CHAPTER 3: ABSENTEEISM AND INCAPACITY
requires employers to at least investigate all cases of disability and incapacity. There is also a requirement for employers to comply with the Employment Equity Act (EEA) and the Code of Good Practice for disability in the workplace. Appropriate case management and appropriate accommodations or adjustments to the workplace can keep workers productive. The main drivers of disability in South African workplaces are listed in the following table according to levels of physical intensity associated with the occupations of the
claimants. It is interesting to note that HIV does not feature in the top three reasons for disability claims and therefore companies should focus not only on HIV programmes, but also integrated wellness programmes that incorporate all chronic diseases and lifestyle conditions. The highest number of disabilities noted below is due to musculoskeletal conditions which could, with the correct intervention and rehabilitation allow the person to be able to return to gainful employment. Active case management may also reduce the long-term costs of disability benefits.
PERCENTAGE OF DISABILITY CLAIMS BY LEVEL PHYSICAL INTENSITY Light
Medium
Heavy
Musculoskeletal, back and connective tissue
25.2%
24.9%
26.4%
Cancer
10.4%
8.3%
7.5%
Mental
11.0%
8.2%
6.5%
HIV
7.0%
4.1%
8.7%
Respiratory
5.6%
8.7%
8.7%
Nervous system
7.4%
7.9%
7.4%
Source: GenRe Analysis, 2012
For many white collar workers and workers performing light manual tasks, a number of the top causes of disability in the workplace can be addressed using appropriate wellness interventions. There are five elements to an effective wellness programme, namely: health education, integration with employee services and benefits, supportive environments for health improvements, integration with corporate culture and employee screenings with follow-ups73. In the South African working 73 Goetzel & Ozminkowski (2008)
65
environment there are relatively few fullyintegrated employee wellness programmes with all five elements in place. There is also a lack of coordination of the various services and service providers, making it difficult to identify trends and any correlating factors. These shortcomings can hamper the effectiveness of these programmes to prevent absenteeism, incapacity and disability73 due to lost synergies.
PART 2 Chapter 3
PART 2: THE ISSUES
EARLY RETIREMENT DUE TO ILL-HEALTH Health tends to decline with age. While there are certain biological and genetic factors that influence the pace and pattern of this deterioration, there are certain modifiable factors that influence how long health is maintained. These include the physical and mental aspects of work and lifestyle74.
PART 2
Where appropriate accommodations in the workplace are not possible due to the very nature of the work, poor health may lead to an early exit from the workforce. Job characteristics strongly influence the age at which individuals are no longer able to work safely or productively. Job characteristics that contribute to earlier retirement ages are illustrated below.
Chapter 3
JOB CHARACTERISTICS THAT CONTRIBUTE TO EARLIER RETIREMENT AGES75
Physical strain Emotional strain Physical strength Physical flexibility Performance under stress Repetitive mechanical tasks Physical and hand-eye coordination Learning where knowledge becomes outdated Production of tangible results such as producing goods
74 See also Case & Deaton (2005) 75 Filer & Petri (1988)
66
CHAPTER 3: ABSENTEEISM AND INCAPACITY
An integrated employee benefits system needs to account for effective management of the sick leave benefit and the chronic conditions driving the disability claims experience within the company.
This suggests that earlier retirement ages may be necessary in jobs involving heavy manual labour, manufacturing, mining and transport. Jobs in personal services involving high degrees of emotional involvement and high stress jobs may also lend themselves to earlier retirement. Early retirements are problematic from a benefits perspective for a number of reasons. Firstly, the employee has less time to save for retirement. Given that all employees typically have the same contribution rate, shorter working lives would result in lower retirement benefits, assuming that the other factors affecting retirement outcomes remain constant. Secondly, the cost of securing life annuities is higher at younger ages for the same level of income required, which means even lower retirement incomes. Finally, retirement typically signals the end of the employer’s medical scheme subsidy where employers do not offer post-retirement medical subsidies to employees. For many workers, funding their current medical scheme membership in retirement on a lower income and without a subsidy represents a significant hardship. Unfortunately, the reality of early retirement is that the medical conditions that shorten the working lifetime of an individual will persist in retirement and require the individual to participate on a more comprehensive and therefore more costly benefit option. The potential loss of medical scheme cover or the inability to afford adequate cover, combined with higher medical expenses, may result in many early retirees paying substantially more for healthcare during retirement76, which would need to be funded from a relatively low level of income.
76 Butler & Van Zyl (2012a)
67
Employers facing high rates of early retirement due to ill-health could structure contribution rates so that workers with earlier expected retirement dates contribute more towards their retirement funds during their shorter working lives. However, the increased cost to the employee or employer is unlikely to be appealing and may affect their standard of living during their working lifetime. Choosing the appropriate combination of cash lump sum and annuity at retirement can help stretch the retirement benefit further. For workers in a poor state of health at retirement, an impaired annuity, which factors in their potentially shorter life expectancy, may deliver value for money while still preventing the retiree from outliving their retirement savings. Appropriate financial planning, which includes advice on funding for post-retirement medical costs, is essential for individuals to ensure that they consider all potential outcomes and plan accordingly. IMPLICATIONS Although many employers have a wellness programme to address elements of physical and mental health, if these are not fully integrated with employee benefits and services, then their effectiveness will be severely compromised. In other words, an integrated employee benefits system needs to account for effective management of the sick leave benefit and the chronic conditions driving the disability claims experience within the company. Additionally, when considering the wellness of employees, employers should take into account that certain jobs lend themselves to early retirement due to ill-health and that benefits packages may need to be adjusted accordingly.
PART 2 Chapter 3
PART 2: THE ISSUES
PART 2 Chapter 3
Most disability cases relate to musculoskeletal conditions, which can be managed through appropriate interventions and rehabilitation. Certain jobs, particularly those which entail heavy manual labour or involve high stress levels, lend themselves to early retirement for health reasons.
68
PART 2: THE ISSUES
4
INCENTIVES CAN THE RIGHT INCENTIVES LEAD TO THE RIGHT BEHAVIOUR? By Megan Butler and Kristin-Ann Cronjé
PART 2: THE ISSUES
SUMMARY Tax incentives have been used to stimulate South Africa’s low savings rate, but the degree to which these are effective in the absence of a strong savings culture or household budgeting is debatable. We question whether current National Treasury proposals are sufficiently transparent to incentivise savings and if a contribution match by the government, of say 25%, may achieve better results at a similar cost.
PART 2 Chapter 4
How do we get people to choose the celery stick instead of the chocolate bar, the treadmill instead of the couch and saving instead of spending? Could tax or other incentives nudge workers to contribute more?
INTRODUCTION It’s never easy to change a habit. And when that habit is enjoyable, it becomes extremely complex and difficult to change behaviour patterns77. So, how do we get people to choose the celery stick instead of the chocolate bar, the treadmill instead of the couch and saving instead of spending? For many South Africans, participation in a retirement fund or medical scheme is a condition of employment. However, employees often have a plan choice on the medical scheme and some may have choices regarding the level of contribution made to their retirement fund, either explicitly or by adjusting the percentage of their salary defined as pensionable. In addition, members can choose to make additional voluntary contributions (AVCs) to retirement funds. Employees also have significant flexibility in their private provision for retirement and medical expenses. The problem is that left to their own devices, they may not choose appropriately.
77 Patel et al (2011) 78 South African Reserve Bank (2012) 79 Member WatchTM 2012 data set 80 Alexander Forbes Research and Product Development
70
South African savings rates are notoriously low. Household debt to disposable income is currently 76.3%78 and local households have had a negative net savings rate since 2005. In other words, South Africans borrow more than they save. As of 31 December 2011, members contributed 13.5%79 of pensionable salaries towards retirement funding, well short of the 20%80 required to provide for a 75% replacement ratio at that date. With subsequent declines in bond yields, the required contribution rate shot up to 27% as at 30 September 2012. Considering the potential cost of medical scheme contributions during retirement, even the targeted replacement ratio of 75% might be too low, given that only a few individuals can still rely on their employer for postretirement subsidies towards medical scheme contributions. So could tax and other incentives change this picture?
CHAPTER 4: INCENTIVES
TAX INCENTIVES During the 2009 tax year, tax incentives for retirement savings and medical scheme contributions totalled R17bn81 and R15.7bn82 respectively. But despite the cost to the fiscus, the jury is out as to whether a tax incentive can boost benefits participation. If a household responds to a tax incentive by reducing spending or increasing their income by say working overtime so that they can save more, then the tax subsidy might be considered to be successful at boosting net private saving83. However, net savings do not increase in response to incentives if: • The savings are funded by redirecting contributions from less tax-efficient to more tax-efficient vehicles. • Savings would have been made anyway due to a strong savings culture. • The household goes into debt in order to finance the saving.
In the absence of a strong savings culture or household budgeting, both of which are lacking in South Africa, incentives might be ineffective in raising savings rates to the required levels. Similarly, with medical scheme coverage there is some US evidence to suggest that where medical insurance participation is voluntary, tax incentives may increase coverage but tax incentives alone are unlikely to result in full coverage84. However, there are some arguments for offering tax incentives even if there’s mixed evidence of their effectiveness.
Tax incentive
Contribution match
81 National Treasury (2012a) 82 National Treasury (2011) 83 Engen (1996) 84 Gruber (2000)
71
PART 2 Chapter 4
PART 2: THE ISSUES
Retirement savings Firstly, authors like Douglas Bernheim suggest that people’s savings rates are influenced by what they think the ‘authorities’ suggest that they should save, and that people take the tax incentives as a suggestion from the ‘authorities’.
The proposed tax subsidy system benefits wealthier individuals more than lower income earners. The graphic below shows the tax benefit for two savers both saving 22.5% of their income. In one US study, lower and middle-income households were much more likely to make voluntary retirement savings and to contribute more towards these plans if offered an additional contribution towards their retirement savings instead of a traditional tax subsidy86.
Secondly, if a tax subsidy is presented clearly so that savers can understand the benefit, then it may improve savings behaviour. Under the new proposals85 for taxation of retirement fund contributions, employer contributions will be taxed as a fringe benefit and individuals will be permitted deductions of up to 22.5% of their income if aged under 45 and 27.5% of their income if aged 45 and over. These deductions will be limited to R250 000 per year if aged under 45 and R300 000 per year if aged over 45.
PART 2 Chapter 4
An alternative way to express the tax subsidy may be a 25% contribution match, based on the tax profile in the 2011 Tax Statistics87. The contribution match would involve the current tax benefit on contributions being removed entirely, which would mean that retirement savings are made from post-tax money. However, the South African Revenue Service (SARS) would then contribute 25c for every R1 each saver contributes from their post-tax income to their retirement fund, with a maximum annual contribution from SARS of say R100 000. The figure of 25% and the maximum annual contribution would need to be revised from year to year as the taxpayer demographics evolve.
However, if you start from the premise that tax incentives change behaviour, and bigger incentives yield larger results, the equity of the tax subsidy becomes important. In other words, policymakers would want to consider whether the subsidies are targeted at the right groups of people.
TAX BENEFIT PER RAND OF RETIREMENT FUNDING CONTRIBUTION
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
2C
R 65 212
(Taxable income)
R 856 059
85 National Treasury (2012d) 86 Duflo et al (2005) 87 South African Revenue Services & National Treasury (2011)
(Taxable income)
72
CHAPTER 4: INCENTIVES
At least some South Africans with low levels of income would benefit from saving.
In Part 2: Chapter 2, we suggested that at least some South Africans with low levels of income would benefit from saving. The incentive scheme could be extended to low-income earners who do not pay tax, provided that they register with SARS.
medical contribution tax credits, subject to a limit. The result is that individuals of different income levels, who are subject to different marginal tax rates, now receive tax incentives of equal rand value. This is illustrated in the table below.
Although there may be some administrative challenges in moving to a contribution-match system, this way of presenting the subsidy may maximise the impact of the tax revenue foregone because it is a far easier system to understand than the tax deduction.
The new system could be seen as incentivising lower-income earners to join medical schemes more than the old system did. However, due to the recent implementation of the new system, there is currently no way to evaluate how successful it has been in achieving this.
Healthcare From a medical scheme point of view, the tax incentives for medical expenses were changed from tax deductions to tax credits with effect from 1 March 2012. Previously, medical scheme contributions could be used to reduce taxable income subject to certain limits. Now, the tax payable is reduced by the
TAX DEDUCTIONS FOR MEDICAL SCHEME CONTRIBUTIONS MARGINAL TAX RATE
TAX DEDUCTION BENEFIT (PER MONTH)
NEW TAX BENEFIT (PER MONTH)
20%
R376
R614
25%
R470
R614
30%
R564
R614
35%
R658
R614
40%
R752
R614
Source: Alexander Forbes Health
73
PART 2 Chapter 4
PART 2: THE ISSUES
INCENTIVES PROGRAMMES Incentives and rewards programmes have become increasingly popular but one can be sceptical about whether they truly change behaviour or are just gimmicks. For an incentive programme to be successful, three things are required: • Registration • Initial use of the programme • Sustained use. The easier the benefits of the incentive programmes are to understand, the higher the registration, the initial use and the sustained use will be.
PART 2 Chapter 4
Registration statistics vary but even if a fee is involved, about 60% of eligible members may enrol88. The level of engagement can be surprisingly low. Only 20%-57%88 of enrolled members use loyalty programmes. In terms of sustained use, most studies show some sort of attrition over time, either due to drop-out or waning enthusiasm. A total of 40%
88 Lambert et al (2009) 89 Patel et al (2011)
74
of consumers drop out of consumer loyalty programmes, citing reasons such as: • The rewards are unappealing, unavailable or of little value. • Difficulty accessing the rewards. • Rules changing or points expiring. • Privacy issues88. However, for the minority who stay the course, we may observe sustained positive behaviour change89. IMPLICATIONS The change to the retirement tax subsidy proposed by the National Treasury is unlikely to have an impact on retirement savings rates. A cleverly designed savings incentives programme may have the desired result, provided that employees remain sufficiently engaged. Designing incentive schemes where the man in the street understands the impact on his wallet remains a challenge for policymakers and the financial services industry.
PART 2: THE ISSUES
5
TEMPORARY AND INFORMAL WORKERS THE GROUP THAT BENEFITS FORGOT By Megan Butler and Anthony Steen
PART 2: THE ISSUES
SUMMARY Less than half of South Africa’s employed labour force has access to retirement and healthcare employee benefits. Many of the rest are informally employed as fixed-term contractors or casual workers. The challenge is to increase the number of South Africans with enough long-term savings in an employment environment that does not fit the traditional retirement funding industry requirements of a stable and regular income. That means that temporary and informal workers need access to long-term savings vehicles with sufficient contribution flexibility to take account of their often volatile earnings, but with enough discipline built into the vehicle to compel regular saving. Given that workers without savings will become reliant on the older person’s grant (OPG), the government may have to force employers to contribute to long-term savings for temporary and informal workers – starting with the more formal temporary sector. PART 2 Chapter 5
Those who are employed without access to benefits fall into a number of groups including the informally employed and temporary workers.
INTRODUCTION According to Statistics South Africa, our employed labour force stands at around 13.6 million people of which 5.8 million do not have access to occupational retirement funds and 7.6 million have no access to medical schemes through their employers90. This represents a substantial gap in benefits coverage which may eventually result in a significant burden on the government. There is significant pressure from organised labour to reduce the number of contract workers, citing the lack of benefits among others reasons. This may lead to legislated amendments that could extend permanent employment rights to contract workers but it is unlikely to increase the number of contract workers with long-term savings. Those who are employed without access to benefits fall into a number of groups including the informally employed and temporary workers, each of which we discuss below. THE INFORMALLY EMPLOYED About 2.3–2.7 million South Africans are informally employed, meaning that they are employed either in the informal sector or informally in the formal sector 91 . It’s fairly difficult to define exactly what informal employment means. It includes factors
90 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 91 Peterson (unpublished) 92 Quarterly Labour Force Survey, Q1 2012
76
such as whether a formal written contract of employment exists. About half of the informally employed people work in domestic service or agriculture but many work in the construction and personal services sectors. Hawkers and informal traders are included in the informally employed category. Apart from the UIF contributions of employers of domestic workers and gardeners, very little is known about the informally employed and this category would be the most difficult to include in any long-term savings initiative. TEMPORARY WORKERS According to Statistics South Africa, 3 to 4 million South Africans are working but are not permanently employed92 and according to the National Association of Bargaining Councils, almost 1 million of these are employed by labour brokers. Temporary workers include: • Casual workers who work for no more than 24 hours in a month • Fixed-term contractors • Project contractors. Included in this category are skilled workers who offer services on a temporary basis due to the nature of their work (such as fixed-term contractors who do project management) or due to the nature of the service (such as being a chef or a waiter for events).
CHAPTER 5: TEMPORARY AND INFORMAL WORKERS
The nature of temporary and informal employment also means that wages may not be predictable and there may be periods where there is no income at all.
This group may include article clerks in the accounting and legal professions. Temporary workers may often have multiple employers. THE CHALLENGES Temporary and informal workers pose benefit design challenges for a number of reasons, including high staff turnover, volatile pay, low levels of pay, varying employment periods and the temporary or informal nature of the employment relationship. One of the significant challenges in bringing temporary and informal workers into the long-term savings process is the high cost of administration of variable income, which is even higher in percentage terms for low levels of income. The nature of temporary and informal employment also means that wages may not be predictable and there may be periods where there is no income at all. As insurers do not allow employees to take out insurance cover only when they need it, it may be difficult or impossible to obtain affordable insured benefits on a group basis for those with very low and fluctuating incomes.
WORKABLE SOLUTIONS A study 93 of retirement savings products for low income earners suggested that the reduction in yield due to administration, commission and investment fees on retail savings products for this market segment is approximately 1.8%–6.1% per year. This is significantly higher than for those in the occupational retirement fund space, where fees are in the range of 0.7%–1.4% per year 94 on a consistent basis. Occupational retirement savings vehicles may therefore offer a substantially cheaper way of saving for retirement. However, a major challenge to putting informal and temporary workers in any occupational retirement funding arrangement is the required flexibility of contributions. Workers don’t necessarily need full flexibility: The Finmark Trust 95 found that even workers with volatile incomes valued discipline in savings products. That’s why it may be acceptable to these workers to pay a fixed percentage of their earnings to retirement savings every time they earn a wage or salary. For more informal employment arrangements, contributions may need to be entirely flexible.
EXAMPLE: INCOME VARIABILITY FOR A TEMPORARY OR INFORMAL WORKER
January
February
March
April
May
June
July
93 Zubi (Unpublished) 94 Alexander Forbes Research and Product Development (2012) 95 Bester et al (unpublished)
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August
September
October
November
December
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Provision will need to be made for periods where no income is earned at all or too little income is earned to cover the cost of collecting the contribution. This would require either direct subsidisation from the administrator or the government, or cross-subsidisation between fund members. PART 2 Chapter 5
This can be dealt with by defining the pensionable salary as basic earnings, which can be zero. However, provision will need to be made for periods where no income is earned at all or too little income is earned to cover the cost of collecting the contribution. This would require either direct subsidisation from the administrator or the government, or cross-subsidisation between fund members. To prevent repeated withdrawal and re-entry into funds, it is possible to establish funds so that withdrawal benefits accrue after a waiting period. This waiting period can be three, six or even twelve months. If the worker experiences a period of unemployment but later finds work and is still eligible, he can simply continue contributing to the fund as opposed to exiting and rejoining. This prevents the member from regularly having to make preservation arrangements for small fund credits. A variety of different sponsors, including the government, the financial services industry and labour brokers, could offer this sort of flexible fund. To encourage disciplined saving, the contribution must be made compulsory for the employer. Finding an appropriate mechanism to do so may require a link to another deduction, like administering the deduction in a similar manner to the UIF contribution. For example, the Department of Labour is in the process of designing and launching a retirement fund for domestic workers and farm labourers, both of whom are typically informally employed, geographically dispersed and not highly unionised. In fact, the government may be the only appropriate sponsor for a fund to cater for the informally employed. Project contractors, on the other hand, may be unionised if the project is relatively long in duration and there are facilities for organised labour. In this case, the most logical sponsor of the retirement fund might be the union.
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However, auto-enrolment into an employer’s fund could change this dynamic, as it may compel employers to enrol project workers directly and not through labour brokers. Temporary workers are more likely to be employed by labour brokers or directly by a company which has a payroll already equipped to make statutory deductions. It would therefore be easier to target this category for long-term savings than those employed informally. Where the worker is employed directly by the company to whom they render services, there may be scope for the employer to launch a temporary employees fund to run alongside the fund for permanent employees. There is a precedent for such an arrangement: the government launched the Temporary Employees Pension Fund in 1979 to provide benefits for its own temporary workers. However, it’s important to be careful that employees don’t view having two distinct funds as being discriminatory. The National Treasury, for example, has recently suggested that the Temporary Employees Pension Fund be incorporated into the Government Employees Pension Fund to avoid allegations of unfair discrimination. An alternative may be for the employer to participate in an umbrella fund arrangement for temporary workers. An example of such a fund is the Capes National Provident Fund, which allows for flexible contributions. IMPLICATIONS As the government contemplates the harmonisation of retirement fund legislation as part of retirement reform, it might be time for the private sector to reconsider its options to expand benefit coverage to temporary workers. Participation in an umbrella fund specially designed for temporary workers may provide a suitable private sector solution. This would require government intervention to compel employer participation. For the informally employed, the government may need to provide a suitable low-cost vehicle.
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6
CHOICE WHEN MORE CAN BE LESS By Anne Cabot-Alletzhauser and Anthony Steen
PART 2: THE ISSUES
SUMMARY While having choices gives individuals a sense of control, more choice does not necessarily lead to better outcomes or happier individuals, and too much choice can lead to paralysis. Choices relating to benefits are particularly complex given that they have long-term implications and should be viewed holistically. As such, adding choice, even if accompanied by financial education, does not necessarily lead to better results for members. For example, employees in the professional services sector, perhaps the most financially literate of all the sector populations, exercise choice most frequently but have some of the lowest contribution rates and replacement ratios of all the sectors covered in this study. Dynamic default solutions that can adjust to an individual’s changing demands as they move through their financial lives provide a powerful way to ‘nudge’ members towards the optimal answers.
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Unnecessary choice destroys value, forcing members to evaluate complex choices that could have easily been made for them. That’s why choice should not be offered for its own sake.
INTRODUCTION When Sheena Iyengar of Columbia Business School wrote her seminal book on The Art of Choosing, she observed that “Whenever possible, people reach for choice. We want to believe that seeing our lives in these terms will make us better off.” Choice is perceived as a powerful tool for controlling your environment. Even in situations where there is no advantage to having more choice because it raises costs in time and effort, choice is still instinctively preferred96. In the famous Whitehall II Studies on stress in the civil service97, an extensive project that spanned several decades of medical and psychological analysis, researchers concluded that the removal of choice can actually lead to depression, listlessness and withdrawal. Even the perception or illusion of choice in these experiments had positive effects. So, given how we feel about choice and given that for benefits to engage or make us physically, mentally or financially healthier
96 lyengar (2010) 97 Bell et al (2004)
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they should be more tailored to our needs, is it also a given that employees should be allowed to structure their total rewards systems? Research is beginning to show us that people perhaps value having choices more than they value making choices. In The Paradox of Choice: Why Less is More, Barry Swartz concludes that choice eventually “no longer liberates, but debilitates”. Unnecessary choice destroys value, forcing members to evaluate complex choices that could have easily been made for them. That’s why choice should not be offered for its own sake. If the relationship between choice and people’s sense of well-being or control is complex, how do you begin to understand which choices relating to the total rewards system destroy value, and which have the potential to enhance value to the employee and improve engagement?
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THE CHOICES Let’s start by first understanding the scope of the problem. Historically, South African employees were remunerated on a basic salary plus benefits approach. Generally, the cost of benefits was not known to employees, who trusted their employers to look after them until retirement and beyond. As service periods were generally long and employers paternalistic, this belief was often correct. However, changing demographic shifts and legislation made defined benefit (DB) retirement plans and promises of postretirement medical scheme subsidies
increasingly onerous. At the same time, many large South African industries faced a heavy burden of benefits, given that they were based in locations where companies had to build towns to be able to attract skills. Providing housing, schools, hospitals and sports facilities just added to the cost of benefits debate. With an increase in competition for skills, employers saw the need to explain to employees the total cost to the company (TCTC) of employing them. Soon the TCTC became the norm and employees went from focusing primarily on salary to focusing on salary plus a number of benefits of certain cost but indiscernible value.
WHY MORE CHOICE CAN BE DEBILITATING
With this transition, employees were expected to take more ownership of their employee benefits, instead of relying on the employer to look after them for life. To enable this, some employers introduced choice into the employee benefits system. But how well equipped are employees to make good choices? Unfortunately, it seems that when it comes to money, savings and wealth creation, individuals appear to be ‘wired’ to make bad choices for themselves! Some choices confronting employees are set out in the graphic below. Let’s focus on retirement choices and the retirement investment choice in particular.
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CHOICE
PENSIONABLE PAY
A lower rate increases take-home pay at no additional cost to the employer but at the expense of retirement and risk benefits.
PERSONAL SAVINGS
Take-home pay may be consumed instead of saved or used to buy additional insurance.
WHICH BENEFITS
RETIREMENT AGE
The more aspirational or asset-lean the employee, the higher the probability that they will opt for a lower contribution rate toward employee benefits. In extreme cases, the employee can opt out of the medical scheme or risk benefits entirely. In retirement funds, a full opt-out would not be allowed although the contribution rate could be varied. Although adjusting contributions upwards at a later stage would allow a ‘catch-up’ on retirement savings, this seldom occurs.
In the DC retirement fund, retirement at any age between 55 and the normal retirement age without penalty is possible, but may result in a lower retirement income. In a DB fund, early retirements might be subject to penalties described in the fund rules.
ANNUITIES
A poor decision as to the post-retirement investment vehicle can irrevocably destroy wealth.
INVESTMENTS
Financial savvy professionals will often respond to most investment decisions on the basis of their own interpretations of the market’s attractiveness at that point in time. The problem here is that how their investment strategy might effectively address short-term conditions in the market may in no way relate to the most optimal way for them to target their income replacement requirement at retirement.
PRESERVATION
The earlier in their career and the greater an individual’s belief in their future earning power, the less meaningful preserving appears to be to the employee, which can create a savings gap that is never closed.
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PART 2: THE ISSUES
HOW INDIVIDUALS APPROACH THE RETIREMENT DECISION-MAKING CONUNDRUM Recent surveys show that between 48% and 76% of funds offer individual member investment choice98. The reasons that trustee boards offer member choice across a spectrum of retirement fund-related decisions vary, and include allowing members to try to better their investment outcomes and even simply not knowing what their members need98. It is the latter rationale that suggests we should be concerned about the rise of interest in offering more choice. But can members themselves do a better job of driving their investment decisions and choices than their boards of trustees?
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?
Chapter 6
0 R4
??
R70 000
Assets
0
00
Olivia Mitchell and Stephen Utkus summed it up best when they concluded: “Being good at retirement savings requires accurate estimates of uncertain future processes including lifetime earnings, asset returns, tax rates, family and health status and longevity. In order to solve this problem, the human brain as a calculating machine would need to have the capacity to solve many decades-long time value of money problems, with massive uncertainties [as] to… cash flows and their timing”99. If we consider just the computing challenges, the problem at hand raises serious doubts as to whether any lay-person could develop meaningful insights on the best course of action.
ngs i n r a e e Lifetim 20 000 R5000 0 R100 000
R60 00
TAX rates FAM
R5000
R
000 R50 0 ILY hR80 ealth sta 00 R300 000 tus 0 R40 00
R90
000R400 000
y t i v e Long R500 000 R10 000
R200 000
R30 000
Retirement savings requires accurate estimates of uncertain future processes.
98 PWC South Africa (2012), Sanlam Employee Benefits (2012) and Old Mutual Corporate (2012) 99 Mitchell & Utkus (2003)
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CHAPTER 6: CHOICE
This is hardly a problem endemic to South Africans alone. In fact, it appears to be fairly universal in any country where the option to save, or invest for retirement, or determine your benefit structure is still subject to some element of individual choice. The presumption has been that the best way to address the problem is to simply increase the level of financial literacy of members. What we hope to illustrate though, is that even greater financial literacy doesn’t properly address the problem. The professional and business services sector is the group that has shown the greatest interest in providing the most expansive opportunities for choice. Indeed, when compared to other sectors, professional and business services reflect the highest number of fund members who make member investments choices, as seen in the table below.
of options at their disposal must be highly diverse and flexible. The fascinating reality, though, is that in spite of their members’ higher financial literacy, having this additional dimension of choice has not translated into better member outcomes. The great irony is that these sectors typically reflect some of the lowest levels of ‘financial wellness’ in their members. As the graph on the next page highlights, professional and business services, which include financial services, have the lowest contribution rates towards retirement savings. This results in very low projected retirement benefits relative to pre-retirement earnings. It’s a phenomenon that warrants close scrutiny, because it helps to highlight the dangers of giving members the choices they want to make for themselves.
Chapter 6
Many employers in the sector believe that for benefit structures to be really attractive to their ‘financially literate’ employees, the range
SECTOR
% MEMBERS OPTING FOR MEMBER CHOICE
Professional and business services
27%
Transport and telecommunications
26%
Fishing, forestry and agriculture
23%
Personal services
20%
Construction
20%
Manufacturing
18%
Retail, wholesale and hospitality
17%
Mining
15%
Energy
12%
Public sector
11%
Source: Member WatchTM 2012 data set
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PART 2: THE ISSUES
CONTRIBUTION RATE TOWARDS RETIREMENT BENEFITS: AVERAGE PER SECTOR Transport and telecommunications
14.3% 13.4%
Retail, wholesale and hospitality Professional and business services
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12.8% 14.2%
Personal services
16.0%
Public sector
15.4%
Mining
14.6%
Manufacturing
16.3%
Fishing, forestry and agriculture 14.6%
Energy
15.0%
Construction 13.5%
Retirement fund industry 0%
2%
4%
6%
8%
10%
Percentage of pensionable pay Source: Member WatchTM 2012 data set
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12%
14%
16%
18%
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A member’s retirement savings decisions are rarely centred around the goal of securing an adequate inflation-proof income in retirement.
THE DYNAMICS AT PLAY Now consider the range of dynamics at play that may influence how members make their decisions around these choices. Essentially we can break this down into three primary categories: • How people think about the retirement benefit problem over the course of their lives. • How framing the key questions can affect decision-making. • How human interaction dynamics can influence the decision. Let’s consider each in turn. Attitudes towards retirement saving Ultimately, the point of saving for retirement is to secure an adequate inflation-proof income in retirement and this is termed the member’s liability. Due to market fluctuations and longevity improvements, this liability is not fixed and can vary rapidly and significantly. A member’s retirement savings decisions are rarely centred around this goal. Behavioural finance research by Daniel Kahneman100 suggests that much of members’ decisionmaking in relation to their investment choice is guided by anchoring and past performance. In other words, decisions are strongly influenced by starting values or what may be happening in the markets today. Members entering an investment plan in times of market turmoil will typically be strongly risk-averse, as opposed to members entering at the end of a bull market who will typically choose a much higher allocation to equities101. Worse still, members may be influenced by how well a strategy performed over a previous time period. Most problematic is the reality that high returns from the best performing asset manager may have no relevance to how
100 Kahneman (2011) 101 Mitchell & Utkus (2003) 102 Member WatchTM 2012 data set 103 Laibson et al (1998)
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members’ liabilities may be changing, or even indicative of that manager’s future performance. As such, a decision made to address short-term market conditions may be completely wrong to meet a long-term income replacement target. If we consider the employees in the professional and businesses services sector again, we find exactly this behaviour. When they made switching decisions, their timing was generally a knee-jerk reaction to recent events that invariably took the wrong view of the markets in the flight to safety102. Members typically switched to less aggressive strategies at the bottom of the market cycle and to more aggressive strategies at the top of a market cycle. In addition, self-control for saving is elusive because we human beings are ‘hyperbolic discounters’. That means we place a lower value on future benefits and a higher value on the present. As such, we over-consume today and under-save for tomorrow103. Translation: young or highly indebted employees will opt for a lower portion of pensionable salary, for the minimum contribution rates and for the least financially demanding benefit structures despite the long-term consequences. Default solutions that automatically adjust a member’s benefit structure, contribution rate and investment solution over the course of their lives in the fund clearly can keep members on track to meet their income requirements in retirement. Getting an individual to buy into the default solution is probably easier than many trustee boards realise.
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PART 2: THE ISSUES
When presented with too much choice, including retirement fund investment options, decisionmakers tend to freeze up and make no decision at all.
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How framing the key questions can impact on decision-making Possibly the most important dynamic that is within the control of trustees is how choices are framed to members. This refers to something as simple as how many decisions and options a member is confronted with.
This was exactly the experience of funds offering professionals a great variety of options. On the one hand the options either elicited the wrong basis for decision-making or no decision at all. At best, only 27% of fund members actually took advantage of the costly flexibility feature in their funds105.
In Sheena Iyenger’s classic jam experiment, she demonstrated that if she loaded a sales table with as many as 24 jars, consumers were far less likely to make a choice or buy than a table exhibiting only 6 choices. The results flew in the face of product providers, who believed that more options allowed people to better tailor their choices to their specific needs. What in fact tends to happen is that when presented with complexity, decision-makers tend to simply freeze up – become inert – and make no decision at all104. The great irony here of course is that many financial service providers are selected for the very reason that they can offer members a vast array of portfolio options. But how useful is that if members won’t even make a decision when they see so much complexity?
If we understand this as a potential problem, then two things become immediately apparent. We can improve outcomes to members simply by: • Designing a default solution that automatically captures the optimal behaviours an active member should pursue over their lifetime in the fund. • Ensuring, when member choice is permitted, that those choices are defined in terms of the time frames and solutions they address rather than by the name brands they represent or performances of the past.
Better decision making is based on fewer choices.
