Benefits Barometer 2014 by Alexforbes

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). Unauthorised reproduction of this book, whether for profit or otherwise, without the permission of Alexander Forbes 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 of or reliance on any information in this book is entirely at the readerâ&#x20AC;&#x2122;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 2014

TABLE OF CONTENTS Foreword by Alexander Forbes Group Chief Executive, Edward Kieswetter

Executive summary

PART 1: THE BIGGER PICTURE CHAPTER 1

WHY IT MATTERS? The role of employee benefits

CHAPTER 2 WHAT’S THE CONTEXT? The role of culture 23 CHAPTER 3

HOW HAS IT CHANGED? The role of financial services 31

CHAPTER 4 WHO’S RESPONSIBLE? The role of each stakeholder

PART 2: THE WAY FORWARD

INTRODUCTION GETTING PEOPLE TO CARE The journey to financial well-being

CHAPTER 1

THE HEART OF THE MATTER What do individuals need?

CHAPTER 2

WHAT’S THE POINT? Making targets meaningful to members

TABLE OF CONTENTS

CHAPTER 3

THE JOURNEY ON AUTOPILOT Knowing when and how to use defaults

CHAPTER 4

MIND THE GAP Aligning HR policies with employee benefits practices

CHAPTER 5

AT WHAT COST? Understanding the link between costs and value

117

CHAPTER 6

COPING WITH COMPLEXITY Balancing affordability and complexity in medical schemes

145

CHAPTER 7

STOP THE PRESSES! WE NEED TO TALK How we’ve lost the plot on member communications

155

CHAPTER 8

FAILURE TO LAUNCH Why financial education is failing and what we can do about it

171

CHAPTER 9

MEASURING SUCCESS How do we know if individuals are winning?

191

CHAPTER 10

THE JOURNEY Not just the end game

209

PART 3: THE ISSUES

237

INTRODUCTION THE ISSUES REVISITED

240

ISSUE 1

UNHEALTHY FINANCES

244

ISSUE 2

LOW-INCOME EARNERS AND INCENTIVES

245

ISSUE 3

ABSENTEEISM AND PRESENTEEISM

246

ISSUE 4 INCAPACITY

247 3

BENEFITS BAROMETER 2014

ISSUE 5

TEMPORARY WORKERS

ISSUE 6 CHOICE

249

ISSUE 7

250

BRICKS AND BOOKS AND BEYOND

ISSUE 8 STRIKES

251

ISSUE 9

YOUNG WORKERS

252

ISSUE 10

PENSIONABLE PAY

253

ISSUE 11

VARIABILITY IN SALARY INFLATION

254

ISSUE 12

MASS EXITS

255

ISSUE 13 LONGEVITY

256

ISSUE 14

INFORMAL WORKERS

257

ISSUE 15

HIGH EMPLOYEE TURNOVER

258

PART 4: SECTOR CASE STUDIES

248

259

INTRODUCTION UPDATING THE SECTOR CASE STUDIES

262

SUMMING IT ALL UP .

264

SECTOR 1

n CONSTRUCTION SECTOR

267

SECTOR 2

n ENERGY SECTOR

279

SECTOR 3

n FISHING, FORESTRY AND AGRICULTURE SECTOR

291

SECTOR 4

n MANUFACTURING SECTOR

303

SECTOR 5

n MINING SECTOR

315

SECTOR 6 nP ERSONAL SERVICES SECTOR • Health industry • Education industry • Media and marketing industry • Security industry

327 330 340 350 360

TABLE OF CONTENTS

SECTOR 7

n PROFESSIONAL AND BUSINESS SERVICES SECTOR

371

SECTOR 8

n PUBLIC SECTOR

383

SECTOR 9 nR ETAIL, WHOLESALE AND HOSPITALITY SECTOR • Retail and wholesale industry • Hospitality industry

395 398 408

SECTOR 10

419 422 432

nT RANSPORT AND TELECOMMUNICATIONS SECTOR • Transport industry • Telecommunications industry

APPENDIX 443 GLOSSARY

444

REFERENCES

455

DATA

465

THANK YOU

469

BENEFITS BAROMETER 2014

Foreword EDWARD KIESWETTER

“Societies would be better served by a policy focus on factors that have been shown to be critical to life satisfaction: relationships, community, security, and physical and mental health.” – Gus O’Donnell

This was the conclusion of former UK cabinet secretary Lord O’Donnell after releasing an exhaustive piece of research on Wellbeing and Policy from the Legatum Institute in March 2014. His observation applies equally to other spheres of life. The work that we do as a financial services industry and the role we play in employee benefits are cases in point. We have to ask ourselves the question: if the financial services industry were designed from scratch to meet what people need for their life satisfaction, what would it look like? Similarly, what would happen if we designed employee benefits this way? Last year we invited you to join us at the table to shift our approach to employee

benefits design from a fragmented to an interconnected one. All of this was based on the key objective of helping individuals to manage their physical, mental and financial health. We remain committed to this objective and believe that all stakeholders still have a critical role to play in achieving this. But often the link between individual wellbeing and what each stakeholder values is fuzzy. Why does getting it right for the individual matter? Since releasing Benefits Barometer 2013, we’ve realised from our interactions with various stakeholders that it’s easy to lose our focus on the bigger picture. It’s easy to slip into the details and focus on fixing this cog or that widget, rather than getting the whole engine to serve a higher purpose.

FOREWORD

And when we do look at the big picture, it’s often to pat ourselves on the back. After all, in 2013 the World Economic Forum ranked the South African financial system as the third most developed in the world. That’s pretty impressive.

■■ H ow has the role of stakeholders changed over time in relation to retirement funding? ■■ What is the role of each stakeholder and what benefits accrue to them if we get the system to work for individuals?

But as Lord O’Donnell’s report showed, it matters what you measure. If improving lives is what we’re after, then we might not have so much reason for celebration.

Answering these questions is not easy, but in wrestling with them we realise how significant our work in employee benefits actually is.

Take, for instance, the fact that according to the United Nations Development Programme’s latest Human Development Report, South Africa ranks 121st out of 186 countries on the basis of its score on the human development index. This is 42 spots lower than if we rank the same 186 countries on the basis of income. This shows how wide the chasm between human development and income can really be.

Having understood the bigger picture for South Africa, we turn to the bigger picture for individuals in Part 2: The way forward. Here we put forward some suggestions for potential solutions, but as we step back in among the cogs and widgets, we ask that you remember the bigger picture.

To address the concerns raised by Benefits Barometer 2013 about why this really matters, in Benefits Barometer 2014 we zoom out to look at two important aspects of the bigger picture. First, how do employee benefits fit into the bigger picture of the South African system of social protection? Second, how do they fit into the bigger picture of an individual South African life? In Part 1: The bigger picture, we will paint the bigger picture for South Africa as a whole. Painting this picture requires wrestling with some key questions: ■■ Where do employee benefits fit into the broader South African economy? ■■ How does South African culture affect how we spend, save and insure?

Benefits Barometer 2013 sought to understand why South African employee benefits were not fulfilling their potential and discovered that the core reason was the fragmentation between stakeholders. Benefits Barometer 2014 seeks practical ways to address the fragmentation in employee benefits in pursuit of individual financial health. While these are just a first foray into solving these issues, we believe that it is important to start testing the boundaries and challenging conventions. We invite you to take this journey with us – do you think these solutions will work? Do they go too far, or not far enough? Improving outcomes for individuals requires improvements within the employee benefits framework and beyond. What this means is that we have to acknowledge that simply preparing an individual for retirement is

not enough. We need to engage with their entire journey and help them to achieve financial health both today and in the future. We propose a number of solutions across the chain of employee benefits design and implementation. Critically, we need to constantly weigh up the roles of design and human behaviour, as getting either of these wrong can completely upset the process. We can’t ignore either of them. So, in Part 2: The way forward, we lay out our solutions according to a threestep process: design, implementation and monitoring. Each of these processes is critical and each is iterative. What we present here is not the end of this exploration, but the beginning. We hope that our suggestions start a chain reaction. Question them, analyse them, use them. But most importantly, measure them. A key insight from our work for Benefits Barometer 2014 is the critical nature of that final step – we have to monitor what we do; we have to measure our success. As we seek to work together to find solutions for employee benefits, we seek to improve the lives of individuals, expanding their access to things which will increase their life satisfaction. We need to improve our results in each part of the puzzle, but we also need to remember that getting each piece right matters only to the extent that it contributes to the bigger picture. Last year we invited you to the table. This year we invite you to tuck into a platter of suggestions. Tell us what you think: good, bad, needs more salt?

BENEFITS BAROMETER 2014

Executive summary

PART 1

THE BIGGER PICTURE

Employee benefits matter. They matter because when a breadwinner is unable to earn an income, these benefits may be the only financial buffer that stands between a household and destitution. And that matters for all South Africans. Benefits Barometer 2013 analysed why the current system is failing and identified that the key issue is the fragmentation of an interconnected system. To fix this, all stakeholders need to work together â&#x20AC;&#x201C; employers, the government, the financial services industry and, most importantly, members and their dependants, who are primarily represented by trustees and unions. Since then, we have realised that many stakeholders donâ&#x20AC;&#x2122;t fully understand the implications of the failing system. They donâ&#x20AC;&#x2122;t see the bigger picture. We need to build a better case for why they should care.

In this section, we will paint the bigger picture. Why it matters? Employee benefits are the primary financial source of social protection for working South Africans. As such, getting employee benefits right is an important component in getting social protection right. When done correctly, social protection allows for a more inclusive growth path that involves full participation from all South Africans. What is the context? Many South Africans rely on their families and communities to protect them from shocks. These informal, often non-financial arrangements sit outside the formal social protection system and are often ignored by stakeholders in this system. To properly understand the importance of social protection, which includes employee benefits, we need to have a

EXECUTIVE SUMMARY

wider understanding of how South African households spend, save and insure against the risks they face. How has it changed? In the shift from defined benefit (DB) to defined contribution (DC) funds, many of the risks associated with retirement funding have shifted from the employers to fund members. More importantly, with employers stepping away, financial services companies now assume a more central role. Financial services companies need to focus on how they can help fund members and their fiduciaries to shoulder

PART 2

the additional burdens they now face. Perhaps we need to consider new ways of approaching retirement funding, one of which is based on the principles used in a DB fund. Who’s responsible? Both social protection and employee benefits are subject to the risk of fragmentation if key stakeholders fail to engage. Returning our focus to employee benefits specifically, we examine the stakes held by the government, employers, custodians for households (trustees and unions) and the financial services industry. Each has a role to play and benefits to derive in making the system work.

THE WAY FORWARD Getting people to care The great challenge that surrounds retirement funds is that for the bulk of an individual’s working life, the average individual has little interest in taking on the complex task of thinking through their retirement funding dilemma. What is uppermost in their minds – and this is true for families in all income brackets – is how to solve that perennial financial conundrum: finding the right balance between meeting their consumption needs of today; building the appropriate cushions to cope with financial shocks in the future (including retirement); and somehow managing to improve their standard of living. To get South African workers to take their retirement plans seriously, it’s as important

that we help individuals maintain a stable financial journey through life as it is to secure stability at the end. This requires improvements within the employee benefits framework and beyond. Starting with the employee benefits framework, we propose that stakeholders examine each of the three key steps: design, implementation and monitoring. We need to take an iterative approach to this process, constantly seeking to improve our ability to achieve meaningful outcomes for individuals. Having made our suggestions for employee benefits within the current context, we then turn to the journey for the individual and we dare to dream what that journey could look like in the future.

BENEFITS BAROMETER 2014

DESIGN The heart of the matter Benefit design is often a combination of legacy issues and market conventions. As such, it may well have little relevance to members in a particular fund. But by prioritising meeting individual needs within a group scheme, employers together with their funds can make a significant difference in employeesâ&#x20AC;&#x2122; lives. This requires having a sound understanding of what members need, how these need change over their life cycle and the cost implications. Whatâ&#x20AC;&#x2122;s the point? Funds need to have targets. By having targets, members can find out at any time the extent to which they are adequately covered for retirement and whether shortfalls exist. But what the target should be is a complex issue, as needs vary widely. More importantly, savings targets donâ&#x20AC;&#x2122;t address the quality of protection individuals have in the course of their financial journey. In an ideal world, we need to design a multi-tiered target framework.

The journey on autopilot Defaults have become increasingly popular, especially among regulators, who have realised that they can counteract behavioural biases to improve both individual and societal outcomes. However, to use defaults effectively, we need to understand the conditions in which they are appropriate and what constitutes a good default. Mind the gap To address the fragmentation we identified in Benefits Barometer 2013, one of the key steps is to examine the links between employer policies, legislation and insurance policies. Gaps can arise between disability, incapacity and sick-leave policies, but can also arise elsewhere. Closing these gaps can be costly, but leaving them unaddressed could have severe consequences for individuals.

IMPLEMENTATION At what cost? Costs are an increasingly contentious concern for clients of the financial services industry, especially given the effects they can have over the long term. Knowing whether costs are reasonable requires an understanding of what types of services add value and what types can destroy value. It also requires understanding of how different pricing structures will affect individuals in different circumstances and the range of ways that the effects of costs can be measured. We

propose a new model for both consulting and asset management costs to address the upside-down value chain. Coping with the complexity Rising medical costs have led to schemes implementing a range of measures to control these costs. Unfortunately, this increases complexity for the individual and often results in higher out-of-pocket expenses due to difficulties in understanding how their medical scheme covers expenses. While communication and education could

EXECUTIVE SUMMARY

offer partial solutions, technology also makes it possible for experts to absorb the management of that complexity. Stop the presses! We need to talk Despite the plethora of research on how good communication can help individuals make better choices, most employee benefits communications follow a tick-box approach designed to appease regulators or protect fiduciaries. By embracing research on how individuals respond to various forms of communication, we can design new material that can actually help members. We look at two specific applications: investment choice and projection statements.

Failure to launch Conventional approaches to financial education are failing, because the focus has been more on teaching fundamentals and less on behavioural issues that affect individualsâ&#x20AC;&#x2122; resistance to learning or change. New research is helping us to identify more effective, if somewhat unconventional, strategies. The employer has a key role to play in facilitating this, but we need to demonstrate why their investment will meet its objective and provide a financial benefit. We also provide suggestions on what to do when the employer is not an appropriate conduit.

MONITORING Measuring success Whatever is done for individuals, in both design and implementation, needs to contribute to better outcomes. Knowing whether the situation for individuals has

improved requires developing and using our ability to measure what is working and what isnâ&#x20AC;&#x2122;t. An expanding range of tools allows us to monitor retirement funds, investment strategies and medical aid selections.

THE JOURNEY â&#x20AC;&#x201C; NOT JUST THE END GAME Many employed South Africans face significant financial challenges but will never be in a position to engage with a financial planner. We explore how we could address these challenges by taking

advantage of emerging research on decision making and financial literacy. We address the issue of how we can get individuals to engage and what will incentivise them to care.

BENEFITS BAROMETER 2014

PART 3

THE ISSUES

In Benefits Barometer 2013 we identified that most people were making it to retirement with insufficient savings. To untangle why, we examined different sectors and found that different issues drive dynamics in different sectors. Issues which might bring one sector to its knees

PART 4

SECTOR CASE STUDIES

The sector case studies provide an update on last year’s numbers and barometers. To start with, we provide basic statistics on each sector, a profile of their member base and an overview of the benefit structures they provide to their members. We identify how each sector is performing in meeting both benefit and savings requirements for its members and what issues may be evolving that might have a specific impact

were totally trivial in another. In Part 3: The issues we provide introductory summaries of last year’s issues chapters and salient updates on any changes. We also change the categories slightly and introduce high employee turnover as an additional issue.

on this member base. Finally we provide an up-to-date reading on each sector’s benefits barometer, which identifies those issues that might pose potential problems for that sector. For each sector we have also included a solution that could either counter some of the issues faced by that sector, or show how the ideas presented in Part 2: The way forward, may apply.

PART 1: THE BIGGER PICTURE

PART 1 THE BIGGER PICTURE

CHAPTER 1

WHY IT MATTERS? The role of employee benefits

CHAPTER 2 WHAT’S THE CONTEXT? The role of culture

CHAPTER 3 HOW HAS IT CHANGED? The role of financial services

CHAPTER 4

WHO’S RESPONSIBLE? The role of each stakeholder

PART 1: THE BIGGER PICTURE

SOCIAL PROTECTION Government

Directly provides social floor

Indirectly manages private sector

• Social grants • Public services • Social wage (in-kind benefits)

• Governance • Incentives (taxes and subsidies)

Society Families and community support

Personal journey to financial, physical and mental well-being

PART 1: THE BIGGER PICTURE

Employers, unions and financial services companies bridge the gap between social protection and employee benefits.

Employee benefits

PART 1: THE BIGGER PICTURE

As we shift our thoughts to the way forward, we hope that you will keep the bigger picture in mind and remember the key role you can play for this country.

PART 1: THE BIGGER PICTURE

WHY IT MATTERS? The role of employee benefits

PART 1 Chapter 1

WHY IT MATTERS?

Summary Social protection is concerned with managing and overcoming situations that can adversely affect an individual’s well-being. Employee benefits are the primary financial source of social protection for working South Africans. As such, getting employee benefits right is an important component in getting social protection right. When done correctly, social protection allows for a more inclusive growth path that involves full participation from all South Africans.

Good social protection is crucial for an economy.

Employee benefits matter. They matter because in the periods when a breadwinner is unable to earn an income, they may be the only financial buffer that stands between a household and destitution. And that matters for South Africa. Benefits Barometer 2013 analysed why the current system is failing and identified that the key issue is the fragmentation of an interconnected system. To fix this, all stakeholders need to work together –

employers, the government, the financial services industry and, most importantly, fund members and their dependants, who are primarily represented by trustees and unions. Since then, we have realised that many stakeholders don’t grasp the implications of the system failing. They don’t see the bigger picture. So, in this and the next three chapters, we will lay out exactly where employee benefits fit in for all South Africans. We will paint you the bigger picture.

PART 1

WHY IT MATTERS?

Chapter 1

HOW EMPLOYEE BENEFITS FIT INTO SOCIAL PROTECTION In Benefits Barometer 2013, we identified four components of employee benefits: healthcare benefits, risk benefits, retirement funding and financial education. We will return to financial education in a later section as it influences the decision making behind the other three, but for the purposes of this section, we will focus on the first three. They all share the common characteristic of providing for a household in some way when the breadwinner can’t as a result of sickness, death, disability or old age. By providing for these emotional and financial shocks, these benefits act as social protection. Social protection exists to protect households from such shocks and provide a social floor. This means that employee benefits form part of the social protection structure for South Africa.

Definition A social floor is the first level of social protection in a national social protection system. It is a basic set of rights derived from the constitution. Good social protection is crucial for an economy. By protecting households from shocks and providing a social floor, it helps to prevent households from falling into poverty, reduces the duration of poverty, assists with redistribution to make a society more equal, and facilitates a pro-poor growth path1.

have to find a more inclusive growth path. The role of social protection in supporting this is clearly acknowledged in the National Development Plan (NDP): “Social protection is at the heart of reducing poverty and inequality. It combines the objectives of alleviating and preventing poverty and protecting individuals against social risks, as well as empowering individuals to seize opportunities for decent employment and entrepreneurship. It should enable a degree of security in normal times and serve as a safety net in times of crisis2”.

This goes to the root of South Africa’s development conundrum. We cannot continue to grow with such deep schisms dividing the haves from the have-nots. We

THE MAIN PILLARS OF SOCIAL PROTECTION

Social protection Government Directly provides social floor Social grants Public services Social wage (in-kind benefits)

1 Aldermann & Yemtsov (2012) 2 National Planning Commission (2012)

Indirectly works through private sector employee benefits Provides incentives, governance, regulatory framework

Society Families and communities provide for social capital and intra-household transfers

PART 1 Chapter 1

WHY IT MATTERS?

The provision of social protection can come from a variety of sources, including the government, the private sector or through families and communities.

employee benefits structure, they have the ability to protect that standard of living. Employee benefits provide for a rising floor for households.

The government takes responsibility for providing the social floor, or minimum level of protection. In South Africa, the government provides this through a combination of social grants and in-kind benefits, such as free or subsidised healthcare and education.

The NDP identifies the need for the private sector to transition individuals from being dependent on the government to relying on their own resources, both when their income is secure and when it is threatened. The government continues to play a role, but instead of being the direct provider of protection, it becomes the guardian of the framework. It provides incentives and ensures that the system, and what it offers individuals, is sound.

The challenge is that the government can only take responsibility, and only intends to take responsibility, for providing the minimum. However, once individuals have access to formal employment and a decent income, they are likely to maintain a higher standard of living and through the

The private sector intermediates social protection for working South Africans employed in the formal sector, in the form

of employee benefits. The government sets the objectives and the private sector identifies the appropriate mechanisms to achieve them. In Part 1, Chapter 3 we will look at how that intermediation works, how it has changed over time and the potential implications. Communities and families also play a crucial role in providing social protection in South Africa. Other stakeholders, including policy makers and financial services companies, have often been slow to recognise the rationality of non-financial strategies for social protection. In Part 1, Chapter 2 we will explore the role that these strategies play and the dangers of undermining one form of social protection in favour of another.

THE FINANCIAL PROVISION OF SOCIAL PROTECTION

The government provides for the minimum level of protection. 20

Employee benefits provide for a rising floor.

PART 1

WHY IT MATTERS?

Getting employee benefits right isn’t about being nice to employees, it’s about safeguarding the future of our society.

The purposes of social protection for the working class

Employee benefits are often the only form of financial savings or safety net for many working South Africans, beyond the bare minimum provided by the government. Because they are not the poorest of the poor does not mean that providing for their social protection has any less of a role to play in developing a more inclusive growth path for South Africa. Research3 shows that social protection for the middle class is also good for the poor in the long term. This is because by providing an income floor, social protection allows households to take greater risks, such as investing in human capital – for instance, through education – and making good decisions to improve their future income4. This means that we have to get social protection right for individuals. And for working households, this means getting employee benefits right. If it isn’t right, then it won’t alleviate risk; if it doesn’t alleviate risk, it won’t help households to boost their income over time; and if it doesn’t do this, it won’t lead to more inclusive growth. Social protection should improve the distribution of growth over time, and if it does not, we need to question its design.

3 Barrett, Carter & Ikegami (2008) 4 Aldermann & Yemtsov (2012) 5 National Planning Commission (2012)

Chapter 1

Social protection also has ancillary benefits. For one, employee benefits should progressively assist in relieving the burden on the government. The NDP’s recommendations rely on a smooth transition from education to employment that progressively reduces reliance on the government. This only works if households shift from depending on the government when their income is threatened to depending on private protection, primarily provided through employee benefits. If this doesn’t happen, the NDP argues that the social grant system will become unsustainable5. Currently, poverty in South Africa is frequently linked to disability and age. If employment doesn’t offer a meaningful way out of these traps through employee benefits, households will continue to place a strain on the government. Employee benefits also pool savings for capital market development and investment – though this is not the primary purpose of any form of social protection. The challenge is to get these savings to serve the interests of society in the long term rather than just maximising short-term returns.

PART 1 Chapter 1

WHY IT MATTERS?

Conclusion The implications for employee benefits

By placing employee benefits into the wider context of social protection, it becomes apparent that this isn’t simply about maximising replacement ratios, death cover multiples or medical cover. It’s about something far more holistic and inclusive. It’s about an individual’s physical, mental and financial health. Essentially, the role of a retirement fund is to: ■■ Provide an income in retirement. ■■ Provide benefits to dependants or members should a member’s income generation cease. ■■ Invest assets in a way to ensure that the member can retire in a world where the quality of life and quality of the environment are worth something. While these points link retirement funds directly to the social protections envisaged in the constitution and the NDP, they play an even bigger role. Social protection exists to look after the household, and by doing so, serves its purpose for society. Acknowledging this should profoundly change how we view employee benefits. Getting employee benefits right isn’t about being nice to employees, it’s about safeguarding the future of our society. The challenge is that employee benefits is only one element of social protection. At present, South Africa’s system is not comprehensive and while there are initiatives under way at a government and society level to improve social protection, they are likely to take some time. In the interim, much can still be done to improve the employee benefits component, and in Part 2: The way forward we will explore some of the options that do exist. In designing these solutions, we always need to keep in mind the broader fabric of social protection, ensuring that employee benefits add to and don’t subtract from the protection households have. We also need to keep in mind protections that are provided by the other elements of the system – the government and broader society, through families and communities. In doing this, the private sector – employers and financial services companies – can make a meaningful contribution to improving protection for households. What we need to be wary of are changes that improve employee benefit outcomes – replacement ratios or death cover multiples – at the cost of other forms of social protection. We can’t neglect the bigger picture.

PART 1: THE BIGGER PICTURE

WHAT’S THE CONTEXT? The role of culture

PART 1 Chapter 2

WHATâ&#x20AC;&#x2122;S THE CONTEXT?

Summary Many South Africans rely on their families and communities to provide protection against emotional and economic shocks. These informal, often non-financial arrangements are often ignored by other stakeholders in the social protection system. To have a proper understanding of how social protection (including employee benefits) fits, we need to have a wider understanding of how South African households spend, save and insure against risks.

CULTURE CANNOT BE IGNORED In South Africa, it is not only the private and public sectors that play pivotal roles in social protection, it is also families and communities. This is typical in both emerging markets and African countries, but plays a far more muted role in developed markets. According to the World Economic Forumâ&#x20AC;&#x2122;s latest Global Competitiveness Report, South Africa has the worldâ&#x20AC;&#x2122;s third most developed financial market1. While this is an accomplishment, it also raises significant risks for the country because

1 World Economic Forum (2013)

what we may end up doing is imposing a developed world model of savings behaviour onto an emerging market, where a large contingent of the population uses collective savings structures. In addition to being an emerging market, South Africa is challenged by inequality, which means a single approach to savings and insurance is even less likely to apply to all. Different segments of income earners may use different mechanisms for savings and protection. This has implications for

social protection, and employee benefits in particular. Not everyone has the same goals and priorities. To make the social protection system work, we need to understand how South Africans solve financial problems in practice. The culture of South Africans influences the choice of financial products that they take up, but it also constrains their ability to participate in some formal arrangements into which policy makers and employers may be pushing them.

PART 1

WHATâ&#x20AC;&#x2122;S THE CONTEXT?

Chapter 2

A SPENDING CULTURE? In their report titled 4 Million and Rising, the Unilever Institute of Strategic Marketing found that the black middle class population in South Africa has grown rapidly over a period of eight years, from around 1.7 million people in 2004 to around 4 million people in 2012. The black middle class is characterised more by the fact that they are driving better cars and using more technology than by where they live2. Collectively, this population has a spending power of around R400 billion a year3. The South African Reserve Bank reports that the ratio of household debt to disposable income at the end of 2013

stood at just over 74%4, a figure which most economists would consider high. Given the legacy of our country, should we be worried? During Apartheid, many millions of black South Africans were denied access to formal investment and credit products5. Once such bans were lifted, the number of new loan recipients surged. Many were accessing longer-term loans to finance houses since there was an enormous pent-up demand for housing after the 1994 elections. By 2012, around 65% of the black middle class population in South Africa owned their own homes6.

Often, concerns are highest around unsecured debt, but the latest Finscope numbers7 show that 36% is spent on housing and another 11% on education, with only 19% spent on bills, monthly fees or unexpected expenses. The high debt ratios we are seeing may be a result of the increase in lending following the lifting of Apartheid restrictions. As people pay off these loans, we may well see a decline in the debt to disposable income ratio.

SOUTH AFRICAN DEBT PATTERNS

36% Spending on housing

19% Spending on bills, monthly fees or unexpected expenses

11% Spending on education

Source: Finmark Trust (2013) 2 UCT Unilever Institute (2005) 3 UCT Unilever Institute (2013) 4 South African Reserve Bank (2014) 5 Ntoyiwa (2012) 6 Ibid 7 Finmark Trust (2013)

PART 1 Chapter 2

WHAT’S THE CONTEXT?

A SAVINGS CULTURE? Evidence suggests that South Africans do save, but it may not be in the way other stakeholders want or expect.

Conventional aggregate measures of savings would lead us to conclude that South Africans do not save. Perhaps we need a broader definition of this concept to understand the dynamics at play. Evidence suggests that South Africans do save, but their ways of doing so, and their priorities, may not be what other stakeholders want or expect. As a result, their savings may not be formally measured.

Stokvels – a multi-million rand industry

It is widely known that there is an informal savings sector in our country which caters to approximately 33% of the population8. Previously conceived notions about the lack of saving among low-income earners have been refuted with evidence from the Finmark Trust, which showed that 48% of individuals in LSM 5–6 who have an average monthly income of R4 497.60, are using stokvels for short- and medium-term savings. A stokvel is a group savings scheme providing for the mutual financial wellbeing of participants, as well as social and entertainment needs9. Individuals within the same community or family voluntarily make contributions on a regular basis which are used for an agreed purpose. Each member of the group has access to the funds whenever a need for it arises, as long as they keep up to date with their contributions. Despite being classified as a type of informal savings vehicle, stokvels are relatively formally structured in their approach. They are governed by a constitution10 and it is not uncommon for stokvels to elect a treasurer11. Most stokvels will deposit their contributions into bank accounts12.

8 Finmark Trust (2013) 9 Ntoyiwa (2012) 10 Mphahlele (2011) 11 Zungu (2012) 12 Ntoyiwa (2012) 13 Part 3, Issue 7: Bricks and books and beyond 14 Holzmann, Mulay & Perotti (2013)

This illustrates how many South Africans solve their financial problems via collective, rather than individualised, mechanisms.

Alternatives to retirement savings

The financial services industry often places greater emphasis on retirement outcomes and having sufficient savings and insurance for emergencies. However, as we raised in Benefits Barometer 201313, individuals often have other financial priorities. What is particularly significant with housing and education is that both act as partial substitutes for retirement savings and other forms of social protection. In the case of education, the World Bank recognises that: “If in a particular context there is a wellestablished tradition according to which adult children support their parents in their old age, it may make perfect sense for a person to use her savings to finance her children’s education rather than investing it in financial products14”. In South Africa, the Old Mutual Savings and Investment Monitor consistently reports that a large proportion of South Africans expect to be supported by their children in retirement – the latest figure from July 2013 being 38%. In the same survey, they found that 45% of 18- to 30-year-olds are planning to support their parents when they are old, with another 16% expecting it, but not planning for it. This is normally seen as negative because it indicates dependency, but given the World Bank’s comment, it doesn’t have to be. Concerns around dependency on family are typical of a Western mindset which focuses on independence, but may not be relevant in cultural contexts with higher levels of social capital.

PART 1

WHAT’S THE CONTEXT?

Chapter 2

FINANCIAL SUPPORT IN RETIREMENT

38% of South Africans expect their children to support them in retirement.

45%

16%

of 18- to 30-year-olds plan to support their parents in retirement.

of 18- to 30-year-olds expect to support their parents but are not planning for it.

Source: Old Mutual (2013)

Furthermore, even among the South African poor, a child’s education is often seen as a key avenue for escaping poverty, with tertiary education being one of the primary reasons for long-term savings among this group15. In the case of housing, the Organisation for Economic Co-operation and Development’s work shows that owning a house in retirement often reduces the incidence and severity of old-age poverty16. Housing is not only an asset; it can also provide an

15 Roth, Rusconi & Shand (2007) 16 OECD (2013)

income, or relieve the amount of income an individual needs. According to the latest Income and Expenditure Survey, imputed rent accounts for 20.5% of the average household’s expenditure – this is an estimate of the rent an owner would need to pay to occupy (or rent) an equivalent home. This suggests that owning a house, particularly when it is mortgage-free, can account for a significant reduction in the amount of income required at retirement. While the government is working to address education and housing, these

interventions are aimed at the poorest and don’t represent a comprehensive solution for all. For households aspiring to a higher standard of living, they need effective mechanisms that facilitate their full set of priorities.

PART 1 Chapter 2

WHAT’S THE CONTEXT?

THE CHOICE: SAVING OR TAKING CARE OF DEPENDANTS?

Funerals

Illness

Food

Housing

Education

±20 dependants

An employed individual’s capacity to save is challenged by the demands that their family may have on their income. 28

PART 1

WHAT’S THE CONTEXT?

Chapter 2

AN INSURANCE CULTURE? As a result of being financially responsible for extended families, employed individuals are often left with little disposable cash for voluntary savings.