104 Iyengar (2010) 105 Member WatchTM 2012 data set
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The answer is not to remove choice in its entirety. Instead, we need to recognise that choice for its own sake simply does not lead to optimal outcomes in something as complex as retirement fund decision-making.
Why two heads may not be better than one Finally we tackle the issue of how human interactions can influence decision-making, both at the board of trustee level and the member level. As Yale psychologist Irving Janis points out, once we move into the realm of interpersonal dynamics, getting the approval of another individual may be a more powerful motivator than getting to the right answer106. This dynamic can act to diminish the value of getting advice if individuals and trustee boards are not mindful of their motivators. Here, the best defence may well be to provide members with decision-making tools that remove this dynamic. These tools would need to show the long-term effects of members’ decisions. Importantly, the tools should allow the user privacy and the opportunity to ask as many seemingly ‘stupid’ questions about the process and the decisions as necessary, without the embarrassment of having to reveal the true extent of their grasp of the key issues to an adviser or peer. It’s not necessarily an option that will suit all members – in fact, the appeal and practicality may be limited to individuals who at least believe they have a modicum of financial literacy, but who may also be grappling with an incomplete understanding. But in terms of getting the engagement and buy-in from the one set of members best equipped to benefit from the ‘choice’ framework, the tools provide an essential leap forward. IMPLICATIONS We started this debate with the statement that ‘choice’ is vital for instilling a sense of control and involvement in most human endeavours. We’ve already argued that it’s a critical factor in securing employee engagement. But, on further analysis, it is apparent that choice
106 Janis (1972) 107 Thaler & Sunstein (2009) 108 Devo (1980). Freedom of Choice.
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in the context of the design of an optimal retirement saving and benefit plan may not lead to this desired outcome, even among more financially literate members. The answer then is not to remove choice in its entirety. Instead, we need to recognise that choice for its own sake simply does not lead to optimal outcomes in something as complex as retirement fund decision-making. But inflexibility can also result in sub-optimal outcomes. What we do need to begin to appreciate is the value of an automated default solution that introduces flexibility into the process, minimises the intrusion of sub-optimal human behaviours and creates outcomes that are more closely aligned to member needs as they move through the course of their financial life. With such a default option on the table, at worst members can opt out, although we know that most employees won’t. But at the very least, we have used our best actuarial minds to try and solve one of the more complex investment and benefit design problems that individuals face in their lifetimes. Richard Thaler classifies this form of ‘nudging’ as libertarian paternalism107. While seemingly an oxymoron, libertarian paternalism captures the dilemma perfectly. People generally hate to be told what to do at this most personal of human decisions, but they desperately yearn for some guidance – preferably very subtle – about what would serve them best. Perhaps the dynamic is best summarised in the words of the 1970s rock group Devo: “Freedom of choice is what you got but freedom from choice is what you want!”108
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PART 2: THE ISSUES
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While having choices gives individuals a sense of control, more choice does not necessarily lead to better outcomes or happier individuals, and too much choice can lead to paralysis. Dynamic default solutions that can adjust to an individual’s changing demands as they move through their financial lives provide a powerful way to ‘nudge’ members towards the optimal answers.
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7
BRICKS AND BOOKS WHEN CAN BENEFITS BE SO MUCH MORE? By Kelsy Moodley and Michael Prinsloo
PART 2: THE ISSUES
SUMMARY Employers have long recognised the importance of offering non-traditional benefits to their employees, including housing and education. These benefits have become entrenched in the mining and agriculture sectors. However, a recent survey showed that employees across all industries may appreciate the same benefits. While full sponsorship might be unaffordable, alternatives are suggested, including subsidies and establishing education trusts for the dependants of employees.
In South Africa, housing and education are regarded as valuable and worth saving for.
PART 2
INTRODUCTION By the late 1800s, industrialists such as Cadbury had noted the importance of benefits beyond regular cash remuneration. These additional benefits included retirement funding and medical services. In some cases industrialists provided so-called ‘model villages’ where the company provided housing and all other infrastructure. Non-traditional employee benefits, such as housing and education, have been offered on South African mines and farms for some time. However, housing is a basic human need. Our survey suggests that across the sectors there are members who value in-kind benefits such as housing and education subsidies as highly as their take-home pay109.
Chapter 7
While employers may feel that their current total rewards system is sufficient to meet the needs of their employees, the argument presented here introduces an additional facet of employees’ needs that employers might not have considered. With rising costs of both housing and education, employers need to ask what benefits really matter most to members. For instance, higher-income earners may value an education subsidy more, relative to low-
109 Alexander Forbes Benefits Barometer Employer Survey 2012 110 Smeeding (1977) 111 Finmark Trust (2011)
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income earners, as they may have a deeper interest in private-schooling, as opposed to public-schooling, for their children. WHAT DO WORKERS NEED? Common economic theory suggests that, except in special cases, an in-kind transfer is relatively less effective at improving welfare than a cash transfer of equivalent cost, since we rarely measure wealth with intangibles like a child’s education 110. But in South Africa, housing and education are regarded as valuable and worth saving for 111. So it needs to be recognised that the perceived value of a housing subsidy, for example, may be greater than the cash equivalent110. This is a ‘win’ for both the employer and employee, so in-kind transfers should form part of the list of employer priorities. To facilitate home ownership for individuals where credit may not be available, some retirement funds allow members to borrow against their retirement savings. However, this may not go far enough. From an employer’s perspective, housing close to the place of work has certain secondary advantages such as reducing time spent in long commutes, traffic congestion and pollution. However, the supply of housing in the area or the infrastructure needed to service a community
CHAPTER 7: BRICKS AND BOOKS
may be insufficient. Finding a way for someone to be able to buy or build a house is unhelpful if water, sanitation, healthcare and roads are simply not there. Similarly, offering bursaries might give employees an opportunity to educate their children but the supply of education may differ from the demand. For example, there may be a primary school in a town but no high school, or the language in which learning takes place may not be appropriate. Even if there is a school, parents need to regard the school as being good enough. This perception might be based on the number of learners in each class, facilities, medium of instruction and whether the school is public or independent.
A modified version of Maslow’s Hierarchy of Needs, illustrated below, is a useful tool for employers who are looking at providing a holistic total rewards system that goes beyond employee benefits. More importantly, employers should recognise the interconnectedness of these levels. A basic need for housing can interweave with an individual’s feelings of achievement. This way the employer provides tangible assets by providing a benefits package, as well as a psychological sense of well-being that can improve both productivity and engagement.
MASLOW’S HIERARCHY OF NEEDS AN ACHIEVEMENT NEED WHICH INCLUDES RECOGNITION BY OTHERS AND REALISATION OF PERSONAL GOALS SUCH AS A COMFORTABLE RETIREMENT
ACHIEVEMENT NEED BELONGING NEED
A NEED FOR BELONGING WHICH INCLUDES CULTURAL NEEDS LIKE BEING ABLE TO AFFORD A DIGNIFIED FUNERAL A SAFETY NEED SUCH AS HOUSING, SECURE WORK CONDITIONS OR THE ABILITY TO AFFORD HEALTHCARE
SAFETY NEED
A PHYSIOLOGICAL NEED SUCH AS BEING ABLE TO AFFORD FOOD OR CLEAN WATER
PHYSIOLOGICAL NEED
Adapted from Maslow, A (1943). A Theory of Human Motivation. Psychological Review, 50(4), 370-396
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PART 2: THE ISSUES
There may well be grounds for allowing retirement fund withdrawal and retirement benefits to be used for housing and education.
WHAT’S IN IT FOR EMPLOYERS Employers may argue that providing housing and education should be the role of the government. But from an employer’s point of view, besides fulfilling basic human needs, providing in-kind benefits contributes to increased employee recruitment, retention and job satisfaction, particularly as housing and education for children are both long-term commitments. A recent survey also showed that employer provision of subsidies for housing and other benefits is in the interest of employee retention112. For society at large, employer-sponsored programmes can result in community revitalisation and much needed infrastructure development that can improve the livelihood of future generations. In terms of strategic objectives, such initiatives can help employers make sure they have a steady supply of workers going forward. Under certain circumstances, the benefit may be tax-deductible in the hands of the employer. However, structuring the benefit so that it qualifies as a working condition fringe benefit, for example, may require specialist tax advice. The tax implications for the recipient should also be considered when structuring the benefit.
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IMPLICATIONS Although housing and education benefits may be advantageous for both the employer and the employee, they are costly to provide, so employers would need to find cost-effective means of delivery. If the government wishes to encourage employers to provide this sort of benefit, policy intervention may well be required to ensure tax efficiency.
112 Alexander Forbes Benefits Barometer Employer Survey 2012 113 Act No 34 of 2005, as amended 114 National Treasury (2012c)
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Similarly, the legislation around pensionbacked lending may need to be extended to cover education as well as housing. Ideally this could be by way of interest-free or low interest rate loans with the amounts being repaid before retirement age. The loans would also need to be exempt from some National Credit Act 113 and FAIS criteria to be cost-effective and have as wide an impact as possible. There would need to be a reduction in unsecured lending at the same time to make sure that average debt levels do not rise above serviceable thresholds. In addition, although the National Treasury’s proposed reforms promote preservation114, there may well be grounds for allowing retirement fund withdrawal and retirement benefits to be used for housing and education. With respect to education, trusts may be a way to pay for education, particularly for employees who cannot afford to pay for themselves. Alternatively, providing for employees’ children or donating land and facilities might also achieve the desired aim. Finally, employers may be required to explore the above as well as other non-traditional benefits. The easiest way for employers to identify the needs of employees might be to enter into a dialogue with employees, directly or through their representatives.
PART 2: THE ISSUES
8
STRIKES THE PART THAT DOESN’T MAKE HEADLINES By Megan Butler, Anne Cabot-Alletzhauser and Lindsay Loftstedt
PART 2: THE ISSUES
SUMMARY Strikes are not necessarily about the money. Other aspects of the total rewards system, such as housing, or personal issues such as indebtedness, can be contributing factors. Managing the total rewards system is critical for enhancing profitability and mitigating the risk of strike action. If negotiation fails and strikes take place, there may be unforeseen benefits consequences, particularly in terms of risk benefits coverage during an unprotected strike. A bit of forethought and advance planning can prevent or alleviate the loss of benefits coverage.
One undeniable lesson from the strikes of 2012 is that they are not always just about the money – at least not completely.
PART 2 Chapter 8
INTRODUCTION In 2011 South Africa lost approximately 2.8 million working days due to strike action115. This has a significant economic impact causing lost productivity, reduced growth expectations and diverted foreign investment. To put this into context, in the first 10 months of 2012, South Africa lost an estimated R10.1 billion to strikes and stoppages in the platinum and gold mining industries alone116. This in turn had the knock-on effect of lowering South Africa’s GDP growth expectations for 2012/2013 to 2.5%116. One undeniable lesson from the strikes of 2012 is that they are not always just about the money – at least not completely. The rock drillers at Marikana, who went on an unprotected strike that resulted in so many deaths, were in the top earning 25% of formal sector employees117. The causes of this and other strikes are complex and can include clashes between various organised labour groups, xenophobia, politics and lack of service delivery. However, some elements of the total rewards system have been noted as contributing factors to the strikes of 2012, such as housing at Marikana and unwanted funeral policies at KDC East. Underpinning the strikes is the omnipresent issue of financial distress among the workers.
115 Over 2.8m Working Days Lost in 2011, Sapa,10/08/2012, http://news.howzit.msn.com/article.aspx?cp-documentid=250871980 116 Idéle Esterhuizen. Mine Strikes Cost SA R10bn in Lost Production – Treasury. Mining weekly 25/10/2012 http://www.miningweekly.com/article/mine-strikes-cost-sa-r10bn-in-lost-production-treasury-2012-10-25 117 Mike Schussler. Lonmin’s ‘poor’ workers are not as poor as they think. Business Day Live 03/09/2012 118 Constitution of the Republic of South Africa, Act No. 108 of 1996 119 Act No 66 of 1995, as amended 120 COSATU (Unpublished)
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So, if not managed properly, the total rewards system can contribute to strike action – but what about the converse: how do strikes impact on the total rewards system? INDUSTRIAL ACTION 101 The South African constitution118 enshrines workers’ rights to peaceful strike action. Subject to the requirements of Section 64 of the Labour Relations Act119, workers may embark on a protected strike, which means that they are treated as if on unpaid leave for as long as the strike remains protected. On the other hand, if these conditions are not met, the strike is unprotected and workers are treated as if absent without leave. Some of the conditions for a protected strike are: • Giving seven days notice to the employer of the intention to strike • Ongoing negotiations to end the strike • The strike remaining peaceful. Research by COSATU suggests that at least half of their union’s members believe that violent, and therefore unprotected, strikes have been more effective than peaceful strikes at achieving their objectives120. We may therefore be seeing more unprotected strikes in future.
CHAPTER 8: STRIKES
Some insurers reserve the right to exclude strike claims completely.
EMPLOYEE BENEFITS ON STRIKE While on strike, employees receive no pay from the employer. This means contributions to various unapproved group risk benefits cease. The retirement fund rules may specify what will happen to approved group risk benefits and retirement fund contributions during a strike. Contributions towards retirement savings would typically not be paid during a protected strike but the decision to pay group risk benefit contributions may be left to the employer’s discretion. The rules of the retirement fund should typically detail the required contributions in the event of an employee being absent without pay. In some cases, the employer may need to decide on their course of action upfront and communicate this to members and their unions at the start of the strike. The impact on group risk benefits can be dramatic. If a month’s premium is not paid, any employees who die or become disabled during that month would not receive an insured benefit. Even if the employer pays the premium, the insurer may contractually exclude claims arising from strike action except if the insurer can arrange appropriate reinsurance cover. Some insurers reserve the right to exclude strike claims completely. This may affect payments to striking and non-striking workers. Some unions may help their members in these circumstances but non-unionised strikers may have no group life or disability benefits.
Similarly, skipping a medical scheme contribution can result in membership being suspended or even terminated. Cover would not be reinstated until all the outstanding contributions are paid, which may be extremely difficult for a household. Medical services may also be adversely affected, particularly non-essential ones, at workplace health facilities. On the retirement funding side, strike action can sometimes cause mass dismissals of employees, but after the collective bargaining process plays itself out fully, all or a very large proportion of the dismissed employees may be reinstated. Allowing members to access their accumulated savings in these circumstances, where they are likely to be re-employed fairly soon, is not in the longterm interests of the member, the employer or the economy. While access assists in cushioning the financial stress resulting from a lack of income during the strike process, the long term erosion of retirement benefits becomes a heavy price to pay. This can also, ironically, lead to future mass action when members start receiving poor retirement payouts and members then engage in protest action, which may then set off a further round of retirement savings leakage, unless an end is put to this vicious circle. This and other dynamics around mass exits are discussed further in Part 2: Chapter 12. The situation requires employers to do some forward planning.
Strikers have to give employers seven days notice for the strike to be protected.
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Where workers are dismissed due to striking, they will automatically lose their group risk cover. Even if they are reinstated there may still be certain gaps in insured benefit cover.
PLANNING AROUND THE POSSIBILITY OF STRIKE ACTION Regarding risk benefits, it is usually best for the employer to clarify upfront what their policy is according to paying risk benefit premiums when their workers are on a protected strike. For approved benefits, this can be clarified in the retirement fund rules. If premiums will continue to be paid, the employer should notify the group risk underwriter of the workers’ intention to strike as soon as they receive the notice to strike. Although this may not be a policy condition, it may help speed up the payment of claims. Where workers are dismissed due to striking, they will automatically lose their group risk cover. Even if they are reinstated there may still be certain gaps in insured benefit cover, where pre-existing conditions or waiting periods may apply to any new cover provided by their new employer arrangement. Regarding medical scheme benefits, there is little that can be done other than advising employees of the risks of missed contributions.
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In terms of retirement benefits, companies that have collective bargaining at the heart of their employee relations should consider implementing waiting periods and special rules into their retirement funds to regulate
121 Jerry Schuitema, How a labour issue has been hijacked by a myriad of motives Moneyweb, Nov, 15 2012.
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and minimise the access that workers have to their savings when dismissed as a result of mass action. Waiting periods of one to three months would potentially go a long way to preventing unnecessary access to savings. By the time the waiting period has passed the workers may well be reinstated. Stakeholders should consider introducing special rules and insured benefit policy conditions that keep members covered during periods of mass action. This can avoid lapses or breaks in cover. IMPLICATIONS The recent strike activity provides a wake-up call to employers that employee well-being and benefit structures must be regarded in their totality. In short: “Ultimately the employers…have to accept some responsibility for the care and developments of their employees121.” This duty of care should extend to making sure employees understand how strike action could impact on their benefits coverage. These impacts might be significant for both striking and non-striking employees.
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YOUNG WORKERS GETTING IT RIGHT FROM THE START By Anne Cabot-Alletzhauser, Vickie Lange and Kelsy Moodley
PART 2: THE ISSUES
SUMMARY Where financial education fails, instilling good habits from the start often succeeds. This means that how we engage with our newest and youngest employees is critical. For most employers, young employees are valuable because of their desire to learn and grow, but they tend to leave before the employer can reap the full value of their investment. One way of fostering commitment is through the total rewards system. Historic benefit structures may no longer be appropriate for this generation of workers, who have a unique set of values and principles. Young workers who favour immediate gratification may not appreciate the importance of retirement savings and contributions for benefits such as medical scheme membership. A bit of paternalism may be precisely what is needed to shape the habits that an employee should have to become financially healthy.
Getting people to do the right thing depends less on their understanding of the problem and more on developing good habits.
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INTRODUCTION Employees’ sense of financial well-being is closely linked to their engagement levels and organisational commitment. Much has been made of the fact that financial literacy lies at the root of getting individuals to take their own financial wellness and savings demands seriously. Getting people to do the right thing depends less on their understanding of the problem and more on developing good habits. An individual’s first job could be the best opportunity to get this reflexive mindset imprinted. Getting this right demands that we have clarity about what employees want, as well as a deep appreciation for what employees actually need.
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As discussed in Part 2: Chapter 6, people rarely make the right decisions to enhance their long-term welfare, so a bit of paternalism in the form of making sure that employees have what they need may well be in everyone’s best interest. Young employees show particularly high rates of resignation from employment. Only older members who are resigning instead of retiring to access higher cash benefits show similarly high resignation rates. But why are young workers showing so little organisational commitment?
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WITHDRAWAL RATES BY REASON
PART 2 Chapter 9 n Unknown reason n Dismissals n Retrenchments n Resignations Source: Member WatchTM 2012 data set
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NEW BEGINNINGS, NEW RULES Each generation brings its own value systems, codes of conduct and aspirations. Young workers have grown up in a very different political and social reality and have entered the workforce under decidedly different economic conditions. Partly due to these factors, they tend to value different things and have different aspirations and needs from those who manage them and design the total rewards systems122. There is a need to bridge this divide. Ironically, the generation that young workers form has been dubbed the ‘connected generation’. Young people want to feel that they are connected, updated and involved122. The total rewards system and the education that underpins it should meet this need for connectivity. The incentives we offer should also convince them that what they need is really what they want. For older generations, high school was often followed by university or some type of job
that would give them the necessary skills to build a career. The same may not be true of Millenials, who are born after 1980, and are staying in school and at home longer and entering the workforce later123. The challenge for this new wave of employees is that in the continuing wake of the global financial crisis, even educated youngsters struggle to find permanent work. As profit margins are squeezed, employers are turning to informal and temporary workers124 of every age. While the lower costs of informal and temporary labour may prove attractive to many employers, the implications for young employees can be significant and can include lower wages, lower lifetime earnings potential, less training and lower retirement savings125. WHY YOUNG WORKERS DON’T SEE THE BENEFIT IN EMPLOYEE BENEFITS In many ways, it’s no wonder that younger employees who are starting out in life may choose higher take-home pay instead of benefits. An employer might unwittingly try to accommodate aspirational spending or
THE COST OF HEALTHCARE FOR A FAMILY PART 2 Chapter 9
Source: Alexander Forbes Health 122 Reynolds et al (2008) 123 Manning (2011) 124 Sassen (1997) 125 Zimmerman, K, “Precarious New World of ‘informal’ Jobs”, Harvard Business Review Blog Network (8 November 2012)
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financial disengagement through decreasing employee benefits and increasing pay. Unfortunately, the long-term cost of this trade-off might be higher than both parties realise. Health and retirement benefits provide good examples of why and how young workers may not see the value in the employee benefits component of the total rewards system. Workers might be given choices about which medical scheme option to take and whether to join a medical scheme at all. Very often, young employees will choose the cheapest cover. This is not entirely irrational. The graph below shows the claims over an individual’s lifetime in a medical scheme. In particular, young employees experience low claim levels relative to their older colleagues. So, in many respects, younger workers need less medical cover than older employees, but late joiner penalties will apply. The likelihood of death and disability are also lower at younger ages.
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People view their future self as a stranger to whom they are unwilling to give away their money.
Retirement benefits are particularly problematic as people many decades from retirement tend to favour immediate gratification126. And while it is possible for an individual to imagine themselves in a particular situation, post-retirement, for instance as the proud owner of a beach house in Clifton, it’s hard to imagine what you look like in that beach house. People are uncertain about what they will be like at retirement. A person’s name, reputation, family circumstances and appearance can alter over the course of a lifetime to the extent that people view their future self as a stranger to whom they are unwilling to give away their money126. WHAT (YOUNG) WORKERS WANT So, if young workers don’t want benefits, what do they want? According to Marston127, Millennials require flexibility in terms of working hours and location, variation in their job, continual feedback from supervisors, opportunities to learn and a work environment that presents
Young employees want to feel that they are
problems they are required to solve. Further, Manning128 finds that young employees want to feel that they are valuable members of the workforce and that their opinions are respected. For this reason, a substantial part of the total rewards system for young workers includes elements apart from pay and employee benefits. The issue of on-the-job training has particular relevance given the current economic climate. Any adult, employed or not, has two major assets: human capital and financial wealth129. Human capital is defined as the value of future labour earnings. For a young person, human capital is potentially enormous and far greater than financial wealth129. However, young workers may choose to miss out on additional formal learning to enter the workforce quicker. This dynamic is driven partly by the fact that the employment rates of young employees are the most sensitive to the economic situation130. It may be up to the employer to provide training that young workers both want and need.
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valuable members of the workforce
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and that their opinions
are respected.
126 Hershfield et al (2011) 127 Marston (2007) 128 Manning (2011) 129 Cambell & Viciera (2002) 130 Hanchane et al (Unpublished)
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If the disability insurance arrangement had no younger workers participating, many older members may find the cost of this benefit unaffordable.
WHY WE CAN’T LET YOUNG WORKERS OUT OF THE BENEFIT NET Employers cannot simply ignore how young workers view employee benefits. The lack of employee benefit coverage and low preference for these benefits among young workers can have repercussions throughout the rest of their lives. Firstly, there is a lost opportunity for forming good habits around savings and responsible insurance arrangements. So, while a young worker may be learning that owning a vehicle means being responsible for its upkeep, so too should they be learning that earning a salary means having to provide for times when they can’t earn. Secondly, there may be short- and longterm consequences for the young worker deferring participation in benefits. In the case of disability benefits, an accident either in or outside the workplace can leave young recruits without income support for the rest of their lives131. In the case of medical schemes, regulations allow for penalties for late joiners, namely those who have not been members of medical schemes for two years immediately before applying for membership132. These may include: • A three-month waiting period, during which the scheme will not accept liability for any claims submitted.
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131 Gruber (Unpublished) 132 Medical Scheme Act, Act No 131 of 1998, as amended
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• A 12-month waiting period relating to all claims arising from pre-existing conditions, including pregnancy. • A permanent increase to the contribution rate through late joiner penalties132. A young employee who joins a medical scheme later in life faces higher costs at a time when it is likely that their personal circumstances, including family size, have already led to a higher cost of living. It may make sense for a young employee to take out more medical scheme cover than they need to avoid these penalties. Thirdly, there are consequences for workers who participate in employee benefit schemes if younger workers are conspicuous by their absence. Employee benefit schemes often allow for cross-subsidies between members, such that, in the case of disability benefits, younger members pay part of the cost of the benefits for older members who are more at risk of injury or ill-health. If the disability insurance arrangement had no younger workers participating, many older members may find the cost of this benefit unaffordable. If young and older workers remain covered by insurance arrangements their whole lives, the subsidies that they receive and give tend to cancel out. However, the system becomes unbalanced if one group opts out.
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The current contribution rates to retirement funds are too low to secure a reasonable retirement income.
A BRAVE NEW WORLD? While we now know that younger employees will respond positively to non-financial benefits such as training, we know that they do not particularly want employee benefits such as retirement funds and risk cover, even though they need these benefits. So, how do we get younger workers to value employee benefits? Use peer pressure Although the choice of contribution rates to retirement funds is influenced by the extent to which these contributions are matched by the employer and the default options for the fund, they can also be influenced by the decisions made by colleagues and peers133. Part of this influence may be due to colleagues learning from each other, so the employer is presented with an opportunity to distribute information at a business level and thus ensure that all employees are well informed about benefits on offer.
Use social media As discussed in our chapter on education, written communication may be ineffective. Alternative platforms that younger workers may find more appealing include social media135, short video clips and reality TV shows136. Use integrated solutions Employers must recognise the importance of creating a total rewards system that goes beyond pay and employee benefits. The package should include clear communication, that speaks to the brand of the organisation so that employees feel a sense of solidarity with their employers. This in turn builds organisational commitment.
Use technology A recent study showed that having young people view simulated, aged images of themselves made them feel more connected with their future selves and actually resulted in higher contribution rates134. The current contribution rates to retirement funds are too low to secure a reasonable retirement income and innovative solutions like this may assist.
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WAYS TO ENGAGE WITH YOUNG MEMBERS Use peer pressure
Use technology
Use social media
133 Duflo & Saez (2002) 134 Hershfield et al (2011) 135 Towers Watson (2012) 136 Polak (2008)
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Use integrated solutions
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On-the-job education and training should be combined with the remuneration package to create an employment experience that looks holistically at the needs of young workers.
IMPLICATIONS Employers must think creatively to encourage contributions to voluntary benefit schemes, using technology that appeals to young workers. On-the-job education and training is imperative and should be a major focus of employers to ensure job satisfaction and engagement. This should be combined with the remuneration package to create an employment experience that looks holistically at the needs of young workers. Young members should be allowed limited choice as they may be influenced by their peer group and often employ a short-term view of their consumption requirements, discounting their future financial needs.
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PENSIONABLE PAY THE LAW OF UNINTENDED CONSEQUENCES By John Anderson and Megan Butler
PART 2: THE ISSUES
SUMMARY Pensionable pay has a direct impact on the contributions to retirement funding and risk benefits and on the benefits themselves. However, pensionable salary is often misunderstood, leading to lower than expected benefits. The implications of this can be quite serious for employers and employees alike. Low contribution rates can lead to low replacement ratios at retirement, and low pensionable salary percentages can make the situation even worse. We find that a way to help members and employers engage with their retirement benefit is to show them the implications of their choice of pensionable pay percentage in rands and cents. Volatile levels of pensionable pay may need to be addressed through additional contributions or notional, smoothed salaries for benefits purposes.
INTRODUCTION One of the issues that is likely to have serious implications for many years to come is that of the level and definition of ‘pensionable pay’. This seemingly harmless term, not defined under South African law, has serious implications for retirement funding. To understand why we have this problem, it’s necessary to consider the evolution of South African employee benefits.
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RFI Retirement funding income
NRFI
WHY WE HAVE PENSIONABLE SALARIES: THEN AND NOW Historically employers offered total rewards systems based on a ‘pay plus benefits’ basis. Retirement fund arrangements were typically on a defined benefit (DB) basis, which meant that if experience was adverse, the employer carried the cost. Many employers also offered a separate post-retirement medical aid benefit that funded the employees’ medical costs in old age. Again, the employer picked up the tab if things did not run according to plan.
Non-retirement funding income
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Volatile salaries could result in the retirement fund liabilities being extremely unstable, and this would have direct implications for the employer contributions and their balance sheet. So the salary used for retirement funding was often defined to exclude bonuses, commissions and other volatile elements of the pay package. In addition, because part of the retirement costs were going to be funded by the postretirement medical aid benefit, the salary level used for retirement funding purposes was set to be less than the full salary excluding volatile items. The Income Tax Act referred to this as retirement funding income (RFI) and the balance of earnings was referred to as non-retirement funding income (NRFI). RFI is commonly referred to as pensionable pay or pensionable salary and the percentage of total income classified as RFI is termed the pensionable salary percentage or the pensionable pay percentage.
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How many people realise that benefits are designed to replace only a portion of their total income?
DB retirement benefits are determined according to pensionable pay at retirement, so a low pensionable pay percentage meant lower costs for the employer, and this was kept firmly within the employer’s control. However, the shift to defined contribution (DC) funds, accompanied by the transition to a total cost to company (TCTC) basis, meant a change in the control and influence of the pensionable pay percentage. Where TCTC arrangements have been put in place, pensionable salary is typically expressed as a percentage of TCTC, typically between 60% and 80% although some employers allow this percentage to be as low as 30%. As a number of deductions, including those for insured benefits and retirement fund contributions, are based on pensionable pay, a low percentage immediately means more take-home pay for the employee. If the pensionable percentage were reduced dramatically the year before the claim, the benefit would be paid based on this lower pensionable salary, even if a very high pensionable salary percentage had been paid for many years previously. The implications for retirement funding are also severe.
UNEXPECTED SHORTFALL AT RETIREMENT
THE TWO-TIER GAP The retirement benefit in a DC fund is impossible to predict, but many employers and trustees wish the fund to be managed in a way that produces a reasonable retirement benefit. What exactly constitutes a reasonable retirement benefit is uncertain but most South African retirement funds use replacement ratios of 70%–79%137. In other words, they aim to replace 70%–79% of pensionable pay as an income in retirement. But if pensionable pay is only 70% of total income, a 75% replacement ratio only delivers a retirement income of 52.5% of pre-retirement income! The projected replacement ratios across the various economic sectors are already visibly low, leaving a gap between total income before retirement and pension after retirement. However, many employees may be unaware of the fact that the use of the pensionable pay in calculating the replacement ratio hides a second gap, that between total income and pensionable pay. This might be in part due to the fact that very few benefit statements with projected retirement benefits actually show members what this means in terms of rands and cents138.
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75%
70%
of pensionable pay
of salary
Expected salary replacement
Pensionable pay
137 Butler & Van Zyl (2012b) 138 Murray (Unpublished)
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52.5% of salary at retirement
Actual salary replacement
PART 2: THE ISSUES
From a retirement savings perspective, large disparities between monthly contributions make the employee vulnerable to market volatility.
Even if employees think their employee benefits meet their retirement, death and disability needs, it is questionable how many realise that these benefits are designed to replace only a portion of their total income. In fact, a survey of employers139 revealed that there was considerable confusion between the contribution rate to retirement funds and pensionable salary percentages. INTRODUCING VARIABLE PAY STRUCTURES INTO THE MIX So far, we’ve considered what happens when the pensionable pay and total income are relatively stable. A further complication is that in some industries, take-home pay is extremely volatile. This may be due to the basic pay structure, such as in the fishing industry where pay depends on the season, the weather and the shifts being worked. In the retail industry, workers can be paid on a sales commission basis. Volatile pay may also be due to generous incentive bonuses, prevalent in professional and business services, energy and certain manufacturing industries.
In these instances, there are some difficulties in structuring appropriate benefits for members. For example, if actual earnings are used in the fishing industry, without any adjustment, the benefits provided on death or disability could be quite variable, and might depend on factors clearly beyond the control of the employee. From a retirement savings perspective, large disparities between monthly contributions make the employee vulnerable to market volatility. This is because investing in the markets just before a market crash can permanently dent savings while investing just before markets begin a recovery can result in higher returns. Over time these should average out but extraordinarily high bonuses or volatile earnings invested for only a short time might be exposed to this phenomenon.
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VOLATILE 139 Future of Employee Benefits Employer Online Survey 2012
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This may be due to the basic pay structure, such as in the fishing industry where pay depends on the season, the weather and the shifts worked.
CHAPTER 10: PENSIONABLE PAY
Explaining the rands and cents impact of financial decisions can be much more beneficial than discussing traditional investment return metrics such as performance relative to benchmarks.
DEFUSING THE TIME-BOMB National Treasury reform proposals suggested that the concepts of RFI and NRFI may soon be scrapped. Tax incentives would be based on percentages of total income instead of RFI and NRFI, although the exact definitions are still uncertain. While sponsors using a TCTC basis would not be compelled to change their fund rules to have pensionable salary reflect total income, it is expected that many would do so. Total income in this context is technically the greater of taxable income and employment income. 140
If the contribution rate toward retirement savings remained fixed, then contributions to retirement funding could shoot up dramatically. For example, an employee with a 70% pensionable pay percentage would pay 43% more towards retirement funding, and have a reduced level of take-home pay. Employers, unions and retirement funds need to take corrective action before these changes are implemented as well as prepare for their implementation. While it would be premature to focus on the specifics of adjusting to the proposed tax regime, there are some general principles that should be borne in mind.
Show employees the money As mentioned before, very few retirement fund members are shown what their projected benefits are in rands and cents. In response to this, some funds have started introducing benefit statements to put things into perspective and allow members to make more informed decisions about whether they are on track for retirement and whether they have enough death and disability cover in place. Where employees can choose their pensionable pay percentages or their contribution rates towards retirement funding, they should be shown the consequences on their disability, death and projected retirement benefits at the same time. Rethink goals Research suggests that the 75% replacement ratio may be too low for many South African households141. Trustees need to apply their minds to what a suitable retirement goal might be and use this goal as part of their asset-liability matching. Explaining the rands and cents impact of financial decisions can be much more beneficial than discussing traditional investment return metrics such as performance relative to benchmarks142.
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Very few retirement fund members are shown what their projected benefits are in rands and cents.