Shocks are particularly detrimental to the poor, as they have few resources left to absorb these shocks17. Medical emergencies, funerals and crime are the key shocks that can set the poor back18. In preparing for these shocks, the poor may have some access to formal products – for instance, if they work in the formal sector, they may have funeral cover through their employer. But the poor often use social ties to manage risk and vulnerability19. This is particularly important given the complexity of South African households. A working household earning under R60 000 per person per year may well support two or three others outside their household. In extreme cases, a worker can have more than twenty dependants, including their own household. Often a household like this ends up with a ‘stationary demographic structure’ in which old people, as they die, are replaced by a new generation of old people, while young people at the bottom of the range shift up to make way for children20. A household then internalises many of the insurance activities which would require saving or formal insurance. Further, the close relationships between the individuals concerned may also mean that the quality and sustainability of the protection is high. This has significant implications for the employed members of a household or

17 Mullainathan & Shafir (2013) 18 Collins, Morduch & Ruthven (2009) 19 Woolcock & Narayan (2000) 20 Deaton (1999)

community. Individuals who have stable employment are obliged to give back to their family or those who raised and supported them. They might be required to cover the cost of housing, food, healthcare and education for younger siblings, while balancing their own cost of living. Furthermore, consider the impact of having a funeral for a family member: funerals can cost up to R50 000 and the burden of covering the cost of a funeral often falls to the employed members of the family. This cost may not relate to immediate family only, but to the extended family as well. Realising how important this can be to employees, many employers offer funeral benefits, even though they are an unapproved benefit for tax purposes. But to provide a benefit that is considered truly valuable in a typical South African household, employers need to consider funeral insurance that covers the death of a member of the extended family of the policyholder. As a result of all these wealth transfers, employed individuals are often left with little disposable cash for voluntary savings. On the one hand, compulsory fund membership of an occupational retirement fund may ensure these individuals do not end up without any resources in retirement. On the other hand, their capacity to save is challenged by the demands that their family may have on their income.

PART 1 Chapter 2

WHAT’S THE CONTEXT?

Conclusion We decry the shabby state of savings in South Africa. We marvel at the levels of underinsurance of the households who have employed family members. But is this really the whole truth? What we have argued here is that how South Africans spend, save and insure is much more complicated than macro-figures make us think. And we need to engage with that. We need to engage with the reality of our country and design our social protection and employee benefits accordingly. While policy makers are currently focused on trying to improve long-term savings, they should be more cognisant of the relative importance of long-term savings in the lives of ordinary South Africans. Mortality estimates show that around half of South Africans currently aged 15 will make it to retirement age21; informal conversations with ordinary South Africans indicate that many believe they will not make it. These people may not see the value in sacrificing current consumption for a future that may not materialise. That’s why in Part 2: The way forward we argue that we have to engage with an individual’s entire journey and all the trade-offs along the way. One of the great ironies of the financial services industry is its tendency to focus on those who need its assistance the least. It is the groups that face real trade-offs that most require the minds of the financial services industry to help them. We cannot ignore the complexity that individuals experience in making financial decisions, particularly given the financial stress that so many South Africans face. By helping individuals to make sensible trade-offs, all the stakeholders can better serve this country and its citizens.

21 O’ Malley, Dorrington, Jurisich, Valentini, Cohen & Ross (2005)

PART 1: THE BIGGER PICTURE

HOW HAS IT CHANGED? The role of financial services

PART 1 Chapter 3

HOW HAS IT CHANGED?

Summary In the shift from defined benefit (DB) to defined contribution (DC) funds, many of the risks associated with retirement funding and medical cover have shifted from the shoulders of employers to fund members. More importantly, with employers stepping away, financial services companies now assume a more central role. Perhaps we need to consider new ways of approaching retirement funding, one of which is based on the principles used in a DB fund.

Given the evolving demands of the changing world of work, DB schemes may no longer be viable. That leaves us with the challenge of refining the newer DC model.

In Benefits Barometer 2013 our primary focus was to assess how well members of South African retirement funds were faring, given the dramatic structural shift from the defined benefits (DB) to defined contribution (DC) model. Our answer was: not very well. DB funds worked when the population they served was substantially more uniform than it is today and only when individuals had long service periods. A key issue was that DB funds and postretirement medical aid benefits were reflected on the employerâ&#x20AC;&#x2122;s balance sheet. With rising costs, reducing interest rates

and volatility of funding levels, many employers simply did not have the appetite to keep this level of risk on their books. They also had to maintain liquidity for paying lump sums on death or withdrawal. And if employees lived too long, employers had to find a way to fund this. Clearly the model had its flaws. Given the evolving demands of the changing world of work, DB schemes may no longer be viable. That leaves us with the challenge of refining the newer DC model so that it better serves the needs of both the current and future working population of South Africa.

PART 1

HOW HAS IT CHANGED?

Chapter 3

BENEFIT STRUCTURES OF SA RETIREMENT FUNDS

77% Defined contribution funds 13%

Defined benefit funds

Unknown

Hybrid funds

Notes: These figures are based on information received from the Financial Services Board. Funds have been excluded if they were: i) pending transfers (either partial or full) ii) liquidated (either finalised or still in the process of liquidating) iii) had a cancelled registration (irrespective of reason therefor iv) under curatorship. Source: Financial Services Board (2013)

CHANGING THE GUARD: WHO ARE THE NEW INTERMEDIARIES? One of the most neglected aspects in the conversion from DB to DC funds is that it subtly changed the intermediation of retirement funding1. Even though financial services have always been a key part of retirement funding, the shift to DC funds moved the bulk of the intermediation from employers to financial services companies. Under older models, responsibility for an employeeâ&#x20AC;&#x2122;s welfare all fell to the employer. Welfare included retirement savings, risk benefits and pre- and post-retirement medical aid (the most valuable retirement benefit of all, given the constantly rising

1 Sexauer & Siegel (2013)

cost of medical care). In the event of any shortfall, the employer would meet the additional costs. People knew what income to expect in retirement, and as long as the company survived and they remained with the same employer until retirement, that is what they would get. It was a relatively paternalistic system with the power and responsibility resting with the employer. With the DC model, power is channelled through trustees or management committees within umbrella funds. More often than not these fiduciaries are guided by the financial services industry. Trustees

make many of the decisions relating to fund and benefit structures, but some critical ones rest with the employees themselves, again being guided by the industry. The crux of the problem is that the employer no longer has a full view of what is being presented to their employees, creating a significant human resources management problem. Instead, they are faced with multiple service providers and sets of fiduciaries all trying to address pieces of the problem. Integrating this into a cohesive picture of their employeesâ&#x20AC;&#x2122; financial, physical and mental health is extremely challenging.

PART 1 Chapter 3

HOW HAS IT CHANGED?

For example, the provision of a medical scheme, along with related HR decisions such as sick leave, remains within the ambit of the employer, at least while the individual is still employed. But setting the risk benefit parameters typically falls to the trustees or management committee members of the retirement fund. The potential for both gaps and significant duplication between those two support systems is real, along with the lingering question about who should be held accountable for making it all fit together.

The consequences of these discontinuities fall on the employer, not on the financial services company: ■■ Where inadequate risk benefit cover or unhealthy finances manifest as absenteeism or presenteeism, poor quality of work, or fraud, this can have a direct impact on the employer’s bottom line. ■■ When employees feel their employer has not taken care of them, the company’s reputation as a desirable employer may be put in jeopardy.

The great irony here is that interviews with members3 have highlighted that many employees believe their employers are still looking after their interests and believe that these benefit arrangements are sufficient, when they are in fact insufficient. However, employee benefits are often seen as providing base cover, with employees being left with the responsibility of making any adjustments if it is insufficient. But individuals aren’t always aware of this and more often than not, do nothing.

UNCOVERING THE HIDDEN LIABILITY: WHAT RESTS ON MEMBERS’ SHOULDERS? Under a DB arrangement, employers promised retirement fund members a benefit often based on a percentage of salary and linked to the number of years of service. Unlike DB funds, DC funds do not offer a guaranteed income after retirement. In addition, where employers used to take - responsibility for providing medical aid post - retirement, many no longer do and the responsibility of paying for medical care during retirement rests with members. Simply put, DC retirement funds offer members a tax-shielded savings account that can be used to purchase an income after retirement. As a consequence, ensuring an individual will have sufficient income in retirement is a highly uncertain exercise. There are no

guarantees and members bear most, if not all, of the risks once borne by the employer. In particular, members are exposed to2: ■■ Investment risk: This is the risk associated with investments both preand post-retirement, which would include the effects of interest rates on the cost of annuities. ■■ Mortality risk: As life expectancy increases, the cost of annuities rises and pensions fall. ■■ Salary growth risk: When salary increases are higher than expected, it becomes more difficult for the member of a DC fund to keep their growth in savings in line, given the concurrent lifestyle improvement.

calculations that compare how significant these risks are to a member when we compare the DC structure to the earlier DB structure2. In interpreting this graph, the DC benefit is expressed as a percentage of the equivalent DB benefit: 150% = very good, 100% = breakeven and 70% = poor. Clearly, investment risk represents the bulk of the risk burden in a DC scheme, with a range of outcomes that can be as high as 263% to a low of 36% of the DB benefit. This certainly provides unequivocal evidence that trustees and management committees need to make communicating the potential magnitude of these risks to members a top priority.

Independent actuary and retirement fund researcher Rob Rusconi provides

Employee benefits are often seen as providing base cover, with employees being left with the responsibility of making any adjustments if it is insufficient.

2 Rusconi (2004) 3 Future of Employee Benefits Members Survey

PART 1

HOW HAS IT CHANGED?

Chapter 3

RISKS TRANSFERRED TO A TYPICAL MEMBER ON CONVERSION TO DEFINED CONTRIBUTION 300%

DC benefits as % of DB benefits

263% 250% 200% Best case 150% 100% 50%

Median case

115%

Worst case

95% 84% 76%

84%

63% 36%

Mortality risk

Salary growth

Investment returns

Source of risk The graph is based on a 40-year-old member, with 12 years of past service. Asset allocation: 60% equities, 40% bonds. The results depend on valuation assumptions and details of both DB and DC funds. Source: Rusconi (2004)

But the chart above also illustrates that many funds may not have thoroughly thought through the potential impact of the salary growth and mortality risk on their retirement fund outcomes. Note that the investment risk shown in this graph includes both returns pre-retirement and the risk of low yields at retirement. In targeting returns pre-retirement, the problem isn’t as simple as producing maximum returns. Members would benefit from some certainty about the incomes they are likely to generate after retirement. What this means is that whatever strategy the member plans

4 Rusconi (2004)

to use after retirement for income provision needs to be reflected in the pre-retirement strategy for a few years prior to retirement. In particular, this strategy needs to be responsive to the changing cost of the relevant annuity so that the member can have a reasonably stable expectation of what income to expect. Irrespective of the type of annuity chosen, declining interest rates generally result in a reduced level of real income. The chart on the next page shows the averaged inflationlinked annuity prices from several providers to illustrate that falling interest rates have reduced the inflation-linked income that a pensioner can buy. The average actual

pension, in nominal terms, that R1 million could purchase has fallen from just over R3 700 per month to just over R3 200 per month – more than a 13% decrease – from August 2007 to February 2014. In some ways these results emphasise the reality that we may not yet have found the optimal alternative to DB funds and that work on this point is probably still required. Perhaps a more optimal solution would be one where some measure of protection was provided while at the same time, risks might be shared between employers and employees4.

PART 1 Chapter 3

HOW HAS IT CHANGED?

MONTHLY INFLATION-LINKED INCOME PURCHASED WITH R1 MILLION (Male, provision for spouse’s annuity, R1 million initial investment, 10-year guarantee) R4 500

Monthly income of R3 753

Monthly pension

R4 000

Monthly income of R3 203

R3 500

R3 000 R2 500 R2 000

R1 500

Aug 2007

July 2008

June 2009

June 2010

May 2011

April 2012

March 2013

Sep 2014

Quotation date Source: Alexander Forbes Research and Product Development

For example, Rusconi suggests that funds could target paying out a lump sum to members at retirement. A formula would be applied that would smooth out the investment returns. In this arrangement, the investment risk would remain with the fund which would have to pay out a specified lump sum, but the mortality and salary growth risks would remain with the member. In the US, this type of arrangement is known as a cash balance plan. As an industry, perhaps more focus needs to be directed at either finding more explicit ways to mitigate risk or providing a better educational framework for helping individuals understand what they can do for themselves.

The most critical risk is planning risk

While the risks mentioned previously are frequently cited in the literature on DC funds, planning risk is often ignored. In many ways, planning risk encapsulates all the other risks faced by individuals because it speaks to the ability to make the decisions most likely to get the individual to their target. For retirement funding, a whole series of decisions need to be made – pensionable pay, contribution rates, retirement age, preand post-retirement investment strategy, and annuitisation – to maximise the individual’s chances of retiring with an adequate income. Making good decisions at the outset, and

then knowing when and how to adjust them, is a critical aspect of planning. Planning risk is the risk that choices made by the individual would result in an inadequate income in retirement. Getting all of these inputs correct is complex, riddled with risk and long-term modelling complications. Because members don’t understand the implications of this, they often make poor decisions. In addition, because employees are likely to work for multiple employers over their lifetime and be a member of multiple funds, stitching it all together remains in the individual’s hands.

PART 1

HOW HAS IT CHANGED?

Chapter 3

INSIGHTS FROM DEFINED BENEFIT FUNDS Members would benefit from some certainty about the incomes they are likely to generate after retirement.

How can intermediaries help?

Can we make a DC fund ‘behave’ like a DB fund? The fundamental thinking behind both types of retirement funds is the same: the task is to spread the income earned during your working life over your entire life5. The experience gained in managing DB funds can still help DC funds.

a. Setting the contribution rate

In DB schemes, the employer determines the benefit they would like to offer their employees when they reach retirement. This is usually set in proportion to the length of service and the member’s salary at retirement. Once the pension promise has been set, the actuary would determine the contribution rates that would have to be paid to reach that goal. Similar thinking can be used in a DC fund. If we set a reasonable goal for income in retirement, we can calculate the contribution rate that will get us there.

b. Adjusting contribution rates over time

A good DB fund was close to, if not fully, funded at all times. In other words, it generally stayed on track. As investment returns went up and down, plan sponsors made up the shortfalls when they occurred.

5 Sexauer & Siegel (2013) 6 Ibid

Members in a DC fund can also ensure they remain on track by adjusting their contributions when necessary and possible, given affordability. There’s little room for wishful thinking about the investment markets when funding a retirement benefit6. Individuals must adjust their savings rates if they are falling short of their goals. Putting your retirement savings on autopilot and just hoping things will come right simply isn’t an option.

c. Finding an appropriate payout strategy

In a DB fund, the member obtains an income for the remainder of their lives, with the employer picking up the tab if individuals live longer than expected. In a DC fund, members need to be as concerned about their withdrawal strategies as they are about accumulation strategies. Retirees can opt for the certainty of a guaranteed income for the rest of their lives, but this is often costly and can mean a substantial decrease in income. To maintain their living standards, they could take a riskier annuity option, such as a living annuity, but this exposes them to the risk of outliving their income.

PART 1 Chapter 3

HOW HAS IT CHANGED?

Conclusion We are only just beginning to appreciate the burden that has been placed on the employee of managing the risks that were once addressed by the employer. But the purpose of a DC fund and a DB fund is essentially the same: to provide an adequate source of funding when individuals are no longer earning a salary. However, the intermediation of funds has changed. If members are to get full value from the DC model, experts need to refocus on mitigating the financial planning risks that are embedded in DC funds to provide an adequate source of funding when individuals are no longer earning a salary.

PART 1: THE BIGGER PICTURE

WHO’S RESPONSIBLE? The role of each stakeholder

PART 1 Chapter 4

WHO’S RESPONSIBLE?

Summary Both social protection and employee benefits are subject to the risk of fragmentation if key stakeholders fail to engage. Returning our focus to employee benefits specifically, we examine the stakes held by the government, employers, custodians for households (trustees and unions), and the financial services industry. Each has a role to play and benefits to derive in making the system work.