140 National Treasury (2012d) 141 Butler & Van Zyl (2012b) 142 Fowler & Campisi (2010)
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Pensionable pay, particularly if it is volatile, may be extremely detrimental to employee benefit outcomes and we believe many members are unaware of its consequences.
Start talking about the other volatility Although investment volatility receives a significant amount of attention, volatile salaries get much less consideration. One option may be to relate benefits to total income averaged over a number of months or years. However, this is unhelpful where the volatility is significant, when salary inflation is high, or where new staff members are concerned. An alternative may be to allow for additional voluntary contributions (AVCs) to be made to retirement funding on a regular basis to keep contributions relatively stable. Similarly, risk salaries can be determined, which roughly reflect the average level of take-home pay without volatility. Have minimum thresholds Employees can make bad financial decisions regardless of how financially educated they are. Allowing for very low pensionable pay
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percentages not only allows members to make choices that may well be bad for them, it gives employees the impression that the company unofficially endorses these poor choices. IMPLICATIONS Pensionable pay, particularly if it is volatile, may be extremely detrimental to employee benefits outcomes and we believe many members are unaware of its consequences. Employers will need to start communicating around this issue as well as take other remedial action when designing their total rewards systems.
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HIGH SALARY INFLATION THE DOWNSIDE TO MOVING UP IN THE WORLD By John Anderson and Anthony Steen
PART 2: THE ISSUES
SUMMARY Recently, salary increases have been well above official consumer price inflation (CPI). The real problem is that these salary increases have translated into increased consumption and borrowing. Given the low investment return environment, retirement savings are not keeping pace with lifestyles. If this continues, employees may experience significant drops in living standards at retirement. A possible solution may be to increase contribution rates each time the salary increases.
Cyclical industries such as construction may have high salary increases in certain years and lower increases in others. Industries such as mining, security and transport may face consistently high increases for a number of years.
INTRODUCTION In October 2012, truck drivers returned to work after a three-week strike, having secured a three-year wage deal that will see nominal annual salary increases of 9%143. If inflation remains within the 3% to 6% target band, this means a real increase of at least 3% per year. According to Member WatchTM data, where salary inflation reflects both promotional and inflationary increases, retirement fund
members have been enjoying high real salary increases, particularly at younger ages and in the last two years. The analysis below is based on a sample of members that depends on the demographics of those included. It does, however, illustrate that over all periods, salary increases have on average been well above inflation. For example over the past two years the real increases have been over 9% for members in the age band 25 to 35 years and just under 6% for members in the age band 55 to 65 years.
AVERAGE REAL INCREASE IN PENSIONABLE SALARY
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Source: Member WatchTM 2012 data set 143 Wendell, R. South African Truckers Sign Wage Deal, Strike Off. Reuters http://www.reuters.com/article/2012/10/12/us-safrica-strikes-trucks-idUSBRE89B07920121012 12/10/2012
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High real salary increases pose more of a challenge in certain industries than others. Cyclical industries such as construction may have high salary increases in certain years and lower increases in others. On the other hand, industries such as mining, security and transport may be adjusting wages upwards in real terms to secure a living wage and may face consistently high increases for a number of years. CAN WE EXPECT IT TO CONTINUE? It is generally accepted that for South Africa to be a better place for all, we need to invest and accelerate the improvement of living standards of the poor, including the lowest earners.
Some of the arguments for higher increases include the impact of petrol and electricity prices. Recent food and fuel inflation has hit lower earners hardest and this has influenced wage negotiations. A second factor is skills shortages, such as in the construction sector during the construction of the Gautrain and the building boom in the lead up to the 2010 FIFA™ World Cup. Skills shortages can result in wages being driven up outside the annual salary review. For example, a new hire may cost more than a previous hire or an employer may be forced to grant a salary increase to retain skills. The higher turnover rates that many employers have experienced in recent years may be in part responsible for higher real salary inflation.
Given that skills shortages remain a feature of many industries, this trend is expected to continue. THE DOWNSIDE OF UPSIZING SALARY Unfortunately, while salary increases might increase take-home pay, they may not necessarily have a positive impact on overall financial health. Perhaps surprisingly, increasing take-home pay does not necessarily reduce financial distress144. In the South African context, this is due to our high levels of credit spending. This is evident from the net of debt savings rates of South Africans as seen in the graph below.
HOUSEHOLD SAVINGS RATE AS A PERCENTAGE OF DISPOSABLE INCOME
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Source: South African Reserve Bank, KBP6287L, Household Savings Rate as a Percentage of Disposable Income, Seasonally Adjusted Data
144 O’Neill et al (2006)
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The higher standards of living funded by high salary increases cannot be supported in the generally lower investment return environment.
Instead of using the additional growth in earnings to increase savings, South Africans have continued to spend the additional income. This has significant implications for retirement savings. The high real salary increases are taking place during a period of low expected returns on accumulated savings. And both the high increases and low returns are expected to continue for the foreseeable future. But why is this a problem? In general, retirement fund contributions are expressed as a percentage of pensionable salary, so the rand amounts being contributed increase with the higher salaries. However, the issue comes in that accumulated savings need to keep pace with salary inflation and then provide an additional return. This is because as you upgrade your lifestyle, the level of income you need to sustain it in retirement increases. So your retirement goal moves further out of reach. To accumulate enough by retirement age to meet this goal, you would either need to save more as a percentage of your salary or earn more investment returns. If the contribution rate is fixed, the only way you could achieve this goal is through increased investment returns.
Accumulated savings
However, future investment returns are expected to be muted at best. A retirement fund member with a 70% equity (shares)
need to keep pace with
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salary inflation and then provide an
additional return.
145 Performed using Alexander Forbes Houseview assumptions as at 30 September 2012
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allocation, 20% bond allocation and 10% cash allocation is only expected to earn 3.8% annually above inflation over the next 10 years. If historic levels of salary inflation continue, the investment returns will hardly be enough to cover the salary increases, let alone provide growth. In other words, the higher standards of living funded by high salary increases cannot be supported in the generally lower investment return environment. This can best be illustrated by an example shown alongside145. Let’s take a 25 year old member who earns R10 000 per month now. He contributes 26% of his earnings to his retirement savings. By the time he gets to retirement, his final salary after tax and saving for retirement would be R23 517 per month. His after-tax pension is estimated at R24 059 per month. If the member’s salary inflation is 1% higher in real terms over his working life, the picture is quite different. His final salary after tax and saving for retirement would be R31 933 per month and his after-tax pension is now R28 146 per month. This example is illustrated in the infographic on the following page.
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DISPOSABLE INCOME BEFORE AND AFTER RETIREMENT Normal salary inflation
High salary inflation
Pay
Pay R23 517
Pension
R31
933
Pen
sion
R24 059
R28
As a result, even though higher salary inflation leads to larger pensions, it also leads to a larger drop in income at retirement. The higher the salary inflation, the bigger the drop. Although the retiree is obviously better off in rands and cents terms following higher salary increases, economising may prove difficult. To reduce the fall in income at retirement, the overall contribution over the member’s lifetime would need to increase. In practice, this could be phased in over a period of time, using a portion of each subsequent salary increase to fund the additional contributions. The appropriate contribution structure would also need to take taxation into account. Given
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146
current conditions, allowing tax-deductible contributions of over 30% over an individual’s lifetime may be required. Every time you receive a salary increase above the return earned in your retirement fund, it means that your accumulated savings have not kept pace with your living standard change. If accumulated savings continually lack behind rising living standards, you will need to reduce your expected living standard at retirement unless you make a plan to close the shortfall.
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Every time a person receives a salary increase, they need to understand that they are building both their current and future lifestyle.
IMPLICATIONS For defined benefit (DB) funds, high salary increases relative to investment returns may translate into additional strain on the funding levels. This, in the absence of any other factors, is likely to lead to increased contribution rates. For defined contribution (DC) arrangements, high salary increases relative to investment returns result in a larger gap between actual retirement incomes and pre-retirement living standards. One response to address this would be to defer retirement, which is discussed in Part 2: Chapter 13. The other response in DC arrangements would be to change the mindset on remuneration. Every time a person receives a salary increase, they need to understand that they are building both their current and future lifestyle. So, the more they spend of their increases, the less they will have to live on in retirement.
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146 Thaler & Benartzi (2004)
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Perhaps it’s time to start looking at defaults that start a person off at a pre-determined contribution rate, which then automatically increases at the salary increase date each year to a maximum level. This approach has shown to increase savings rates in the United States146 and is one way to overcome some of the behavioural problems involved in increasing the amount people save. Lastly, these issues illustrate the importance of improving the financial literacy of South Africans. This is desperately needed to stimulate a savings culture that would turn salary increases into increased savings and decreased debt.
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MASS EXITS COPING WITH THE DOWNTURN By Lindsay Lofstedt
PART 2: THE ISSUES
SUMMARY The turbulent environment of economic downturns has increased the amount of company mergers and acquisitions, liquidations and shut-downs. These events have significant short- and long-term implications for employee benefits, but these can be managed through careful planning. Each form of closure and mass fund withdrawal brings its own special problems, which demand specific attention from employers and unions. Some of these challenges include providing exiting members with appropriate preservation options on retrenchment and ensuring tax-efficient benefit transfers during the merger and acquisition process. Members who do not exit the fund might still face lower incomes due to ‘short time’ and increasing benefit expenses due to lost economies of scale.
Whatever the cause of mass exits, some form of anticipation and contingency planning can help reduce their impact.
INTRODUCTION When a significant proportion of the workforce leaves an employer at the same time the impact on the individuals, their industry and society as a whole can be devastating. This situation can arise because of: • Retrenchment • Transfer from one company to another due to merger and acquisition activity • Dismissal, for example, due to strike action. Whatever the cause of mass exits, some form of anticipation and contingency planning can help reduce their impact. This chapter covers retrenchment and transfers, where the lead times are usually considerably longer than dismissal due to strike action. RETRENCHMENTS
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The consequences Large scale retrenchments arise when employers liquidate or restructure. This is a sad reality of industries in decline, for example the textiles industry. If the industry in question is relatively healthy, there may be prospects of re-employment for
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the members. This would not be the case in a declining industry, particularly if the skills are not transferable. The effects begin long before the employee actually leaves the organisation. In the build-up to the actual exit, employees may work reduced hours or ‘short time’. This results in lower pensionable pay, which affects retirement fund contributions and the level of insured benefits under a retirement fund arrangement. A consequence of reduced hours may well be reduced death and disability cover. Where funds offer housing loans using the member’s benefits as collateral, the affordability of the housing loan repayments may reduce dramatically, potentially resulting in default. This can lead to the members accessing their benefits to settle the loan. Tax is also payable on such loan settlements and members also have to accept a reduced taxfree amount at retirement. As administration fees have a significant fixed cost element to them, a fund may find that the administration costs start to make up a greater proportion of the contributions made into the fund when reduced hours
CHAPTER 12: MASS EXITS
Retrenched employees bear the double burden of the cash portions of their already depleted retirement savings being taxed at a higher tax rate.
are in place. This erodes the amount of the contributions ultimately allocated towards the members’ retirement savings. In terms of the actual retrenchments, the greater the prospect for longer-term unemployment, the greater the desire to access retirement savings will be, particularly in the absence of other savings. About 90% of withdrawal benefits are accessed as cash147. This leakage erodes the individual’s prospects for financial independence at retirement and places a significant burden on governmentfunded benefits and the communities in which these workers live. A second negative consequence of accessing retirement savings is that these amounts are also potentially double taxed. Certain retrenchment benefits are taxed more favourably at the date of retrenchment. However, this tax-free retrenchment benefit will reduce the tax-free amount at retirement, which increases the marginal tax rate on retirement cash lump sums. (See the ‘Tax on withdrawal’ section on page 121.) Retrenched employees therefore bear the double burden of the cash portions of their already depleted retirement savings being taxed at a higher tax rate.
A third consequence is that the cash lump sums are often used to fund lifestyle expenditure. This may make the decline in living standards even more painful when the money runs out. Members who exit funds will also be affected by lapses in their risk benefit cover, leaving them and their dependants vulnerable to any possible adverse life events. Even where members are employed again after a short period, there may still be certain gaps in insured benefit cover where pre-existing conditions or waiting periods may apply to any new insurance or medical cover provided by their new employer arrangement. Managing the consequences In circumstances where the industry is in decline and the government cannot afford to bail it out, longer term unemployment is a real prospect for workers unless re-skilling programmes are undertaken. Introducing these retraining programmes should be an objective of the government, the unions and the industries concerned.
- 100% - 90% - 80% - 70% - 60% - 50% - 40% - 30% - 20% - 10% - 0%
About 90% of withdrawal benefits are taken as cash
147 Member WatchTM 2012 data set
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To manage housing loans when ‘short time’ is in place, members, employers and funds should engage with the housing loan credit provider and try to reach a more affordable repayment agreement. The provisions of Section 19(5) of the Pension Funds Act148 might however constrain the credit provider and fund’s ability to help all members. When retrenchments become unavoidable, it is critical that employers give members enough lead time to find alternative employment and make financial arrangements. Longer lead times also allow members an opportunity to access financial advice. Employers going through this process should seriously consider arranging specific financial advice to be made available for affected members, possibly at the workplace. Members should be made aware of these issues as part of the communication around the retrenchments.
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When retrenchments become unavoidable, it is critical that employers give members enough lead time to make alternative employment and financial arrangements.
For example, the individual can make use of any severance package received and any unemployment insurance income, while seeking employment, and decide to preserve the growing retirement fund benefit in a preservation fund. Having access to a once-off withdrawal from the preservation fund would give the individual some security that they would have access to additional funding for survival purposes if they are not re-employed by the time their severance package and unemployment insurance benefits are finished. In certain circumstances, it is almost inevitable that the amounts will need to be accessed. These circumstances include situations where there is a general decline in a particular industry and skills are not readily transferrable to other industries. In this case, it may be more cost-effective for these individuals to access their full benefits at withdrawal rather than incurring the administration expenses and commissions involved in transferring to a preservation fund. Access to cost-effective and seamless preservation fund options would also help
148 Act No 24 of 1956, as amended
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members – and warrants further investigation by employers and trustees. Employers may also wish to consider paying for a period of extended risk cover as part of the retrenchment package. TRANSFERS The consequences The lengthy negotiations around the purchase and sale of a business often involve a great degree of due diligence. When retirement funds were predominantly defined benefit (DB), valuing the fund was an integral part of the sales process due to the significant financial implications for the company. With the risks relating to retirement funding having shifted to members in defined contribution (DC) funds, the perception of companies is often that little or no attention to retirement fund arrangements is required. As a result, depending on the rules, retirement fund members may have an opportunity to withdraw their retirement fund benefit even though their employment is being transferred to the new business owners without any substantial changes. This would not in itself be a bad thing, provided that members act responsibly and choose to defer tax and preserve their benefits in preservation funds, retirement annuity funds or in their new employer’s retirement funds. However, all the evidence points towards low preservation rates. Managing the consequences A little planning and attention to detail during the merger and acquisition process would result in the sale agreement providing details of how members’ benefits will be dealt with. Ideally these provisions would confirm that members’ benefits are to be preserved through transfers to the new employer’s retirement funds or within the existing arrangement, which would then be allowed to continue. Arrangements would be made for the relevant fund rules to be amended to facilitate either of these approaches.
CHAPTER 12: MASS EXITS
TAX ON WITHDRAWAL The default tax treatment on lump sum withdrawal benefits is as follows:
VALUE OF LUMP SUM
TAX RATE
R0 - R22 500
0%
R22 501 – R600 000
18%
R600 001 – R900 000
27%
R900 000 or more
36%
This table applies to the combined withdrawal benefits that become available to members on or after 1 March 2009. This means that if a member received a withdrawal benefit of R100 000 from a retirement fund on 1 April 2009, they will pay R13 950 in tax (first R22 500 tax-free, the rest taxed at 18%). If the member then received a further withdrawal benefit of R20 000 on 1 May 2010 from another retirement fund, the member will pay R3 600 in tax (18%) on that benefit. Each withdrawal benefit pushes the member higher up on the tax scale and the member will pay more tax each time a benefit is taken in cash. However, withdrawal benefits on qualifying retrenchments receive beneficial tax treatment. Paragraph 2(1)(a) of the Second Schedule to the Income Tax Act provides (with effect from March 2009) that in the event of a member receiving a lump sum benefit as a result of employment being terminated due to: • The employer having ceased to carry on business or intending to cease carrying on the trade for which the employee was employed • That person having become redundant in consequence of having being affected by the general reduction in personnel or class of personnel then the benefit having accrued to the member will be taxed on the same basis as a retirement benefit. This exemption does not apply to members who at any time were directors of the company or who at any time held more than 5% of the share capital of the company. However, the member will then be penalised at retirement date when the tax on any lump sum taken on retirement is calculated, as the amounts accessed will be set off against the tax-free amounts they qualify for at retirement, notwithstanding the fact that these amounts will already have been taxed. This has the effect of increasing the marginal rate of tax on the retirement lump sum benefit taken.
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Mass exists also have an impact on those who survive the process and retain employment. It is critically important for the employer and trustees to conduct a full review of the benefit arrangements.
OTHER CONSEQUENCES TO CONSIDER Mass exits also create a challenge for trustees considering the appropriate investment strategy to adopt. Mass exits usually arise in poor economic conditions, which are often also reflected in poor financial markets. This, in turn, may result in a reduction in members’ accumulated savings at the point when they may need to access these benefits to survive a period of unemployment. This locks in market losses to the detriment of the members. The difficult question for trustees in these circumstances is whether to change the fund’s investment strategy to provide capital protection, at the expense of the fund’s longer-term strategy. Although theoretically appealing, in reality, the trustees are unlikely to know which members will be affected by the downsizing and which will not. Any change in investment strategy will then also have an inherent risk to the members who remain in the fund, as they will either enjoy profits or sustain losses as a result of the temporary change in the investment strategy. IMPLICATIONS The impact on the individuals affected has been explored in some detail above. With planning, the consequences can be managed to some extent. There are also longer-term implications for the government because of increased dependence on state benefits. Mass exits also have an impact on those who survive the process and retain employment, although not as dramatic. After mass exits
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After mass
occur, employers and industries are left with smaller retirement funds with reduced membership and fewer assets, which can lead to a loss of the benefits of economies of scale. This then drives up per-member administration, investment and risk benefit costs and, at the extreme, can potentially threaten the financial viability of the retirement arrangement. Under these circumstances, it is critically important for the employer and trustees to conduct a full review of the benefit arrangements to decide which services and benefits are truly value-adding and necessary, to make sure the arrangement remains as cost-effective as possible. A conversion from a stand-alone retirement fund arrangement to an umbrella fund might relieve the loss of economies of scale. Offering members fewer choices may help keep costs to a minimum. If compulsory preservation were to be implemented as part of the retirement fund reform process, the framework will be significantly tested where mass exits occur due to a decline in industry or even a downsizing of a particular employer. With limited access to accumulated savings to provide for urgent financial needs, the unemployment insurance support system would need to be bolstered. Otherwise, there is likely to be great unhappiness among affected members who are not able to meet their urgent financial needs while having savings preserved for their retirement.
exits occur, employers and industries are left with smaller retirement funds with reduced membership and fewer assets, which can lead to a loss of the benefits of economies of scale. 122
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LONGEVITY WHY 75 SHOULD BE THE NEW 65 By Megan Butler
PART 2: THE ISSUES
SUMMARY Shorter working lives, lower real investment returns and greater life expectancies have resulted in significantly reduced projected benefits from retirement funds. Increasing retirement age may help boost benefits. Retirement age should reflect productivity levels, so only certain jobs lend themselves to later retirement ages. A modest extension of retirement age or allowing workers to gradually reduce their working hours is preferable to a dramatic change. Good communication of any change will be key.
Retiring at 67 instead of 65 could add 15%–30% to a member’s savings in retirement.
INTRODUCTION Average defined contribution (DC) fund members are on track to replace just 39% of their income when they retire, based on their current accumulated retirement savings and contribution rates149. While this ignores any other savings members may have, members under the age of 30 are likely to be in their first job, not have any additional savings and have particularly poor retirement prospects. About 95% of members under 40 can expect to replace less than 75% of their income when they retire149. There are a number of reasons for these startling statistics. Firstly, many people are entering the workplace later due to longer training periods and, potentially, difficulty finding permanent full-time employment. This means they are starting to save later in life. Secondly, the general economic gloom means that investment returns are likely to be lower in the future than they were when many funds were designed. Shorter careers, higher salary expectations due to qualification levels and lower investment returns mean that savings at retirement are simply less than they used to be relative to salaries at retirement. Annuity (pension) prices, on the other hand,
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149 Member WatchTM 2012 data set 150 Alexander Forbes Pensions Index, September 2012 151 Alexander Forbes Research and Product Development
124
are higher, so retirement savings do not stretch as far as they used to when retirees buy life annuities. These changes can occur relatively quickly. For example, on 1 January 2002, a 40-year old who was on track to receive a pension of 75% of his salary when he retired at 65 could expect to replace only 40.5% of his income in retirement by the end of September 2012150 aged 50. This deterioration was driven mainly by declining forecasts of investment returns and rising projected annuity costs. A contributing factor to poor projected replacement ratios is improving life expectancy, which has led to questions being asked as to whether retirement ages between 60 and 65 are still appropriate. Men and women retiring at 65 can expect to live another 16 and 20 years respectively, of which 7 to 9 years will be spent in relatively good health. Extending the retirement age seems an obvious and powerful way to boost retirement benefits: retiring at 67 instead of 65 could add 15%–30%151 to a member’s savings in retirement. Retiring even later could boost benefits further.
CHAPTER 13: LONGEVITY
RETIREMENT, INCAPACITY AND PRODUCTIVITY Retirement ages exist because old age will eventually render workers unproductive and unable to perform their work. This deterioration impacts on profitability for the employer, as well as health and safety in the workplace. Economists would argue that retirement ages are necessary given our high wage inflation rates, which make older workers expensive relative to younger workers who may be more productive152. Given these arguments, it makes sense to set the retirement age relative to the capacity and capabilities of older workers. This was the approach taken to setting the retirement age at 65 in the late 1800s. Back then, 65 was the
The demands of different jobs vary greatly. For example, physically demanding work lends itself to earlier retirement, while jobs involving people skills or intellectual effort lend themselves to later retirement. This suggests that different retirement ages are required for different jobs154. The graph below reveals surprisingly little variation in normal retirement ages despite variation in occupations. This suggests that further refinement of retirement ages should be possible.
age at which most workers were considered incapable of safely performing their work. However, by 1997, UK men and women retiring at the age of 65 could expect seven and nine years of healthy living in retirement before becoming incapacitated153. So it might be time to reconsider the average retirement age of individuals. It is difficult to make definitive statements about the productivity of older workers. Some studies show that productivity declines with age, others show that older workers tend to be better at accuracy and output consistency. Others show almost no relationship between age and productivity once factors such as job fit and experience are taken into account.
The key lies in refining the retirement age to make it appropriate for the category of worker and not simply extending the retirement age for everyone. This is important to safeguard employee welfare and to prevent an increase in unemployment at younger ages.
NORMAL RETIREMENT AGE: AVERAGE PER SECTOR 63.3 62.7 62.8 63.7 62.7 62.4 63.8 63.4 63.4 63.8 63.3
Source: Member WatchTM 2012 data set
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152 Lazear (1979) 153 Bellaby (2006) 154 Filer & Petri (1988)
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A global comparison of retirement ages and youth unemployment rates shows that there is no relationship between the two.
LATER RETIREMENT AND EMPLOYEE WELFARE Evidence suggests that people who work later are least likely to die early155. People who retire earlier often report that they feel in poorer health and view the loss of their job in a similar way to people who have been retrenched. However, continuing to work can severely harm the health of those in physically demanding jobs155. This reinforces the point that certain jobs do not lend themselves to later retirement. In these cases, employers will need to consider alternatives to improve retirement benefits for these workers, as extending retirement age is not a viable option. LATER RETIREMENT AND UNEMPLOYMENT Just over half of economically active South Africans between the ages of 15 and 24 are unemployed156. But a global comparison of retirement ages and youth unemployment rates shows that there is no relationship between the two. Economists agree this is due to economies slowly adjusting to gradual changes in the size of the working population. Employers bringing in new retirement ages independently will slowly change the size of the working population, which is unlikely to have a significant negative effect on the economy.
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of workers. Other elements of the benefits package would also need to be amended to make sure that each group gets a fair deal. For example, workers with earlier retirement ages will need higher contribution rates towards their retirement savings to reach a reasonable benefit target. This may require another part of the benefit package to change to ensure sufficient take-home pay during employment. Employers would need to use their judgement in deciding how far to extend the retirement age, given their workforce. Most international experts believe that 75 is a reasonable maximum retirement age at the moment, although this may rise with medical advances. Given the entrenched nature of the 60, 63 or 65 retirement age, employers may wish to consider a more modest and gradual extension. Any change would need to be carefully communicated. In a defined contribution (DC) fund, extending the retirement age would not remove the right to retire early but would give members the option to work later. DC funds would also not penalise members choosing to leave before the normal retirement age. What this doesn’t address is that individuals who do not fully understand their retirement needs are most likely to retire early without adequate savings.
PRACTICAL SUGGESTIONS
IMPLICATIONS
One suggestion is that determining the retirement age should be up to the employer and not the retirement fund. Even if funds could extend the retirement age, members would continue to retire earlier if their employment contract suggested so157. The employment contract and fund retirement age together play a very big role in determining when employees retire and would need to be reviewed simultaneously.
Employers need to consider the characteristics of their workforce to assess whether workers might benefit from older retirement ages both financially and in terms of increased longevity, without harming profitability. If it is appropriate to increase the retirement age, employers can introduce gradual increases, such as a two-year extension or the opportunity for a worker to phase out from working and phase into retirement over a five-year period. Workers would still be able to retire at the current lower retirement age without penalty.
When the employer is considering the retirement age, different retirement ages could be considered for different categories 155 Bellaby (2006) 156 Statistics South Africa (unpublished). Labour Force Survey: Q1 2012 157 Filer & Petri (1988)
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PART 3 SECTOR CASE STUDIES
PART 3
SECTOR CASE STUDIES
BASED ON MEMBER WATCHTM 2012 DATA
CHAPTER 1 CHAPTER 2
n Construction sector n Energy sector
CHAPTER 3
n Fishing, forestry and agriculture sector
CHAPTER 4
n Manufacturing sector
CHAPTER 5
n Mining sector
CHAPTER 6 n
Personal services sector - Health - Education - Media and marketing - Security
CHAPTER 7
n Professional and business services sector
CHAPTER 8
n Public sector
CHAPTER 9 n Retail, wholesale and hospitality sector - Retail and wholesale - Hospitality CHAPTER 10 n Transport and telecommunications sector - Transport - Telecommunications 127
131 141 153 163 177 189
192 198 205 211
219 229 239
242 250
257
260 268
BENEFITS BAROMETER
HIGH PRIORITY ISSUES IN THE TEN SECTORS
CONSTRUCTION n Absenteeism and incapacity n Bricks and books
MANUFACTURING
n Incentives n Longevity
FISHING, FORESTRY AND AGRICULTURE
n Low-income earners n Temporary and informal workers
n Absenteeism and incapacity
n Young workers
n Bricks and books n Incentives
ENERGY n Absenteeism and incapacity n Choice
n Low-income earners n Pensionable pay n Strikes n Temporary and informal workers
n Mass exits
MINING n Absenteeism and incapacity n Bricks and books n High salary inflation n Mass exits n Strikes n Temporary and informal workers n Young workers
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PERSONAL SERVICES RETAIL, WHOLESALE AND HOSPITALITY
HEALTH n Absenteeism and incapacity n Longevity n Pensionable pay
RETAIL AND WHOLESALE
n Strikes
n Incentives
EDUCATION n Absenteeism and incapacity
n Longevity n Strikes
n Low-income earners
TRANSPORT
n Pensionable pay
n Absenteeism and incapacity
n Temporary and informal workers
n Bricks and books
n Unhealthy finances n Young workers
PROFESSIONAL AND BUSINESS SERVICES
n High salary inflation
n Incentives
n Incentives
n Low-income earners
n Temporary and informal workers
n Longevity
n Choice
n Pensionable pay
n High salary inflation
n Absenteeism and incapacity
n Pensionable pay
n Incentives
n Bricks and books
n Temporary and informal workers
n Longevity
n Incentives
n Pensionable pay
n Longevity
n Young workers
n Strikes
n Low-income earners
TELECOMMUNICATIONS
HOSPITALITY
n Bricks and books
n Incentives
n High salary inflation
n Choice
MEDIA AND MARKETING
SECURITY
TRANSPORT AND TELECOMMUNICATIONS
PUBLIC SECTOR
n Temporary and informal workers
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n Young workers
BENEFITS BAROMETER
Part 3 considers the problems, principles and practicalities at an economic sector level. Each sector faces a different set of challenges in terms of how to create a more efficient and effective way of meeting their members’ very specific requirements.
Disclaimer: These case studies were compiled by Alexander Forbes Financial Services consultants and are largely based on their experience in the relevant sectors and industries as well as the Member WatchTM 2012 data set. The case studies reflect the composition of the Alexander Forbes clients and may not be representative of the relevant sector or industry as a whole.
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1
CONSTRUCTION SECTOR By Lindsay Lofstedt with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 1
A significant number of the workforce are low-income earners. There is also a trend to appoint limited duration contractors without benefits coverage.
INTRODUCTION The construction sector plays a vital role in South Africa’s economic and social development. It provides the physical infrastructure for economic activity and is responsible for the development of our factories, offices, cities and residences. Construction is labour intensive, employing between 330 000158 and 1 million people159, depending on how the sector is defined. The demographics in this sector are diverse, ranging from highly skilled professional engineers and property developers through to a significant proportion of unskilled labourers, with skilled and semi-skilled workers between. Hence a significant number of the workforce are low-income earners. The average number of employees at a construction company is only 28 due to the large number of very small enterprises. These companies may not offer employee benefits or even be registered with SARS158. There is also a trend to appoint limited duration contractors without benefits coverage. Hence benefits coverage is poor. The sector is subject to seasonal activity within each year and cyclicality over different years. Different regions also experience
158 Construction Education and Training Authority 159 Statistics SA Statistical Release P0211; Quarterly Labour Force Survey, Quarter 2, 2012
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different rates of activity. While the Western Cape, Northern Cape, Mpumalanga and Limpopo provinces have enjoyed growth over the past year, employment in the Eastern Cape, Free State, KwaZulu-Natal and Gauteng has reduced by more than10%158. Similarly, infrastructure projects have boosted growth among civil engineering based companies, whereas investment in residential construction has been on the decline for some time. Experience and skill are becoming increasingly scarce resources in this sector, due to low recruitment rates of professionals and skilled workers. To retain skilled staff beyond the normal retirement age, a number of employers are considering an increase in their normal retirement age or providing post-retirement fixed-term contracts. At the other end of the spectrum, younger workers tend to be highly mobile and are often appointed as fixed-term contractors and not included in employee benefits arrangements. The result is an ageing population in benefit schemes. The average age of the workforce of some schemes is approaching 45 years.
CHAPTER 1: CONSTRUCTION
PART 3 Chapter 1
SECTOR ECONOMIC ANALYSIS
R341.6 bn 3.44% 0.80%
GDP contribution (2011 prices)160 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
Approximate employment161
723 000 323 000
Formal sector Informal sector
Key stakeholders Companies162 n n n n n n
Aveng Grinaker-LTA Basil Read Holdings Ltd Group Five Ltd South Africa Murray and Roberts Holdings Ltd South Africa Pretoria Portland Cement Co Ltd South Africa Wilson Bayly Holmes-Ovcon Ltd South Africa
Government ministries163 n n n n
Department of Economic Development National Planning Commission Department of Human Settlements Department of Public Works
Unions164 n n n n n n n
AUBTWSA BWU NACBAWU SABAWO BAGWU BWAWUSA BCAWU
n n n n n n n
BMEAWU NBV CAMMBAWU AMCU CEMAWU BUMC MFEREBU
160 Gross Domestic Product, Statistics SA, 2012 161 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 162 Who Owns Whom (2012). SA Sector Profile – Construction of Complete Constructions or Parts Thereof, http://www.whoownswhom.co.za/web/index.php?m=SA%20Sector&p=sectorinfo7id=399 163 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 164 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
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EMPLOYEE PROFILE
PART 3
The membership of construction sector funds administered by Alexander Forbes is 78% male. This shows a significantly greater proportion of female staff than the national gender split for the construction sector of 88% males and 12% females165. This may be due to the inclusion of a large number of funds with a relatively high percentage of female administration staff. In certain bargaining council funds, which include mainly semi-skilled and unskilled workers, the proportion of females can be 1% or less.
Chapter 1
The construction sector has a high proportion of low-income earners. In fact, in certain funds, 80% or more of the membership have salaries below R5 000 per month and some workers have annual salaries of around R20 000.
PROPORTION OF MEMBERS BY ANNUAL PENSIONABLE SALARY BAND: CONSTRUCTION SECTOR
R0 - R24 000
R24 000 - R60 000
R60 000 - R120 000
R120 000 - R240 000
Source: Member WatchTM 2012 data set
165 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012
134
R240 000 - R480 000
R480 000 - R960 000
R960 000 +
CHAPTER 1: CONSTRUCTION
BENEFITS BY THE NUMBERS
PART 3 Chapter 1
Contribution to retirement savings as a percentage of pensionable pay
15.0%
Contribution to death benefits as a percentage of pensionable pay
2.02%
Contribution to disability benefits as a percentage of pensionable pay
0.98%
Contribution to retirement funding costs as a percentage of pensionable pay
0.95%
Projected replacement ratio for a member aged 25
53%
Average actual retirement age
61.9
Actual preservation rate
7.5%
Percentage of employers offering disability benefits
81.5%
Average insured death benefit as a multiple of pensionable pay
3.6 times
Percentage of employees covered by medical schemes
22%
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
RETIREMENT ANALYSIS The delivery of retirement funding in this sector is strongly determined by whether there is a bargaining council fund in place. If so, all employees within the scope of the collective bargaining agreement – typically lower-income earners – will be members of this fund. If a collective bargaining agreement is not in place, employers will either offer a single fund for all employees or offer funds targeted at different income groups. Broader diversity means that a middle of the road approach will not adequately meet the needs of individuals at the extremes of the membership profile. On average, the construction sector appears to have high contribution rates relative to other sectors, and the expenses also
compare favourably. However, it is important to note that segmented schemes for lower income earners typically have higher total contributions due to higher costs as a percentage of payroll and more expensive risk benefits. A further feature of funds targeted at lowerincome earners is the propensity for them to have lower-risk investment strategies, to avoid any negative returns. Market volatility is often not understood or accepted by the workers and consequently more conservative strategies are implemented for them. Given the cyclical nature of the construction sector, non-core employees may find themselves being employed and then unemployed for periods of time and often
135
access their benefits for income purposes while they are unemployed. Some retirement funds have waiting periods in place and members cannot access their withdrawal benefits if they regain employment in the sector within the waiting period. Although the preservation statistics suggest that the average preservation rate in this sector is marginally below average, this masks the divergence in preservation rates seen on the various retirement fund types. The preservation rates on bargaining council funds are close to zero.
PART 3: SECTOR CASE STUDIES
Low contribution rates, conservative investing and low preservation rates all contribute to low projected retirement outcomes. Around 75% of new employees entering funds between the ages of 20 to 30 years can expect to receive
PART 3 Chapter 1
a replacement ratio of 45% or more. These replacement ratios deteriorate dramatically as we look at older members. By the time these members are aged 50, around 90% have replacement ratios of less than 45%.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: CONSTRUCTION SECTOR 1%
38%
1%
3%
48%
34%
35%
23% Ages 20 - 30
2%
2%
15% Ages 30 - 40
2%
37%
49%
9%
Ages 40 - 50
Replacement ratios 4%
85% 73%
3%
2% 2%
30% - 45% 45% - 60%
6% 3%
15% Ages 50 - 60
0% - 30%
8%
Ages 60 +
Source: Member WatchTM 2012 data set
136
60% - 75% 75% +
CHAPTER 1: CONSTRUCTION
Pensionable service lengths at retirement tend to two extremes. They are generally relatively short for unskilled workers who move in and out of employment throughout their careers, and 20 years or more for skilled workers who generally do not leave the industry once they are older than 40. This disparity is set to become even greater with the skills shortage requiring that skilled workers stay on beyond normal retirement age. These dynamics account for the fact that a third of retirees in this sector have five years service or less, even though the average pensionable service at retirement is 13.5 years and increasing. Only 25% of retirement benefits are used to buy annuities, but this is partly due to the dominance of provident funds where
members have access to 100% in cash and tend to use all their benefits as cash. On pension funds, members tend to take the full tax-free benefit and annuitise the remainder. Interestingly, where the pension fund offers an in-fund pension, 75% of the members choose to receive a pension from the fund rather than buying an annuity from an external insurer. However, in both pension and provident funds, those with larger benefits are more inclined to buy annuities. Given the lower level of financial sophistication in this sector, it is perhaps unsurprising that two-thirds of money that is annuitised is used to buy life annuities, which are simpler products than living annuities.
AVERAGE ALLOCATION OF RETIREMENT BENEFITS: CONSTRUCTION SECTOR Source: Member WatchTM 2012 data set
CASH
75%
17%
8%
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LIFE ANNUITY
LIVING ANNUITY
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PART 3: SECTOR CASE STUDIES
PART 3 Chapter 1
The low average earnings in this sector pose a real challenge, particularly for younger workers with high cash needs and workers wanting funds for housing and education.
RISK BENEFIT ANALYSIS While the lump sum benefits offered within the construction sector are consistent with the average experienced within the broader retirement funds industry, the maximum levels of cover are generally lower than in other sectors. This is because risk benefits are relatively expensive due to high claim rates. These high claim rates are attributable to the male-dominated low-income workforce and the nature of the work undertaken. Given that allocations to risk benefits reduce allocations towards retirement funding, risk benefits contributions may be capped, leading to lower risk benefit cover levels, particularly on bargaining council funds. The most favoured risk benefits within the construction sector mirror those of broader retirement fund industry, where funeral, death and disability insurance arrangements are very prevalent. However, the disability income protection benefit is another area where we find that the level of cover provided is dependent on the demographics of the particular scheme within the construction sector. Funds targeted at higher-income earners typically provide a disability income benefit, whereas bargaining council funds and funds targeted to lower-income earners tend to prefer lump sum disability income. This is because qualification for income continuation benefits is occupation-based, and also based on the individual’s ability to continue to perform their own or a similar job. Semi-skilled or unskilled workers generally can perform only one particular function due to their lack of experience, education and training. By contrast, an office worker may well be able to continue to perform other tasks if a disability impacts on their ability to perform their existing job. HEALTHCARE ANALYSIS When we consider the healthcare benefits of workers in this sector, the distribution of income has an obvious impact. All the
166 Alexander Forbes Health Survey 2010
138
respondents in a survey of Alexander Forbes Health clients in this sector, offered medical scheme cover to employees, whether compulsory or voluntary and 55% offered some sort of subsidy for medical scheme contributions during employment, with 27% offering a post-retirement subsidy166. Despite this, only 22% of members actually participated in a medical scheme166. This low uptake of medical scheme cover speaks to a high percentage of members not being able to afford medical scheme cover, even with the assistance of a subsidy. BENEFITS BAROMETER AND CONCLUSIONS The construction sector is a significant employer but many temporary workers or workers in small enterprises may not have benefits. Extension of cover to these employees should be a high priority. The low average earnings in this sector pose a real challenge, particularly for younger workers with high cash needs and workers wanting funds for housing and education. As non-taxpayers, this lower-income segment also needs alternative incentives to stimulate saving. An additional complication is that, while skilled workers may wish to extend the retirement age, unskilled workers may need to stop work before normal retirement age due to incapacity. Mass withdrawals are an issue due to the highly cyclical nature of the sector and unhealthy finances should also be a concern. What then is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to particular circumstances and should therefore be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 1: CONSTRUCTION
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
ER
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
M PRIOR ITY
H PRIORITY HIG NE
F ITS
BAROM
ET
HIGH PRIORITY Absenteeism and incapacity Bricks and books Incentives Longevity Low-income earners Temporary and informal workers Young workers
– MEDIUM PRIORITY – Mass exits – Unhealthy finances
ER
W PRIORITY LO
BE
– – – – – – – –
– – – – –
LOW PRIORITY Choice High salary inflation Pensionable pay Strikes
ER
139
PART 3 Chapter 1
PART 3: SECTOR CASE STUDIES
PART 3
WHAT CAN BE DONE?
Chapter 1
WHAT? WHO?
Temporary and informal workers
Create benefit schemes to cater for this group.
Unions, the government and labour brokers
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
Assess the appropriateness of including very low earners on the occupational retirement fund.
Employer and unions
Remove or modify the means-test on the older person’s grant (OPG).
The government
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Expand employee benefits offering to include taxeffective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Mass exits
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Low-income earners
Incentives
Bricks and books
140
PART 3: SECTOR CASE STUDIES
2
ENERGY SECTOR
By Duane Naicker with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 2
Many companies in this sector still have defined benefit pension funds, although these are typically closed to new employees who are accommodated in defined contribution arrangements.
INTRODUCTION As a whole, the energy sector, which includes power generation and petrochemicals, faces increasing demand which must be met from dwindling resources on an ageing infrastructure. In terms of power generation, coal still fuels most of the country’s power stations although pressure is mounting to turn to other sources of energy167. Power diversification initiatives have not proceeded smoothly so far. Plans to exploit shale gas reserves in the Karoo have been put on hold due to environmental concerns and no real progress has been made on building new nuclear reactors. However, when diversification begins in earnest, demand for skill-sets will shift, which may lead to retrenchments and skill shortages as the importance of certain power production modes waxes and wanes. Many petrochemical companies are subsidiaries of multinationals. Frequent corporate restructuring is a feature in this sector because of a focus on the deleveraging of balance sheets and improving the bottom line. Restructuring activity has been intense in the wake of the global financial crisis. In terms of organisational culture, safety is a top priority given that in the energy sector the stakes are high. A mistake could result in a leak, spill or explosion that could cause
167 Oxford Business Group (2012)
142
immense loss of life, injury and environmental damage. Given this dynamic and the global shift towards integrated reporting on environmental, governance and sustainability issues, it is not surprising that companies in this sector have prioritised both environmental responsibility and a health and safety culture. A visitor to the offices of a petrochemical company, for example, may need to watch a five minute safety video or take a breathalyser test before being allowed to attend a meeting, which would open with an announcement about safety. Many companies in this sector still have defined benefit (DB) pension funds, although these are typically closed to new employees who are accommodated in defined contribution (DC) arrangements. Although the DB funds are generally solvent, the risk that they may pose to organisations’ balance sheets provides additional justification for the use of specialised pension and investment departments at some organisations with multinational parent companies. These departments add another tier of governance and provide additional support to a board of trustees during the decision-making process.
CHAPTER 2: ENERGY
SECTOR ECONOMIC ANALYSIS
PART 3
R203.8 bn 2.05% 1.35%
GDP contribution (2011 prices)168 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
Approximate employment169
103 000 2 000
Formal sector Informal sector
Key stakeholders Companies170 n n n n n n n n n
African Oxygen BP Southern Africa Chevron Engen Petroleum Eskom Holdings Sasol Shell South Africa South African Petroleum Refineries Total South Africa
Government ministries171 n Department of Energy n Department of Water n Department of Environmental Affairs
Unions172 n n n n n
CEMAWU OCGAWU CEPPWAWU SACWU PWU
168 Gross Domestic Product, Statistics SA, 2012 169 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 170 Who Owns Whom (2012). SA Sector Profile – The Manufacture of Gas; Generation of Electricity, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=640 171 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 172 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
143
Chapter 2
PART 3: SECTOR CASE STUDIES
EMPLOYEE PROFILE The age profile of the energy sector has a slightly heavier concentration of members at ages 50–65 than other sectors, as seen in the graph below. This is expected, as the retention of scarce skills and valuable experience is a priority for companies operating in this sector.
PART 3 Chapter 2
PROPORTION OF MEMBERS BY AGE: ENERGY SECTOR
Retirement funds industry Source: Member WatchTM 2012 data set
144
Of the surveyed members, 73% are male and the lack of female representation in higher levels of management is clear from the salaries data, shown opposite.
CHAPTER 2: ENERGY
Given the fact that workers in this sector tend to be highly skilled, salaries tend to be higher than the average across our client base. However, this result is skewed by the fact that blue collar workers in the sector typically
belong to funds not in the Member WatchTM 2012 data set. Merit and cost of living increases also exceed the average level of increases observed in our client base.
PART 3 Chapter 2
PROPORTION OF MEMBERS BY ANNUAL PENSIONABLE SALARY BAND: ENERGY SECTOR
Source: Member WatchTM 2012 data set
145
PART 3: SECTOR CASE STUDIES
AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: ENERGY SECTOR
Chapter 2
Salary increase per year
PART 3
Sector experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
14.6%
Contribution to death benefits as a percentage of pensionable pay
1.4%
Contribution to disability benefits as a percentage of pensionable pay
0.9%
Contribution to retirement funding costs as a percentage of pensionable pay
0.7%
Projected replacement ratio for a member aged 25
50%
Average actual retirement age
59.7
Actual preservation rate
17.4%
% of employers offering disability benefits
73.7%
Average insured death benefit as a multiple of pensionable pay
3.8 times
Percentage of employees covered by medical schemes
Not credible
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
146
CHAPTER 2: ENERGY
RETIREMENT ANALYSIS The key retirement issue in this sector is that of the contribution rate and the level of choice offered around it. In some companies, members can choose to contribute anything from 11% to 29%, inclusive of contributions towards risk benefits and administration costs. Some retirement funds also allow members to make additional voluntary contributions (AVCs). While this level of choice offers members additional flexibility, it does allow members to select contribution rates that are well below the required rate of contribution needed to attain a replacement ratio of 75%. Many boards of trustees have already recognised the risk that offering low rates of contribution can introduce and have taken
corrective action to close out some of the low contribution categories. Retirement funds that offer only one or two contribution rates will certainly need to revisit these rates to determine whether they are still appropriate in an environment of lower expected returns and falling bond yields. Pensionable earnings are usually structured at 70% of the total cost to company (TCTC) but may differ depending on employment grade and the corporate remuneration strategy. Due to the higher than average payroll base, trustees are able to negotiate highly favourable costs with service providers
PRESERVATION RATE: ENERGY SECTOR
Age band Sector experience Source: Member Watch
TM
Retirement funds industry experience
2012 data set
147
on behalf of members, which means that administration costs for this sector are considerably lower than average. Despite corporate restructuring activity, withdrawal rates, including retrenchments, are lower than average. When members do leave, they tend to preserve more of their benefits than in other sectors, as shown in the following figure. While the preservation rates are healthy, they are erratic and can still be improved. Boards will need to spend more time on strategies to effectively communicate the importance of preservation.
PART 3 Chapter 2
PART 3: SECTOR CASE STUDIES
The relatively high contribution rate to retirement funding, low withdrawal rates and relatively good preservation behaviour suggest that projected replacement ratios are better than many other sectors.
PART 3
The distribution of projected replacement ratios per age band are shown below.
Chapter 2
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: ENERGY SECTOR
26%
22%
36%
9% 11%
16%
25%
43%
13%
31% 10%
10% 10% Ages 20 - 30
26%
Ages 30 - 40
14% Ages 40 - 50
Replacement ratios 33% 16% 15%
15%
0% - 30%
15%
18%
30% - 45%
24%
17% 29%
19% Ages 50 - 60
45% - 60% 60% - 75%
Ages 60 +
Source: Member WatchTM 2012 data set
148
75% +
CHAPTER 2: ENERGY
Skills retention is key in this sector. The fact that 72% of retirees have 20 or more years of service at retirement is testimony to the fact that employers have been able to retain key staff for significant periods of time.
Skills retention is key in this sector. The fact that 72% of retirees have 20 or more years of service at retirement is testimony to the fact that employers have been able to retain key staff for significant periods of time. However, a startling 76% of retirement benefits paid out in the energy sector are paid out in cash and a portion of this will be directed to SARS for tax. Unsurprisingly, the majority of members who use their retirement benefits to buy annuities tend to be members with substantial retirement benefits. The annuitisation rate for members with retirement benefits above R945 000 is around 60% but retirees with smaller lump sums take their benefits almost entirely in cash. RISK BENEFIT ANALYSIS Insured group life assurance benefits and contributions categories tend to be the major differentiators between funds. Lump sum death benefits range from 1 to 13 times annual salary with an average of 3.8 times. Certain funds offer insured death benefits based on the member’s full possible service, which means relatively generous benefits
173 Alexander Forbes Health Survey 2010
149
are paid to employees on death. Disability income benefits and funeral benefits tend to be comparable between employers with some employers offering accidental death and additional death cover, spouse’s death cover and dread disease cover outside the fund. HEALTHCARE ANALYSIS No definitive comments can be made on healthcare in this sector as there were only four energy companies in the healthcare data173. None of these companies offer a subsidy towards medical scheme cover, either during or after employment, indicating either that employees are given a wide enough range of medical cover to ensure that all income levels are considered, or that members generally don’t have an issue with the affordability of medical scheme contributions. An alternative explanation may be that closed medical schemes do arise in this sector and the employer may feel that they can control costs well enough not to have to offer a subsidy.
PART 3 Chapter 2
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 2
In some funds members can, and do, choose low contribution levels, which could compromise otherwise good retirement prospects.
BENEFITS BAROMETER AND CONCLUSIONS Due to the high degree of foreign ownership and vulnerability to changes in government policy, the energy sector is exposed to the possibility of large scale retrenchments and skill shortages. Because of current skills shortages, salary inflation is relatively high. Pensionable salary percentages are low and in some funds members can, and do, choose low contribution levels, which could compromise otherwise good retirement prospects and indicates unhealthy finances. Despite the health risks inherent in this industry, which may lead to incapacity, risk benefit offerings are fairly standard and in some cases minimal. Workers in this sector may need support to pay for housing and education.
150
What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to particular circumstances and so should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 2: ENERGY
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
ER
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
M PRIOR ITY
H PRIORITY HIG NE
F ITS
BAROM
ET
– – – – – –
MEDIUM PRIORITY Bricks and books High salary inflation Mass exits Pensionable pay Unhealthy finances
– – – – – – –
LOW PRIORITY Incentives Longevity Low-income earners Strikes Temporary and informal workers Young workers
ER
W PRIORITY LO
BE
– HIGH PRIORITY – Absenteeism and incapacity – Choice
ER
151
PART 3 Chapter 2
PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE? PART 3 Chapter 2
WHAT? WHO? Reconsider the range of contribution rates offered and have a plan to guide members to save responsibly. Choice
Re-evaluate if other choices offered are appropriate and put minimum levels of benefits in place. Communication should be embedded in the safety culture.
Trustees
Institute good incapacity management processes to assist in accommodating workers injured on duty.
Employers
Expand employee benefits offering to include taxeffective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
High salary inflation
Encourage workers to save a greater percentage of their pay with each salary increase.
Trustees, unions and employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Promote re-skilling of workers in declining industries.
Unions and the government
Integrate physical, mental and financial wellness initiatives.
Employers
Absenteeism and incapacity
Bricks and books
Mass exits
Unhealthy finances
152
PART 3: SECTOR CASE STUDIES
3
FISHING, FORESTRY AND AGRICULTURE SECTOR By Saul Leeman with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 3
Some high-value fisheries like abalone, prawns and linefish are largely overexploited. As such, sustainability and environmental management issues hold the key to the future of this industry.
INTRODUCTION Fishing South Africa’s commercial fishing industry employs about 27 000 people and contributes 0.5% to the gross domestic product (GDP). The commercial fishing activities are concentrated on the west coast while the east coast has a wide range of intertidal resources which provide an important source of food and livelihood for coastal communities. Most of South Africa’s fisheries are fully exploited and some high-value fisheries like abalone, prawns and linefish are largely overexploited. As such, sustainability and environmental management issues hold the key to the future of this industry. However, some experts suggest that, with proper management, the value of production could grow a thousand-fold over the next ten to twenty years. Pay may be volatile where it is determined by the catch, which is influenced by environmental factors, strictly enforced fishing quotas and the skill of the captain. Most of the people who are employed in the fishing industry and who have access to employee benefits have work all year round. Agriculture and Forestry Poultry farming is the most valuable of the farming activities but crop-farming contributes the most to employment. Maize production alone employs 150 000 people on 9 000 commercial farms174. Forestry and timberprocessing, on the other hand, employs about 118 000 people directly175.
174 Department of Agriculture, Forestry and Fisheries (2012) 175 Forestry South Africa (2010)
154
Both forestry and agriculture are highly cyclical with working hours and pay varying during the year. For example, agriculture’s employment numbers can range from 700 000 people to about six million. This is a reflection of the large number of temporarily and informally employed seasonal workers. This group of workers typically have no benefits coverage. Total rewards systems differ substantially from one farm to another, but standardisation through minimum benefits packaging could be unaffordable for small producers, who are especially vulnerable to climatic events. Larger producers may have more diversified activities, including agri-processing. Large numbers of unskilled workers mean that many working in this sector are low-income earners. However, agricultural workers are often able to produce their own food. In addition, housing may also be provided for farming and forestry workers. We can expect a high degree of government involvement given the government’s intentions around rural employment development and land redistribution and ownership, as well as this industry’s role in providing food security.
CHAPTER 3: FISHING, FORESTRY AND AGRICULTURE
SECTOR ECONOMIC ANALYSIS
R 243.7 bn 2.45% -0.35%
GDP contribution (2011 prices)176 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
661 000
Approximate employment177
Key stakeholders Companies178 n n n n n n n n
Afgri Astral Foods Mondi Tongaat Hulett Illovo Sugar Oceana Group Sappi Sea Harvest Corporation
Government ministries179 n n n n
Unions180
Department of Agriculture, Forestry and Fisheries Department of Rural Development and Land Reform Department of Water Affairs Department of Environmental Affairs
n n n n n n n n
BAWUSA FAWU CSAAWU RAAAWU ICCAFAWU HOCAFAWU NDSAAWU TALFU
176 Gross Domestic Product, Statistics SA, 2012 177 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 178 Who Owns Whom (2012). SA Sector Profile – Agriculture, Hunting, Forestry and Fishing, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=536 179 South African Government Information, National Departments [online], available at: http://www.info.gov.za/aboutgovt/dept.htm 180 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
155
n n n n n n n
NCFAWU SAFTU CEPPWAWU WEPU NSRAIEU SAFCWU SAFRAWU
PART 3 Chapter 3
PART 3: SECTOR CASE STUDIES
EMPLOYEE PROFILE The fishing, forestry and agriculture sector is 76% male due to the physical requirements of the outdoor work. But there is a significant female presence in factories used for processing food products such as fish and poultry.
Pensionable salaries are relatively low, with around half of the workers earning R5 000 a month or less.
PART 3 Chapter 3
PROPORTION OF MEMBERS BY ANNUAL PENSIONABLE SALARY BAND: FISHING, FORESTRY AND AGRICULTURE SECTOR
R0 - R24 000
R24 000 - R60 000
R60 000 - R120 000
R120 000 - R240 000
Source: Member WatchTM 2012 data set
156
R240 000 - R480 000
R480 000 - R960 000
R960 000 +
CHAPTER 3: FISHING, FORESTRY AND AGRICULTURE
The differences in salaries, lifestyles and expectations between co-workers can be immense. This creates a significant price spread for risk benefits and the cost of administration which has to be managed to appear fair to workers.
Salary increases are broadly in line with that for the retirement funds industry as a whole but in some cases completely uncorrelated with actual earnings.
PART 3
BENEFITS BY THE NUMBERS
Chapter 3
Contribution to retirement savings as a percentage of pensionable pay
16.3%
Contribution to death benefits as a percentage of pensionable pay
1.7%
Contribution to disability benefits as a percentage of pensionable pay
1.0%
Contribution to retirement funding costs as a percentage of pensionable pay
1.2%
Projected replacement ratio for a member aged 25
56.8%
Average actual retirement age
60.2
Actual preservation rate
7.1%
Percentage of employers offering disability benefits
82.8%
Average insured death benefit as a multiple of pensionable pay
3.16 times
Percentage of employees covered by medical schemes
Not available
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
RETIREMENT ANALYSIS The overall average contribution rate to retirement is surprisingly high at 16.3%. However, to accommodate lower-income earners who have affordability constraints, certain categories may have considerably lower contribution rates. This sector had the highest costs as a percentage of payroll. This is partly due to
157
low salaries and partly due to funds typically having multiple contribution categories to accommodate the diversity of needs. The high intensity administration required by certain funds to ensure compliance with legislation, particularly with regard to the on-site collation of data and contributions, adds to the cost.
PART 3: SECTOR CASE STUDIES
The projected replacement ratios for the membership look respectable at older ages, with 23% of the membership over the age of 60 expected to retire with replacement
PART 3 Chapter 3
ratios of 75% or more. However, this masks the fact that pensionable salaries may not be correlated with actual earnings.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: FISHING, FORESTRY AND AGRICULTURE SECTOR
4%
14% 49%
23%
7% 6%
44%
23%
23%
36%
34%
8%
Ages 20 - 30
Ages 30 - 40
Ages 40 - 50
Replacement ratios 0% - 30%
45%
11%
23% Ages 50 - 60
44%
8%
15% 7%
13%
13%
Ages 50 - 60
Source: Member WatchTM 2012 data set
158
23%
30% - 45% 45% - 60% 60% - 75% 75% +
6%
16% 8%
CHAPTER 3: FISHING, FORESTRY AND AGRICULTURE
Almost 80% of retirement benefits are paid in cash, which is a reflection of the generally small size of the benefit and low levels of financial literacy.
For many members, especially at lower income levels, retirement savings are regarded as a cost not a benefit. Some degree of compulsion and paternalism is therefore key in ensuring some level of retirement saving. The need for an intensive campaign of financial awareness and education remains paramount. A general lack of financial education and formal schooling has, in certain instances, required the implementation of very conservative investment strategies, which ultimately harm the members’ retirement prospects. The preservation patterns in this sector are typical for the retirement funds industry as a whole. While funds set the average normal retirement age at 63.4 years, 45% of retirees leave before the age of 60, presumably because of ill-health and incapacity. In spite of this, anecdotal evidence suggests that in the fishing industry there is a trend for workers to go back to sea after the age of 60 to supplement their retirement income, or to defer the date when they actually start drawing a pension. The average employee serves 20.3 years in their final job before retirement, but for most their final stint is only 5 to 10 years. Almost 80% of retirement benefits are paid in cash, which is a reflection of the generally small size of the benefit and low levels of financial literacy. In addition, many retirees opt for fixed annuities to maximise their monthly income, without appreciating the long-term impact of not allowing for an annual inflation related increase. RISK BENEFIT ANALYSIS Most workers have access to a combination of approved lump sum death benefits, disability income cover and funeral benefits, although the benefits are low relative to salary. This is driven by high risk costs due to the inherently dangerous nature of the work environment
159
coming up against constraints imposed either through a risk cap or a low overall employer contribution. In some funds, benefits are rand-based rather than linked to current salary, which can cause unexpected benefit gaps. Consistent with the low-earnings profile, the member may be a sole breadwinner and the 3.16 times annual risk salary multiple may prove inadequate. In such cases, dependants may look to the employer for assistance. Employers may therefore look for ways to review and upgrade benefits affordably and have explored options such as tax replacement cover on the reinsured lump sum death benefit and improved funeral benefits. The structure of the risk benefits is very sensitive to the fund demographics and member perception of value. Anecdotal evidence suggests the balance between funeral and disability cover may be viewed as sensitive enough to cause strike action. Disability benefits are particularly difficult to communicate in this sector and the importance of the disability definition is often underestimated, given the industry-specific skills that workers have. HEALTHCARE ANALYSIS Considering that 49% of female employees and 58% of male employees have pensionable salaries below R60 000 per year, membership for just one person on a basic medical scheme option would represent around 9% of their earnings. There are alternative insurance products for low-income earners as discussed in Part 2: Chapter 2.
PART 3 Chapter 3
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 3
A key feature of this sector is the provision of non-traditional benefits such as housing or land for subsistence farming. This is not reflected in pensionable pay and can create a shortfall in the retirement benefit.
BENEFITS BAROMETER AND CONCLUSIONS The fishing, forestry and agriculture sector employs a large number of low-income earners, many on an informal basis who then have no employee benefits coverage at all. As non-taxpayers, current incentives to save are ineffective. Wages and pensionable pay tend to be volatile and are poorly matched to each other. A key feature of this sector is the provision of non-traditional benefits such as housing or land for subsistence farming. This is not reflected in pensionable pay either and can create a shortfall in the retirement benefit. Due to the nature of the work, incapacity management is very important. Geographic dispersion is a key challenge making it difficult to reach members for education purposes. Strikes are a key risk to the country because it impacts on food production. Workers also risk losing their housing and food supply, as these may be employerprovided. Unhealthy finances are also a concern, particularly as workers tend to live in under-developed areas.
160
What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 3: FISHING, FORESTRY AND AGRICULTURE
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
ER
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
M PRIOR ITY
H PRIORITY HIG NE
F ITS
BAROM
ET
HIGH PRIORITY Absenteeism and incapacity Bricks and books Incentives Low-income earners Pensionable pay Strikes Temporary and informal workers
– MEDIUM PRIORITY – Unhealthy finances
ER
W PRIORITY LO
BE
– – – – – – – –
– – – – – –
LOW PRIORITY Choice High salary inflation Longevity Mass exits Young workers
ER
161
PART 3 Chapter 3
PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO?
PART 3 Chapter 3 Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Assess the appropriateness of including very low earners on the occupational retirement fund.
Employer and unions
Remove the means-test on the older person’s grant (OPG).
The government
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Expand employee benefits offering to include tax-effective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Strikes
Clarify the benefits to be forfeited in the event of a dispute. Employers and unions
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Unhealthy finances
Improve infrastructure and opportunities in rural areas.
The government
Low-income earners
Incentives
Bricks and books
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4
MANUFACTURING SECTOR By Belinda Sullivan with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 4
A sizeable proportion of the South African manufacturing sector is foreign-owned. This has an impact on the employee benefits offering due to the need to align benefits with overseas practice and report to parent companies.
INTRODUCTION South Africa is viewed by many as the gateway to Africa due to its clear legal and regulatory environment and reliable infrastructure. This has facilitated the growth of South African companies that are globally competitive. However, rising energy and labour costs and the economic dominance of China has placed the manufaturing sector under extreme pressure. This is exacerbated by the dampening of global demand, particularly in the Eurozone, which accounts for a third of our trade181. A sizeable proportion of the South African manufacturing sector is foreign-owned. This has an impact on the employee benefits offering due to the need to align benefits with overseas practice and report to parent companies.
The motor vehicle and metals industries have seen shifts from international ownership to local ownership and back again. In some cases, this has resulted in a number of different employee benefits offerings in place at the same employer. Over the past five years, there have been large scale retrenchments, particularly in the textiles, metals and motor vehicle industries. As members typically took their retirement benefits as cash, these exercises may have long-term implications for their retirement outcomes. The impact of the retrenchments on retirement fund membership sizes has been mitigated by the union-led initiatives to expand employee benefits coverage to temporary workers, particularly those with contracts of six months or more. However, the overall decline in membership has prompted a shift to consolidate benefit offerings through the rationalisation of funds within one employer group.
The sector itself can be divided into a number of industries. This segmentation is important because of differences in the nature of the work and business environment, as well as the use of bargaining councils to negotiate benefits for like industries. An overview of the industries in the manufacturing sector analysis is set out below.
Manufacturing sector
Electrical and components
Chemicals and plastics
Food and beverages
Metals
Motor vehicle Pharmaceuticals Textiles Other
181 BUSA’s Economic and Business outlook for South Africa in 2012 – based on an evaluation of existing economic data. Input from BUSA’s Economic Policy Committee & members of BUSA.
164
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SECTOR ECONOMIC ANALYSIS GDP contribution (2011 prices)182 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
Approximate employment183
R1.7 trillion 17.07% 2.41% 1.7 million
Key stakeholders Companies184 n n n n n n n n n n n n
Consol Mittal Steel Barloworld Imperial Holdings Foodcorp Tiger Brands Highveld Steel and Vanadium Corp Reunert Pioneer Foods Allied Electronics Corporation Macsteel AECI Omnia
Government ministries185 n Department of Trade and Industry
Unions186 n n n n n n n n
WEPU NSARAIEU SAFRAWU CEPPWAWU FAWU SACWU SACTU NUMSA
182 Gross Domestic Product, Statistics SA, 2012 183 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 184 Who Owns Whom (2012). SA Sector Profile – Manufacture of Basic Metals, Fabricated Metals, Refined Petroleum Products, Food Products and Beverages, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=515/ 185 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 186 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
165
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EMPLOYEE PROFILE Occupations in the manufacturing sector include manual labour, usually hourly paid, and salaried managerial and clerical positions based both in the factory and office environment. The age distribution is similar
MALE/FEMALE SPLIT: MANUFACTURING SECTOR PART 3 Chapter 4
Source: Member WatchTM 2012 data set
166
to that of the retirement funds industry as a whole. As shown in the chart below, two-thirds of workers are male. There is greater female representation at younger ages and in less labour intensive industries such as textiles.
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BENEFITS BY THE NUMBERS PART 3 Sector average
Chemicals and plastics
Electrical and Food and components beverages Metals
Contribution to retirement savings as a percentage of pensionable pay
14.6%
14.2%
13.7%
15.0%
14.9%
14.5%
15.9%
12.2%
15.2%
Contribution to death benefits as a percentage of pensionable pay
1.6%
1.5%
1.4%
2.0%
1.5%
1.5%
1.0%
1.8%
1.6%
Contribution to disability benefits as a percentage of pensionable pay
1.0%
1.0%
0.8%
1.0%
0.9%
1.0%
0.8%
1.0%
1.1%
Contribution to retirement funding costs as a percentage of pensionable pay
1.0%
0.9%
1.0%
1.1%
0.6%
1.0%
0.9%
1.2%
1.0%
Projected replacement ratio for a member aged 25
52%
53%
48%
52%
50%
51%
59%
44%
54%
Average retirement age
61.5
61.0
62.0
60.6
61.7
61.2
62.6
61.6
62.0
Actual preservation rate
7.0%
3.0%
14.7%
6.2%
3.2%
6.4%
5.2%
5.6%
5.9%
Percentage of employers offering disability benefits
89.7%
100%
80.8%
96.8%
69.2%
94.6%
96.3%
92.3%
81.4%
Average insured death benefit as a multiple of pensionable pay
3.4
3.6
3.2
4.1
2.9
3.3
3.5
3.2
3.2
Percentage of employees covered by medical schemes
70%
Motor vehicle
Not available
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
167
Pharmaceuticals
Textiles
Other
Chapter 4
PART 3: SECTOR CASE STUDIES
RETIREMENT ANALYSIS The manufacturing sector has an average contribution rate of 14.6%. Some funds have introduced an additional voluntary contribution (AVC) facility to give individuals greater flexibility to save more for retirement.
PART 3 Chapter 4
The average allocation to fund expenses for the manufacturing sector is 0.98%, which is not significantly higher than the average of the retirement fund industry at 0.97%. All the underlying sectors are within a reasonable margin relative to the average, with food and beverages and electrical and components
and other manufacturing industries being somewhat more expensive. Despite the healthy retirement contribution rates, projected retirement incomes are low relative to projected salaries at retirement, as seen in the distribution of projected replacement ratios. Older members seem to be more severely affected, which implies that either they have not saved enough for retirement or have other savings earmarked for retirement outside the retirement fund. Given that this sector
has high withdrawal rates and fairly typical preservation rates, leakage may account for the poor outcomes for older workers. A further contributor may be the large proportion of members who use pensionbacked lending for housing purposes. Members who default on their housing loan repayments experience the same impact on their retirement outcomes as in the case of non-preservation, because the loan is settled from their accumulated savings.