In 1968, Garrett Hardin identified the ‘Tragedy of the Commons’ as a scenario in which individuals acting on a rational basis end up over-exploiting the resources needed by a group. Since then, economists have identified a range of similar scenarios, including the ‘Prisoner’s Dilemma’, where acting in rational self-interest on an individual basis ends up harming the group, sometimes to the extent of imperiling survival. This dichotomy between the interests of the group and the interests of the individual is evident in social protection. When we get it right, we get all the benefits outlined in our Part 1, Chapter 1 – including, most

significantly in South Africa’s case, an inclusive growth path. But because of all the parties involved, the withdrawal of key stakeholders from the process could imperil it. If this sounds similar to our analysis in Benefits Barometer 2013, that is because it is. In Benefits Barometer 2013, we looked at how fragmentation affects employee benefits; what we are realising now is that this fragmentation extends further into the fabric of the entire social protection system. This shows how imperative it is to appreciate the bigger picture and bring all stakeholders to the table.

PART 1

WHO’S RESPONSIBLE?

Bringing all the stakeholders to the table means that each needs to appreciate the significance of getting employee benefits right, the role they can play and the benefits for each of them.

To paint the bigger picture we have discussed how: ■■ Employee benefits fit into social protection, and how getting employee benefits right contributes to South Africa’s future. ■■ Communities and families play a significant role in social protection for households, and how a deeper understanding of how households use these mechanisms can enhance private provision. ■■ The roles and responsibilities in private provision of social protection, primarily employee benefits, have shifted and the implication for employers, households and the financial services industry.

Chapter 4

Having understood the bigger picture into which employee benefits fit, we return to a more focused discussion of stakeholders specific to employee benefits. Bringing all the stakeholders to the table means that each needs to appreciate the significance of getting employee benefits right, the role they can play and the benefits for each of them. While we have touched on this in the preceding chapters, this chapter pins it down before diving into the detail of how we can start improving employee benefits.

STAKEHOLDERS IN EMPLOYEE BENEFITS HOUSEHOLDS

UNIONS THE GOVERNMENT

EMPLOYERS

TRUSTEES

FINANCIAL SERVICES INDUSTRY

PART 1 Chapter 4

WHO’S RESPONSIBLE?

THE GOVERNMENT As the primary representative of society as a whole, it should be clearest to the government why we need a comprehensive system for social protection and why we need to get employee benefits right. As the Finance Minister put it in the 2014 Budget Speech: “We need to do more, together with labour, business and all stakeholders, to lead our economy in a new, bold direction for higher growth, decent work and greater equality”. The National Development Plan (NDP), as quoted in Part 1, Chapter 1, shows that the government fully appreciates the role that a good social protection system can play in meeting the twin goals of eliminating poverty and reducing inequality. This is particularly significant given that both the President’s State of the Nation address and the Finance Minister’s Budget Speech affirmed the government’s commitment to the NDP. Within the context of employee benefits, the specific role of the government is to provide the framework, including

regulating, providing incentives, making certain actions compulsory and guiding the financial education framework. At present, the National Treasury has been focusing specifically on retirement reform and improving outcomes within this sphere. The key benefit for the government if it manages to get this sphere right is to reduce dependency on the government and its fiscus when individuals reach pensionable age. Various aspects of the retirement reform process – including tightening the rules around preservation, mandating enrolment to capture the millions of unenrolled employees and creating options for vulnerable workers – should increase the pools of patient capital available for the economy’s development. The government is also focusing on the implementation of a National Health Insurance (NHI) system, which is aimed at ensuring that everyone in South Africa will have access to appropriate, efficient and quality health services1. If effectively implemented, this would reshape the employer’s approach to healthcare benefits.

The specific role of the government is to provide the framework, including regulating, providing incentives, making certain actions compulsory and guiding the financial education framework.

1 Department of Health (2011)

PART 1

WHO’S RESPONSIBLE?

Chapter 4

EMPLOYERS Clearly, getting retirement funding right across the economy is good for employers – a vibrant economy with robust spending power is good for firms.

As discussed in Part 1, Chapter 3, the role of employers has changed substantially as part of the shift from the defined benefit (DB) to the defined contribution (DC) framework. In some ways, this has blurred their stake in getting employee benefits right, as they no longer directly bear the burden of getting it wrong. Yet they still remain the central point for providing access for many individuals to the tools needed to protect their standard of living through employee benefits. What does this mean for them? We identified four components of employee benefits in Benefits Barometer 2013: healthcare benefits, financial education, risk benefits and retirement funding. It is still clearly in the interests of the employer to provide some of these. Healthrelated benefits and employee wellness systems, including financial education, that seek to maintain individual productivity, have a clear-cut link to the employer’s operations. As long as the costs of the benefits and systems which maintain productivity are less than the costs of lost time and employee turnover, this makes clear economic sense. Long-term benefits, for risk and retirement, are more complex. When individuals value employee benefits, this provides a strong case for the employer providing them, as it assists with employee attraction and retention. But where individuals see employee benefits as infringements on their take-home pay, this motivation is weakened. Employees often appreciate risk benefits, particularly funeral cover, and not offering these benefits can have reputational implications for the employer. Consider the risks of neglecting life cover: leaving

widows and orphans without an income doesn’t look good, either in public or within an organisation where it can affect morale. Retirement funding is the trickiest portion of the employee benefits package. It is a key portion of social protection, and yet with employees switching jobs at more frequent intervals, the impact of each employer and fund becomes more and more muted in the overall outcome. Clearly, getting retirement funding right across the economy is good for employers – a vibrant economy with robust spending power is good for firms. But how much does each individual employer’s contribution really matter? This creates a classic free-rider problem, such as those common to such economic quandaries as the Tragedy of the Commons as outlined on page 40. Free-riders are those who fail to contribute to a collective solution that is in their best interests. Because their individual contribution makes little difference, it is rational to withdraw, hoping that everyone else will do the right thing, and so the system will work without their contribution. The problem is that this logic is common to all, and if everyone withdraws, the whole system fails. We need employers at the table, and getting all of this right will benefit them in the long term. However, as we discussed in Part 1, Chapter 3, other stakeholders may need to step in to help employers to make it as easy as possible for them to make their contribution.

PART 1 Chapter 4

WHO’S RESPONSIBLE?

HOUSEHOLDS AND THEIR REPRESENTATIVES The central objective is to make households sufficiently secure. It is through this security that we are able to build a more inclusive economy.

From the discussion about social protection, it should be clear that the central objective is to make households sufficiently secure. It is through this security that we are able to build a more inclusive economy. This security should also be valuable to the household, but as we discussed in Part 1, Chapter 2 about communities and families, many South African households seek this security through other non-financial, informal arrangements. They also often have different priorities and see more security in a house or a well-educated child than they do in a retirement pot. As work from the World Bank and Organisation for Economic Co-operation and Development showed in Part 1, Chapter 1, this is neither irrational nor unfounded. But it does complicate matters for employee benefits. What further complicates this is that households seldom represent themselves at the table. Instead, they are represented by various agents in different phases of the development of employee benefits. This use of agents may be eminently sensible. Many of the decisions raised by employee benefits are both cognitively complex and clouded by multiple behavioural biases. However, where it can complicate matters is when the interests of households and their agents are not entirely aligned. In the first phase of negotiating an overall pay package, many households are represented by unions. Unionised workers rely on collective bargaining to shape their remuneration structure, which includes their employee benefits. By bulking their bargaining power and using informed representatives, this in theory provides better outcomes for individual workers.

Once an overall remuneration structure is set, households are typically represented by trustees. These trustees are drawn from unions, employers and directly elected by members. Where umbrella funds and open medical schemes are involved, trustees are typically professionals from the financial services industry. There is an option for management committees from the participating employer to be involved and represent the specific needs of their employees, particularly in restricted medical schemes. While these agents are meant to represent the interests of households and seek the best solutions for them, interests may not always be aligned. For instance, sometimes pension fund trustees interpret their fiduciary duty to protect member interests as best achieved by taking the most conservative route – minimising contributions and investment risk – but this may mean that households are unlikely to accumulate what they need. The same may be true in medical schemes where trustees might choose lower investment risk for fear of reducing solvency levels, but where a less conservative – but still well-thought-out – strategy may assist in reducing contribution inflation over time and improve solvency levels. Control of the considerable assets at the disposal of some pension funds can also confer significant power on the wielder. Using this power could be an attractive lure to distract agents from their primary purpose of safeguarding household interests. Households may not always understand or agree that a particular decision is in their interests.

PART 1

WHO’S RESPONSIBLE?

Chapter 4

FINANCIAL SERVICES INDUSTRY As a stakeholder in the private sector, a more inclusive and sustained growth path should be eminently valuable to the financial services industry. But as social protection, especially employee benefits, evolves to close gaps and respond to government reform, the industry’s role in the system is likely to shift. In Part 1, Chapter 2 on culture, we indicated that the financial services industry needs to apply their expertise and resources to a wider demographic. Critically, experts in the financial services industry can help households manage the complex issues around trade-offs in their financial decisions. To this end, the more we can understand about the complete picture for the individual and their dependants the more meaningful the advice on trade-offs can become. The industry needs to move toward helping individuals assemble the complete picture. In Part 1, Chapter 3 we discussed how moving from DB to DC has changed the industry’s roles and responsibilities. As risks have shifted from employers to

households, this has created the need for the financial services industry to redirect its expertise towards helping households manage these risks. In all of this, a key challenge remains resolving the information asymmetries in the industry. It is in this vein that much of the reform in this industry is emerging, including Treating Customers Fairly (TCF). It is difficult for households to understand the products provided by this industry and how they can be used to meet the households’ goals. The expertise of the industry needs to be directed continually towards helping households to understand what they do need, what they don’t need and the simplest way to meet their needs. The financial services industry has a key role to play in employee benefits. In playing this role, it will need to ensure profit making and social purpose remain aligned. If it does this, it can regain trust, make money and make a difference.

Critically, experts in the financial services industry can help households manage the trade-offs between different types of security in ways that will help them to get the best outcomes out of their journey.

PART 1 Chapter 4

WHOâ&#x20AC;&#x2122;S RESPONSIBLE?

Conclusion As we argued in Benefits Barometer 2013, employee benefits cannot continue in its fragmented state and hope to make a meaningful contribution to employeesâ&#x20AC;&#x2122; financial, physical and mental health. This fragmentation can be addressed only if all stakeholders agree to come to the table. Because of the key role that employee benefits plays in the broader system of social protection, fixing it has significant benefits for each role player. But these benefits can be realised only if employee benefits fulfils its promise to provide financial security for South African households. As we shift our thoughts to Part 2: The way forward, we hope that you will keep the bigger picture in mind and remember the key role you can play in this country.

PART 2: THE WAY FORWARD

PART 2 THE WAY FORWARD

INTRODUCTION

GETTING PEOPLE TO CARE The journey to financial well-being

CHAPTER 1

THE HEART OF THE MATTER What do individuals need?

CHAPTER 2

WHAT’S THE POINT? Making targets meaningful to members

CHAPTER 3

THE JOURNEY ON AUTOPILOT Knowing when and how to use defaults

CHAPTER 4

MIND THE GAP Aligning HR policies with employee benefits practices

CHAPTER 5

AT WHAT COST? Understanding the link between costs and value

117

CHAPTER 6

COPING WITH COMPLEXITY Balancing affordability and complexity in medical schemes

145

CHAPTER 7

STOP THE PRESSES! WE NEED TO TALK How we’ve lost the plot on member communications

155

CHAPTER 8

FAILURE TO LAUNCH Why financial education is failing and what we can do about it

171

CHAPTER 9

MEASURING SUCCESS How do we know when individuals are winning?

191

CHAPTER 10

THE JOURNEY Not just the end game

209

PART 2: THE WAY FORWARD

The journey Each individual must walk their own road to financial freedom, but the government, employers, financial services companies, trustees and unions can build better roads and offer roadside assistance.

PART 2: THE WAY FORWARD

Engage individuals on their entire journey to improve financial decision making.

The sheer volume of financial challenges are overwhelming.

Monitor

Design

Implement

PART 2 Introduction

GETTING PEOPLE TO CARE

Summary With the sheer volume of financial challenges facing them, most people pay little attention to their retirement until they arrive at the destination. Instead of trying to sleepwalk them there, we need to engage with their entire journey and all the threats along the way. This means improving the employee benefits structure, but also helping individuals to improve their own financial decision making.

The great challenge for retirement funds is that for the bulk of their working life, the average person has little interest in taking on the complex task of thinking through their retirement funding dilemma.

Twenty-year-olds are not interested in retirement issues. Thirty-year-olds are not interested in retirement issues. Fortyyear-olds are not interested in retirement issues. By 55, many individuals are starting to move into panic mode about retirement issues. And by 60, it’s too late. Game over. The great challenge for retirement funds is that for the bulk of their working life, the average person has little interest in taking on the complex task of thinking through their retirement funding dilemma. As long as we’re employed and earning an income, we give little thought to just how long we will be able to maintain that earnings potential in our lives. With many families financially

stretched to beyond their earnings power, most people can’t even think about saving for retirement because they’re too busy figuring out how to hang on until the next pay cheque. What is uppermost in their minds – and this is true for families in all income brackets – is how to solve that constant financial conundrum: finding the right balance between meeting their consumption needs of today, building the appropriate cushions to cope with financial shocks in the future (inclusive of retirement), and somehow managing to improve their standard of living.

PART 2

GETTING PEOPLE TO CARE

Introduction

A SUITCASE FOR THE JOURNEY Sendil Mullainathan and Eldar Shafir, in their book Scarcity – Why having too little means so much, use the particularly appropriate image of a suitcase that we carry along on this financial journey. That suitcase must hold our daily consumption needs, our housing, our medical care and whatever buffers we can add to protect us from financial shocks during the course of that journey. Some of us are able to travel with larger suitcases than others, and some of us are forced to jam as much as we can into particularly small suitcases. But no matter what size suitcase life has dealt us, filling it for our journey demands careful thought, and it demands trade-offs for those of us who are financially stretched. What you decide to include in your packing and

what you leave out will have significant implications for how you will fare on your financial journey through life. The problem is that many South African workers or members of retirement funds have a very small suitcase. It’s not about what financial services they need to buy that’s important, but rather which ones they can afford to leave out and still have adequate protection for whatever life throws their way. As Robert Holzman and Steen Jorgenson pointed out in their work for the World Bank on social protection, it could be rational for individuals not to prioritise longterm issues such as retirement when there are so many short-term risks1.

Our suitcase must hold our daily consumption needs, our housing, our medical care and whatever buffers we can add to protect us from financial shocks during the course of that journey.

1 Holzmann & Jørgensen (2001)

PART 2 Introduction

GETTING PEOPLE TO CARE

SHOULD RETIREMENT REFORM BE ABOUT THE DESTINATION? OR THE JOURNEY AND THE DESTINATION? National Treasury has been channelling much of its reform focus on meeting retirement fund end goals. Preservation, mandatory enrolment, annuitisation, cost reduction and casting a wider net are all ideas to maximise the quality of that retirement moment2. What members need is more simplicity, more vanilla, less costs. The perfect model here would be if we could simply ‘sleepwalk’ an individual to retirement. The less there is for members to think about or worry about in terms of their retirement savings, the less likely they are to abandon it. In principle, there is nothing wrong with the concept – as long as the most critical challenge that individuals face is saving for retirement. But is that the case for most South Africans? We believe that if we want South African workers to take their retirement plans seriously – and it’s clearly in the government’s interest that a significant percentage of workers do not end up back on their grant books when an income is no longer forthcoming – then it’s as important to help people to maintain a stable financial journey through life as it is to secure stability at the end. That means we have to tackle the problem on two distinct fronts:

We need to make the current structure of employee benefits as a whole far more efficiently targeted to meet each member’s needs. To do this, we need cooperation between employers, the custodians of members’ interests (trustees and unions) and financial services companies to ensure the system is properly integrated to give members the best outcomes.

We need to be just as keen to help members maximise their own financial decision making. That means we have to develop clever ways to make the most of educational techniques at different points in a member’s life, with tools to help the majority of South Africans who will never see a financial planner, to manage their own financial security.

More importantly, if we merely ‘sleepwalk’ an individual to retirement, we lose out on a critical opportunity to get them to engage in their financial well-being and develop the financial literacy of South Africans in general.