DISTRIBUTION OF MEMBERS’ PROJECTED REPLACEMENT RATIO PER AGE BAND: MANUFACTURING SECTOR
30% 27% 9%
34% 24%
10%
Ages 20 - 30
6%
34%
35%
18% 31%
7%
11%
15% Ages 30 - 40
Ages 40 - 50
Replacement ratios 7%
49% 19% 11%
Ages 50 - 60
15%
53%
6%
17%
14%
Ages 60 +
0% - 30% 30% - 45%
10%
45% - 60% 60% - 75% 75% +
Source: Member WatchTM 2012 data set
168
9%
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However, even the youngest members who have typically not changed jobs have poor projected retirement outcomes. Because of medical inflation, replacement ratios of less than 100% may be inadequate. Members will either need to be sensitised to this so they can make private provision, or the total rewards system will need to be adjusted to improve these outcomes.
Withdrawal rates are highest for the youngest members and slow down from age 45. At older ages, the withdrawal rates are marginally lower than for the retirement funds industry but the exit patterns are otherwise unremarkable. Preservation rates are in line with industry experience below the age of 50. However,
high exit rates mean that the average preservation rate of 7.7% has a significant detrimental effect on retirement outcomes. Members over the age of 50 show a greater tendency to preserve, indicating more responsible behaviour than in many other sectors where members resign instead of retire to increase the allowable cash portion.
PART 3 Chapter 4
PRESERVATION RATE: MANUFACTURING SECTOR
Sector experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
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PART 3: SECTOR CASE STUDIES
DISTRIBUTION OF ACTUAL RETIREMENT AGE: MANUFACTURING SECTOR
PART 3 Chapter 4
Source: Member WatchTM 2012 data set
The average normal retirement age as per the retirement fund rules is 63.8 years but the average employee stops working aged 61.5 years. The average pensionable service is 19 years which, given the current economic environment and the staff turnover, is very stable. Our statistics, displayed in the graph above, show a gradual number of members retiring early from age 55 onwards, with the bulk of the members retiring at their normal retirement ages, generally 60, 63 or 65. However, these statistics exclude members withdrawing with the intention to retire.
170
The data indicate that members take a significant portion of their benefit in cash, even when this will incur a tax liability. It is evident that the larger the amount of capital available on retirement, the greater the proportion of members opting to annuitise part, if not all, of their benefits.
CHAPTER 4: MANUFACTURING
ANNUITISATION RATE BY SIZE OF BENEFIT: MANUFACTURING SECTOR
PART 3 Chapter 4
Source: Member WatchTM 2012 data set
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PART 3: SECTOR CASE STUDIES
RISK BENEFIT ANALYSIS The risk benefit offerings are in line with the retirement funds industry as a whole: namely, an approved death benefit plus disability income insurance plus funeral cover. Less than 10% of employers offer other benefits such as accidental death, dread disease or spouse’s death benefits.
Chapter 4
The average death benefit multiple in terms of assessing approved lump sum death benefits in the retirement funds industry is 3.42 times
LUMP SUM DEATH BENEFITS: MANUFACTURING SECTOR
Lump sum benefit (as a multiple of salary)
PART 3
The main concern is that benefits provided by way of the traditional offering do not necessarily offer members any flexibility in structuring their benefits to suit their personal circumstances, resulting in inefficiencies.
Chemicals and plastics
Electrical and components
Food and beverages
Motor vehicle
Source: Member WatchTM 2012 data set
172
annual pensionable salary, exactly in line with the average across the manufacturing sector. There is also little variation between the industries, with the average multiple for food and beverages being marginally higher than average and the averages for metals and textiles being slightly lower, as shown below.
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Certain industries within the manufacturing sector show notable deviations from the standard benefit offerings.
There are some notable deviations from the standard benefits offerings in the following industries. Textiles There is a greater allocation to unapproved benefit offerings as well as lump sum disability benefits in the textile industry, although these are offered by well below 10% of the employers. The lump sum disability benefit is quite often structured with a temporary and total disability benefit where this benefit is payable for a limited period of time, as opposed to the disability income protection benefit. The unapproved benefits are generally geared towards the higher income earners, where they either pay for the additional cover with after-tax money, or the cost is subsidised by the employer and the premium attracts fringe benefit tax. Metals industry The most notable aspect for the metals industry is that the disability income protection benefit lags behind the manufacturing sector average considerably. Based on this, in a labour intensive environment, disabilities should be more closely monitored with appropriate cover in place. Food and beverages The food and beverages industry provides most of its employee benefits in traditional offerings, with a small percentage of dread disease, spouses and lump sum disability cover, noting that only 10% of the proportion of employers offer these additional benefits. The multiples of death benefit cover, noting that this industry are, on average, the highest within the manufacturing sector. In addition, this industry has the greatest disparity between the highest and lowest death benefit multiples.
173
Electrical and components The electrical and components industry provides members with the traditional risk benefit offering in line with the manufacturing sector averages. In addition, the industry offers significant levels of unapproved lump sum death benefits. Pharmaceuticals Proportionately, there are more employers offering dread disease benefits in this industry than any of the other underlying industries. There is also a greater percentage of employers offering unapproved lump sum death benefits, although this remains under 10%. Chemicals and plastics In this environment, disability income protection benefits are important and it is evident that the employers are in agreement here, with 100% of the employers assessed providing these benefits. This industry shows the biggest disparity between the maximum and minimum approved death benefit offered. However, a relatively small proportion of employers, under 10%, provide dread disease, spouses lump sum death benefits and unapproved lump sum death benefits, although all of these benefits are ahead or on par with the sector average.
PART 3 Chapter 4
PART 3: SECTOR CASE STUDIES
The manufacturing sector is highly cyclical and vulnerable to mass withdrawals, with some potential for a high impact strike.
HEALTHCARE ANALYSIS Of the 46 companies surveyed in this sector187, at least 90% offer medical scheme membership to employees, whether on a compulsory or voluntary basis, with about 70% of employees actually enjoying medical scheme cover. There are a few large closed schemes in this sector. Approximately two-thirds of these companies offer a subsidy during employment, with only 15% offering a subsidy in retirement.
PART 3
BENEFITS BAROMETER AND CONCLUSIONS
Chapter 4
The manufacturing sector is highly cyclical and vulnerable to mass withdrawals. Hourly paid workers may have particularly volatile pensionable pay, which may be particularly low if the organisation moves to ‘short time’. This in turn may lead to unhealthy finances, which may jeopardise home ownership. Early retirement due to incapacity is a risk in heavy manufacturing industries. The large numbers of young workers may be under-insured but may prefer to choose their risk cover levels. There is potential for a high impact strike, although the risk is fairly low due to continuity in the union leadership and the number of active unions.
187 Alexander Forbes Health Client Survey 2010
174
What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 4: MANUFACTURING
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
ER
PART 3 Chapter 4
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
ER
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
F ITS
BAROM
– HIGH PRIORITY – Mass exits
ET
– – – – – – – –
MEDIUM PRIORITY Absenteeism and incapacity Bricks and books Choice Pensionable pay Strikes Unhealthy finances Young workers
– – – – – –
LOW PRIORITY Incentives High salary inflation Longevity Low-income earners Temporary and informal workers
ER
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PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO? PART 3 Chapter 4
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Choice
Reconsider the range of choices offered and have a plan to guide members to save responsibly.
Employers, trustees and unions
Expand employee benefits offering to include tax-effective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Strikes
Clarify the benefits to be forfeited in the event of a dispute.
Employers
Young workers
Improve financial education targeted at young people.
Employer, the government and unions
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Promote re-skilling of workers in declining industries.
Unions and the government
Bricks and books
Mass exits
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PART 3: SECTOR CASE STUDIES
5
MINING SECTOR
By Michael Prinsloo and Anthony Steen with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
Work conditions in this sector are typically hazardous. Due to these conditions, the health and safety aspect has probably been the single biggest focus of employers, unions and the regulators over recent years. PART 3 Chapter 5
INTRODUCTION The mining sector in South Africa has been the main driving force behind the development of Africa’s most advanced and richest economy. In particular, revenue from gold exports provided enough capital to buy machinery and petroleum products to support an expanding manufacturing sector. Within the mining sector there are a variety of industries. The gold, platinum group metals, coal and iron ore industries accounted for 82% of the total mineral sales and 40% of total exports in 2011. This significant sector is therefore very dependent on the global economy. Given the cyclical demand for commodities, this sector may initiate retrenchments, only to rehire when the economic outlook improves. Similarly, strike action often involves mass dismissals with subsequent reinstatements, as was seen in 1998 and more recently in 2012. In certain industries, such as gold and coal, industry bargaining councils were formed to deliver standardised total rewards systems. It is possible that the platinum industry may follow this path. The sector has a very large unskilled or semi-skilled workforce and also employs highly skilled engineers in much smaller numbers. Work conditions in this sector are typically hazardous, especially underground, due to high temperatures, confined spaces, high levels of silica dust and sometimes unstable rock formations. Due to these conditions, the health and safety aspect has probably been the single biggest focus of employers, unions and the regulators over recent years. The provision of benefits such as death and disability cover will therefore remain an integral part of the offering to employees.
178
Non-traditional benefits form a large part of the total rewards systems in the mining sector. On-mine benefits can include housing, regular meals and mine medical facilities. Housing is a key challenge, with overcrowding in the single-sex hostels prompting employers to offer living-out allowances instead. However, a lack of infrastructure such as water, electricity, sanitation, education and healthcare facilities in the neighbouring communities makes living-out a less viable option and is an unresolved challenge. Mine employers believe there is a strong need for financial education, given that up to 15% of their employees are under garnishee orders and micro-lending is rife. Given low levels of functional literacy, there is a low level of understanding of financial issues, and debt in particular. In terms of retirement savings, the industry uses affinity-group retirement funds, defined by job classification and industry, such as Sentinel, the Mine Employees Pension Fund and the Mineworkers Provident Fund. However, there are many mining companies that have their own retirement fund and in some instances one fund for all employees. In considering the future outlook, the ongoing debate about the nationalisation of the mines seems to have been largely resolved. However, there are now concerns over mine closures and wide-scale job losses in the mining sector. Such issues create uncertainty on the part of investors, which reduces South Africa’s appeal from a global investment perspective. Over time this may impact on employment. In addition, mine rehabilitation and environmental liabilities have become key financial concerns and may dampen growth.
CHAPTER 5: MINING
SECTOR ECONOMIC ANALYSIS
R583 bn 5.87% 0.19%
GDP contribution (2011 prices)188 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
533 000
Approximate employment189
Key stakeholders Companies190 n n n n n n n n n n n n n n n
BHP Billiton Anglo American Anglo American Platinum Anglogold Ashanti Goldfields Harmony Gold Mining Company Kumba Iron Ore Impala Platinum Holdings Lafarge Mining Xstrata De Beers Consolidated Mines African Rainbow Minerals Lonmin Assmang Assore
Government ministries191 n Department of Mineral Resources n Department of Public Enterprises
Unions192 n n n n n
NUM NUMSA AMCU UASA Solidarity
188 Gross Domestic Product, Statistics SA, 2012 189 Quarterly Employment Statistics, June 2012, Statistics SA, 2012 190 Who Owns Whom (2012). Mining of Diamonds; Stone Quarrying, Clay & Sandpits; Mining of Gold and Uranium Ore; Mining of Chrome; Mining of Coal and Lignite, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=450 191 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 192 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
179
PART 3 Chapter 5
PART 3: SECTOR CASE STUDIES
EMPLOYEE PROFILE The mining sector surveyed workforce was 79% male. There are programmes such as ‘Women in Mining’ to improve transformation but progress is slow. There is a significant difference in the spread of salaries between males and females because most females are employed in office-based roles, with higher salaries at lower ages relative to the more operational roles. At the other end of the spectrum, most senior managers are
PART 3
males. In general, pensionable salaries compare favourably to salaries in other blue collar sectors. The average salary increase across all age bands is significantly above inflation and the increases in the retirement funds industry as a whole, which can have serious implications for retirement outcomes as discussed in our Part 2: Chapter 11.
AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: MINING SECTOR
Salary increase per year
Chapter 5
Sector experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
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CHAPTER 5: MINING
BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
15.4%
Contribution to death benefits as a percentage of pensionable pay
2.2%
PART 3
Contribution to disability benefits as a percentage of pensionable pay
1.2%
Chapter 5
Contribution to retirement funding costs as a percentage of pensionable pay
0.8%
Projected replacement ratio for a member aged 25
51%
Average actual retirement age
61.0
Actual preservation rate
3.8%
% of employers offering disability benefits
73.7%
Average insured death benefit as a multiple of pensionable pay
3.9
Percentage of employees covered by medical schemes
23%
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
181
PART 3: SECTOR CASE STUDIES
RETIREMENT ANALYSIS The mining sector has an average 15.4% allocation to retirement savings, with contribution rates on some funds of up to 5% more. This is significantly higher than the average for the retirement funds industry. Total gross contribution rates are approaching 22%, which in itself is close to the proposed new tax deductibility limit of 22.5% for persons under the age of 45.
PRESERVATION RATE: MINING SECTOR PART 3 Chapter 5
Sector experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
182
Mining sector workers may lose their jobs and be rehired a number of times in their careers. Preservation rates are low, as shown in the chart, which means that workers may regularly dip into their retirement savings.
CHAPTER 5: MINING
Replacement ratios are projected to be low. The chart shows that almost 90% of members are predicted to have replacement ratios of less than 60%, due to high salary increases, conservative investment strategies, short service periods and low historical preservation
rates combined with high withdrawal rates. Anecdotal evidence suggests that the conservative investment strategies stem from a distrust among some members and the perception that negative returns represent ‘stolen money’.
DISTRIBUTION OF MEMBERS’ PROJECTED REPLACEMENT RATIO PER AGE BAND: MINING SECTOR 1%
1%
3%
32%
2%
2%
11%
58%
24%
52%
37% 27%
6%
Ages 20 - 30
11%
Ages 30 - 40
Ages 40 - 50
2%
5%
1%
76%
2% 5%
Replacement ratios 0% - 30% 30% - 45%
72% 6%
16%
17%
Ages 50 - 60
34%
Ages 60 +
Source: Member WatchTM 2012 data set
183
45% - 60% 60% - 75% 75% +
PART 3 Chapter 5
PART 3: SECTOR CASE STUDIES
The average normal retirement age is 62.4 years. However, the average actual retirement age is 61.0 years, meaning members retired on average 1.4 years earlier than the normal retirement age. The average pensionable service at retirement was 14.8 years but this is skewed by a few very long service retirees. Half of the retirees worked for 13.5 years or less. Employers that we interviewed see the retirement fund primarily as a savings vehicle, as opposed to a means of providing risk
PART 3 Chapter 5
benefits. The employers felt that the members shared this view but conceded that the results could be based on average age. In the mining sector, almost 80% of retirees take cash at retirement. Although this may reflect historic migrant labour practices and preferences, two-thirds of those with more R945Â 000 will annuitise their benefits at retirement. Interestingly though, the encashment rate at retirement mirrors the tax incentives almost perfectly.
ANNUITISATION RATE BY SIZE OF BENEFIT: MINING SECTOR
Source: Member WatchTM 2012 data set
184
CHAPTER 5: MINING
Risk benefits are relatively expensive in the mining sector, which limits the level of benefits that can be afforded.
RISK BENEFIT ANALYSIS The average death benefit lump sum in the mining sector is 3.9 times annual pensionable or risk salary, which is higher than average. This result may be skewed by a fund with very high risk benefits of more than 12 times salary. The majority of funds have a fixed death benefit structure, regardless of members’ age and circumstances, which may not be enough or efficient. Risk benefits are relatively expensive in the mining sector, which limits the level of benefits that can be afforded. Funeral benefits are a popular addition to the overall insurance offering in the mining sector and can assist with repatriation of the physical remains to the place of burial, which may be far from the mine or in a neighbouring state. HEALTHCARE ANALYSIS In a high-risk environment, having enough medical cover is an important need and in the mining sector, there are many restricted medical schemes. A restricted scheme is different from an open scheme in that membership is restricted to individuals who meet certain criteria, such as being employed
185
by a certain employer. The advantages of a restricted scheme are that the employer and employee are usually represented on the board of trustees and the benefits on the medical scheme can be more suitably designed to meet the needs of members. Due to the remoteness of many mining sites, on-site clinics are a common feature on mines, and these clinics often have payment arrangements with the specific medical schemes. These could include agreements for lower than average costs of consultants and certain procedures, and where the medical scheme would pay in full if members use the specified clinics, but would only pay up to a certain amount if members choose to go elsewhere. The benefit of this is that the lower negotiated rates will filter through to lower overall claims experience and lower contributions, to the benefit of these members. Provided that the medical schemes are large enough and have a stable risk profile, these schemes should be able to remain sustainable and provide competitive benefits into the future.
PART 3 Chapter 5
PART 3: SECTOR CASE STUDIES
Mining is prone to periodic industrial action as well as cyclical employment expansion and contraction leading to mass withdrawals.
PART 3 Chapter 5
BENEFITS BAROMETER AND CONCLUSIONS As a sector, mining is prone to periodic industrial action as well as cyclical employment expansion and contraction leading to mass withdrawals. For safety reasons, underground workers are usually permanent staff, but highly skilled temporary workers are used to sink the shafts. As mining work is hazardous, sometimes leading to incapacity or death, pay levels are relatively high and salary inflation has been relatively high. However, there is a perception that mineworkers are poorly paid, possibly due to unhealthy finances or poor housing and educational facilities nearby. That said, pensionable pay is lower than the full salary. Recent protests have highlighted that workers may want more choice in their benefits. The mining sector has struggled to recruit young workers and increased choice may assist with this.
186
What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 5: MINING
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
F ITS
BAROM
ET
ER
– – – – – – – –
HIGH PRIORITY Absenteeism and incapacity Bricks and books High salary inflation Mass exits Strikes Temporary and informal workers Young workers PART 3
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
M PRIOR ITY
H PRIORITY HIG NE
F ITS
BAROM
ET
MEDIUM PRIORITY Choice Low-income earners Pensionable pay Unhealthy finances
ER
W PRIORITY LO
BE
– – – – –
– LOW PRIORITY – Incentives – Longevity
ER
187
Chapter 5
PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO? Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
Low-income earners
Workers may perceive themselves as low paid despite getting higher salaries than workers in many other sectors. This suggests that the mix of benefits in the total rewards system requires reconsideration or infrastructure improvements.
Employer, unions and the government
Expand employee benefits offering to include tax-effective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Promote re-skilling of workers in declining industries.
Unions and the government
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Choice
Reconsider the range of choices offered and have a plan to guide members to save responsibly.
Employers, trustees and unions
Strikes
Clarify the benefits to be forfeited in the event of a dispute. Employers and unions
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Employers, trustees and unions
PART 3 Chapter 5
Bricks and books
Absenteeism and incapacity
Mass exits
188
PART 3: SECTOR CASE STUDIES
6
PERSONAL SERVICES SECTOR
By Megan Butler, Sandira Chaithram, Saul Leeman and Conrad Roper with healthcare analysis by Kristin-Ann CronjĂŠ
PART 3: SECTOR CASE STUDIES
PERSONAL SERVICES SECTOR Medical services, education, media & marketing, security, religious & charitable organisations and veterinary services are very different, but they are all require personal delivery of a service.
INTRODUCTION The personal services sector spans a wide range of fields including medical services, education, media and marketing, security, religious and charitable organisations and veterinary services. Although very different in many respects, these are all industries that require personal delivery of a service. About 38% of the workers in the industry work in health-related activities. Education is the second largest employer with 20% of the workers in this sector.
PART 3 Chapter 6
SECTOR ECONOMIC ANALYSIS GDP contribution (2011 prices)193
R607.6 bn
% contribution to GDP in 2011
6.12%
Real increase in GDP 2010 - 2011
2.45%
Approximate employment194 Formal sector Informal sector
2 705 000 320 000
193 Gross Domestic Product, Statistics SA, 2012 194 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012
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KEY STAKEHOLDERS HEALTH Companies
EDUCATION Companies198
195
n MediClinic Corporation n Network Healthcare Holdings Ltd n Life Healthcare
n ADVTECH n City Varsity n Educor Holdings n Monash South Africa
Government ministries196
Government ministries196
n Department of Health
n Department of Basic Education n Department of Higher Education and Training
Unions197
Unions197
n SADNU n MASA
n SADTU
PART 3 Chapter 6
SECURITY
MEDIA AND MARKETING Companies
Companies200
199
n ADT Security n Altech Netstar n Fidelity Security Group n Protea Coin Group n Tracker Network
n Avusa Media n Caxton and CTP Publishers and Printers n Conde Nast Independent Magazines n Media 24 n Independent Newspapers
Government ministries196
Government ministries196
n Department of Defence and Military Veterans n Department of Police
n Department of Arts and Culture
Unions197
Unions197
n SATAWU n NSWU n SAPSWU
n MWASA n CEPPWAWU n SATU
195 Who Owns Whom (2012). SA Sector Profile – Medical and Dental Practices Activities, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=606 196 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 197 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561 198 Who Owns Whom (2012). SA Sector Profile - Primary and Secondary Education; Education by Universities, http://www.whoownswhom.co.za/web/index.php?m=SA%20Sector&p=sectorinfo7id=399 199 Who Owns Whom (2012). SA Sector Profile - Publishing of Newspapers, Journals, and Periodicals, http://www.whoownswhom.co.za/web/index.php?m=SA%20Sector&p=sectorinfo7id=399 200 Who Owns Whom (2012). SA Sector Profile - Investigation and Security Activities, http://www.whoownswhom.co.za/web/index.php?m=SA%20Sector&p=sectorinfo7id=399
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HEALTH
OVERVIEW There are approximately 410 000 health workers in South Africa and over 230 000 of these are nursing staff201, who are highly unionised. A notable trend is the high attrition rate of workers: a quarter of qualified healthcare workers do not work in the South African healthcare industry. Consequently, there are key shortages of most health professionals and high levels of competition201. The impact of National Health Insurance on this industry has yet to be quantified, although demand for skilled workers in this industry is likely to increase substantially.
PART 3 Chapter 6
In an environment where working conditions could result in risk to the worker’s own health, the work environment itself is a key factor in the total rewards system201.
201 Department of Health (Unpublished)
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EMPLOYEE PROFILE The health industry is almost 80% female. It has the greatest female representation of all
the industries and sectors we surveyed. The age profile is slightly older than average and salary inflation rates are higher than average.
BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
12.7%
Contribution to death benefits as a percentage of pensionable pay
1.3%
Contribution to disability benefits as a percentage of pensionable pay
1.3%
Contribution to retirement funding costs as a percentage of pensionable pay
0.8%
Projected replacement ratio for a member aged 25
45%
Average actual retirement age
61.4
PART 3
Actual preservation rate
4.4%
Chapter 6
Percentage of employers offering disability benefits
55.0%
Average insured death benefit as a multiple of pensionable pay
2.7
Percentage of employees covered by medical schemes
47%
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
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RETIREMENT ANALYSIS The contribution rate in this industry is relatively low at 12.6% of pensionable salary. The withdrawal rates are consistent with the retirement funds industry as a whole but preservation rates are lower. This results in low projected replacement ratios. The average normal retirement age is 64 which is one of the highest among all the industries and sectors surveyed. Average pensionable service at retirement is only
12.7 years, which reflects that there are relatively few employees who spend a considerable percentage of their career at a single employer. Only around 40% of retirement benefits are annuitised. This is partly a function of the relatively small size of the retirement benefit due to short service and low contribution rates. The benefit from the tax-free cash lump sum allowance is proportionately larger for smaller benefits.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: HEALTH INDUSTRY PART 3 Chapter 6
1%
24% 0%
1%
1%
50%
38%
67%
1%
5%
42%
33%
26%
11% Ages 20 - 30
2%
11%
Ages 30 - 40
Ages 40 - 50
3%
2% 4%
2% 4% 7%
Replacement ratios 0% - 30% 30% - 45%
82%
83%
45% - 60% 60% - 75% 75% +
Ages 50 - 60
1%
Ages 60 +
Source: Member WatchTM 2012 data set
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RISK BENEFIT ANALYSIS The level of approved death cover is slightly lower than average at 2.7 times. Although funeral benefits coverage is higher than average, it is unlikely to make up this shortfall. Disability income protection levels are low. This is somewhat surprising but possibly reflects higher risk costs, due to the largely female workforce as well as the potential for contracting infections in the workplace. HEALTHCARE ANALYSIS Healthcare benefits are offered extensively within this industry. Of the ten employers surveyed, nine make membership of a medical scheme compulsory for some or all employees, while eight provide postretirement medical scheme subsidies. Some of these companies still provide postretirement medical scheme subsidies to new employees. Wellness initiatives to support physical and mental health are commonly offered. BENEFITS BAROMETER AND CONCLUSIONS In this mainly female industry, confronting longevity will need to be prioritised while still acknowledging absenteeism and incapacity.
195
There are a number of other weaknesses in the system: pensionable pay gaps, opaque incentives and failure to provide the housing and education benefits that members want. Temporary and informal workers are often uncovered by employee benefits. High salary inflation, poor choices and leakage due to unhealthy finances erode benefits for those who are covered. The impact of a strike could be devastating, even if non-essential services are not affected. WHAT IS THE FORECAST FOR EMPLOYEE BENEFITS? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
PART 3 Chapter 6
PART 3: SECTOR CASE STUDIES
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HIGH PRIORITY Absenteeism and incapacity Longevity Pensionable pay Strikes
– – – – – – –
MEDIUM PRIORITY Bricks and books Choice High salary inflation Incentives Temporary and informal workers Unhealthy finances
– – – –
LOW PRIORITY Low-income earners Mass exits Young workers
ER
PART 3 Chapter 6
– – – – –
ER
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WHAT CAN BE DONE?
WHAT? WHO? Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Incentives
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Expand employee benefits offering to include tax-effective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Strikes
Clarify the benefits to be forfeited in the event of a dispute.
Employers and unions
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Trustees, unions and employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Choice
Reconsider the range of choices offered and have a plan as to how to guide members to save responsibly.
Employers, trustees and unions
Bricks and books
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PART 3: SECTOR CASE STUDIES
EDUCATION
OVERVIEW The South African education industry can be divided into schools and tertiary facilities such as universities, further education training (FET) colleges and universities of technology.
PART 3 Chapter 6
According to the Department of Basic Education202, in 2010, South Africa had about 24 400 ordinary public schools and around 1 400 registered independent schools, employing around 390 000 and 30 000 educators respectively. Registered independent schools tend to have more educators per school and considerably fewer learners, resulting in learner-educator ratios of 15.6:1 in independent schools, half that of ordinary public schools. However, not all educators at public schools are employed by the provincial education authorities. In an effort to control class sizes, the governing bodies at certain public schools employ educators privately. One public school might have two different categories of employee working for them subject to different total rewards systems. To make the situation more complex, privately employed teachers at public schools are typically appointed first as contract workers and may only have access to benefits after a year. Given that the average ordinary public school only has 16 educators in total, including government-employed
202 Department of Basic Education (Unpublished) 203 Internal Education Association of South Africa (Unpublished) 204 Dampier, GA. How we can incentivise teaching Africa in City Press 22 July 2012
198
teachers, finding a cost-effective way of delivering benefits to privately employed staff members can be extremely challenging. The tertiary education system faces different challenges. There are almost 45 000 full-time staff at the 23 tertiary facilities, which provides good economies of scale, but a further 65 000 are employed part-time and may have limited access to benefits in a similar way to temporary workers203. In terms of job functions, a third of the permanent employees are academics, a third work in administration and a third in facilities maintenance. Although high quality educators at a school level are in great demand, withdrawal rates are lower than in other industries. A number of mechanisms are used to encourage long service, such as long service awards and better benefits for longer-serving employees. Non-traditional benefits such as subsidised school fees and extended holidays might also be offered. However, non-financial aspects of the total rewards system may influence commitment and engagement levels. The South African Democratic Teachers Union (SADTU) recently stated that teachers wanted more support and mentoring on the job and stated ongoing syllabus revision as a significant demotivator204.
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Given the age profile and levels of education of people working in education, it is unsurprising that there are a large number of higher earners than for the retirement funds industry as a whole.
EMPLOYEE PROFILE The Alexander Forbes clients in the Member WatchTM data belong to universities, associated research institutions and independent schools. Men make up 48% of the workers in the industry and the pay differential between men and women is relatively small. By age profile, there is a larger representation of older workers in this
industry than the retirement fund industry as a whole. Given the age profile and levels of education of people working in education, it is unsurprising that there are a large number of higher earners than for the retirement funds industry as a whole. Salary increases have been above the average for the retirement funds industry as a whole.
PROPORTION OF MEMBERS BY AGE: EDUCATION INDUSTRY 20% 18% 16%
PART 3
14%
Chapter 6
12% 10% 8% 6% 4% 2% 0%
Retirement funds industry Source: Member WatchTM 2012 data set
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BENEFITS BY THE NUMBERS
PART 3
Contribution to retirement savings as a percentage of pensionable pay
14.7%
Contribution to death benefits as a percentage of pensionable pay
1.4%
Contribution to disability benefits as a percentage of pensionable pay
0.7%
Contribution to retirement funding costs as a percentage of pensionable pay
1.0%
Projected replacement ratio for a member aged 25
50%
Average actual retirement age
62.1
Actual preservation rate
1.1%
Percentage of employers offering disability benefits
82.4%
Average insured death benefit as a multiple of pensionable pay
3
Percentage of employees covered by medical schemes
Not credible
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
Chapter 6
RETIREMENT ANALYSIS The contribution towards retirement benefits is 14.7%, which is well above the average for the retirement funds industry. However, this is only sufficient to allow a new entrant at 25 to replace half of their pensionable income at age 65. Young members experience high withdrawal rates, but those that do continue their careers here display lower than average withdrawal rates compare to other industries. It is often said that teaching is a calling and at most ages the withdrawal rates are lower than for the retirement funds industry as a whole. The exception is at very young ages where the withdrawal rate suggests that almost one in two education workers will leave their job within a year.
200
The preservation experience is in line with the retirement fund industry average, except at older ages when retirement needs may become more prominent. The average service at retirement is 21.7 years and 31% of workers have 15-20 years service at retirement. Despite improving longevity and teaching lending itself to longer working lives, the average retirement age is 62.1 and the average actual normal retirement age is 63.1. 52% of retirement benefits are taken in cash. This is concerning given that after 15-20 years service the benefit should be substantial. Only about a third of benefits between R315 000 and R945 000 are annuitised, which is extremely low.
CHAPTER 6: PERSONAL SERVICES
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: EDUCATION INDUSTRY
27% 15%
29%
17%
12% 45%
7%
31%
19%
6%
Ages 20 - 30
8%
Ages 30 - 40
34%
13%
25% 11%
Ages 40 - 50
PART 3 Replacement ratios 0% - 30% 11% 24% 36% 18%
30% - 45%
18% 11%
Ages 50 - 60
31%
20%
19%
12%
Ages 60 +
Source: Member WatchTM 2012 data set
201
45% - 60% 60% - 75% 75% +
Chapter 6
PART 3: SECTOR CASE STUDIES
EXIT RATE: EDUCATION INDUSTRY
PART 3 Chapter 6
Industry experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
RISK ANALYSIS The average approved death benefit level for education is slightly lower than average although some employers offer spouse’s cover to enhance the offering. Disability income protection levels are relatively high. HEALTHCARE ANALYSIS Many tertiary institutions have their own restricted medical schemes and postretirement medical aid subsidies. BENEFITS BAROMETER AND CONCLUSIONS Despite high literacy levels, workers in this industry seem to be no better at making good choices than anyone else. This leads to unhealthy finances. High salary inflation compounds the problem and longevity has yet to be tackled as an issue. Strikes,
202
absenteeism and incapacity are also realities in this industry. The total rewards system often includes educational subsidies but does not address the housing problem. Temporary and informal workers are a more prominent issue in independent schools. WHAT IS THE FORECAST FOR EMPLOYEE BENEFITS? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 6: PERSONAL SERVICES
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M PRIOR ITY
H PRIORITY HIG NE
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– – – – –
MEDIUM PRIORITY Choice High salary inflation Temporary and informal workers Unhealthy finances
– – – – – –
LOW PRIORITY Incentives Low-income earners Mass exits Pensionable pay Young workers
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HIGH PRIORITY Absenteeism and incapacity Bricks and books Longevity Strikes
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– – – – –
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PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO? Expand employee benefits offering to include tax-effective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Strikes
Clarify the benefits to be forfeited in the event of a dispute. Employers and unions
Choice
Reconsider the range of choices offered and have a plan as to how to guide members to save responsibly.
Employers, trustees and unions
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Trustees, unions and employers
Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Bricks and books
PART 3 Chapter 6
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CHAPTER 6: PERSONAL SERVICES
MEDIA AND MARKETING
OVERVIEW The South African media and marketing industry covers print, television, radio and online media. With the drastic shift towards online content and given the sensitivity of advertising revenues to the economy, this industry has seen significant levels of restructuring and merger and acquisition activity. These activities can create highly complex benefit structures, with some companies having up to four or five retirement funding arrangements. There is a range of benefit offerings across the industry. Some companies offer their employees substantial benefit packages, while others tend to offer basic benefits due to affordability constraints. There is not a significant union presence within this industry.
205
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PART 3: SECTOR CASE STUDIES
EMPLOYEE PROFILE Our clients in this industry have a membership that is 49% female and skewed towards workers under the age of 40. This industry has relatively few lower income earners and a slight over-representation of middle income earners. This is probably due to the low proportion of employees involved in manual labour.
The salary increase profile shows aboveaverage increases at older ages which is significantly higher than average levels in the late 40s.