2 National Treasury (2014)

PART 2

GETTING PEOPLE TO CARE

Introduction

IT CAN BE DONE! So, how can we orchestrate a shift of focus that gives members a meaningful outcome – and at the same time address some of the gaps and disruptions that keep threatening the security of their journey? As much as the individual is at the centre of all our thinking, we see the four main facilitating groups: the government, employers, financial services companies and the custodians of the members’ interests (trustees and unions), as the primary audience for these discussions. To start with, we need to make it easy and rewarding for each of these groups to participate. What follows is a bit of ‘blue sky’

thinking that we believe could dramatically change the dialogue around their roles and what they can contribute. We’ve termed the next ten chapters our solutions. In some cases we may discuss a new set of underlying principles; in others, a new tool that could simplify a particular problem; and in others still, we propose ideas that we think have incredible potential, but only if they exist outside the financial services industry altogether. Together they represent ways in which we believe we can nudge the current system into providing much more efficient, effective and targeted outcomes.

TRUSTEES GOVERNMENT

EMPLOYERS

FINANCIAL SERVICES COMPANIES

UNIONS

CUSTODIANS OF THE MEMBERS’ INTERESTS

As much as the individual is at the centre of all our thinking, we see the four main facilitating groups as the primary audience for these discussions. 53

PART 2 Introduction

GETTING PEOPLE TO CARE

The important point is to continue the dialogue.

to understand the impact of their decisions, and then to make the right choices.

Weâ&#x20AC;&#x2122;ve tried to follow a natural sequence of thinking about how we could most effectively lay out the journey for people and then deliver on it. This means starting where employees typically have their first interaction with a lifetime savings plan or with the concept of risk benefits; insurance products that protect their ability to earn an income. Then, as we move on to monitoring and measuring an individualâ&#x20AC;&#x2122;s progress on the journey, we start to grapple with the issues around financial literacy, financial education and what it will take to start getting people

We send these thoughts out there in the hopes of getting other interested parties to join us in facilitating what we believe can be important changes in thinking. All of them stand open to comment and constructive criticism. The important point is to continue the dialogue.

9 The right incentives 8 Understand trade-offs

7 Translate future to present

5 Defaults

1 Teachable moments 2 Just-in-time education

Rules of thumb 3 Understand bandwidth

MORE SUCCESSFUL JOURNEY 54

Smart defaults

PART 2: THE WAY FORWARD

THE HEART OF THE MATTER What do individuals need?

PART 2 Chapter 1

THE HEART OF THE MATTER

Summary Benefit design is often a combination of legacy issues and market conventions. As such, it may well have little relevance to members in a particular fund. But by prioritising meeting individual needs within a group scheme, employers together with their funds can make a significant difference in their employeesâ&#x20AC;&#x2122; lives. This requires having a sound understanding of what members need, how these need to change over their life cycle and the cost implications of responding.

What weâ&#x20AC;&#x2122;ve come to learn over time is that the one-size-fits-all approach to employee benefits is just not cutting it.

In this chapter we look at how we could think differently about benefits design. What weâ&#x20AC;&#x2122;ve come to learn over time is that the one-size-fits-all approach to employee benefits is just not cutting it. In a country with a population as culturally diverse as South Africa, a tick-box approach to benefits design serves no one well. We need to recognise that for some people educating their children may be more important than buying disability cover. Meeting needs must also be a dynamic process. Our approach to meeting needs must change over time as society changes and as markets and industry develop innovative new ways to address individual needs.

1 True South Actuaries and Consultants (2013)

What we propose instead is a needsbased approach to benefits design. This approach looks holistically at the needs of the individual and should afford them the ability to structure their benefits, such as retirement, risk and healthcare, within the confines of a group arrangement. Ensuring that individuals are provided with enough protection to sustain them throughout their lives regardless of whatever life throws in their path, proves to be important for stemming the re-direction of savings meant for retirement towards more immediate needs. The ultimate objective is to enable the individual to optimise consumption, saving over their entire life cycle and protection against risks.

PART 2

THE HEART OF THE MATTER

Chapter 1

WHY WE NEED A MORE EVOLVED APPROACH A shift from the traditional approach to employee benefits design is as much a mind shift as it is one of design. To start with, designing an employee benefits package has to move beyond an approach where employers simply offer what the rest of the market offers. A needs-based approach demands that we develop solutions from the bottom up: begin with a clear understanding of the unique features of the workforce and assess how those needs are likely to evolve over time. Although our goal might be to optimise a memberâ&#x20AC;&#x2122;s exposure to income protection, family protection

and savings requirements as their life dynamics change, this needs to be done within the cost and contribution constraints that the fund may impose. If employee benefits are to be as valuable to the employer as they are to the employee, we need new tactics: the total rewards that a company could potentially offer their employees must be highlighted to them and not just the risk benefits provided by the fund. Non-traditional benefits like discounts on products can be a powerful reward for employees and this means that employee benefits can

Total compensation Remuneration (Monetary compensation) Traditional remuneration

Non-traditional remuneration

become an important tool in enhancing employee engagement and ultimately improving productivity. The diagram below provides some sense of how expansive this potential could be. Many companies may recognise that they already provide many of these services to employees. The point here is that if employees donâ&#x20AC;&#x2122;t understand the full extent and value of their benefit offering, employers are missing an opportunity to capture the positive knock-on effects of having such benefits in place.

Total reward system Employee benefits

Traditional employee benefits

Other employee benefits*

Non-financial motivators*** Recognition from management One-on-one contact with management

Salary / wages

Profit share

13th cheque

BEE schemes

Bonuses

Share options / staff share scheme

Healthcare benefits Retirement benefits Risk benefits: death, disability, funeral

Notes: * These are some of the non-traditional employee benefits that can be offered in a compensation package. ** Stated benefits is defined in the glossary. *** These are some of the non-financial motivators that employers can use.

Dread disease Family friendly benefits (such as day care) Stated benefits** Leave programme Pension-backed lending Executive benefits Benefits for expatriates Lifestyle benefits Wellness programmes

Source: Alexander Forbes Research & Product Development

PART 2 Chapter 1

THE HEART OF THE MATTER

HOW EXACTLY CAN WE ESTABLISH WHAT MEMBERS NEED? What follows is a description of the process we can follow to either establish a new total rewards offering or review the existing offering:

STEP 1

Carry out a needs analysis The employer or fund – with the help of experts, if necessary – needs to carry out a comprehensive analysis of their employees or members. They must consider the following: ■■ Employee profile: This includes a look at the earnings, job type, age, gender, level of education, level of financial education and, if possible, family structure of employees. ■■ The sector the person falls into: The type of industry the employed person works in generally dictates the level of pay they can expect. This directly affects the basket of goods they can hold and limits their ability to access those benefits outside the fund if they are not offered. The sector can also affect the level of risk that the member represents to the insurer. ■■ The split of the employee base between different geographical areas: Some provinces have greater exposure to certain types of diseases. ■■ The past claims experience of the fund. Payroll systems rarely capture the level of detail required. As such employers need a process that allows members to give additional information about their family structure and number of dependants on an ongoing basis.

STEP 2

Set up a benefit matrix There is a whole universe of employee benefits, both savings and risk-related, that companies can include in an employee’s total rewards package. From the information gathered in the needs analysis in Step 1, we can make a list of benefits suitable for particular groups of employees.

STEP 3

Compare the current offering with the benefit matrix Add another column to the matrix you established in Step 2 to set out whether employees currently receive this benefit. This helps you not only to identify the gaps in your benefits offering, but where you may have overlaps.

PART 2

THE HEART OF THE MATTER

STEP 4

Chapter 1

Benchmark your current total rewards system against the market To remain competitive, this kind of review has to consider what the market is offering. Each employer should be particularly interested in what other companies in their sector offer.

STEP 5

Determine cost constraints Employers (and members) have to balance offering benefits that meet employees’ needs while controlling associated costs. For benefits offered through the retirement fund, like group life cover, the cost is constrained by the fixed contribution rate that the member and employer pay. Contribution rates from an employer’s previous defined benefit arrangement, like with so many other retirement fund features, may not have been reviewed for appropriateness over time. For employer-owned policies, the cost is constrained by the other demands on an employer’s finances. The cost of certain employee benefits will determine whether employers can include them in the benefits offering. So, despite the needs of the workforce, the decision about what to include will depend on weighing up potential benefits against the cost of providing these benefits.

STEP 6

Determine employee satisfaction levels to gauge return on investment In Benefits Barometer 2013 we touched on the fact that you can boost employee engagement with an appropriately structured total rewards system. You can use employee satisfaction as a proxy for the success of the employee benefits programme. Companies can measure employee satisfaction by surveying your employees. This should tell you if your current benefits meet your employees’ needs. However, treat the results of the survey with caution. Sometimes when employees indicate that they’re not satisfied with their benefits offering, it may just be that they don’t understand a benefit or how it works because your communication strategy may be flawed. If they don’t understand the purpose of the benefit or the protection it gives them, they may think the benefit is unnecessary. We discuss communication strategies in more detail in Part 2, Chapter 7.

PART 2 Chapter 1

THE HEART OF THE MATTER

BENEFIT DESIGN IN DETAIL In this section we examine specific benefit designs to illustrate the extent to which a needs-based approach can enhance outcomes for members.

Designing death benefits in a defined contribution environment

In general there are two reasons why a fund member would need life cover: ■■ To pay their debt. ■■ To provide for their dependants. Debt cover is usually provided through personal arrangements outside the fund. For instance, when you take out a home loan, the bank may require that you take out life cover equal to the outstanding loan and may arrange the cover for you. Group life cover generally focuses on providing protection for dependants of the fund’s members. This is why we need to be aware of the family and dependency

structure of employees when designing these benefits. To establish whether the current structure is appropriate, we need to make some assumptions about our members’ benchmark needs. For instance, where members may be married, then a possible benchmark for sufficient death cover would be to provide the spouse with 60% of the member’s pensionable salary in the event of death. We can then use this benchmark to see how effective current death benefit coverage is at meeting this requirement. The graph below summarises how actual benefits compare to the assumed benchmark need. The data sample reflects the full range of members in the Alexander Forbes Member Watch™ data set. A ‘shortfall’ of 0% means that the benefit payable on the death of the member

provides for the benchmark needs. A ‘shortfall’ of –50%, for example, means that the benefits payable on death are 50% below the benchmark needs, and a ‘shortfall’ of +25% means that the benefits payable on death are 25% above the benchmark needs. It is clear from the graph below that for many members, their current benefit offering is falling short of their actual needs. A warning with this analysis is that it does not take account of an individual’s family structure and the extent to which any risks and insurance can be internalised. This was discussed in Part 1, Chapter 2. Having more information about an employee’s family structure can be a useful part of a needs analysis as it will help to identify employees who may only need very basic levels of cover.

ANALYSIS OF DEATH BENEFITS AGAINST BENCHMARK NEED

Proportion of members

50% 40% 30% 20% 10% 0% less than -75% -75% to -50%

-50% to -25%

-25% to 0%

0% to 25%

Shortfall percentage Source: Member WatchTM Survey (2012)

25% to 50%

50% to 75%

75% +

PART 2

THE HEART OF THE MATTER

at its lowest at younger ages and highest immediately before retirement.

Results like these clearly suggest that there is a need to review and change the existing structure of death benefits. But deciding what structure to put in place is not a simple task and it might differ for different employers or subsets of employees within one employer. For example, when a dependency structure goes significantly beyond a single spouse, these assumptions may not be adequate.

We could argue that the need for cover is higher at younger ages where the member has a younger family and fairly low retirement savings compared to an older member with accumulated retirement savings and a shorter time to provide for dependants. This is reflected in the required multiples of salary payable on death, as shown in the chart below.

But there are other drawbacks to employing established conventions in setting benefit policies. One of the most common death benefit structures is a benefit based on fund credit plus some multiple of salary at the date of death.

An age-related benefit may therefore be more appropriate. One argument for age-related benefits is that they eliminate the cross-subsidy from younger members to older members. Older members are more likely to claim, that’s why the cost of benefits will be higher at older ages. An age-related benefit will help to avoid

Assuming positive salary increases and a static benefit multiple of three times salary, the total lump sum death benefit is

Chapter 1

younger members carrying the cost of benefits for older members, depending on how the benefits are priced. But the main advantage is that it can be tailored to better meet the needs of members at various stages. Another arrangement would be to structure multiples which better meet the needs of individuals at various ages using a single unit rate. This approximates needs but retains an element of cross-subsidy. However, there are several ways in which age-related benefits can be structured and priced, each with their own pros and cons. One method may involve cross-subsidies while other methods can be used to retain cross-subsidies.

DEATH BENEFIT NEED AGAINST ACTUAL BENEFIT OFFERED 16 14

Multiple of salary

12 Actual benefits offered

10 8

Multiple of salary required at various ages

6 4 2 0

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Alexander Forbes Research & Product Development

PART 2 Chapter 1

THE HEART OF THE MATTER

DISABILITY BENEFIT CHOICES If we think about the type of benefit that will best meet members’ needs, there’s much less flexibility available when designing disability benefits than when designing death benefits. There are two main types of disability benefits: Permanent income benefits: These are typically provided at a level of 75% of an employee’s risk salary (the employer defines the risk salary and this is the salary on which risk benefits are based). The fact that the income is less than 100% serves as an incentive for employees to return to work, once recovered, if they can get their full salary again.

Capital disability benefits: This pays a once-off lump sum when the employee is declared disabled. While most people think the cash lump sum disability benefit is more valuable, an income disability benefit better meets the needs of most individuals, because if you’re truly unable to return to work, there is no risk that you will run out of money before your retirement date. To ensure that the benefit best meets the needs of employees, employers may need to revise their definition of risk salary. Given that the insurance policies are based on

risk salary (which is often just a fraction of total income and not the individual’s total income), they may face a significant decline in living standards in the event of disability. Employers in sectors that involve physical labour often provide a capital disability benefit because it’s cheaper than the alternative. But even when they offer high multiples of salary, the benefit is often not big enough to meet the income needs for the rest of the individual’s working life.

CHANGING MEDICAL NEEDS As people grow older, their medical expenses are expected to change according to changes in their personal circumstances and health status. When you start working, you generally only need basic cover for unexpected medical events and emergencies. You typically find this kind of cover in a hospital plan within medical schemes. At this stage, people are usually single with no dependants. People who earn less money may also choose health insurance products at this stage of their lives. These products are cheaper than full medical scheme cover, but they generally pay only a portion of the actual medical expenses incurred. Members get

a predetermined fixed amount payable on admission to hospital, no matter what the actual cost of the procedure. As a family starts to grow, members generally need to add some day-to-day cover as well as generous maternity benefits. When your children are young, they typically need regular day-to-day benefits for common illnesses. These are covered by benefit options that offer generous out-ofhospital benefits for GP visits, dentistry and medication. You may be able to reduce this cover as children grow older. During middle age, you may start to develop certain chronic conditions like

high cholesterol and diabetes as a result of either poor lifestyle choices or genetic predisposition. You’ll need regular medication and monitoring for these chronic conditions to ensure they don’t cause further complications. The risk of developing more serious conditions increases as people move into their retirement years. This is when you need additional comprehensive cover. The diagram on the next page illustrates a typical claims pattern of an individual and a family through their lifetime:

PART 2

THE HEART OF THE MATTER

Chapter 1

SMOOTHED CLAIMS OVER AN INDIVIDUAL’S LIFETIME The diagram below represents general needs, but actual needs will depend on an individual’s own circumstances.

Family with children

Middle-aged

Retired or retiring

■■ Hospital cover ■■ Limited or no day-to-day cover

■■ Hospital cover ■■ Day-to-day cover ■■ Maternity benefits ■■ Limited chronic benefits

■■ Hospital cover ■■ Higher day-to-day cover ■■ Chronic benefits

■■ Hospital cover ■■ Comprehensive day-to-day cover ■■ Higher chronic benefits ■■ Cover for joint replacements and other age-related conditions

Average claim per member

Young and single

Individual claims Family claims

70+

Age Source: Restricted Medical Scheme client of Alexander Forbes Health (Pty) Ltd, Technical and Actuarial Consulting Solutions (2011)

PART 2 Chapter 1

THE HEART OF THE MATTER

Saving for retirement is a complex task that demands discipline on the part of the saver.