BENEFITS BY THE NUMBERS
PART 3 Chapter 6
Contribution to retirement savings as a percentage of pensionable pay
15.1%
Contribution to death benefits as a percentage of pensionable pay
1.4%
Contribution to disability benefits as a percentage of pensionable pay
0.9%
Contribution to retirement funding costs as a percentage of pensionable pay
1.0%
Projected replacement ratio for a member aged 25
54%
Average actual retirement age
59.7
Actual preservation rate
6.5%
Percentage of employers offering disability benefits
93.3%
Average insured death benefit as a multiple of pensionable pay
3.6%
Percentage of employees covered by medical schemes
Not credible
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
RETIREMENT ANALYSIS Contributions towards retirement savings average 15.1%, which is far above the contribution rate across all industries. This level of contribution is sufficient to provide for a replacement ratio of 54% on retirement at age 65. Older members in this industry tend to have either relatively high or relatively low replacement ratios. The high replacement ratios may be a result of more favourable conditions for retirement saving previously.
206
At young ages, the withdrawal rate is very high and it exceeds the retirement funds industry average over most ages. The preservation rates are typical. This accounts for the members in their 50s and 60s with poor replacement ratios. Most retirees leave with 10-15 years of service. Annuitisation rates are high with 55% of retirement benefits annuitised.
CHAPTER 6: PERSONAL SERVICES
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: MEDIA AND MARKETING INDUSTRY 1% 2%
5%
0%
52%
12%
3%
60%
12%
57%
45%
20%
4%
22% 6%
Ages 20 - 30
Ages 30 - 40
Ages 40 - 50
PART 3 Replacement ratios 13% 65%
10%
16%
Ages 50 - 60
28%
9%
5% 5%
9%
40%
0% - 30% 30% - 45% 45% - 60% 60% - 75%
Ages 60 +
207
75% +
Chapter 6
PART 3: SECTOR CASE STUDIES
EXIT RATE: MEDIA AND MARKETING INDUSTRY
PART 3 Chapter 6
Industry experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
RISK ANALYSIS The average approved lump sum death benefit is slightly higher than the retirement funds industry as a whole. There is very little variation between employers. Funeral benefits coverage is low while disability income benefit coverage is higher than average. HEALTHCARE ANALYSIS There were too few companies in this industry with available healthcare data to make definitive comments. However, this industry does lend itself to freelance workers who may not have medical scheme cover as a condition of employment. However, it is important that these employees are made aware of the importance of getting medical scheme cover at an early age to avoid late joiner penalties.
BENEFITS BAROMETER AND CONCLUSIONS
WHAT IS THE FORECAST FOR EMPLOYEE BENEFITS?
Given generally unhealthy finances, employees may not be able to increase their rate of pensionable pay or their contribution rate to improve replacement ratios. However, the nature of their work implies reasonable longevity and the option to increase the retirement age. This industry attracts young workers and more attention should be given to their needs and the impacts of choice and high salary inflation on retirement outcomes.
These practical problems can be grouped into high, medium and low priorities in terms of priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
208
CHAPTER 6: PERSONAL SERVICES
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– – – – –
MEDIUM PRIORITY Choice Salary inflation Unhealthy finances Young workers
– – – – – – – –
LOW PRIORITY Absenteeism and incapacity Bricks and books Incentives Informal and temporary workers Low-income earners Mass exits Strikes
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– HIGH PRIORITY – Longevity – Pensionable pay
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PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO?
PART 3 Chapter 6
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Choice
Reconsider the range of choices offered and have a plan as to how to guide members to save responsibly.
Employers, trustees and unions
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Trustees, unions and employers
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
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SECURITY
OVERVIEW The South African security industry offers services which range from personal security through to corporate and commercial security arrangements. Security guards make up the majority of the membership in these types of funds, but technicians and call centre staff are also employed in this industry. According to the Private Security Industry Regulatory Authority (PSIRA)205, in 2011 there were 411 000 active security guards registered with PSIRA. On average, security companies employ 50 security officers. However, almost
205 Private Security Industry Regulatory Authority (Unpublished). Annual Report 2010/2011
211
4 000 security companies employ 20 or fewer officers, which make cost-effective benefits provision difficult. In addition, many employers pay very poor wages, in some cases below minimum wage, and may not offer any benefits at all. Union penetration is also low and the most active union is the South African Transport and Allied Workers Union (SATAWU). Mobility is also extremely high, with many guards leaving the industry and not simply changing employer. This is evidenced by the fact that there were 1.37 million inactive security officers in 2011.
PART 3 Chapter 6
PART 3: SECTOR CASE STUDIES
EMPLOYEE PROFILE The security industry is almost 73% male. The higher salary peak for female earners may be a function of the fact that women carry out clerical or administrative functions while the men are actively on duty. There is an over-representation of members aged 35 to 45 relative to members aged over 45.
The salary progressions in this industry follow an unusual pattern. Typically, these are high at young ages and lower at older ages, but in this industry, salary inflation increases slightly after the age of 30 and then remains above average. This unusual pattern may be the result of practices at one or two employers in the relatively small sample.
PROPORTION OF MEMBERS BY ANNUAL PENSIONABLE SALARY BAND: SECURITY INDUSTRY
PART 3 Chapter 6
R0 - R24 000
R24 000 - R60 000
R60 000 - R120 000
R120 000 - R240 000
Source: Member WatchTM 2012 data set
212
R240 000 - R480 000
R480 000 - R960 000
R960 000 +
CHAPTER 6: PERSONAL SERVICES
Salary increase per year
AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: SECURITY INDUSTRY
PART 3 Industry experience
Chapter 6
Retirement funds industry experience
BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
12.7%
Contribution to death benefits as a percentage of pensionable pay
1.6%
Contribution to disability benefits as a percentage of pensionable pay
1.0%
Contribution to retirement funding costs as a percentage of pensionable pay
1.3%
Projected replacement ratio for a member aged 25
46%
Average actual retirement age
62.9
Actual preservation rate
6.7%
Percentage of employers offering disability benefits
100.0%
Average insured death benefit as a multiple of pensionable pay
3%
Percentage of employees covered by medical schemes
Not credible
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
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PART 3: SECTOR CASE STUDIES
Security guards are typically low-income earners and despite registration requirements, many may be on a contract basis without benefits.
RETIREMENT ANALYSIS The contribution rate towards retirement benefits is 12.7% in the security industry. Given the low earnings profile, this is likely to be driven by affordability concerns. In addition, the highly fragmented nature of the industry results in relatively high costs, which erode the retirement funding contribution. The high withdrawal rates and low preservation rates result in relatively low projected replacement ratios, particularly at older ages. RISK ANALYSIS
PART 3 Chapter 6
Although the average death benefit lump sum is in line with the personal services sector as a whole, relatively few employers offer any approved death benefits at all, preferring to offer cheaper funeral benefits. Disability income benefits coverage is higher than the retirement funds industry average. HEALTHCARE ANALYSIS Due to the low income level of the security guards, the affordability of benefits in general, and healthcare benefits in particular is questionable and alternatives for low-income earners should be considered where appropriate.
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BENEFITS BAROMETER AND CONCLUSIONS Security guards are typically low-income earners and despite registration requirements, many may be on a contract basis without benefits. Those that are covered may have pensionable pay gaps and earn too little to be incentivised by the current tax regime. Despite low union penetration, strikes are a distinct possibility. Like most other industries, unhealthy finances are a latent problem. WHAT IS THE FORECAST FOR EMPLOYEE BENEFITS? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 6: PERSONAL SERVICES
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: SECURITY INDUSTRY
0%
0% 4%
19%
44%
16%
65%
82%
52%
2% 0%
Ages 20 - 30
0%
16%
Ages 30 - 40
Ages 40 - 50
PART 3 Chapter 6 0%
0%
4%
0%
0%
4%
93%
2%
2%
94%
Replacement ratios 0% - 30% 30% - 45% 45% - 60% 60% - 75% 75% +
Ages 50 - 60
Ages 60 +
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– – – –
MEDIUM PRIORITY Pensionable pay Strikes Unhealthy finances
– – – – – – – –
LOW PRIORITY Absenteeism and incapacity Bricks and books Choice High salary inflation Longevity Mass exits Young workers
ER
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HIGH PRIORITY Incentives Low-income earners Temporary and informal workers
ER
PART 3 Chapter 6
– – – –
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216
CHAPTER 6: PERSONAL SERVICES
WHAT CAN BE DONE?
WHAT? WHO? Temporary and informal workers
Low-income earners
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Assess the appropriateness of including very low earners on the occupational retirement fund.
Employers and unions
Remove the means-test on the older person’s grant (OPG).
The government
PART 3
Incentives
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Strikes
Clarify the benefits to be forfeited in the event of a dispute.
Employers and unions
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
217
Chapter 6
PART 3: SECTOR CASE STUDIES
PART 3 Chapter 6
About 38% of the workers in the personal services sector work in the health industry.
Education is the second largest employer with 20% of the workers in this sector.
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7
PROFESSIONAL AND BUSINESS SERVICES SECTOR By Megan Butler and Reuven Coenen with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
There is a generally acknowledged skills shortage in this sector. This is partially driven by the fact that mathematical skills are a prerequisite in the engineering and accounting professions.
PART 3 Chapter 7
INTRODUCTION Professional and business services span a broad range of activities including financial services, the legal and accounting professions, information technology (IT), the engineering profession and other services associated with real estate development. The needs of the workers in each of these industries might be quite different. However, there are some common themes that emerge. Apart from legal services, there is a generally acknowledged skills shortage in this sector206. This is partially driven by the fact that mathematical skills are a pre-requisite in the engineering and accounting professions. In 2011, only 8.4%207 of the country’s grade 12 pupils obtained a mark of 50% or more in mathematics, which is the minimum mark required to pursue studies in science, including computer science, engineering or accounting. Competition for these skills locally is fairly intense and recruitment and retention pressures are intensified by a demand for these skills in overseas markets. A further feature is the unusual career path in the legal and accounting professions. Both attorneys and accountants must complete a minimum two- or three-year period of
206 Development Network Africa (Unpublished) 207 Parker, F. Do the maths: Results not in line with South Africa’s ambitions. Article appearing in the Mail and Guardian, 10 January 2012
220
articles respectively before being admitted into their professions. This typically starts after at least four years of university education. For the articles period, they are often fixed-term contractors and so they may have no employee benefits at all or minimal benefits such as medical scheme subsidies. At the end of the articles period, they may become permanent staff members, in which case the total rewards system expands to incorporate a range of benefits. Workers tend to start saving for retirement only in their mid-twenties. Some of the risks of joining benefit schemes later in life are discussed in Part 2: Chapter 9. A further complication is that partners in accounting and law firms tend to have highly variable salaries, which again can have a significant effect on retirement readiness and risk benefits as discussed in Part 2: Chapter 10. The employees in this sector fall into three categories: professional, clerical and manual. The first two categories would be expected to have high literacy levels. Those involved in financial services might be expected to have reasonable levels of financial literacy.
CHAPTER 7: PROFESSIONAL AND BUSINESS SERVICES
SECTOR ECONOMIC ANALYSIS GDP contribution (2011 prices)208 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
Approximate employment209
R2.4 trillion 23.7% 3.53% 1.8 million
PART 3 Chapter 7
Key stakeholders Companies210 Standard Bank Absa First Rand African Bank Investec Capitec Nedbank MMI Holdings Limited Liberty Holdings
Government ministries211 Discovery Old Mutual Allan Gray Sanlam Investment Solutions Coronation Fund Manages Alexander Forbes Dimension Data
n Department of Communications n National Treasury
Unions212 n n n n n n
IBSA SOSASA PETUSA SAPGWU BIFAWU SASBO
208 Gross Domestic Product, Statistics SA, 2012 209 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 210 SA Sector Profile – Central Banking & Banks and other Banking Products; Private Equity; Life Insurance; Pension Funding; Medical Aid Funding, available online: http://www.whoownswhom.co.za/ 211 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 212 List of Registered Trade Unions in South Africa, Department of Labour, Available Online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
221
PART 3: SECTOR CASE STUDIES
EMPLOYEE PROFILE The professional services sector is 52% male but there is a considerable difference in the composition of various industries. IT services are 65% male while services relating to real estate and engineering are 73% male. Other professional services, which include legal, accounting and financial services, are more
balanced with 51% of the workforce being female. The age profile is somewhat younger than the average industry. Although this sector is notorious for awarding excessive bonuses, in recent years salary inflation has been below the retirement fund industry average due to the global economic crisis.
BENEFITS BY THE NUMBERS
PART 3 Chapter 7
Contribution to retirement savings as a percentage of pensionable pay
12.8%
Contribution to death benefits as a percentage of pensionable pay
1.2%
Contribution to disability benefits as a percentage of pensionable pay
0.7%
Contribution to retirement funding costs as a percentage of pensionable pay
1.0%
Projected replacement ratio for a member aged 25
43%
Average actual retirement age
61.0
Actual preservation rate
7.2%
Percentage of employers offering disability benefits
83.6%
Average insured death benefit as a multiple of pensionable pay
3.3
Percentage of employees covered by medical schemes
79%
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
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CHAPTER 7: PROFESSIONAL AND BUSINESS SERVICES
RETIREMENT ANALYSIS Given the relatively high education levels, the fact that the average contribution rate towards retirement savings was 12.8%, which is the lowest of all the surveyed sectors, is concerning. Fund members in the IT industry generally tend to choose the lowest contribution rate option available and the average contribution rate was 11.9%. The contribution rate in the engineering and real estate services was 13.3%, which is very close to the overall industry average of 13.5%. These lower contribution rates
will have lasting detrimental effects on retirement income levels and this places an onus on trustee boards to educate members accordingly. The majority of members in every age group should expect replacement ratios of less than 45%. In every age band, less than 20% of the membership can expect to replace more than 60% of their income in retirement.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: PROFESSIONAL AND BUSINESS SERVICES SECTOR 24%
12% 43%
43%
39%
1%
30%
53% 3%
21%
3%
2%
Ages 20 - 30
Ages 30 - 40
Ages 40 - 50
Replacement ratios 0% - 30% 59%
67%
12%
7% 5%
9% 12%
Ages 50 - 60
8%
13%
Ages 60 +
Source: Member WatchTM 2012 data set
223
8%
30% - 45% 45% - 60% 60% - 75% 75% +
PART 3
12% 7% 8%
Chapter 7
PART 3: SECTOR CASE STUDIES
Withdrawal rates are similar to the retirement funds industry as a whole and despite the relatively high education levels in this sector, preservation rates are no better than the
PENSIONABLE SERVICES OF RETIREES: PROFESSIONAL AND BUSINESS SERVICES SECTOR
PART 3 Chapter 7
Source: Member WatchTM 2012 data set
224
average fund. Despite the high levels of turnover, there are a number of longer-serving employees at retirement.
CHAPTER 7: PROFESSIONAL AND BUSINESS SERVICES
Annuitisation rates are high due to periods of long service, resulting in reasonably high benefits in rand terms.
Annuitisation rates for moderately sized benefits are better than average but the annuitisation rates for small benefits are low.
ANNUITISATION RATE BY SIZE OF BENEFIT: PROFESSIONAL AND BUSINESS SERVICES SECTOR
PART 3 Chapter 7
Source: Member WatchTM 2012 data set
225
PART 3: SECTOR CASE STUDIES
RISK BENEFIT ANALYSIS Risk benefit packages are broadly in line with other sectors except for dread disease and spouse’s cover, which is offered to financial and legal professionals, and accidental death cover offered to professionals working in real estate and engineering. The IT industry has relatively low levels of approved death and funeral cover and members tend to choose the lowest possible multiple. This in all likelihood means that those members are underinsured. HEALTHCARE ANALYSIS Nine of the twelve companies surveyed during 2012 offer medical scheme membership as a condition of employment to their employees, with another 17% offering membership on a voluntary basis. However, only 8% offer a subsidy to current employees, which may indicate that affordability is perceived to be less of an issue in this sector.
PART 3 Chapter 7
It is interesting to note that 50% of these companies still subsidise medical scheme contributions in retirement. This may also explain the small group of members at older ages that have long periods of service. BENEFITS BAROMETER AND CONCLUSIONS This sector attracts large numbers of young workers and over the course of their working lives they may have relatively high salary inflation, punctuated by bonuses that make
226
their pensionable pay unpredictable. Despite the fact that this group should understand incentives, they may not be sufficiently transparent to prevent unhealthy finances. Longevity is an issue that has yet to be tackled. A further surprising feature is that employees in this sector exercise choice more readily but make worse decisions than less financially sophisticated sectors. This is a sector that is quite prone to regulation changes. This can lead to mass exits. In recent years, it has emerged that even professionals are struggling with the bricks and books problem. What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 7: PROFESSIONAL AND BUSINESS SERVICES
ME
DIU
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HIG
H PRIORITY
W PRIORITY LO
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NE
ME
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BAROM
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HIG
H PRIORITY
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NE
ME
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DIU
BAROM
ET
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H PRIORITY HIG NE
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HIGH PRIORITY Bricks and books Choice High salary inflation Incentives Longevity Pensionable pay Young workers
– MEDIUM PRIORITY – Mass exits – Unhealthy finances PART 3 Chapter 7
ER
W PRIORITY LO
BE
– – – – – – – –
– – – – –
LOW PRIORITY Absenteeism and incapacity Low-income earners Strikes Temporary and informal workers
ER
227
PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO?
PART 3
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
Incentives
Alter the tax subsidy so that it incentivises saving more transparently.
The government
Bricks and books
Expand employee benefits offering to include taxeffective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Mass exits
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Choice
Reconsider the range of choices offered and have a plan to guide members to save responsibly.
Employers, trustees and unions
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Trustees, unions and employers
Chapter 7
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8
PUBLIC SECTOR
By Megan Butler, Sandira Chaithram and Edward Kieswetter with healthcare analysis by Kristin-Ann CronjĂŠ
PART 3: SECTOR CASE STUDIES
Employment in the public sector carries some unique features due to South Africa’s history. The jobs were effectively a means of providing incomes to individuals who would otherwise be unemployed.
PART 3 Chapter 8
INTRODUCTION The public sector is South Africa’s largest employer, with almost two million employees either involved in public service or employed by public sector entities such as SARS213. The public service consists of national, provincial and local government, all of whom have significant numbers of employees. The skills shortage in the public sector has been highlighted by academics214 and the media and by local authorities themselves. There is a critical need to tailor benefits to assist in recruitment and retention. Employment in the public sector carries some unique features due to South Africa’s history. Under apartheid, certain service delivery functions were duplicated for each race group resulting in substantial inefficiencies215. Each local authority employed a large number of unskilled workers. These positions were typically part-time and wages were low, as the jobs were effectively a means of providing incomes to individuals who would otherwise be unemployed. This patronage system was particularly rife in the former homelands, where services were offered directly instead of outsourced as they were in other areas. In 1994, these workers were made permanent employees and after the local government elections in 1995-1996 the consolidation of local authorities began in earnest. These unskilled workers bore the brunt of the resultant downsizing and it is estimated that 40% of the unskilled jobs within local authorities were shed. However, the public service still remains a large employer of unskilled workers and administrators. Before 1994, there were no wage negotiations. Benefits packages were simply determined by the Public Services Commission or the homeland authority. Many workers gained access to fairly generous, paternalistic benefits on consolidation, which might include membership of the defined benefit (DB) Government Employees Pension Fund (GEPF). Collective bargaining is used
213 South African Reserve Bank (2012). Quarterly Bulletin, No. 263. South African Reserve Bank, Pretoria 214 Chipkin & Lipietz (Forthcoming) 215 Makgetla (Unpublished)
230
extensively but because of the breadth of skills and jobs in the public sector, the process is fraught with difficulty. The 200 000 workers in local municipalities excluded from the GEPF can choose from a list of retirement funds and medical schemes on starting employment. The medical schemes are typically closed schemes targeted at municipal workers and the retirement fund options include union and bargaining council funds. Despite the apparent flexibility, there is a moratorium on switching between the various retirement funds and the possibility of a window period for fund switching remains a topical issue in local authorities. Our analysis focused on local authority funds, which have several other special features. One such feature is that many local authority funds are registered as Paragraph (c) funds in terms of the Income Tax Act, which means higher tax deductibility limits on the employer contributions to benefits than for other pension and provident funds, where it is limited to 20%. Given this exemption and reduced cost pressures, it is not unusual for contributions to group risk and retirement benefits to be in excess of 20%. In addition to traditional benefits such as retirement funding, employers in the public sector may offer housing subsidies and group risk benefits outside the retirement fund. In particular, certain employees who participate in the Government Employees Medical Scheme (GEMS) receive subsidies towards their medical scheme contributions. There are 283 local government authorities, only six of which are attached to major metropolitan areas. There is considerable geographic dispersion between the authorities, which creates challenges from a member education perspective.
CHAPTER 8: PUBLIC SECTOR
SECTOR ECONOMIC ANALYSIS
R1.5 trillion 15.27% 3.85%
GDP contribution (2011 prices)216 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
2 million
Approximate employment213
Key stakeholders
PART 3
Government ministries217
Unions
n Department of Public Service and Administration n Department of Public Works
n n n n n
218
SAMWU SAPU POPCRU PAWUSA IMATU
Chapter 8 n n n n n
UNIPSAWU NUPSAW NPSWU SASAWU PSA
213 South African Reserve Bank (2012). Quarterly Bulletin, No. 263. South African Reserve Bank, Pretoria 216 Gross Domestic Product, Statistics SA, 2012 217 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 218 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561
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EMPLOYEE PROFILE The public sector is 66% male. The age distribution is skewed towards the older ages with disproportionately fewer employees under the age of 35.
The older age profile explains in part the higher than average earnings. Around 75%–80% of workers earn between R60 000 and R240 000 a year, a remarkably narrow range. Salary increases are broadly in line with the retirement funds industry as a whole.
PROPORTION OF MEMBERS BY ANNUAL PENSIONABLE SALARY BAND: PUBLIC SECTOR
PART 3 Chapter 8
R0 - R24 000
R24 000 - R60 000
R60 000 - R120 000
R120 000 - R240 000
Salary band
Source: Member WatchTM 2012 data set
232
R240 000 - R480 000
R480 000 - R960 000
R960 000 +
CHAPTER 8: PUBLIC SECTOR
BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
16.0%
Contribution to death benefits as a percentage of pensionable pay
1.2%
Contribution to disability benefits as a percentage of pensionable pay
0.8%
Contribution to retirement funding costs as a percentage of pensionable pay
0.6%
Projected replacement ratio for a member aged 25
57.5%
Average actual retirement age
61.4
Actual preservation rate
5.1%
Percentage of employers offering disability benefits
89%
PART 3
Average insured death benefit as a multiple of pensionable pay
5.4 times
Chapter 8
Percentage of employees covered by medical schemes
Not available
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
233
PART 3: SECTOR CASE STUDIES
RETIREMENT ANALYSIS The contribution rate towards retirement funding is high at 16.0% – only fishing, forestry and agriculture has a higher contribution rate at 16.3%. However, despite the contribution rate being relatively high, a new entrant at 25 could expect to replace only 58% of their pensionable earnings at retirement at age 65. Fortunately, the exit
EXIT RATE: PUBLIC SECTOR
PART 3 Chapter 8
Age band Sector experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
234
rate in this sector is far below that of the average for the retirement funds industry and a 40-year service period is not as unrealistic as it might appear. In fact, a quarter of all retirees in the public sector have 35 years service or more. When members do withdraw, however, preservation rates are low and in line with retirement fund industry experience.
CHAPTER 8: PUBLIC SECTOR
Because investment returns have historically been favourable, there are a number of older members in public sector funds who have high projected retirement benefits.
average retirement age is 61.4.This is driven largely by a number of retirements at age 55. These may be early retirements linked to transformation initiatives.
Average pensionable service at retirement is 24.2 years with 53% of retirees having 25 years service or more. This is markedly higher than what is observed in other industries and is attributable to the low withdrawal rate. The average normal retirement age is 62.7 and the
Annuitisation rates are between 51% and 68% for benefits above R630 000, but the large number of smaller benefits results in 60% of retirement benefits are taken in cash.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: PUBLIC SECTOR 0% 2% 1% 25%
47%
26%
44%
19%
13% 22%
Ages 20 - 30
15%
Ages 30 - 40
22%
18%
17%
29%
Ages 40 - 50
Replacement ratios 24%
17%
27%
30%
0% - 30% 30% - 45%
14%
16% 13%
23%
18% 19%
45% - 60% 60% - 75%
Ages 50 - 60
Ages 50 - 60
Source: Member WatchTM 2012 data set
235
75% +
PART 3 Chapter 8
PART 3: SECTOR CASE STUDIES
RISK BENEFIT ANALYSIS Public sector death benefits are extremely generous – in one case the death benefit is almost 15 times annual salary and the average benefit is higher than in any other sector. More funds provide funeral benefits than is true for the retirement funds industry as a whole and disability benefit provision is marginally above average. Contribution rates towards risk benefits are high. This may be a legacy issue but high risk benefits mitigate the reputational risks associated with having to deal with destitute families following the death of a breadwinner. Absenteeism is a key problem in this sector, with 33.6% of public sector employees taking sick leave during 2011. This was substantially above the national average of 9.2%219. Absenteeism is dealt with in greater detail in Part 2: Chapter 3. HEALTHCARE ANALYSIS Healthcare cover in the public sector is dominated primarily and increasingly by Government Employees Medical Schemes (GEMS), and to a lesser extent by the LA Health Medical Scheme, which is specifically accredited by the South African Government Bargaining Council to provide medical scheme cover to employees of local government.
PART 3 Chapter 8
A subsidy is offered to certain government employees who participate as members of GEMS. This has encouraged its significant growth since its registration in 2005. This speaks to the generous overall benefits package that employees in the public sector seem to enjoy.
219 Adcorp Employment Index, April 2012
236
Additionally, many municipalities and other public sector entities offer subsidies of medical scheme contributions during retirement, which would encourage long periods of service and lower rates of withdrawal. BENEFITS BAROMETER AND CONCLUSIONS The public sector is South Africa’s largest employer and this analysis focuses mainly on local authorities where employees cannot join the GEPF, and instead have some benefits choice. Benefits include nontraditional benefits such as housing. This sector struggles to attract young workers and has not tackled the longevity problem either. Unhealthy finances are a significant concern and incentives need to change to encourage healthier habits. Abuse of sick leave is a major problem in this sector and strikes are a distinct possibility. What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 8: PUBLIC SECTOR
ME
DIU
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HIG
H PRIORITY
W PRIORITY LO
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NE
ME
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DIU
BAROM
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– – – –
MEDIUM PRIORITY Choice Unhealthy finances Young workers
H PRIORITY HIG
PART 3 NE
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DIU
BAROM
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Chapter 8
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HIG
H PRIORITY
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BE
HIGH PRIORITY Absenteeism and incapacity Bricks and books Incentives Longevity Strikes
ER
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BE
– – – – – –
NE
F ITS
BAROM
ET
– – – – – –
LOW PRIORITY High salary inflation Low-income earners Mass exits Pensionable pay Temporary and informal workers
ER
237
PART 3: SECTOR CASE STUDIES
WHAT CAN BE DONE?
WHAT? WHO?
Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Incentives
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Expand employee benefits offering to include taxeffective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Strikes
Clarify the benefits to be forfeited in the event of a dispute.
Employers and unions
Choice
Reconsider the range of choices offered and have a plan to guide members to save responsibly.
Employers, trustees and unions
Bricks and books
PART 3 Chapter 8
238
PART 3: SECTOR CASE STUDIES
9
RETAIL, WHOLESALE AND HOSPITALITY SECTOR By Megan Butler and Sandira Chaithram with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
Approximately 62% of people employed in this sector work for retailers or wholesalers. The remainder work in hotels and restaurants and miscellaneous service industries.
PART 3
INTRODUCTION Retail and wholesale trading and hospitality involve the sale of goods to individuals or other companies. In the case of hospitality, the basic offering of accommodation is often just a small part of the value proposition to the customer, with the service component being the dominant factor. So hospitality shares some characteristics with retail and wholesale trading, and others with personal services. To get a better idea of the benefits landscape in this sector, trading and hospitality are considered separately. Official economic statistics for this sector are difficult to come by. However, Statistics South Africa data from 2009220 221 suggests that approximately 62% of people employed in this sector work for retailers or wholesalers. The remainder work in hotels and restaurants and miscellaneous service industries. About 25% of workers in this sector work for wholesalers while another 30% are permanently employed by retailers. A further 5% work as temporary or casual workers in retail and are likely to be without benefits.
Chapter 9
220 Statistics South Africa (Unpublished). Retail Trade Industry, 2009. P6201. Report dated 7 December 2010 221 Statistics South Africa (Unpublished). Wholesale Trade Industry, 2009. P61-01-01. Report dated 2009
240
CHAPTER 9: RETAIL, WHOLESALE AND HOSPITALITY SECTOR
SECTOR ECONOMIC ANALYSIS GDP contribution (2011 prices)222 % contribution to GDP in 2011 Real increase in GDP 2010 - 2011
Approximate employment223
R1.4 trillion 13.86% 4.44% 2 966 000
KEY STAKEHOLDERS RETAIL AND WHOLESALE Companies
HOSPITALITY Companies227
224
n Clicks Group n Edcon n Ellerine Holdings n Foschini Retail Group n Fruit & Veg City Holdings n JD Group n Lewis Group n Massmart Holdings
n Mr Price Group n Pepkor n Pick n Pay n Shoprite n The Spar Group n Truworths n Woolworths
n City Lodge Hotels n Gold Reef Casino Resorts n Sun International n Tsogo Sun Holdings n Peermont Global Government ministries225 n Department of Tourism n Department of Trade and Industry n Department of Sport and Recreation
Government ministries225 n Department of Trade and Industry
Unions226
Unions226
n n n n
n FEDCRAW
SACCAWU HIAWU ECCAWU SACA
n CONSAWU n HOTELICCA n FEDHASA
222 Gross Domestic Product, Statistics SA, 2012. 223 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012. 224 SA Sector Profile – Retail Trade except of Motor Vehicles and Motor Cycles, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=554. 225 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm. 226 List of Registered Trade Unions in South Africa, Department of Labour, available online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561. 227 Who Owns Whom (2012). SA Sector Profile - Hotels & Restaurants, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=620.
241
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PART 3: SECTOR CASE STUDIES
RETAIL AND WHOLESALE
OVERVIEW The economic sanctions on South Africa from the 1960s to the 1990s forced the development of a strong, innovative local economy. However, the entrance of global players changes not only the competitive environment, leading to mergers and acquisitions, but also the corporate culture. Given that the total rewards system must be embedded in and supported by the corporate culture, this can have a very real impact on benefits. Large enterprises make up 75% of retailers and there are also a number of small independent retailers
PART 3 Chapter 9
242
operating in townships. The biggest employers are non-specialist stores carrying mostly food and beverages, followed by clothing stores. Together, these stores employ about 300 000 people on a permanent basis. Among wholesale employees, most are employed in the food and beverages sector, with other household goods and construction materials also employing significant numbers. Given the predominance of food and beverages and other household goods, many retailers and wholesalers have a logistics focus, with characteristics in common with the transport industry.
CHAPTER 9: RETAIL, WHOLESALE AND HOSPITALITY SECTOR
EMPLOYEE PROFILE This industry employs a large number of young women – about 57% are female. The age structure of the industry accounts, in part, for the wage structure. Almost half of the employees have pensionable salaries
of between R24 000 and R60 000 per year. Almost 10% of female workers have even lower pensionable salaries. The specific total rewards system concerns relevant to low-income earners are discussed in Part 2: Chapter 2.
PROPORTION OF MEMBERS BY AGE: RETAIL AND WHOLESALE INDUSTRY
PART 3 Chapter 9 Retirement funds industry Source: Member WatchTM 2012 data set
243
PART 3: SECTOR CASE STUDIES
Salary inflation is fairly rapid at younger ages. This reflects the fact that employers are taking on young, inexperienced workers who are rewarded as their experience grows. While this is useful in terms of stimulating youth
employment, it discourages employers from retaining older workers in the workplace as an older worker costs significantly more per unit of productivity than a younger worker.
PROPORTION OF MEMBERS BY ANNUAL PENSIONABLE SALARY BAND: RETAIL AND WHOLESALE INDUSTRY
PART 3
R0 - R24 000
R24 000 - R60 000
R60 000 - R120 000
R120 000 - R240 000
Chapter 9
Source: Member WatchTM 2012 data set
244
R240 000 - R480 000
R480 000 - R960 000
R960 000 +
CHAPTER 9: RETAIL, WHOLESALE AND HOSPITALITY SECTOR
Salary increase per year
AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: RETAIL AND WHOLESALE INDUSTRY
Industry experience
Retirement funds industry experience
Source: Member WatchTM 2012 data set
BENEFITS BY THE NUMBERS PART 3 Contribution to retirement savings as a percentage of pensionable pay
14.00%
Contribution to death benefits as a percentage of pensionable pay
1.28%
Contribution to disability benefits as a percentage of pensionable pay
1.15%
Contribution to retirement funding costs as a percentage of pensionable pay
0.91%
Projected replacement ratio for a member aged 25
46%
Average actual retirement age
60.5
Actual preservation rate
9.75%
Percentage of employers offering disability benefits
89.30%
Average insured death benefit as a multiple of pensionable pay
3.32
Percentage of employees covered by medical schemes
35%
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
245
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PART 3: SECTOR CASE STUDIES
RETIREMENT ANALYSIS The average contribution rate towards retirement benefits is 14.0%. This is considerably higher than the 12.6% contribution rate in the hospitality industry and marginally better than the 13.5% contribution rate for the retirement funds industry as a whole. However, given current expectations about future returns and the cost of annuities, someone joining the industry at 25 and retiring at 65 can expect to replace only 45% of their income when they retire. When looking at the under-30s, 52% are expected to retire with less than that. However, it is encouraging that a good percentage of older workers are on track to replace 75% of their
income when they retire. This is due to a wide range of contribution rates in this industry. The withdrawal rates in this industry are significantly higher than average at older ages. Together with the early retirement age, this results in many retirees having relatively short service at retirement, with almost a third having ten years service or less at retirement. As with the retirement funds industry as a whole, preservation rates are low. This suggests workers retire with lower retirement benefits than the projections depicted suggest. The average retirement age is 60.5 years with an average normal retirement age of 62.5.
Only mining, which is extremely physically taxing, has an earlier planned normal retirement age. This reflects that extending the retirement age is a relatively expensive decision for the employer due to the salary increase profile. Extending the retirement age is discussed in Part 2: Chapter 13. Annuitisation rates are low in this industry: two-thirds of retirement benefits are taken in cash. Living annuities are relatively uncommon and only taken by 8% of retirees. This is unsurprising given the low earnings of the average worker and their low level of financial sophistication.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: RETAIL AND WHOLESALE INDUSTRY 19% 30%
2%
1%
4%
47%
43%
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12%
4%
22% Ages 20 - 30
Ages 30 - 40
12%
Ages 40 - 50
Replacement ratios 10% 13%
8% 6%
50% 6%
19%
56%
25%
28%
17%
0% - 30% 30% - 45%
52%
6%
45% - 60% 60% - 75%
Ages 50 - 60 Source: Member Watch
TM
Ages 60 +
2012 data set
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7%
75% +
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Chief among the risks in this industry are low incomes and pensionable pay, the combination of which can result in very poor retirement outcomes.
RISK BENEFIT ANALYSIS The risk benefits are relatively unremarkable in this industry. All surveyed employers offer approved death benefits which average 3 times annual salary, marginally below the retirement funds industry average. However, there was a greater tendency for employers to offer unapproved death cover, which may bring the benefits package into line, as well as being paid more quickly than the approved benefit.
What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
HEALTHCARE ANALYSIS Companies in this industry have historically been just large enough to offer restricted medical schemes. However these schemes are relatively small and may become unsustainable relatively quickly, especially given the high cost environment. BENEFITS BAROMETER AND CONCLUSIONS Chief among the risks in this industry are low incomes and pensionable pay, the combination of which can result in very poor retirement outcomes. The current incentives will not stimulate saving among this group and the needs of young workers are not adequately addressed. Temporary workers are common and few have employee benefits, so finances are generally unhealthy. Incapacity can be caused by repetitive tasks such as shelf-packing.
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LOW PRIORITY Bricks and books Choice High salary inflation Longevity Mass exits Strikes
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WHAT CAN BE DONE?
WHAT? WHO?
Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Assess the appropriateness of including very low earners in the occupational retirement fund.
Employers and unions
Remove the means-test on the older person’s grant (OPG).
The government
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
Incentives
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Low-income earners
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HOSPITALITY
OVERVIEW The South African hospitality industry consists predominantly of hotels and other forms of accommodation. Given fluctuations in demand and revenue, some companies in this sector have diversified their operations to include other types of revenue streams such as casinos and theme parks. Occupancy rates fell from 71.8% in 2007 to 53% in 2011228. However, the outlook for the sector going forward is more positive because of marketing initiatives aimed at tourists from India and China and a focus on events-hosting.
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228 PwC (2012) 229 Federated Hospitality Association of Southern Africa (Unpublished)
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Although most of the workforce is permanently employed, the Federated Hospitality Association of South Africa (FEDHASA)229 estimates that about 100 000 workers are employed on a temporary basis during peak tourism season, and that almost 80 000 are employed on a casual basis from day to day. Many of the permanent workforce are low-income earners.
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EMPLOYEE PROFILE The hospitality industry is evenly balanced in terms of males and females with a
disproportionate number of workers under the age of 35. Wages are marginally lower than the average for the retirement funds industry.
PROPORTION OF MEMBERS BY AGE: HOSPITALITY INDUSTRY
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Retirement funds industry Source: Member WatchTM 2012 data set
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BENEFITS BY THE NUMBERS
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Contribution to retirement savings as a percentage of pensionable pay
12.60%
Contribution to death benefits as a percentage of pensionable pay
1.37%
Contribution to disability benefits as a percentage of pensionable pay
0.71%
Contribution to retirement funding costs as a percentage of pensionable pay
0.93%
Projected replacement ratio for a member aged 25
43%
Average actual retirement age
60.6
Actual preservation rate
11.93%
Percentage of employers offering disability benefits
90.50%
Average insured death benefit as a multiple of pensionable pay
3.08
Percentage of employees covered by medical schemes
84%
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
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RETIREMENT ANALYSIS We observe a high degree of mobility between employers within the industry, with many low skilled workers seeking to change employers for better remuneration as opposed to benefits. The levels of turnover observed are therefore high.
considered a low priority in this industry. The low contribution results in a 25-year-old new entrant having a projected replacement ratio of just 43%. The actual projected benefits reflect an even grimmer picture: over 90% of members over the age of 50 are expected to have replacement rates of less than 45%.
The average contribution rate towards retirement is 12.6%, which is below the average for the retirement funds industry and consistent with retirement funding being
Curiously, the withdrawal profile for this industry is almost flat. For most industries withdrawal rates are higher at younger ages than at older ages.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: HOSPITALITY INDUSTRY 19%
26%
1% 47%
45%
32%
3% 24%
0%
Ages 20 - 30
15% 51% 29%
2%
Ages 30 - 40
71%
6%
0% - 30% 4%
1% 20%
Ages 40 - 50
1%
1% 11%
Ages 40 - 50
Source: Member WatchTM 2012 data set
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2%
Ages 40 - 50
Replacement ratios 81%
3%
4%
30% - 45% 45% - 60% 60% - 75% 75% +
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EXIT RATE: HOSPITALITY INDUSTRY
Industry experience Source: Member Watch
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TM
Retirement funds industry experience
2012 data set
The preservation rates are in line with industry experience. The combination of the exit and preservation patterns may have serious implications for older workers. They may be leaving without preserving and then have to start saving from scratch with very little time left before retirement. This explains the poor projected retirement outcomes. Most workers retire at 63, which is the average normal retirement age. However, there are a number of earlier retirements, possibly due to the physically demanding nature of some of the work, resulting in an average retirement age of 60.6. The average service at retirement is 11.9 years, but this hides the fact that workers tend to either be long serving or have very short service at retirement. Annuitisation rates are relatively good, with 61% of retirement benefits being taken in cash. Around 80% of benefits above R630 000 are annuitised.
RISK BENEFIT ANALYSIS The risk benefits are relatively unremarkable in this industry. Lump sum death benefits are, on average, below the average for the retirement funds industry, at around three times annual salary. However, there is a tendency for employers to offer spouses cover and funeral cover, which may bring the benefits package into line. HEALTHCARE ANALYSIS The young age profile and high withdrawal rates at older ages in this industry generally lend themselves to lower costs in a restricted medical scheme. BENEFITS BAROMETER AND CONCLUSIONS This sector has a very young profile. Benefits usually play a secondary role to cash, leading to unhealthy finances. This industry has a
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large proportion of low-income workers, some of whom are temporary and have no benefits. Those who do have benefits coverage may have poor outcomes due to pensionable pay gaps and they are not incentivised to save. The industry is vulnerable to retrenchments and mergers and acquisitions. What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
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WHAT CAN BE DONE?
WHAT? WHO? Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
Assess the appropriateness of including very low earners in the occupational retirement fund.
Employer and unions
Remove the means-test on the older person’s grant (OPG).
The government
Incentives
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Mass exits
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Low-income earners
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10
TRANSPORT AND TELECOMMUNICATIONS SECTOR By Megan Butler and Martin Teubes with healthcare analysis by Kristin-Ann Cronjé
PART 3: SECTOR CASE STUDIES
TRANSPORT AND TELECOMMUNICATIONS SECTOR Telecommunications plays a vital role in the transport industry, which includes logistics, distribution management and ports and air infrastructure.
INTRODUCTION Transport and telecommunications may seem an odd pairing. However, if we consider that transport includes logistics and distribution management as well as ports and air infrastructure, we can see the vital role that telecommunications plays in the transport industry. But as technology develops, telecommunications and information technology are likely to become more closely linked. In recognition of this transition and the fact that the needs of workers are likely to be very different, the transport and telecommunications industries will be analysed separately.
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SECTOR ECONOMIC ANALYSIS
R 1.0 trillion
GDP contribution (2011 prices)230 % contribution to GDP in 2011
10.2%
Real increase in GDP 2010 - 2011
3.26%
Approximate employment231 Formal sector
637 000
Informal sector
198 000
KEY STAKEHOLDERS TRANSPORT Companies n n n n n n
TELECOMMUNICATIONS Companies235
232
ACSA Comair Europcar Imperial Fleet Management Grindrod Freight Services Unitrans Supply Chain Solutions
n n n n n
South African Airways Super Group Trencor Transnet Putco
n South African Broadcasting Corporation Ltd n Telkom SA n Vodacom Group
n Department of Communications n Department of Science and Technology
n Department of Trade and Industry n Department of Economic Development
Unions234
Unions234 SATAWU SACU CWU SAPWU TOWU
Datatec Ltd MTN Group Multichoice South Africa Holdings Neotel Primedia Broadcasting
Government ministries233
Government ministries233
n n n n n
n n n n n
n n n n n
MTWU AUSA PTAWU TAWU NASAWU
n n n n n
ALPA-SA SAFDWU THOR FSRDTU SARWHU
n SAAMA n CSAAWU n SA-AAWU
n CWU n SAPWU
230 Gross Domestic Product, Statistics SA, 2012 231 Quarterly Labour Force Survey, Quarter 3, Statistics SA, 2012 232 Who Owns Whom (2012). SA Sector Profile - Fleet Management; freight Transport by Road; Air Transport, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=458 233 South African Government Information, National Departments, available online: http://www.info.gov.za/aboutgovt/dept.htm 234 List of Registered Trade Unions in South Africa, Department of Labour, Available Online: http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561 235 Who Owns Whom (2012). SA Sector Profile – Telecommunications, http://www.whoownswhom.co.za/web/index.php?m=SA Sector&p=sectorinfo&id=208
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TRANSPORT
OVERVIEW The transport industry includes commuter services, logistics and distribution as well as services to support transport infrastructure. According to the Oxford Business Group236, commuter services by rail are controlled by the Passenger Rail Agency of South Africa, a parastatal, while most workers using the roads travel by taxi, which are effectively small businesses with informally or selfemployed drivers. The difference in usage between rail and road is remarkable. On a daily basis, only 2.2 million South Africans use the train while 15 million use taxis. Due to increasing congestion and deteriorating roads, commuters are being encouraged to use either rail services or the bus rapid transit systems in Cape Town and Johannesburg, which may threaten the livelihood of some of the country’s 150 000 taxi drivers.
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Part of the reason for the congestion on the country’s roads is the proliferation of road freight transport. Before 1988, freight could only be transported on the rail network which was controlled by the government-
owned Transnet. According to the Council for Scientific and Industrial Research (CSIR)237, subsequent deregulation has led to 68.7% of the country’s freight by total tonne-kilometre being moved by road. However, rising costs due to fuel price hikes, tolls and poor road conditions, which can damage the goods being transported, may mean that a shift back to rail is needed. This may impact heavily on the workers involved in the actual transportation of goods. However, workers with clerical and managerial positions, such as those involved with order control and supplier management, may be less affected. Unfortunately, road accidents are common in the transport industry resulting in losses and exposing drivers to the risk of death or injury. This means that comprehensive medical, disability and death cover is a must. Mining and heavy industry rely almost entirely on rail freight. Resources for export typically exit the country from Durban and Richard’s Bay. High costs and long delays may make South African ports less attractive relative to neighbouring Mozambique, which threatens the jobs not only of port workers but
236 Oxford Business Group (Unpublished) 237 CSIR (2012)
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employees in the warehousing facilities and connecting rail facilities. South Africa’s airports have excess capacity due to the upgrades completed in 2010. As the Airports Company of South Africa tries to recoup this capital expenditure, tariffs have risen sharply. Low levels of competition among airlines and high costs have impacted on commuter travel. Airfreight only accounts for 0.2% of freight moved, despite part of the airport upgrade being intended to boost air cargo. A key theme in this industry is that there are a number of different modes of transport and the usage of different modes changes over time. This may leave workers with specialised skills vulnerable to mass job losses in any subsequent restructuring. This issue is discussed further in Part 2: Chapter 12.
CHAPTER 10: TRANSPORT AND TELECOMMUNICATIONS SECTOR
EMPLOYEE PROFILE Although the industry is 76% male, this is one of the few industries where female workers earn more than their male counterparts. It is likely that most of the female workers in this industry perform clerical work and face very different occupational risks to their male counterparts. Most workers have pensionable earnings between R60 000 and R120 000 per year and there are relatively few very high earners.
The age distribution is slightly skewed towards older ages, with members over the age of 35 being over-represented. Salary increases are much higher than average at all ages, and particularly at young ages.
Salary increase per year
AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: TRANSPORT INDUSTRY
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Source: Member WatchTM 2012 data set
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BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
14.5%
Contribution to death benefits as a percentage of pensionable pay
1.6%
Contribution to disability benefits as a percentage of pensionable pay
1.0%
Contribution to retirement funding costs as a percentage of pensionable pay
0.9%
Projected replacement ratio for a member aged 25
49%
Average actual retirement age
61.1
Actual preservation rate
5.9%
Percentage of employers offering disability benefits
84.6%
Average insured death benefit as a multiple of pensionable pay
3.4
Percentage of employees covered by medical schemes
Not credible
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
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RETIREMENT ANALYSIS At 14.5% the contribution rate towards retirement benefits is relatively high. However, given expectations of future investment returns and annuity prices, this is only expected to be sufficient to allow a new entrant into the industry at 25 retiring at 65 to replace 49% of their income when they retire.
It should be noted that this represents a bestcase scenario, as it ignores the fact that most workers change jobs frequently over their careers and do not preserve their benefits. The industry withdrawal rates are similar to those for the retirement funds industry as a whole and the preservation rates are similar under the age of 50. This constant leakage
results in a substantial number of older workers with very low projected retirement benefits. If the workers with replacement ratios below 30% have no other savings, they may become reliant on the government for benefits.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: TRANSPORT INDUSTRY
16% 5%
29%
59%
51%
16%
9%
30%
28%
5%
Ages 20 - 30
4%
2%
3%
45%
Ages 30 - 40
0% - 30%
7% 74%
60% - 75%
7%
2%
Ages 50 - 60
30% - 45% 45% - 60%
4%
2%
Ages 40 - 50
Replacement ratios
9%
83%
2%
7%
2%
Ages 60 +
Source: Member WatchTM 2012 data set
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75% +
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In reality, members’ actual retirement benefits may be even lower, given that the average retirement age is 61.1 and the most common retirement age is 60. However, the real culprit behind the very low replacement ratios may lie in the late hire ages in this industry. At retirement 22% of retirees have five years service or less. This suggests a number of new employees in their late fifties who may not transfer their existing savings into the new fund.
In most industries, the preservation rate increases at age 50. Generally, this is attributable to the member’s growing awareness of the importance of retirement benefits as they near the retirement age. Unfortunately, this is not true in this industry, where preservation rates are consistently below 20%, although, short service lengths may mean that withdrawal benefits are fairly low at every age, making preservation less attractive.
PRESERVATION RATE: TRANSPORT INDUSTRY
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Retirement funds industry experience
Source: Member WatchTM 2012 data set
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Retirement readiness appears to be a problem, with 73% of retirement benefits being taken in cash. This may be because retirement benefits would be small due to the short service of most retirees. We see 53.7% of retirement benefits under the tax-free limit on retirement benefits, which was R315 000 over the period of investigation.
CHAPTER 10: TRANSPORT AND TELECOMMUNICATIONS SECTOR
Recent strike activity, which has resulted in high salary inflation, makes the cost of benefit provision in this industry more volatile and uncertain.
RISK BENEFIT ANALYSIS From an occupational incapacity perspective, the transport industry has inherently high risks due to the high standards of health required of drivers and pilots. Disability income cover is thus relatively low, as while many workers may qualify for benefits under their own occupation, they may fail to qualify for benefits during the extended period when the disability definition is extended to cover any occupation. Employers appear to compensate for this by, on average, offering dread disease cover much more widely than we see in other industries. These policies typically cover cancer, heart attack, stroke and coma but leave employees at risk in terms of musculoskeletal risks. Incapacity management is discussed in more detail in Part 2: Chapter 3. Almost 90% of employers offer approved death benefits that are in line with the retirement funds industry as a whole. HEALTHCARE ANALYSIS Affordability of medical schemes is likely to be problematic in this industry, where workers may earn too much to enjoy free public healthcare but may earn too little to comfortably afford comprehensive medical scheme membership.
BENEFITS BAROMETER AND CONCLUSIONS This industry has a large number of informally employed workers. Earnings are typically low and pensionable pay is even lower. This group needs incentives in order to save more. Finances are generally unhealthy and physical incapacity is also a concern. In anticipation of possible shifts to rail transport leading to retrenchments, employers should start considering how to skill workers so that they can be either retained or employed in other industries. Furthermore, recent strike activity, which has resulted in high salary inflation, makes the cost of benefit provision in this industry more volatile and uncertain. What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
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MEDIUM PRIORITY Incentives Low-income earners Mass exits Pensionable pay Strikes Temporary and informal workers Unhealthy finances
– – – – –
LOW PRIORITY Bricks and books Choice Longevity Young workers
CHAPTER 10: TRANSPORT AND TELECOMMUNICATIONS SECTOR
WHAT CAN BE DONE?
WHAT? WHO?
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Assess the appropriateness of including very low earners in the occupational retirement fund.
Employer and unions
Remove the means-test on the older person’s grant (OPG).
The government
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Promote re-skilling of workers in declining industries.
Unions and the government
Absenteeism and incapacity
Allow for shorter working lifetimes in retirement fund design and implement absenteeism management.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Strikes
Clarify the benefits to be forfeited in the event of a dispute.
Employers and unions
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Trustees, unions and employers
Temporary and informal workers
Low-income earners
Incentives
Mass exits
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TELECOMMUNICATIONS
OVERVIEW Telecommunications is one of the fastest growing industries of South Africa’s economy, driven by rapid growth in mobile telephony and broadband connectivity.
PART 3 Chapter 10
As of 2009, there were over 46.4 million mobile users in South Africa, ranking the country 26th in terms of subscriber numbers. South African mobile companies are making inroads internationally: the company has well over 100-million subscribers in more than 20 countries in Africa, Asia and the Middle East. Fixed-line telephony is still dominated by Telkom, which is majority owned by the Department of Communications and had a monopoly on fixed-line services until 2006. The country’s second fixed-line operator, Neotel, is majority-owned by India’s Tata Communications. Importantly, due to the licensing requirements in this sector, there are relatively few operators and they are each fairly large. Companies in the telecoms industry aim to attract and retain staff from a relatively small pool of people with the required technical and operational skills available in South Africa. Different total rewards systems are used across various staffing levels to make employer offerings more attractive. Employers
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would typically offer a guaranteed package on a total cost to company basis. Members’ pensionable remuneration varies in the region of 65% to 75% of total cost to company (TCTC). While Telkom offers defined benefit (DB) options and in-fund pensions to members, the majority of companies offer defined contribution (DC) funds to members who, at retirement, have the option to buy annuities from approved insurers. A common feature of this industry is that members have investment choice, although this freedom is seldom exercised. Education features strongly in this industry and employees have embraced social media platforms as methods of member communication. Members in this industry are relatively engaged in their financial planning and often question the compulsory nature of the employer’s retirement fund, the investment objectives and the allocation towards risk benefits. That said, the majority of members still opt to remain in the default options offered by their funds.
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EMPLOYEE PROFILE The telecommunications industry is 59% male and 41% female. The telecommunications industry employs a higher proportion of younger members relative to other industries, specifically from ages 25 to 40. The ratio between male and female employees is also more equally split among younger members, with more males than females among older member groups.
Average female pensionable salaries are lower than male pensionable salaries across all age groups and the disparity between male and female salaries becomes more pronounced as members get older, as is typical in many industries.
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Female
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BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay
13.6%
Contribution to death benefits as a percentage of pensionable pay
0.9%
Contribution to disability benefits as a percentage of pensionable pay
0.7%
Contribution to retirement funding costs as a percentage of pensionable pay
0.7%
Projected replacement ratio for a member aged 25
47%
Average actual retirement age
62.1
Actual preservation rate
3.2%
Percentage of employers offering disability benefits
90%
Average insured death benefit as a multiple of pensionable pay
3.5
Percentage of employees covered by medical schemes
Not credible
Source: Member WatchTM 2012 data set and Alexander Forbes Health Client Survey 2010
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RETIREMENT ANALYSIS Although the savings rate is close to the average survey results and employers in this industry are generally efficient at cost containment, this does not mean that retiring members would be in a position to afford a comfortable retirement.
salary at retirement. Only 3% of members in this age group have a projected replacement ratio of 75% or more. This indicates that most funds in this industry are not structured in a way that would provide their members with a pension that would be comparable to their final salary before retirement.
When considering members aged between 20 and 30, 89% will end up with a replacement ratio of 60% or less of their final pensionable
As members age, the effects of previous poor choices begin to impact on projected retirement outcomes. The percentage of
members set to retire on a replacement ratio of 0%–30% grows from 1% for those younger than 30, to 48% for those in the age group 50–60. This means that almost 50% of members retiring at age 60 would have to make significant lifestyle adjustments after retirement. Those without other additional savings could potentially become destitute.
PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: TELECOMMUNICATIONS INDUSTRY 5%
13% 3%
6%
44%
45%
1%
4%
53%
42%
26% Ages 20 - 30
6%
14%
2%
Ages 30 - 40
33%
Ages 40 - 50
Replacement ratios 18%
8%
11%
11% 17% 16%
17%
48% 16%
0% - 30% 30% - 45% 45% - 60%
38%
60% - 75%
Ages 50 - 60
Ages 60 +
Source: Member WatchTM 2012 data set
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75% +
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The telecommunications industry experiences a relatively low staff turnover, especially among younger staff. Lower staff turnover results in longer average fund membership and less opportunity for members to cash in their benefits on exit. Unfortunately, when the opportunity presents itself, in almost 90% of all cases members opt to take their benefits in cash instead of preserving them. The average normal retirement age is 63.4 and the average pensionable service at retirement is 19.0 years. Almost half of employees have a pensionable service of 15 years or more at retirement. Few members take early retirement, with 66% of all members retiring at age 60 or older. The majority of payments at retirement are in the form of cash. The higher the member’s fund credit, the higher the likelihood that the member would preserve benefits. RISK BENEFIT ANALYSIS Employers offer death, disability and funeral cover to members. Benefits are generally insured with approved insurers but certain in-fund arrangements do exist. Risk benefit options are fairly inflexible and most funds follow a one-size-fits-all approach. Workrelated injuries require specific focus from most employers, especially for technicians and members who are not office-bound.
To ensure the ongoing well-being of injured employees most employers offer permanent health insurance rather than lump sum disability benefits. The average lump sum death benefit is in line with the average indicated across the retirement funds industry. The types of benefits offered and the split between approved and unapproved benefits are also closely correlated with the wider retirement fund industry. All employers offer group life assurance benefits, 90% offer disability benefits and 50% offer funeral benefits to members. HEALTHCARE ANALYSIS This industry employs a considerable number of call centre agents. These employees are often temporary and casual workers who may not have medical scheme cover as a condition of employment. However, it is essential that employees are made aware of the importance of obtaining medical scheme cover at an early age to avoid late joiner penalties. BENEFITS BAROMETER AND CONCLUSIONS The telecommunications industry is expanding rapidly and employers are keenly aware of the need to structure the rewards system to attract and retain staff. Given the large number of young workers under 45 who
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may have very young dependent children, the death benefit, housing and education needs may currently not be met. Some of the professionals may benefit from extending the retirement age. Current replacement ratios are low in this industry and savings incentives are required as well as solutions for the large numbers of temporary and informal workers. Fixed-line operators may undergo retrenchments. High salary inflation and low pensionable pay percentages are a feature of this industry. Temporary workers such as call centre staff may have no options at all. This is an industry that demands choice, and time will tell if choice will lead to healthier finances. What is the forecast for employee benefits? These practical problems can be grouped into high, medium and low priorities for action by the various stakeholders to create the Benefits Barometer. The priorities for specific employers or groups of employees may be different due to the particular circumstances and should be used as a broad guide. The rapidly changing economic and political landscape can mean that priorities may change relatively quickly.
CHAPTER 10: TRANSPORT AND TELECOMMUNICATIONS SECTOR
ME
DIU
M PRIOR ITY
HIG
H PRIORITY
W PRIORITY LO
BE
NE
ME
F ITS
DIU
BAROM
ET
M PRIOR ITY
H PRIORITY HIG NE
ME
F ITS
DIU
BAROM
ET
M PRIOR ITY
H PRIORITY HIG NE
F ITS
BAROM
ET
– – – – – –
MEDIUM PRIORITY Bricks and books Longevity Mass exits Pensionable pay Unhealthy finances
– – – –
LOW PRIORITY Absenteeism and incapacity Low-income earners Strikes
ER
W PRIORITY LO
BE
HIGH PRIORITY Choice High salary inflation Incentives Temporary and informal workers Young workers
ER
W PRIORITY LO
BE
– – – – – –
ER
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WHAT CAN BE DONE?
WHAT? WHO?
Temporary and informal workers
Create benefit schemes to cater for this group.
The government, unions and labour brokers
Young workers
Improve financial education targeted at young people.
Employers, the government and unions
Incentives
Alter the tax subsidy so that it incentivises saving for lower-income earners and find ways of extending this to non-taxpayers.
The government
Bricks and books
Expand employee benefits offering to include taxeffective housing and education benefits.
The government and employers
Allow borrowing against the retirement fund to pay for housing and education benefits.
The government and trustees
Have contingency plans in place to give appropriate counselling and advice to members when they leave.
Employers and unions
Promote re-skilling of workers in declining industries.
Unions and the government
Longevity
Increase normal retirement age in the retirement fund rules and in the conditions of employment.
Employers and trustees
Unhealthy finances
Integrate physical, mental and financial wellness initiatives.
Employers
Pensionable pay
Show projected retirement benefits in terms of rands and cents.
Trustees
Choice
Reconsider the range of choices offered and have a plan to guide members to save responsibly.
Employer, trustees and unions
High salary inflation
Encourage workers to save an increasing percentage of their earnings with each salary increase.
Trustees, unions and employers
Mass exits
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IN CLOSING
IN CLOSING The future of employee benefits does not lie in a fancy actuarial model or a tax-efficient product. It will not be found by simply throwing more money at the employee benefits problem.
Every enterprise, from the smallest business to the international conglomerate relies on the people who work for it. Each of those people has needs, hopes, fears and interests as unique as they are. If employers want to get the most out of their people by making sure they are engaged and healthy, the benefits that they offer need to address these needs, hopes, fears and interests in a holistic way. This means various benefits from various different sources need to be integrated. More than that, this integrated offering needs to be presented in such a way that employees engage with their finances in a meaningful and positive manner. The issues are complex and intertwined. The stakeholders are connected but do not always have aligned interests. Employers do not always connect the dots between physical, mental and financial health, employee engagement and profitability. And the result is that we have a system delivering a fraction of its potential.
275
The future of employee benefits does not lie in a fancy actuarial model or a taxefficient product. It will not be found by simply throwing more money at the employee benefits problem. Instead, the future of employee benefits lies in a conversation. It is a conversation between employees, their employers, their unions, the financial services industry and the government. It is a conversation that helps us truly understand the real difference between 45 and 46.
BENEFITS BAROMETER
The issues are complex and intertwined. The stakeholders are connected but do not always have aligned interests. Employers do not always connect the dots between physical, mental and financial health, employee engagement and profitability. And the result is that we have a system delivering a fraction of its potential.
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APPENDIX
APPENDIX Glossary Abbreviations References Data Thank you
277
278 285 286 293 302
APPENDIX: GLOSSARY
APPENDIX
GLOSSARY
Glossary
Absenteeism
An employee’s deliberate or habitual absence from work.
Accumulated credit
The amount that has been collected in a defined contribution (DC) retirement scheme, including contributions, expenses and investment returns at a specific point in time.
Anchoring
A concept used in behavioural finance which explains irrational market behaviour as a tendency to attach or ‘anchor’ your thoughts to a reference point, even though it may have no logical reference to the decision at hand.
Annuity
A financial product sold by financial institutions that is designed to make a stream of payments to the individual later in time. Annuities are primarily used to secure a steady cash flow for an individual during their retirement years, for the remainder of their lives.
Approved
Approved benefits are provided through scheme-owned policies and attract certain tax benefits.
Approved lump sum death benefits
A group life insurance policy owned by the scheme and in which the premiums paid by the employer are tax-deductible but the lump sum payable on death is subject to tax.
Attrition
Employee attrition is the rate at which employees in a particular industry leave their line of work.
Balance sheet
A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific time.
Bargaining council
Organisations that facilitate the negotiation process between unified employees (typically trade unions) and employers on matters such as working conditions and wages.
Behavioural finance
A field of finance that uses insights from psychology to explain decisions of investors that may not be seen as rational according to economic theories. The central issue in behavioural finance is why investors make persistent errors. Such errors affect prices and returns, thus creating market inefficiencies.
Benefit design
A decision regarding the constituents of the total rewards system.
Bond yields
Yield is a figure that shows the return an investor would earn if a bond was bought and held to maturity.
Collective bargaining
Collective bargaining is a type of negotiation used by employees to work with their employers. During a collective bargaining period, workers’ representatives approach the employer and attempt to negotiate a contract both sides can agree on. Once the contract is signed, it is kept in place for a period of time that varies according to the purpose of the agreement. The final contract is known as a collective bargaining agreement.
Co-payment
A portion of the medical cost for which the individual is responsible.
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APPENDIX: GLOSSARY
Community rating
A concept usually associated with health insurance, which requires health insurance providers to offer policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status.
Consumer price index (CPI)
Measure of living costs based on changes in retail prices. Consumer price indices are widely used to measure changes in the cost of maintaining a given standard of living.
Contribution rate
The regular payments made to the benefit scheme, by the employer, employee or both. It is calculated as a percentage of pensionable pay.
Conventional life annuity
An annuity that will provide a secure, known or variable amount of income for the remainder of the beneficiary’s life.
Correlation
Correlation explains the relationship between two variables. It shows how much of a change in one variable is explained by a change in another.
Deductible
The amount you have to pay from your own costs (out-of-pocket) for expenses before the insurance company will cover the rest (see out-of-pocket payment).
Defined benefit (DB) fund
A type of retirement fund where the final benefit is pre-determined using a mathematical formula. The benefit is based on the employee’s final salary at retirement, the number of years of membership of the retirement fund and a rate of increase.
Defined contribution (DC) fund
A type of retirement fund where the final retirement benefit the employee receives depends on all the contributions made to the fund, as well as the fund’s investment returns.
Designated service provider (DSP)
A healthcare provider or group of providers selected by the medical scheme as the preferred provider or providers for their members’ diagnosis, treatment and care for one or more prescribed minimum benefit conditions (see prescribed minimum benefits).
Disability income benefits
Benefits that will provide employees with a regular income until the soonest of death, retirement or recovery. Benefits may only be paid when a listed condition is diagnosed. The provider may impose exclusions and waiting periods.
Disposable income
The amount of money households have available for spending and saving after income tax has been deducted.
Dread disease cover
Insurance that pays a benefit on a disease diagnosis that has a significant impact on lifestyle and longevity and which incurs high costs.
Earnings per share
The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.
Employee assistance
Confidential individual assistance and support service programme designed to help employees cope with personal problems that have a negative effect on their lives, behaviour, and performance.
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APPENDIX Glossary
APPENDIX: GLOSSARY
APPENDIX
Employee benefits
Indirect and non-cash compensation paid to an employee to meet their needs. Some benefits are mandated by law (such as UIF), others vary from firm to firm or industry to industry. Benefits can include items like health insurance, life insurance, a medical scheme, paid vacation, retirement fund and so on.
Employee engagement
This is an employee’s positive or negative emotional attachment to their organisation. It influences their commitment to the organisation and its goals.
External branding
The external experience a customer, vendor or employee has with the company's brand through interaction with an organisation’s logo, website, employee uniforms, shop front, shop signage and so on.
Financial education
Financial education centres on enabling individuals to make decisions on certain personal finance areas like real estate, insurance, investing, saving, tax planning and retirement.
Financial health
A way to measure the overall financial well-being of an individual that includes the amount of assets they own and how much income they must pay out to cover regular and other expenses.
Flexible benefits
A benefit option where the beneficiary has a choice about the types or levels of benefits received. This will usually involve an option to receive a salary instead of other forms of benefits.
Garnishee order
A drastic measure for collecting debt that allows the creditor to sieze the property of the debtor before it reaches them, for example their salary.
Gross domestic product (GDP)
The monetary value of all the finished goods and services produced within a country's borders in a specific time period. GDP is usually calculated on an annual basis. It includes all private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. A country’s GDP often shows its standard of living and whether the country’s economy is growing or not.
Group risk benefits
Group risk benefits include group life insurance (death-in-service benefit), group income protection and group critical illness. They are primarily used to rehabilitate staff who are (or could be) off work on long-term sick leave because of stress, an accident or illness. They also insure employees for long-term illness or death.
Human capital
The anticipated value of future labour earnings.
Hyperbolic discounting
A term used in behavioural finance to describe the tendency human beings have to place a higher value on their immediate needs and a lower value on future benefits.
Insured death benefit
The amount on a life insurance policy or pension that is payable to the beneficiary when the insured person passes away.
Insured disability benefit
Income that an employee receives from a disability insurance policy after disablement. This is different to the income received from a workers’ compensation plan.
Insured medical benefit
A type of insurance cover that pays for medical and surgical expenses. Medical insurance can either reimburse the insured for expenses because of illness or injury or pay the care provider directly.