FITTING IN RETIREMENT SAVINGS Saving for retirement is a complex task that demands discipline on the part of the saver. They must start from an early age and contribute enough to achieve a decent outcome in retirement. In theory this is simple, but when an individual has to find more money to pay for living expenses, one of the first things they may be tempted to sacrifice is their retirement savings rate if they have the option. Our main proposals here are: ■■ For contributions to be structured so that they increase over time, in line with the individual’s age or some other factor. (We discuss this further in Part 2, Chapter 3.) ■■ For risk benefit structures to have variable elements that change according to the needs of the individual over their life cycle. Such an approach is best accommodated by a contribution rate that either increases over time or is variable over the life cycle. Many people might be unwilling to increase their total gross contribution rate because they don’t understand the implications of inadequate protection. This means that to pay for risk benefit expenses, you have to vary the amount of money you channel towards retirement savings over time. As long as we are able to achieve the same average contribution rate towards retirement savings as we would under a fixed benefit offering, then the retirement outcome should remain similar. Alternatively, the employer could provide a fixed benefit offering and present the results of the employee benefits review to the employee. This would allow them to take up the benefits not offered, but which they need, at their own cost. The cost issue in funds is often clouded by how well employees understand the ‘cost advantage’ to them of having their fund or employer use economies of scale to provide them with services they might normally procure in their own right. An effective total rewards framework is hugely dependent on communicating this point effectively.

PART 2

THE HEART OF THE MATTER

Chapter 1

BRINGING IT ALL TOGETHER As we mentioned earlier, the goal of needsbased benefit design is to get the best benefit structure possible within the cost constraints. We need to work within the contribution rate the member has selected and attempt to allocate it between death, disability and retirement savings to best meet the needs of the individual at each life stage. The aim is to ensure that we achieve the most efficient allocation of the contribution rate over time.

A fixed multiple of salary offers the same benefit regardless of 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.

Efficiency involves maximising benefits that engage the employee at that period of their life cycle, while providing minimum levels of cover on other benefits. Because disability benefits are vital to sustaining employees and their families through illness and injury, it is assumed that this benefit would always be a priority. That’s why in our modelling it is secured before allocating the rest of the contribution rate to retirement and death benefits.

The difference, however, is that the secondary offering simply offers lower multiples in the benefit coverage at some ages in an attempt to lower the cost of death benefits. The secondary offering is also for membership groups where the family structures are such that they can absorb more of the risks and hence a lower level of overall cover is required.

Efficiency is measured by looking at the shortfall between what each benefit offering will give members and what their needs are at each point in life. Let’s consider four death benefit structures: 1. A fixed, flat multiple of salary 2. Primary Lifecycle default 3. Secondary Lifecycle default 4. A fully flexible benefit without an increase in the total contribution towards risk and retirement.

In the two Lifecycle options the same benefits are assumed to be on offer.

A fully flexible benefit will aim to offer the same disability benefit as stated above, but retirement funding and life cover will be assumed to be variable over the life cycle to achieve the most efficient allocation to each of these benefits. This means that their allocation to death benefits will reduce automatically as they approach retirement.

Efficiency involves maximising benefits that engage the employee at that period of their life cycle, while providing minimum levels of cover on other benefits.

PART 2 Chapter 1

THE HEART OF THE MATTER

To illustrate how you can achieve an efficient allocation we consider two retirement fund members, Rivash and Lerato. Lerato is a 41-year-old woman with a contribution rate of 17% of pensionable salary and Rivash is a 40-year-old man with a contribution rate of 17% of pensionable salary. A needs-based approach requires

that we take account of additional factors like whether they have any dependants, debt or affordability constraints. The graph below shows which benefit package ends up maximising efficiency for members under various scenarios. The higher the number on the spider graph the greater the efficiency.

OUTCOMES-BASED EFFICIENCY IN VARIOUS SCENARIOS Male aged 40, 17% contribution rate, no children 100% 90% 80% 70% Female aged 41, 22.5% contribution rate, two children (16 and 10)

60% 50%

Male aged 40, 17% contribution rate, two children (16 and 10)

40% 30% 20% 10% 0%

Female aged 41, 17% contribution rate, two children (16 and 10)

Male aged 40, 22.5% contribution rate, two children (16 and 10)

Fixed, flat multiple of salary Female aged 41, 17% contribution rate, no children

Secondary Lifecycle default Primary Lifecycle default Fully flexible benefit structure

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Chapter 1

The output from the graph on the previous page can be summarised in the following tables.

Rivash Male aged 40 Debt level

Number of children

Total contribution rate

Most efficient benefit stucture

Least efficient benefit structure

17%

Primary Lifecycle default

Fixed multiple of salary

R300 000

2 (aged 10 and 16)

17%

Fully flexible benefit structure

Fixed multiple of salary

R300 000

2 (aged 10 and 16)

22.5%

Fully flexible benefit structure

Fixed multiple of salary

Lerato

Female aged 41 Debt level

Number of children

Total contribution rate

Most efficient benefit stucture

Least efficient benefit structure

17%

Fully flexible benefit structure

Fixed multiple of salary

R300 000

2 (aged 10 and 16)

17%

Fully flexible benefit structure

Fixed multiple of salary

R300 000

2 (aged 10 and 16)

22.5%

Fully flexible benefit structure

Fixed multiple of salary

This analysis has important implications. It shows that simply implementing a fully flexible benefit structure may not be appropriate for all members. For example, when Rivash has no children and no debt, a Primary Lifecycle default, along with retirement savings and disability cover, represents the most efficient allocation of his contribution rate. But perhaps the most important message here is that a flat multiple of salary at all ages is not an efficient benefit for members under any circumstances. With the correct benefits structure we are able to achieve efficient outcomes for

members. But this demands a contribution rate big enough to meet the cost of death and disability benefits while still providing a sufficient allocation to retirement savings. And as mentioned before, the allocation to each element of the package will vary over time in response to the member’s changing needs. Outside the fund the member must also ensure that out of their take-home pay, they are able to balance other costs like medical aid contributions.

PART 2 Chapter 1

THE HEART OF THE MATTER

ENSURING EMPLOYEE WELL-BEING The final element of a holistic employee benefits programme is one that deals less with the specific benefits on offer and has more to do with how well employees understand how to manage their financial, physical and mental well-being. Securing mental well-being is a harder task for employers and until recently was not recognised as a key issue affecting profitability. Unhealthy finances have a direct impact on productivity because it distracts people from their work. In the longer term, it can create physical and mental health problems because of stress and not receiving appropriate medical treatment. These health problems themselves create even more financial distress for employees as well as increasing absenteeism. Both of these decrease productivity further. Poor personal finances could also lead to increased workplace fraud and theft of company property. We are seeing evidence of shortcomings in securing physical, mental and financial well-being in South African workplaces. The graph on the next page shows the most common types of issues reported to employee wellness provider ICAS in 2013. Stress was the second most prevalent concern for employees, with money management and mental health concerns ranking among the most reported problems. For an employee benefits/total rewards programme to translate into a programme that enhances employee engagement, a comprehensive wellness programme that helps employees develop effective budgeting skills and financial literacy could stop minor financial worries from turning into major concerns. It can also provide insights into how to manage their health and family needs. In addition it can offer one-on-one emotional support for the individual and their family following a traumatic event. We discuss wellness programmes and personal counselling further in Part 2, Chapter 8.

PART 2

THE HEART OF THE MATTER

Chapter 1

Effective budgeting skills and financial literacy could stop minor financial worries from turning into major concerns.

PROPORTION OF CASES OF EACH PROBLEM SEGMENT IN 2013 Relationship issues

20.0%

Stress

14.3%

Organisational issues

10.0%

Legal issues

8.0%

Mental illness/Psychiatric

6.0%

Problem segment

Child & family care

5.6%

Money management

5.2%

Trauma

4.5%

Information & resources

4.2%

Loss issues

4.0%

Health & lifestyle

3.9%

Addictive behaviours

3.4%

HR issues

3.3%

Personal development

3.1%

Abuse

1.4%

Life threat

1.3%

HIV

0.9%

Discrimination/Harassment Relocation

0.5% 0.2%

10%

15%

20%

Proportion of all cases Source: ICAS (2013)

PART 2 Chapter 1

THE HEART OF THE MATTER

Conclusion As we said in Benefits Barometer 2013, achieving efficiency involves maximising benefits that are most significant for the employee at different life stages, while providing minimum levels of cover on other benefits. We can improve efficiencies for the same total contribution level by tailoring benefit design to the individual’s position in their life cycle. We can further improve it with higher contribution rates. It’s not impossible to migrate from the traditional approach. We can tweak current programmes gradually to introduce more flexibility. A needs-based approach to benefit design is not ‘a nice to have’ but an imperative if individuals are to have a chance at safeguarding their journey, both along their way and at their retirement destination.

PART 2: THE WAY FORWARD

WHATâ&#x20AC;&#x2122;S THE POINT?

Making targets meaningful to members

PART 2 Chapter 2

WHAT’S THE POINT?

Summary Targets help members to see, at any point in time, if they are adequately covered for retirement or need to supplement their savings. But what the target should be, is a complex issue. Needs vary widely. More importantly, savings targets don’t address the quality of protection an individual has in the course of their financial journey. In an ideal world, we need to design a multi-tiered target framework. To make these targets meaningful in the real world of high employee mobility, we need to establish a standardised approach that we can apply to all funds.

DO GOALS STILL APPLY IN A DEFINED CONTRIBUTION WORLD? At the heart of employee benefits sits the employee: a person with needs, plans and dreams. And deciding how much to save for retirement is a big part of the financial planning that goes into meeting these needs and pursuing these aspirations1.

When the defined contribution (DC) model was introduced, some boards of trustees believed this ‘financial planning’ problem simply transferred to the member. The member alone knew what that ‘right amount’ for retirement would be for them.

1 Bernheim, Forni, Gokhale & Kotlikoff (2000). Tacchino & Saltzman (1999)

But if there has been one important lesson we’ve learnt from the DC experience, it is that the ability to define those targets was most definitely beyond the scope of most members. It became clear that to meet the needs of the broadest number of members,

PART 2

WHAT’S THE POINT?

Chapter 2

The graph below shows the improvement in retirement readiness an individual has achieved by using an online calculator to work out their target. The results are given for four different income quartiles and the graph shows that online calculators seem to be the most useful for lower income earners – those very individuals who may not be able to afford a financial planner.

boards needed to establish targets, and manage funds around those targets. What has also becoming increasingly apparent is that providing members with targets, and helping them understand whether they are achieving them over time, is an important catalyst for getting members to take action that might improve their retirement readiness2.

So how do we decide what an appropriate target would be for a fund?

ESTIMATED PERCENTAGE POINT INCREASE IN MODIFIED RETIREMENT READINESS RATING FROM USING TARGETING 20%

16%

18.1%

18.0%

18%

16.8%

18.2%

17.6%

17.3%

14.7%

14.6%

Income quartile

Percentage

14% 12.0%

12% 10%

Lowest quartile

11.4%

Second quartile

9.3%

8.7%

Third quartile

Highest quartile

4% 2% 0% Family

Single female

Single male

Gender or family status Source: EBRI (2013) The graph shows the estimated percentage point increase in modified retirement readiness ratings for respondents who used an online calculator to determine their savings target. The modified retirement readiness rating is simulated given the 2013 RCS respondents’ age, income, gender and family status and their response to: “amount you think you and your spouse will need to accumulate in total by the time you retire so that you can live comfortably in retirement.”

2 Goda, Manchestwe and Sojourner (2012)

PART 2 Chapter 2

WHAT’S THE POINT?

WHAT MAKES A TARGET MEANINGFUL? In setting a target at fund level, there are a few desirable characteristics that the target must fulfil, like:

Targets must be: 1. Realistic 2. Communicable 3. Balanced against other needs 4. Based on income requirements

THE TARGET IS REALISTIC

Trustees cannot set targets independently of the current design of the retirement fund. Contribution rates, expenses, normal retirement age and other pertinent factors are required to project the possible retirement funding outcomes that members could achieve. Sensitivity testing under a range of investment return assumptions can help to provide the range that the target must fall into. If members’ projected outcomes are clearly inadequate, an exercise of this sort may also provide an indication that trustees may need to redesign the fund.

THE TARGET IS COMMUNICABLE

Short service periods indicate that members may be accumulating their retirement funding from a number of different sources. As a result, it may make sense to communicate goals in terms of multiples of salary given that these are mathematically simpler to manipulate than replacement ratios3. This is the wealth-earnings ratio we describe later. Current estimates suggest that 75% of single men need 12.9 times annual salary at age 654. The comparative replacement ratio is 90.9%5. We argue later on in this chapter that trustees may find a goal that reflects a multiple of a member’s annual salary far easier to communicate to their membership.

3 Butler & Van Zyl (2012) 4 Butler (2011) 5 Butler (2011)

PART 2

WHATâ&#x20AC;&#x2122;S THE POINT?

Members may have to address potential shortfalls between fund targets and their unique targets.

Chapter 2

TARGETS ARE SET SUCH THAT THEY BALANCE OTHER NEEDS

In an effort to maximise their retirement funding outcome, individuals face conflicting objectives. They can increase their savings rate, but they will have to sacrifice take-home pay. They can allocate the highest possible portion of their retirement fund contributions to the investment vehicle, but that would be at the expense of important protections of their income and families. Setting a target realistically would involve finding that balance and looking at the problem holistically.

THE TARGET IS BASED ON EXPECTED OR ASSUMED INCOME REQUIREMENTS

Individuals will have variable views on how to spend their retirement savings. Some may choose an inflation-linked income while others may choose a fixed, guaranteed income for life. We may need to change the way we calculate the target to accommodate these differences. For instance, if members all intend to buy an inflation-linked income, then we should calculate the replacement ratio based on inflation-linked annuity rates rather than a fixed, guaranteed annuity.

Perhaps the most practical suggestion is for trustees of DC funds to have a goal that includes both the total amount an individual needs to save, as well as some broad indication of what their savings will translate into at retirement to provide that post-retirement income. The goal may not, however, fulfil all of a memberâ&#x20AC;&#x2122;s income requirements and trustee boards should communicate this to members. Armed with that information, members can then at least determine for themselves what their total picture is likely to be and whether they need to find alternative ways to address potential shortfall issues.

PART 2 Chapter 2

WHATâ&#x20AC;&#x2122;S THE POINT?

WHAT OPTIONS EXIST FOR DEFINING A TARGET? The replacement ratio is one of the more widely used targets for South African funds. Defined as the ratio of income in the year after retirement to the income (usually pensionable income) in the year before retirement, South African boards of trustees use replacement ratios as a way to determine whether fund members are achieving adequate outcomes. Replacement ratios originated in defined benefit (DB) funds because of how benefits were calculated:

Accrual rate x final salary x number of years of service The pension benefit accrual rate usually varied around 2% and the resulting pension benefit replaced between 60% and 80% of the memberâ&#x20AC;&#x2122;s pre-retirement income, based on between 30 and 40 years of service. Replacement ratios can be difficult measures for individuals to understand. Wealthearnings ratios provide individuals with the multiple of current pensionable salary they would need for an adequate retirement income6. Wealth-earnings ratios share many similarities with replacement ratios, but interpretation of the outcome on the part of the member is made much easier with the use of multiples rather than percentages. This means that members with multiple retirement savings vehicles could easily work out the total collective outcomes of these funds to work out whether they will achieve an adequate income level.

6 Moore & Mitchell (1997)

PART 2

WHAT’S THE POINT?

Chapter 2

WHAT IS THE RIGHT NUMBER?

90% of South African households will need more than 75% of their actual pre-retirement income.

Although the concept of using a target to help with financial planning and retirement fund design is a simple one, finding the quantum for the target can be difficult. South African savers and trustees may be familiar with the rule of thumb of aiming for a 75% replacement ratio. Indeed, academic literature from both the US and UK suggests targets (gross of tax) of 65%7 to 89%8. But perhaps we need to interrogate this number more fully.

Using consumption smoothing as a way to estimate needs

One way to estimate how much South African households would need is to estimate the lump sum at retirement that would allow pensioners to smooth their consumption into retirement and then divide this by the earnings at retirement to give a wealth-earnings ratio9. In practice, we can calculate targets for individual households by taking the value of goods and services consumed and then projecting this through to retirement. At retirement, this consumption may change slightly. Research shows that most South African households don’t radically change their consumption at retirement although some households may start to spend more on healthcare and less on other things10. During retirement, health expenditure rises faster than other consumption until it reaches a critical level when the pensioner reins in their health expenditure by, for example, switching to state services and generic medicines. Other expenditure rises with inflation. Consumption may also increase if the pensioner is widowed and no longer benefits from shared living expenses.