Glossary
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APPENDIX: GLOSSARY
Internal branding
This is a cultural shift within an organisation, where the employees become more customer and business focused. It is achieved through an organised, communication- and behaviour-driven process that leads to a desired end state.
Investment risk
The risk of investment returns being lower than anticipated. This may be due to a recession or the underperformance of the investment manager, for example.
Late joiner penalty
It is a penalty by way of additional contributions imposed on persons joining a medical scheme late in life.
Leakage
Benefit leakage from a retirement benefit scheme happens when benefits are taken as cash.
Libertarian Paternalism
A term coined by Richard Thaler and Cass Sunstein. Libertarian Paternalism is paternalism in the sense that it tries to influence choices in a way that will make choosers better off. But it is also libertarian, in that people are free to accept or reject these influences.
Lifestyle investment strategies
An asset allocation strategy used mainly in defined contribution schemes whereby a member’s investment is adjusted depending on their age and time remaining before retirement. Typically assets are switched from equities (shares) to either less risky assets or assets that are more closely aligned to the annuity they will buy at retirement.
Living annuity
A type of pension that allows the beneficiary to choose the amount of money they need as a monthly income. This choice gives more flexibility than other pensions but there is more risk. The individual can draw just the investment return earned on the fund each year or a fixed amount, subject to regulatory restrictions.
Longevity risk
Longevity risk arises due to lifetimes being longer than anticipated.
Market cycle
Trends or patterns that exist in a given market where assets and securities move from a period of increasing prices and strong performances to periods of declining prices and weak performances, and then back again to new strengths, in a cyclical manner.
Means-test
The means-test is an assessment of the income and assets of an individual or couple. People who have earnings and assets below a certain level are eligible for either full or partial government support in the form of a grant.
Medical underwriting
The process that an insurance company uses to decide, based on your medical history, whether or not to take your application for insurance, whether or not to add a waiting period for pre-existing medical conditions (if the law allows it), and how much to charge you for that insurance.
Municipal indigence line
The income level below which an individual or a household will qualify for a package of goods and services. The package includes free water and housing, among other things.
Musculoskeletal condition
A condition where a part of the musculoskeletal system is injured over time.
Normal retirement age (NRA)
The retirement age specified in the scheme rules as the official age at which employees are entitled to their retirement benefit.
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APPENDIX Glossary
APPENDIX: GLOSSARY
APPENDIX
Occupational fund
A fund organised by an employer on behalf of a group of employees to provide benefits for one or more employees. This can be established as a pension or provident fund, where the only difference between the two types of fund relates to the tax treatment of benefits on retirement.
Older person’s grant (OPG)
A monthly pension payable to men and women over the age of 60. The OPG currently stands at a monthly amount of R1 200, for adults between the ages of 60 and 74, and R1 220 for people aged 75 and over.
Organisational commitment
An attachment to an organisation, characterised by an intention to remain in it.
Out-of-pocket payment
An expense incurred and paid for by an individual related to medical costs.
Paternalism
A system where people in authority restrict and regulate the conduct of those under their control.
Pension
An annuity paid to an individual during their retirement years (see annuity).
Pension fund
A type of retirement fund where employee contributions are tax-deductible within certain limits. A maximum of one-third of the retirement benefit may be taken in cash at retirement.
Pensionable pay
Pensionable pay is defined in whatever way the employer wants to define it. Typically this is as a percentage of total cost to company or basic pay. Also known as retirement funding income, it is usually less than an employee’s total monthly salary.
Pensionable pay percentage
The percentage of taxable income (gross salary) that can be used to calculate the regular retirement fund contributions. Typically less than 100%.
Prescribed minimum benefits (PMBs)
The benefits of relevant health services prescribed by the regulations under the Medical Schemes Act, and given by state hospitals or designated service providers according to clinical protocols and criteria.
Preservation
Preservation is when the money saved for retirement through pension, provident and preservation funds remains in those funds until the person retires, or is rolled over into another similar retirement savings scheme without incurring taxes or penalties when a person changes jobs.
Productivity
An economic measure of output per unit of input. Inputs include labour and capital, while output is typically measured in revenues and other GDP components such as business inventories.
Provident fund
A type of retirement fund where the employee contributions are not tax-deductible. The entire benefit may be taken in cash at retirement.
Reference price list (RPL)
Also known as the National Health reference price list, this was a price list for health services published by the Council for Medical Schemes and was used to reimburse service providers. It is no longer in use.
Replacement ratio
The ratio of monthly income in the year after retirement to the monthly income in the year before retirement. A replacement ratio shows the relative level of income a member needs after retirement.
Glossary
282
APPENDIX: GLOSSARY
Restricted schemes
Schemes in which membership is restricted to individuals who meet certain criteria, such as being employed by a certain employer.
Retirement savings
Amount of money saved to cover the cost of your living expenses when you retire.
Risk-adjusted return
A concept that defines an investment's return by measuring how much risk is involved in producing that return.
Risk benefits
See group risk benefits.
Risk equalisation fund
Money set aside to reduce or eliminate the difference in contribution rates arising on different funds simply because of different risk profiles. Schemes with worse-than-average risk would receive funds from the risk equalisation fund that would subsidise members’ contributions to a degree.
Risk profile
An evaluation of an individual or organisation's willingness to take risks, as well as the threats to which an organisation is exposed.
Seamless preservation
A seamless preservation option refers to the arrangement where a fund member can have their retirement savings in the occupational scheme transferred to a preservation fund with minimal disruption to the investment strategy.
Short-term insurance
Short-term insurance covers things such as vehicles, property, household, personal liability, travel and business insurance.
Short time
A system of working, usually for a temporary period, when employees are required to work and be paid for fewer than their normal hours per week because of a shortage of work.
Solvency margin
The solvency margin is the amount of assets the regulators need an insurer or pension scheme to hold above their supervisory liabilities.
Spouse’s death benefit
A death benefit paid to the spouse of the deceased often as a monthly income for life.
Total cost to company (TCTC)
Total cost to company refers to the total cost that an organisation is spending on each employee including salary, bonuses, cost related to benefits and cost related to hiring and training.
Total rewards system (TRS)
A modern compensation strategy that incorporates a holistic view of employee remuneration.
Unapproved benefits
Unapproved benefits are provided through policies owned by the employer which do not attract the same tax benefits as if they were approved benefits.
Unapproved lump sum death benefits
A lump sum death benefit that is unapproved (see unapproved benefits).
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APPENDIX Glossary
APPENDIX: GLOSSARY
APPENDIX Glossary
Underwriting
See medical underwriting.
Volatility
A statistical measure of returns for a given security or market index. Volatility can either be measured by using standard deviation or variance between returns from that same security or market index. Commonly the higher the volatility, the riskier the asset.
Waiting period
In the case of occupational pension provision, the period during which an employee doesn’t meet the eligibility conditions for membership of the occupational scheme. In the case of disability benefits, the period of disability that must elapse before a benefit becomes payable also sometimes called the deferred period.
Workplace accommodation procedures
An accommodation is any change in the work environment or in the way things are customarily done that enables an individual with a disability to enjoy equal employment opportunities.
Workplace health promotion activities
Work site health focus on the prevention of illness or injury and interventions that reduce the health risk of the employee.
284
APPENDIX: LIST OF ABBREVIATIONS
LIST OF ABBREVIATIONS
APPENDIX Abbreviations
AVC
Additional voluntary contribution
CMS
Council for Medical Schemes
CPI
Consumer price inflation
COIDA
Compensation for Occupational Injury and Diseases Act
DB
Defined benefit
DC
Defined contribution
DSP
Designated service provider
FAIS
Financial Advisory and Intermediary Services Act
FSB
Financial Services Board
GDP
Gross domestic product
GEMS
Government Employees Medical Scheme
GEPF
Government Employees Pension Fund
LIMS
Low income medical scheme
NRFI
Non-retirement funding income
OPG
Older person’s grant
PMB
Prescribed minimum benefit
REF
Risk equalisation fund
RFI
Retirement funding income
RPL
Reference price list
SARB
South African Reserve Bank
TCTC
Total cost to company
UIF
Unemployment insurance fund
285
APPENDIX: REFERENCES
APPENDIX
REFERENCES
References
Academic and commercial literature are cited using footnotes. The full citations are listed by chapter below. FURTHER READING PART 1: CHAPTER 1 – THE EMPLOYEE BENEFITS SYSTEM AND ITS INTER-DEPENDENCIES Butler, MBJ & Van Zyl, CJ (2012b). Retirement Adequacy Goals for South African Households. South African Actuarial Journal, 12, 31-64 Gallup Organisation (2006), Engagement predicts earnings per share Garman, ET, Leech, IE & Grable, JE (1996). The Negative Impact of Employee Poor Personal Financial Behaviour on Employers. Financial Counselling and Planning, 7, 157-168 Hunt, S & Landry, R (2011). The Importance of Employer Branding. The Future of Work – Total Rewards Strategies and Productivity Canada’s Aging Workforce, 33-36, http://www.sunlife.ca.static/canada/Customer%20Solutions/thefutureofwork/pdf Maslow, A (1943). A Theory of Human Motivation. Psychological Review, 50(4), 370-396 O’Neill, B, Prawitz, AD, Sorhaindo, B, Kim, J & Garman, ET (2006). Changes in Health, Negative Financial Events, and Financial Distress/ Financial Well-Being for Debt Management Program Clients. Financial Counselling and Planning, 17 (2), 46-63 Towers Perrin – ISR (2006), The ISR Employee Engagement Report
PART 1: CHAPTER 2 – THE OUTCOMES OF THE EMPLOYEE BENEFITS SYSTEM Bhattacharya, U, Hackethal, A, Kaesler, S, Loos, B & Meyer, S (2012). Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study: The Review of Financial Studies, 25:4, 975-1032 Blanchett, D & Kaplan, P (2012). Alpha, Beta and now... Gamma. Morningstar Investment Management division, http://corporate.morningstar. com/ib/documents/PublishedResearch/AlphaBetaandNowGamma.pdf, 23/11/2012 Butler, MBJ & Van Zyl, CJ (2012b). Retirement Adequacy Goals for South African Households. South African Actuarial Journal, 12, 31-64 Joo, S-H & Grable, JE (2000). Improving Employee Productivity: The Role of Financial Counseling and Education. Journal of Employment Counseling, 37, 2-15 Murray, SH (Unpublished). Establishing Criteria to Assess the Effectiveness of Benefit Statements from Defined Contribution Pension Funds: An Initial Assessment. Unpublished Honours Project, University of the Witwatersrand, Johannesburg, 2012 Nash, J (2008). ANZ’s approach to responsible lending. Presented at OECD-US Treasury International Conference on Financial Education Washington DC, May 7-8 2008 National Treasury (2012b). Enabling a Better Income in Retirement. National Treasury, Pretoria National Treasury (2012c). Preservation, Portability and Governance for Retirement Funds. National Treasury, Pretoria
286
APPENDIX: REFERENCES
O’ Connell, A (Unpublished). Evaluating the effectiveness of financial education programmes. OECD Working paper presented at INFE Conference, Bali, Indonesia, 20 October 2008 OECD-US Treasury (2008). Proceedings of OECD-US Treasury International Conference on Financial Education, 1, Washington DC, May 7-8 2008 (1) Polak, M (2008). Edutainment in action. Presented at OECD-US Treasury International Conference on Financial Education, Washington DC, May 7-8 2008 Roberts, B & Struwig, J (Unpublished). Financial Literacy in South Africa: Results of an OECD/INFE pilot study. Report prepared for the Financial Services Board and Human Sciences Research Council dated 9 June 2011 Sanlam Employee Benefits (2012). Sanlam BenchmarkTM, http://www.sanlambenchmark.co.za/webadmin/include/content/Benchmark%20 Survey%202012.pdf Sykes, W, Hedges, A & Kelly, J (Unpublished). Understanding responses to pension forecasts: qualitative research, http://research.dwp.gov. uk/asd/asd5/rports2007-2008/rrep492.pdf, 20/5/2012 Townsend, C & Lui, W (2012). Is Planning Good for You? The Differential Impact of Planning on Self-Regulation. Journal of Consumer Research, http://www.jcr-admin.org
PART 2: CHAPTER 1 – UNHEALTHY FINANCES: EMPLOYEES ON THE EDGE Garman, ET, Leech, IE & Grable, JE (1996). The Negative Impact of Employee Poor Personal Financial Behaviour on Employers. Financial Counselling and Planning, 7, 157-168 Jenkins, V (2005). Educating Employers to make an Informed Choice about Financial Education. Pensions, 10, 331-335 Joo, S-H & Grable, JE (2000). Improving Employee Productivity: The Role of Financial Counseling and Education. Journal of Employment Counseling, 37, 2-15 O’Neill, B, Prawitz, AD, Sorhaindo, B, Kim, J & Garman, ET (2006). Changes in Health, Negative Financial Events, and Financial Distress/ Financial Well-Being for Debt Management Program Clients. Financial Counseling and Planning, 17 (2), 46-63 Schaitberger, B & Dell, P (2007). Financial EAP counselling can improve fiscal, physical health. Employee Benefit News, March 2007, 26
PART 2: CHAPTER 2 – LOW-INCOME EARNERS: CAN YOU EARN TOO LITTLE TO SAVE? Alexander Forbes Research & Product Development (2012). Member WatchTM Survey 2012. Unpublished document, Alexander Forbes, Johannesburg Department of Health (2012). Explanation of the Current Policy Regarding the Classification of Patients for the Determination of Fees. Republic of South Africa. Eighty20 (Unpublished). Demand side analysis of medical aid coverage and access. Report prepared for the Centre for Financial Regulation and Inclusion, May 2009
287
APPENDIX References
APPENDIX: REFERENCES
APPENDIX References
Magennis & Van Zyl (2009). Making Health Insurance Work for the Low-Income Market in South Africa – Cost Drivers and Strategies. Discussion Document Prepared for Finmark Trust, Vorna Valley McLeod, H, Mubangizi, DB, Rothberg, A & Fish, T (2003). The Impact of Prescribed Minimum Benefits on the Affordability of Contributions Moodley, K (Unpublished). Retirement Savings for Low-Income Earners: Who should be saving? Unpublished Honours Project, University of the Witwatersrand, Johannesburg, 2012 Plaks, S & Butler MBJ (2012). Access to Public Healthcare in South Africa. South African Actuarial Journal, 12,129-164 Schedule H, Uniform Patient Fee Schedule, Department of Health, 2006 Zubi, G (Unpublished). Retirement Savings Vehicles for Low-Income Earners: Options Beyond Social Security. Unpublished Honours Project, University of the Witwatersrand, Johannesburg, 2011.
PART 2: CHAPTER 3 – ABSENTEEISM AND INCAPACITY: GETTING EMPLOYEES BACK TO WORK OR COPING WITH THE FACT THAT THEY WILL NEVER RETURN Butler, MBJ & Van Zyl, CJ (2012a). Consumption Changes on Retirement for South African Households. South African Actuarial Journal, 12, 1-29 Case, A & Deaton, A (2005). Broken Down by Work and Sex: How Our Health Declines, In: Wise, DA (2005). Analyses in the Economics of Aging, 1st edition, 185-212. University of Chicago Press, Chicago, 424 pages Filer, RK & Petri, PA (1988). Job Characteristics Theory of Retirement. The Review of Economics and Statistics, 70 (1), 123-128 Goetzel, RZ & Ozminkowski, RJ (2008). The Health and Cost Benefits of Work Site Health-Promotion Programs. Annual Review of Public Health, 29, 303-323 PART 2: CHAPTER 4 – INCENTIVES: CAN THE RIGHT INCENTIVES LEAD TO THE RIGHT BEHAVIOUR? Duflo, E, Gale, W, Liebman, J, Orszag, P & Sze, E (2005). Savings Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block. NBER Working Paper 11680,National Bureau of Economic Research, Massachusetts Engen, EM, Gale, WG & Scholz, JK (1996). The Illusory Effects of Savings Incentives on Saving. Journal of Economic Perspectives, 110(4), 113-138 Gruber, J (2000). Tax Subsidies for Health Insurance: Evaluating the Costs and Benefits. NBER Working paper 7553, National Bureau of Economic Research, Massachusetts Lambert, EV, da Silva, R, Patel, D, Fatti, L, Kolbe-Alexander, T, Noach, A, Nossel, C, Derman, W & Gaziano, T (2009). Fitness-Related Activities and Medical Claims Related to Hospital Admissions. Preventing Chronic Disease: Public Health Research, Practice and Policy, 6(4), 1-9 National Treasury (2011). Conversion of Medical Deductions to Medical Tax Credits: Tax policy discussion document for public comment. National Treasury, Pretoria
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National Treasury (2012a). Strengthening Retirement Savings – An Overview of the Proposals Announced in the 2012 Budget. National Treasury, Pretoria National Treasury (2012d). Improving Tax Incentives for Retirement. National Treasury, Pretoria South African Revenue Services & National Treasury (2011). Tax Statistics. Pretoria Patel, D, Lambert, EV, da Silva, R, Greyling, M, Kolbe-Alexander, T, Noach, A, Conradie, J, Nossel, C, Borresen, J & Gaziano, T (2011). Participation in a Fitness-Related Activities of an Incentive-Based Health Promotion Program and Hospital Costs: A Retrospective Longitudinal Study. American Journal of Health Promotion, 25, 341-348 South African Reserve Bank (2012). Quarterly Bulletin, No. 265. South Africa Reserve Bank, Pretoria
PART 2: CHAPTER 5 – TEMPORARY AND INFORMAL WORKERS: THE GROUP THAT BENEFITS FORGOT Alexander Forbes Research & Product Development (2012). Member WatchTM Survey 2012. Unpublished document, Alexander Forbes, Johannesburg Bester, H, Hendrie, S, Hobden, T, Hougaard, C, Ketley, R & Musa, O (Unpublished). Old age saving among low-income South Africans. Genesis Analytics (Pty) Ltd, 2008. Peterson, MM (Unpublished). Informal Employment in South Africa: A critical assessment of its definition and measurement. Unpublished Honours Project. University of the Western Cape, 2011 Zubi, G (Unpublished). Retirement Savings Vehicles for Low Income Earners: Options Beyond Social Security. Unpublished Honours Project, University of the Witwatersrand, Johannesburg, 2011.
PART 2: CHAPTER 6 – CHOICE: WHEN MORE CAN BE LESS Bell, R, Britton, A, Brunner, E, Chandola, T, Ferrie, J, Harris, M, Head, J, Marmot, M, Mein, G & Stafford, M (2004). Work, Stress, Health – The Whitehall II Study, ed Dr Jane E Ferrie. Council of Civil Service Unions/Cabinet Office, London. Iyengar, S (2010). The Art of Choosing, Little, Brown Book Group, London Janis, IL (1972). Victims of Groupthink. Boston, Houghton Mifflin. Kahneman, D (2011). Slow Thinking, Fast Thinking. Farrar, Straus and Giroux Laibson, DI, Repetto, A & Tobacman, J (1998). Self-Control and Saving for Retirement. Brookings Papers on Economic Activity, 1998(1) 91-172. Mitchell, O & Utkus, S (2003). Lessons from Behavioural Finance for Retirement Plan Design. The Wharton Financial Institutions Center, University of Pennsylvania, Philadelphia. Thaler, RH & Sunstein, CR (2009). Nudge. Penguin Books. Old Mutual Corporate (2012). Old Mutual Retirement Monitor, http://www.oldmutual.co.za/documents/Retirement /RetirementMonitor2012.pdf.
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APPENDIX References
PWC South Africa (2012). Today’s Decisions, Tomorrow’s Rewards. Retirement Fund Strategic Matters and Remuneration Survey, Third Edition, http://www.pwc.co.za/industries/retirementfunds Sanlam Employee Benefits (2012). Sanlam BenchmarkTM, http://www.sanlambenchmark.co.za/webadmin/include/content/Benchmark%20 Survey%202012.pdf
PART 2: CHAPTER 7 – BRICKS AND BOOKS: WHEN CAN BENEFITS BE SO MUCH MORE? Fin Mark Trust (2011). Fin Scope South Africa 2011. Unpublished document, Fin Mark Trust, Vorna Valley Maslow, A (1943). A Theory of Human Motivation. Psychological Review, 50(4), 370-396 National Treasury (2012c). Preservation, Portability and Governance for Retirement Funds. National Treasury, Pretoria Smeeding, TM (1977). The Anti-Poverty Effectiveness of In-Kind Transfers. The Journal of Human Resources, 12:3 360-378 PART 2: CHAPTER 8 – STRIKES: THE PART THAT DOESN’T MAKE THE HEADLINES COSATU (Unpublished). Findings of the COSATU Workers’ Survey, 2012, http://www.cosatu.org.za/docs/reports/2012/final%20workers%20 surveys%20results%20August%202012.pdf
PART 2: CHAPTER 9 – YOUNG WORKERS: GETTING IT RIGHT FROM THE START Campbell, JY & Viciera, LM (2002). Strategic Asset Allocation. Oxford University Press Inc., New York Duflo, E & Saez, E ( 2002). Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues Choices. Journal of Economics, (85), 121 – 148 Gruber, J (Unpublished). Disability Insurance Benefit and Labour Supply. National Bureau of Economic Research, Working Paper 5866, http://citeseerx.ist.psu.edu/viewdoc/download?10.1.1.197.686.pdf, 13/11/2012 Hanchane, S, Loui, A & Touahri, D (Unpublished). Human Capital as a Risky Asset and the Effect of Uncertainty on the Decision to Invest, http://halshs.archives-ouvertes.fr/halshs-00010139/PDF/paper_hlt_dijon-1.pdf, 13/11/2012 Hershfield, HE, Goldstein, DG, Sharpe, WF, Fox, J, Yeyklis, L, Carstensen, LL & Bailenson, JN (2011). Increasing Saving Behaviour Through Age-Progressed Renderings of the Future Self. Journal of Marketing Research, XLVIII, 23 – 37 Manning, T (2011). What the Under 30 Generation wants in the Workforce: What Employers Need to Know to retain them, http://www.ncsu. edu/iei/wp-content/uploads/2011/11/workforce_terrimanning.pdf, 13/11/2012 Marston, C (2007). Motivating the “What’s in it for Me?” Workforce. Hoboken, NJ: Wiley & Sons Polak, M (2008). Edutainment in action. Presented at OECD-US Treasury International Conference on Financial Education Washington DC May 7-8 2008 Reynolds, L, Campbell Bush, E & Geist, R (2008). The Gen Y Imperative. Communication World, http://www.emerging healthleaders.ca/ resources/Reynolds-GenY.pdf, 13/11/2012
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Sassen, S (1997). Informalisation in Advanced Market Economies, http://www.ilo.int/wcmsp5/groups/public/@ed_emp/documents/publication/ wcms_123590.pdf, 13/11/2012 Towers Watson (2012). Global Workforce Study. Engagement at Risk: Driving Strong Performance in a Volatile Global Environment
PART 2: CHAPTER 10 – PENSIONABLE PAY: THE LAW OF UNINTENDED CONSEQUENCES Butler, MBJ & Van Zyl, CJ (2012b). Retirement Adequacy Goals for South African Households. South African Actuarial Journal, 12, 31-64 Fowler, P & Campisi, S (2010). Getting to the Heart of Investing: Financial Stewardship That Meets Client Objectives. The Journal of Performance Management, 15(2), 21-30 National Treasury (2012d). Improving Tax Incentives for Retirement. National Treasury, Pretoria Murray, SH (Unpublished). Establishing criteria to assess the effectiveness of benefit statements from defined contribution pension funds: an initial assessment, Unpublished Honours Project, University of the Witwatersrand, 2012
PART 2: CHAPTER 11 – HIGH SALARY INFLATION: THE DOWNSIDE TO MOVING UP IN THE WORLD O’Neill, B, Prawitz, AD, Sorhaindo, B, Kim, J & Garman, ET (2006). Changes in Health, Negative Financial Events, and Financial Distress/ Financial Well-Being for Debt Management Program Clients. Financial Counseling and Planning, 17 (2), 46-63 Thaler, RH & Benartzi, S (2004). Save More Tomorrow: Using Behavioural Economics to Improve Employee Saving. Journal of Political Economy, 112:1:2, S164-S184 PART 2: CHAPTER 13 – LONGEVITY: WHY 75 SHOULD BE THE NEW 65 Bellaby, P (2006) Can they carry on working? Later retirement, health and social inequality in an aging population International Journal of Health Sciences, 36(1), 1-23 Filer, RK & Petri, PA (1988). Job Characteristics Theory of Retirement. The Review of Economics and Statistics, 70 (1), 123-128 Lazear, EP (1979). Why is there Mandatory Retirement? Journal of the Political Economy, 87(61), 1261-1284 PART 3: CHAPTER 2 – ENERGY SECTOR Oxford Business Group (2012). The Report: South Africa 2012
PART 3: CHAPTER 3 – FISHING, FORESTRY AND AGRICULTURE SECTOR Department of Agriculture, Forestry and Fisheries (2012). The Maize Market Value Chain Profile. Pretoria. Forestry South Africa (2010). The South African Forestry and Forest Products Industry: 2009. Presentation dated September 2010
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APPENDIX: REFERENCES
APPENDIX
PART 3: CHAPTER 6 – PERSONAL SERVICES SECTOR
References
Department of Basic Education (Unpublished). Education Statistics in South Africa 2010. Report dated February 2012 Department of Health (Unpublished), Human Resources for Health South Africa: HRH Strategy for the Health Sector: 2012/2013-2016/2017. Report dated 11 October 2011 International Education Association of South Africa (Unpublished). South African Higher Education Facts and Figures. http://www.ieasa.studysa.org/resources/Study_SA/Facts_Figures_section.pdf Private Security Industry Regulatory Authority (Unpublished). Annual Report 2010/2011, http://www.psira.co.za/joomla/pdfs/PSIRA_ AR_20102011.pdf
PART 3: CHAPTER 7 – PROFESSIONAL AND BUSINESS SERVICES SECTOR Development Network Africa (Unpublished). Professional Services in South Africa, http://www.dnaeconomics.com/assets/Usegareth/SA_ Professional_Services.pdf
PART 3: CHAPTER 8 – PUBLIC SECTOR Chipkin, I & Lipietz, B (forthcoming) Transforming South Africa’s racial bureaucracy: New Public Management and public sector reform in contemporary South Africa Makgetla, N (Unpublished). Labour Relations and Transformation in the Public Service. Centre for Political Studies No 8. November 2000
PART 3: CHAPTER 9 – RETAIL, WHOLESALE AND HOSPITALITY SECTOR Federated Hospitality Association of Southern Africa (Unpublished). A consolidated industry submission to the Department of Labour. Dated 17 February 2011 PWC (2012). South African Hospitality Outlook 2012-2016: Unpacking trends. Dated July 2012.
PART 3: CHAPTER 10 – TRANSPORT AND TELECOMMUNICATIONS SECTOR CSIR (2012). Eighth Annual State of Logistics Survey for South Africa: 2011 Gearing up for change. Pretoria. Oxford Business Group (2012). The Report: South Africa 2012.
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DATA
APPENDIX Data
MEMBER WATCHTM 2012 DATA SET The Member WatchTM Survey is an annual analysis performed on the data for retirement funds that are administered by Alexander Forbes Financial Services. The analysis prepared for the Benefits Barometer used data as at 31 December 2011. The number of funds in each sector was sufficiently large to give credible results.
NUMBER OF FUNDS PER SECTOR
Where analysis was required at an industry level, there were a relatively large number of funds in every industry except for security. This suggests that comments made regarding benefit designs would need to be interpreted with caution, as the sample may not be representative of the industry.
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APPENDIX
NUMBER OF FUNDS PER INDUSTRY
Data
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NUMBER OF MEMBERS PER SECTOR
APPENDIX Data
The fund data corresponded to 597 166 lives that could be classified by sector. The large number of members in each sector suggests the data around member behaviour is likely to be relatively credible. At an industry level there were significant numbers of members in each industry, even security.
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APPENDIX
NUMBER OF MEMBERS PER INDUSTRY
Data
The data set was combined with data from funds where the industry could not be ascertained or where the client’s operations were diversified across industries. This combined data set forms the data set for the retirement funds industry. In total, this data set included information from 1 232 690 members and 1 858 funds.
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GUARDBOOK DATA SET 2011 Member education data dating from February 2006 to August 2012 was obtained from Alexander Forbes Member Education. The raw data contained the name of the client, which could be a retirement fund, union or employer, but no sector classification was provided. Sector classifications, consistent with those used in the Member WatchTM 2012 data set, were applied by hand to the data from 2011, being the most recent complete calendar year. A total of 1 137 group education seminars was recorded. Over 70% of the seminars were to employees in manufacturing, professional and business services and personal services.
PERCENTAGE OF GROUP SEMINARS PER SECTOR
4%
18% 297
APPENDIX Data
APPENDIX: DATA
APPENDIX Data
HOT TOPICS SUMMIT EMPLOYER SURVEY 2012 The Hot Topics Summit Employer Survey 2012 was a study designed to gain insight around the link between an individual’s financial state and the impact this could potentially have in the work setting. There were 42 respondents in the survey. TOTAL REWARDS PERSPECTIVE SURVEY 2010 The Total Rewards Perspective Survey 2010 was conducted by Alexander Forbes Financial Services during February and March 2010. The aim of the survey was to ascertain clients’ views of holistic benefit structuring. Responses were received via electronic survey form and face-to-face interviews. The data corresponded to 71 respondents in a variety of industries. The industry classification system used was inconsistent with that used for the Benefits Barometer and classification by hand was not possible. FUTURE OF EMPLOYEE BENEFITS MEMBER INTERVIEW SURVEY 2012 The Future of Employee Benefits Member Interviews was a pilot study to ascertain the wants and needs of members and gauge their financial health. Responses were received in writing and forms were distributed at Member Education workshops and via email in August and September 2012. Respondents were from the energy, fishing, forestry and agriculture, manufacturing, professional and business services; and transport and telecommunications sectors, with 22 respondents in total. The majority of the respondents in the survey were from the professional and business services sector due to the ease with which the interviews could be circulated and collected. FUTURE OF EMPLOYEE BENEFITS EMPLOYER ONLINE SURVEY 2012 The Alexander Forbes Employee Benefit Review Survey 2012 is an analysis based on data collected from the clients of Alexander Forbes Financial Services between 28 August and 7 September 2012. Employee benefits managers were requested to fill out an online survey form where the questions related to current and future benefit offerings. The analysis is based on 31 respondents. The distribution of funds in each sector is shown on the next page.
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NUMBER OF EMPLOYERS PER SECTOR: FUTURE OF EMPLOYEE BENEFITS EMPLOYER ONLINE SURVEY 2012
299
APPENDIX Data
APPENDIX: DATA
APPENDIX Data
ALEXANDER FORBES HEALTH CLIENT SURVEY 2010 The Alexander Forbes Health Client Survey is based on a 2010 study of 149 corporate clients of Alexander Forbes Health. Information was collected by the Alexander Forbes Health Consultants assigned to the client. The figure below shows the breakdown of clients in each sector:
NUMBER OF EMPLOYERS PER SECTOR: ALEXANDER FORBES HEALTH SURVEY 2010
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RISK BENEFITS SURVEY 2012 Risk benefits data was gathered from a variety of sources, including the Member WatchTM 2012 data set and commission records, to give a complete picture of approved and unapproved benefits. After a rigorous checking process, data was analysed for 528 clients. These were mainly in the manufacturing sector as shown below. There were only four clients in this data set in the security industry, but sample sizes were reasonably credible in all other industries.
NUMBER OF EMPLOYERS PER SECTOR
301
APPENDIX Data
APPENDIX: THANK YOU
APPENDIX
THANK YOU
Thank you
The Benefits Barometer stands as testimony to an organisation’s commitment to serve the people of South Africa. However, it is also a testament to the commitment of a group of individuals who gave their time and talents, beyond the call of duty, to contribute towards this landmark publication. To those who wrote the articles: Megan Butler (Editor)
Kristin-Ann CronjĂŠ
Lindsay Lofstedt
Myrna Sachs
John Anderson
Edward Kieswetter
Kelsy Moodley
Anthony Steen
Anne Cabot-Alletzhauser
Michael Kirkpatrick
Duane Naicker
Belinda Sullivan
Sandira Chaithram
Vickie Lange
Michael Prinsloo
Martin Teubes
Reuven Coenen
Saul Leeman
Conrad Roper
Steve Watson
Reinhild Nauhaus
Brad Oldridge
To those who supplied, analysed and managed the data: Dean Furman
Michael Kirkpatrick
Niel Gerryts
Jeshma Naidoo
To those who interviewed clients and employees: Muneeb Allen
Sheldon Lotter
Michael Prinsloo
Belinda Sullivan
Vickie Lange
Suzette Muller
Rosemary Rheeders
Martin Teubes
Saul Leeman
Derek Munton
Conrad Roper
Lindsay Lofstedt
Duane Naicker
Avishal Seeth
To those who shared their insights, checked material and encouraged us along the way: Craig Bentley
Chris Hart
Thabo Mashaba
Derek Munton
Anton Engelbrecht
David Hufton
Bonga Mokoena
Giles van Hagen
Clive Francis To those in the Research & Product Development team who proof-read: Paulo Agostinho
Mladen Colic
Clive Bydawell
Brian Hu
Monica Matthews
Kim Strydom
To those in the Communications team: Michelle Wilson
Priscilla Botha
Sharon Stephen
Byron Howes
(Art director/design)
(Senior designer)
(Designer)
(Designer)
Ziska Baumgarten
Myrsheila Wessels
Sharmaine Chanee
(Editing/proof reading)
(Project manager)
(Production)
To the clients who answered surveys and who allow us to analyse their data on an ongoing basis To the employees who shared their hopes, fears and financial secrets with us To the Alexander Forbes Legal Services team To those outside the Alexander Forbes family who contributed their thoughts and expertise because they believed in our message: Thank you!
302
HEAD OFFICE SANDTON
115 West Street, Sandown P O Box 787240, Sandton, 2146 Tel +27 (11) 269-0000 Fax +27 (11) 269-1111
www.alexanderforbes.co.za