7 Burns & Widdows (1990) 8 Greninger, Hampton, Kitt & Jacquet (2000) 9 Butler & Van Zyl (2012b) 10 Butler & Van Zyl (2012a). Butler (2013) 11 Butler & Van Zyl (2012b). Butler (2011) 12 Butler (2011) 13 Butler & Van Zyl (2012b) 14 Butler (2013)

Consumption smoothing means that consumption can change at retirement as a result of lifestyle changes, but pensioners shouldn’t have to cut back due to lack of funds. Once we’ve estimated this consumption stream, we can calculate the amount of income needed to provide for this consumption. This involves adjusting for the fact that the person’s property may be mortgage-free in retirement and that they would need to pay tax on income before they can spend it. When we’ve calculated the income stream, we can estimate the value of the lump sum required to provide for that income stream11. If you consider targets for real South African households using this method, it becomes clear how inadequate the 75% replacement ratio target is. Data collected from households over the course of 2010 and 2011 suggested that 90% of households will need more that 75% of their actual (and not pensionable) pre-retirement income12. This was not an isolated result, as repeating the exercise for data collected in 2006 and 2007 produced a similar result13. These studies also showed that targets differ from household to household for a number of reasons and that the targets change over time because of changes in the economy and taxation14. This means that, at best, trustees can aim to get members within the ballpark of their target, but members will need to take responsibility for determining and reaching their own unique target.

PART 2 Chapter 2

WHAT’S THE POINT?

HOW DO WE ADDRESS THE MOBILITY PROBLEM? Rather than standardise the number that all funds should target, we should standardise the approach to calculating the target.

Job mobility makes the replacement ratio convention particularly problematic. Most members are unlikely to retire with 40 years of service from one employer, so it becomes even more difficult to assess if their financial position at retirement is attributable to the retirement goal that any particular fund used along the way. It is arguable that a goal designed to be met over 40 years is of little practical use in a world where the average service period of an employee at any particular company is three years15.

The added value of the consumption smoothing model is that it also solves for the required contribution rate.

One way to address the impact of high employee turnover is to have a standard target that all funds will aim to achieve for their members. This is not a new concept since many South African funds now target a replacement ratio of 75%. However, complications arise when we consider the fact that pensionable salary definitions vary across funds. This means that if we consider the target as a percentage of an individual’s pensionable salary, the true amount that funds are targeting can end up being quite different from one fund to the next. Setting an arbitrary target of 75% of pre-retirement earnings also ignores the consumption and expenditure pattern of fund members.

The consumption smoothing model will require information about fund salaries, salary increases over time and the normal retirement age. And when we consider the different income requirements of individuals we find that the wealth-earnings ratio that they require can vary from person to person. For instance, a person with higher housing values may have a higher target16. As such, the model may have to be run for distinct categories of workers, making the target even more specific.

We therefore propose that rather than standardise the number that all funds should target, we should standardise the approach to calculating the target. A consumption smoothing model can be used to solve simultaneously for the contribution rate and the target that the fund will aim to achieve. The advantage of a consumption smoothing model is that it looks at the spending patterns of members and aims to give them a post-retirement income that will continue to support that spending.

15 Member WatchTM 2012 data set 16 Butler (2013)

Rather than using replacement ratios as our measure for the target, we propose the use of a wealth-earnings ratio. Targets like this are easily communicated and easily aggregated across different funds. And if all funds use the same approach to setting the target, the investment strategy and fund design used to achieve that target should not vary too much between funds.

However, this specific approach looks solely at the outcome the retirement fund must deliver and does not aim to optimise the allocation of contributions towards protection and saving at each point in a person’s life cycle. For this we will need a more holistic measure of a person’s needs. So in summary, a consumption smoothing model helps us to establish a target. That target can be in terms of a replacement ratio or a wealth-earnings ratio. But because wealth-earnings ratios are easily communicated to ordinary fund members, we suggest the use of this measure when calculating targets.

PART 2

WHAT’S THE POINT?

Chapter 2

MOVING FROM GOOD TO GREAT Replacement ratios and wealth-earnings ratios measure retirement readiness. But they don’t show how retirement readiness, and other employee benefits, fit into an individual’s journey to financial health. So, we now introduce a new measure, one which looks at an individual’s ability to achieve financial health over the course of their lives.

Second-tier targets

Individuals will have needs at each point of their life. Consider a 30-year-old man who is employed as a construction site engineer and who is about to be married. His employer has provided an arrangement that offers group life cover, disability insurance and retirement savings. However, his spouse earns less than he does and in the event of his death, he wants to ensure that she is able to comfortably maintain her lifestyle. In his view, the answer is to take out additional life cover. He is still young and at high risk of becoming disabled while at work, but he chooses to forgo additional disability protection in favour of the life cover.

What happens if he becomes disabled? Does he have enough protection or additional savings in place to maintain his standard of living? Is it more important to have life cover or disability cover? Individuals need tools to help them address these issues. Achieving wellness at an individual member level involves considering mental, physical and financial needs. In Benefits Barometer 2013 we defined financial health as 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. This means catering for immediate financial needs as well as preparing for both certain and uncertain events.

What happens if he becomes disabled? Does he have enough protection or additional savings in place to maintain his standard of living? Is it more important to have life cover or disability cover?

PART 2 Chapter 2

WHAT’S THE POINT?

Events such as death are certain to occur, but the timing is not certain. Other events like disability or retrenchment are uncertain in both the timing and probability of occurrence. We need to make appropriate allowances for all these events, through savings (pre-funding) or buying insurance cover, to ensure we remain financially healthy throughout our lifetime.

To measure financial wellness, we focus on what individuals need and compare this to what they have. We also consider the means available to an individual. Having less doesn’t have to mean being less prepared, but it does mean having to make more careful choices.

HOW CAN WE MAKE THE JOURNEY SMOOTHER? To carry out an appropriate assessment of current and future financial health, we need to at least consider: ■■ Current assets and liabilities, including housing, education, investments and debt ■■ Current and future retirement savings ■■ Life cover ■■ Disability cover ■■ Medical cover ■■ Short-term insurance (motor and household contents). If we can identify the events that may affect an individual at a particular stage of their life, we can match up the required protection that will help them cope. This is a benchmark against which individuals can assess their current position to determine whether or not they have enough protection against various ‘shock’ events. Please note this is not about how much money an individual will have or make, but rather about the choices they make with the resources available and how what they have compares to what they need.

PART 2

WHATâ&#x20AC;&#x2122;S THE POINT?

How can we use this measure?

A primary objective in measuring an individualâ&#x20AC;&#x2122;s financial health is to enable them to understand where their potential shortfalls are so that they can take corrective action. Equally important is knowing when there is too much cover and to adjust for this as well. While these scores have been designed to provide individuals with important feedback, employers or boards of trustees can aggregate individualsâ&#x20AC;&#x2122; scores to create a score that is split by specific demographic characteristics such as age, gender, occupation or province. This could provide a useful insight into which areas might require more focused communication.

Chapter 2

For example, if a company were to find that the majority of its 20- to 30-year-old married males were under-insured in terms of life cover, they could target this group through interventions or default structures and encourage them to increase their life cover. This is not only useful for trustees to identify which groups are over- or underinsured, but should also help them to determine the best form of education and advice.

Trustees could target under-insured groups through interventions or default structures and encourage them to increase their cover. This is not only useful to identify which groups are over- or underinsured, but should also help them to determine the best form of education and advice.

PART 2 Chapter 2

WHATâ&#x20AC;&#x2122;S THE POINT?

Conclusion Under a defined contribution model, individuals are being asked to assume more responsibility for ensuring they meet their goals. Deciding how much to save for retirement is a function of the total sum of money an individual needs to provide for an adequate income during retirement17. For some, this may be less than their preretirement earnings. For others, a need for comprehensive medical cover in retirement may result in a required income that is greater than their pre-retirement earnings. The rest may need a post-retirement income that is equal to their pre-retirement earnings. We have determined that, despite their flaws, first-tier targets like replacement ratios and wealth-earnings ratios, are a necessary part of the financial planning process in defined contribution funds. But we need to understand how employee benefits fit into the holistic well-being of the individual over their life cycle. For this reason, we need to increasingly consider second-tier targets, both as employers and individuals.

17 Mitchell & Moore (1998)

PART 2: THE WAY FORWARD

THE JOURNEY ON AUTOPILOT Knowing when and how to use defaults

PART 2 Chapter 3

THE JOURNEY ON AUTOPILOT

Summary

PLAY VIDEO

Defaults have become increasingly popular, especially among regulators, who have realised that they can counteract behavioural biases to improve both individual and societal outcomes. However, to use defaults effectively we need to understand the conditions in which they are appropriate and what constitutes a good default.

Defaults help individuals to make the right decisions about issues that have significant long-term impacts for their lives.

When Sunstein and Thaler released their book Nudge, regulators around the world sat up and listened. Nudge addressed the issue of how to get individuals to make the right decisions about issues that have significant long-term impacts for their lives. Their suggestions about applying choice architecture and libertarian paternalism provided some much-needed guidance. In fact, in the United Kingdom, regulators went so far recently as to set up their own â&#x20AC;&#x2DC;Nudge Unitâ&#x20AC;&#x2122;. Locally, National Treasury in particular, is exploring the possibility of using default solutions to address everything from preservation to annuity selection and investment strategies. Defaults first became popular when defined contribution (DC) funds came

into existence. Many early defaults simply translated accepted conventions (like pensionable pay percentages) directly from defined benefit (DB) schemes where individual members had limited choices because the benefits design was set by the employer and trustees. Originally, defaults existed primarily as a back-stop for when individuals didnâ&#x20AC;&#x2122;t make their own decisions. As such, in those early days, many trustees simply opted for the most conservative options on the grounds that these would appear the safest and least controversial. It would take some time to understand the extent of the unintended consequences of such 'safe' decisions.

PART 2

THE JOURNEY ON AUTOPILOT

about how choices are presented to them. In many cases, choices can appear so overwhelming that individuals simply retreat from them.

Gradually trustees and regulators became more circumspect about what would constitute a responsible default option. But the real breakthrough in thinking about the power of the default model only came about when academics like Sunstein and Thaler started to introduce behavioural economics principles into their consideration of default structures. This has led to the creation of an entirely different beast. Far from being a stop-gap for when people fail to make decisions, defaults are now understood to provide a structure for steering them to the right ones. Essentially these defaults rely on research that individualsâ&#x20AC;&#x2122; observed choices are less about their preferences and more

With these kinds of defaults, the idea is to distil the best advice from experts into a series of pre-assigned choices that maximise the chances of achieving a particular outcome. Individuals can still make different choices if they want, but if they prefer not to engage, donâ&#x20AC;&#x2122;t have any strong preferences or would rather trust an expert to make their decision for them, they can follow the default which has now been properly thought out.

Chapter 3

One example of this new approach to default construction can be seen in national programmes for organ donation. In many countries, such as South Africa, if you die, you only become an organ donor if you have actively chosen this option in advance. But in other countries, including Austria, Belgium and Sweden, anyone who dies is automatically assumed to be an organ donor unless they elect to opt out of that default. The graph below shows the dramatic difference in outcomes of these two different default structures.

EFFECTIVE CONSENT RATES BY COUNTRY 99.9%

100%

98%

99.9%

99.5%

99.6%

Effective consent percentage

85.9%

80% Explicit consent (opt-in)

60%

40%

Presumed consent (opt-out)

27.5%

20%

17.2%

12%

4.3%

Denmark Netherlands United Kingdom

Germany

Austria

Belgium

France

Hungary

Poland

Portugal

Sweden

Countries Source: Johnson and Goldstein (2003)

PART 2 Chapter 3

THE JOURNEY ON AUTOPILOT

HOW OPT-IN AND OPT-OUT OPTIONS AFFECT OUTCOMES What accounts for such a large disparity in results? Itâ&#x20AC;&#x2122;s unlikely that moral preferences are this divergent. Instead, what this illustrates is how dramatically defaults influence choice. Default structures seem to influence choice in three important ways: 1. Decision makers may believe that defaults are suggestions by those setting the default. 2. Many people would rather not make a difficult decision, particularly about something as emotive as donating their own body parts. Defaults fill the gap for that decision-making inertia.

3. The beauty of a default is that there is no further administration hassle. This is a huge plus to the confused decision maker1. So, defaults can be very powerful and can be used to significantly improve individual well-being and societal outcomes. But they are not always applicable. We need to appreciate when to use them and how.

Defaults can be very powerful and can be used to significantly improve individual well-being and societal outcomes. WHEN TO USE DEFAULTS Defaults work best when we have a clear idea of what decision is best for everyone2. For instance, in organ donation, we know that everyone benefits if everyone is a donor. But not all decisions are like this. People are different and when those differences change the optimal outcomes, then one-size-fits-all defaults donâ&#x20AC;&#x2122;t work. Typically, defaults are also used in circumstances where experts have more insight into the correct decision than individuals3. For some decisions, individuals have strong preferences and know enough

1 Johnson and Goldstein (2003) 2 Carrol, Choi, Laibson, Madrian and Metrick (2009) 3 Carrol et al (2009)

to be able to better identify the best solution for them than an expert would. For instance, when you choose where to live, you are normally the best person to identify what will work for you. Decisions with clear gatekeepers also lend themselves to defaults. There are a whole range of decisions where the government is a gatekeeper and either sets a default or constrains what choices individuals can make. Even the tax incentives to make contributions towards retirement are a form of nudging.

PART 2

THE JOURNEY ON AUTOPILOT

Considering this, it should be clear that many decisions in employee benefits lend themselves to defaults. While individuals may have little idea of how much to save for retirement, how much risk cover they need, how to invest – particularly given the long-term views required – trustees, with the help of expert advisers, often have enough information to better answer these questions. Within the categories of employee benefits that we have identified – retirement funding, risk benefits, healthcare benefits, and financial education – the first two lend themselves to defaults, to varying extents. Where medical scheme membership is a condition of employment, employers

RETIREMENT FUNDING

Lend themselves to default solutions

will typically offer one or more schemes of choice which employees can choose between. In addition, some employers may restrict the choice of benefit options within the chosen medical scheme. Although this is a type of default, it is not an individualised solution. Experts can definitely help individuals to make the right choice, but they need a lot of information from the individual to do so, and so healthcare benefits don't lend themselves to defaults. As far as financial education is concerned, it is used in situations in which individuals have to face decisions alone and so defaults would not be entirely relevant. In Part 2, Chapter 8, we will explore how employers and trustees can effectively implement financial education programmes.

POST RETIREMENT SOLUTIONS

RETIREMENT FUNDING RISK BENEFITS

Chapter 3

POST-RETIREMENT SOLUTIONS

RISK BENEFITS HEALTHCARE BENEFITS

Lend themselves to smart defaults up to a certain point

FINANCIAL EDUCATION

Individualised solutions 87

PART 2 Chapter 3

THE JOURNEY ON AUTOPILOT

PRINCIPLES FOR SETTING A GOOD DEFAULT When setting defaults, there are a few key principles to observe:

Principle

A good default must work to satisfy the needs of the largest representative body of fund members – not the needs of the trustees or the service providers.

Principle

A good default should reflect what would be considered the best advice of the fund’s experts for that population.

Principle

A good default should maximise the probability of meeting a fund’s needs and targets.

Principle

Defaults should seem intuitively sensible to minimise opting out (de-selection) by members.

Principle

A good default should be cost-effective.

All this means that a fund’s set of defaults should represent the most optimal path for the majority of individuals in the fund to reach their targets, in the absence of additional information. Get the default wrong and the outcomes could be crippling for members. Get the default right, and the risk of potential harm should be mitigated to some extent. This means that the exercise of setting an optimal default demands as much insight into the composition of the population being serviced, and the appropriate targets for that population, as it does in defining a theoretically correct strategy.

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THE JOURNEY ON AUTOPILOT

Chapter 3

MAKING DEFAULTS ‘SMARTER’ An alternative to a one-size-fits-all default is a smart default. In a smart default, experts are still often in the best position to identify the right solution, but they need more information about the individual to get it right. In some cases, this is a demographic variable which is readily available to the fund. For instance, many funds apply a lifestage approach for their investment strategy default. This is a smart default4 of the most basic kind because it adjusts the asset allocation of the individual as they approach retirement. It is based on a single variable – such as years until retirement or age – which then generates different answers for different individuals without the need for engagement.

One of the fair criticisms of life-stage investment strategies, though, is that they don’t take into account the total savings reflected in a member’s account at the point they start to de-risk, or perhaps their specific choice of how they want to convert that savings into a post-retirement income stream. By simply adding these two small pieces of additional information, we now have an even ’smarter default’ that provides members with individualised solutions over the course of their membership. As defaults get ‘smarter’, they are able to incorporate an increasing number of variables to reach the correct answer. Sometimes, smart defaults require an individual to engage to a limited extent, or they could be improved through limited

engagement5. This is when an expert needs key information to which they don't have easy access to make a decision – for instance, what are an individual’s priorities for retirement. In this case, they could use advice or interactive tools to present a limited range of choices, along with a series of questions whose answers will guide an individual to the correct decision. Other areas where smart defaults are applicable in this book include the approach discussed in Part 2, Chapter 1 where we alter the mix of risk benefits and retirement funding depending on member age, and our discussion in Part 2, Chapter 10 on individualised asset allocation.

IN THE EXAMPLES TO FOLLOW, WE CONSIDER TWO APPLICATIONS:

Application 1

This examines contribution rates, which is an area where a single default approach could be appropriate. It specifically examines auto-escalation in cases where changes to contribution rates are likely to be met with resistance.

SETTING CONTRIBUTION RATES FOR RETIREMENT SAVINGS

Application 2 SETTING ANNUITISATION DEFAULTS

4 Fernandes, Lynch and Netemeyer (2014) 5 Ibid

This examines annuity defaults. These are very difficult defaults to set. This is one area where defaults will likely need to be supplemented by education and advice. They'll also likely need to be a bit ‘smarter’.

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Application 1 SETTING CONTRIBUTION RATES FOR RETIREMENT SAVINGS

Defaults can prove to be useful tools in setting contribution rates. Experts are likely to have better insight than individuals into what an appropriate contribution rate is to maximise the probability of reaching the target. We talk about targets in Part 2, Chapter 2. Given the current low return environment, funds may find that the default contribution rate ends up being more than many members can stomach. In fact, Alexander Forbes Research & Product Development

found that a 25-year-old new fund entrant, who plans to retire at the age of 65 with a replacement ratio of 75%, will need to contribute 17% of his pay towards retirement savings. This rate may be more than many individuals are comfortable with. This means that maximising the probability of meeting the target (Principle 3) may clash with either meeting an individualâ&#x20AC;&#x2122;s other needs (Principle 1) or maximising the number of individuals using the default (Principle 4).

A 25-year-old new fund entrant, who plans to retire at the age of 65 with a replacement ratio of 75%, will need to contribute 17%, of their salary.

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Choosing the contribution rate default when it starts to infringe on expectations of take-home pay is a key challenge.

Getting people to choose the contribution rate default when it starts to infringe on their expectations of their take-home pay is a key challenge. When rates are set too high, individuals are likely to opt out6. When they are too low, individuals are unlikely to meet their targets7. A key concern for the UKâ&#x20AC;&#x2122;s auto-enrolment programme is that all employees are enrolled at a 3% contribution rate, which is unlikely to make a significant difference in increasing retirement incomes. Because defaults are so often seen as advice, setting a low default can result in individuals saving less than they would otherwise have done8.

improves their chances of a decent retirement outcome without disrupting consumption.

But there is an alternative called autoescalation, which academics originally proposed as the Save More Tomorrow (SMarT) programme that could provide a less painful way of achieving what is required9.

Since it has been rolled out more broadly, it has often been used as a default where all new employees start at a defined contribution rate, with a predetermined increment applied to increase the rate each year, until they reach a cap. In this case, the increase in rate is not related to the annual salary increase as such, but applied at a specific increment for all employees.

Auto-escalation slowly adjusts contribution rates to the level required as individuals receive salary increases. This means it

6 Beshears, Choi, Laibson and Madrian (2010) 7 Choi, Laibson, Madrian & Metrick (2004) 8 Choi et al (2004) 9 Thaler and Benartzi (2004)

We can implement auto-escalation in a few ways. In its original conception in the SMarT programme, contribution increases were linked to annual increases. Each year when an individual receives their salary increase, some percentage of the increase (say 1â&#x20AC;&#x201C;2% of a 7% increase) would be redirected towards saving. This means that while contributions toward retirement are increasing, so is take-home pay, making a smaller negative impact on members.

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If we consider a fund in which individuals committed that part of their salary increase that was above inflation to their retirement fund contribution for three years and then held that contribution rate constant until retirement, we would see the average replacement ratio increase from 40% to 82% at the end of that three-year period. A final way in which we can apply autoescalation is on an age basis, where we set default contribution rates for different age bands, with older ages having higher default contribution rates.

contributions based on their age, a few potential pitfalls have been identified. Extensive US experience suggests that we should be wary of10: ■■ Setting the starting contribution level too low. ■■ Setting the increment between contribution levels too low. ■■ Stopping the auto-escalation increases before an adequate rate is reached. Any of these could result in individuals saving less than is necessary or even less than they would have without auto-escalation.

In this final route where all new employees follow the same step-wise increases in

EFFECT OF AUTO-ESCALATION ON REPLACEMENT RATIOS

82% 40% 92

10 Van Derhei (2012)

Increase in the average projected replacement ratio

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The starting contribution rate under an auto-escalation structure could be set by age. In standard auto-escalation, any new employee, whether 25 or 40 years old, would start at the minimum contribution rate.

CAN AUTO-ESCALATION WORK IN SOUTH AFRICA? In South Africa, inflation complicates the setting of the increment. An aggressive increment, such as 2%, increases the chances of real take-home pay falling, while small increments may fall short of the contributions required. In the case of individual need, research suggests that individuals with lower incomes tend to be less likely to opt out of a default â&#x20AC;&#x201C; in other words, make a choice different from the default11. Yet, it could be these very individuals who can least afford higher contribution rates, and have the greatest need for take-home pay. So we need to ensure that individuals receive proper advice and communication around the impact of such defaults before they are implemented. Another challenge with auto-escalation is in industries or companies with high employee turnover. If employees change

11 Beshears, Choi, Laibson and Madrian (2010)

jobs frequently and the firms that they join all use auto-escalation, they may be perpetually enrolled at the minimum contribution rate. Or worse, they may transfer into a fund without auto-escalation and the net effect of a low starting contribution rate with one employer together with an only average contribution rate with the next employer could also result in the individual being underfunded. To avoid this, the starting contribution rate under an auto-escalation structure could be set by age. In standard auto-escalation, any new employee, whether 25 or 40 years old, would start at the minimum contribution rate. If the strategy is set around age, then a 25-year-old would start at the same rate as a model 25-year-old enrolled in the strategy, say 10%, while the 40-year-old would start at the same rate as a model 40-year-old, say 18%.

Given that as people age, their salaries tend to rise in real terms (up to a point), this still retains the benefits of auto-escalation. If the increase in contribution rate is structured to be a fixed annual increment, it does raise significant risk of take-home pay falling at some point. Because it is a default, individuals could choose to opt out of the structure at this point. However, as this is more likely at older ages when individuals become more aware of retirement, employees may be willing to stick with the strategy. Despite its shortcomings, auto-escalation may work well in bargaining council funds, where members may remain within a single fund over their lifetime even though they may not always have the same employer.

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Application 2 SETTING AN ANNUITISATION DEFAULT

Legislation will likely require boards of trustees to select a default option for fund members who annuitise their fund credit at retirement. This default could be offered within the fund or outside the fund; it could be a life annuity or a living annuity. Unfortunately, research shows that no single default is likely to meet the needs of the majority of any fund’s population12. What makes this particularly challenging is that funds will have to set a default and individuals are likely to take this as advice13. For this reason, trustees will need an explicit strategy to engage individuals in

Trustees need to consider what types of annuities to offer as well as how to provide the appropriate advice to support decision making. In keeping with our framework, some of the key steps involved will be:

DESIGN

IMPLEMENT

MONITOR

■■ Analyse member needs and wants.

■■ Identify an advice strategy.

■■ Identify appropriate annuities.

■■ Appoint service or product providers.

■■ Use an in-fund or external solution.

the decision of choosing a default. This could include providing advice, providing simple engagement tools that direct them to choose smart defaults or providing just-in-time education to help them make the decisions themselves. We discuss communication techniques in Part 2, Chapter 7.

12 Butler, Hu and Kloppers (2012) 13 Brochetti, Dee, Huffman and Magenheim (2011)

■■ Keep track of take-up.

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ANALYSIS OF PREVIOUS RETIREESâ&#x20AC;&#x2122; DECISIONS We have already discussed in Part 2, Chapter 1 how to do a broad analysis of needs and wants within the fund. In addition, trustees can also analyse recent decisions by retirees as well as the profile of upcoming retirees. This analysis should help trustees to make sure they have the appropriate menu of options available and an advice framework, if needed. Letâ&#x20AC;&#x2122;s look at an example of such an analysis. The analysis is based on a large fund in the retail and wholesale industry. The graph below shows the annuitisation decisions of recent retirees by size of

their benefit and the proportion of retirees selecting each annuitisation option. In our example here, the evidence suggests that members with significant fund credits are purchasing living annuities. By contrast, members with low fund credits (or potentially low incomes) are simply withdrawing cash. This gives trustees some sense of what type of default annuity will be the most attractive to members. It also allows trustees to check if decisions appear to be prudent. If many retirees appear to be making particular kinds of poor decisions, then they can incorporate this into the advice framework.

PERCENTAGE OF RETIREMENT BENEFITS 80%

Percentage

60% Percentage split by size of benefits 40% Percentage split by number of retirees 20%

Living annuity

Level annuity

Unclassified annuity

Cash

Retirement benefits

Source: Alexander Forbes Research & Product Development

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ANALYSIS OF UPCOMING RETIREES We can also carry out an analysis of upcoming retirees. This involves looking at those employees who are within seven years of their normal retirement age. A look at the projected fund credits of upcoming retirees can help to shed some light on the likely decisions that they will make when they reach retirement. The graph below serves as an example of how projected fund credits may look. Given the spread of projected fund credits for upcoming retirees, we can note the following:

■■ Retirees usually take benefits of less than R75 000 in cash, as the cost of an annuity exceeds the advantages. ■■ Benefits up to R1 million usually imply a low replacement ratio and the retiree cannot afford to take a significant amount of risk. A guaranteed annuity is usually most appropriate. ■■ Members with benefits over R1 million can often afford to invest in living annuities, but it is recommended that a portion be invested in a guaranteed annuity to reduce the risk of longevity.

A final, but perhaps more crude, assessment is to look at the spread of salaries of upcoming members. In some instances, annual salaries have been used as a proxy for the financial literacy levels of members. Although this may be a less precise approximation, it could supply a basic guideline. Living annuities for example require a significant level of financial understanding (and financial advice) to set an appropriate investment strategy and drawdown rate, and to understand that the pension is not guaranteed for life. A higher level

PROJECTED FUND CREDITS OF UPCOMING RETIREES

Number of upcoming retirees

60 50 40 30 20 10 0

0–75k

75–500k

500k–1m Fund credits (in rands)

1–2m

2m+

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of financial sophistication is required to understand the risks and lack of predictability of the pension and appreciate the benefits of a living annuity. Inflation-linked annuities are easy to understand as they provide pension increases equal to inflation for the rest of the retiree’s life. These annuities are therefore predictable (in real terms) and offer the ultimate form of financial security. With-profit annuities fall somewhere between living annuities and inflation-linked annuities. Pension increases are linked to an underlying investment return but are guaranteed never to be negative (in other

words, the pension will never reduce) and are guaranteed for life. For our example fund, the graph below shows that we have a skewed salary picture. This can complicate things, and may indicate that a single default annuity option may not be suitable for all members. The implied variability in financial literacy is self-evident. These type of analyses will help trustees and their advisers to identify what kinds of annuities to offer, whether there are enough retirees and whether trustees and employers have a big enough governance

Chapter 3

budget appetite to make an in-fund solution feasible and what level of advice they’ll need. They may also provide sufficient information for a smart default to be structured where members’ defaults are contingent on this kind of information. By limiting the questions to which annuities are likely to be best for the population, trustees can design tailored communication and education with this in mind. And as time goes on, the trustees can monitor the takeup and establish whether their approach is working.

ANNUAL SALARIES OF UPCOMING RETIREES

Number of upcoming retirees

0–60 000

60 000–120 000

120 000 –180 000

180 000–300 000

300 000–600 000

600 000+

Salary band

Source: Alexander Forbes Research & Product Development

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Conclusion Regulators have seized on the ability of defaults to influence behaviour as a powerful way to improve decision making across a range of contexts. National Treasury has made them a prominent feature of retirement reform across many retirement decisions. For this reason, trustees need to understand both the power of defaults and how to apply them correctly. They need to be based on a solid grasp of membersâ&#x20AC;&#x2122; needs, appropriate targets, the best possible advice and ongoing monitoring to ensure trustees channel the desired behaviour.

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Aligning HR policies with employee benefits practices

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Summary To address the fragmentation we identified in Benefits Barometer 2013, one of the key steps is to examine the links between employer policies, legislation, and insurance policies. Gaps can arise between disability, incapacity and sick-leave policies, but can also arise elsewhere. Closing these gaps can be costly, but leaving them unaddressed could have more severe consequences for individuals.

Gaps in cover can leave individuals without essential benefits when they need them most.

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In Benefits Barometer 2013, we stressed the importance of an integrated approach to employee benefits design. In this edition, we identify discontinuities between employer policies, legislation and insurance policies. These are the kinds of gaps that can leave individuals without essential benefits when they most need them. An excellent case in point is the loss of life cover when employees go on a protected strike. When gaps do arise, what we need to keep in mind is that it costs money to close gaps. But it may cost an individual more not to close the gaps.

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WHERE TO START ■■ Code of Good Practice of Disability in the Workplace ■■ Compensation for Occupational Injuries and Diseases Act ■■ Schedule 8 of the Labour Relations Act.

Often these gaps are the result of legacy issues not being reconsidered in light of new developments elsewhere in the company or in the fund. Addressing these problems demands a centralised accountability that can bring together diverse departments and legislation. This challenge rests with various structures within an employer, including its human resources, payroll and finance departments. It’s the employer’s responsibility to review all employment policies and establish a clear understanding of the total rewards on offer to employees and whether or not needs are being met. The first step is to review existing legislation. This sets out the high-level framework that all employers operate within. This is followed by an analysis, which consists of gathering information on: The company’s current health, incapacity and disability policies. Normally, these policies follow legislative requirements set out in the: ■■ Basic Conditions of Employment Act ■■ Employment Equity Act

The types of insurance policies currently in place, either through the employer or the retirement fund. Examples include: ■■ Permanent health insurance (PHI) ■■ Capital disability benefits ■■ Temporary disability benefits ■■ Extended sick leave benefits. Other factors to be considered like: ■■ Definitions of disability ■■ Waiting periods ■■ Exclusion clauses ■■ Terms of cover. Once the above analysis has been completed, the company must review union agreements to ensure that employer and insurer policies dovetail with existing agreements. Step two is to determine whether there are any gaps or overlaps in the benefits that have been put in place.

CLOSE THE GAPS

DETERMINE GAPS

ANALYSE 101

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Overlaps in benefit coverage can be as costly as leaving gaps.

To facilitate an assessment of the employee benefits programme, we can use a matrix. Such a matrix would outline the various benefits a company can offer as part of its employee benefits package. The matrix would take note of the varying needs in an individualâ&#x20AC;&#x2122;s (life like death, disability, retirement, retrenchment and so on). By identifying the full range of needs in an individualâ&#x20AC;&#x2122;s life, we can then look at the benefits we can offer an employee to help meet these needs. Overlaps in benefit coverage can be as costly as leaving gaps. As a result of corporate activity like mergers, many companies have inherited legacy benefits, which result in potential inefficiencies and overlapping with existing schemes. A matrix helps you to identify where you may be offering too many solutions to address the same need, like death cover. There are many variations of death cover that can be packaged and offered as part of a total

rewards system. By using a matrix we can identify those variations that are necessary and those that are not. Not only do the employers have to consider the insurer and union policies, they also have to avoid funding benefits the government provides to, or facilitates on behalf of all working South African citizens. For instance, all workers have some form of recourse to benefits through the Compensation for Occupational Injury and Diseases Act (COIDA)1 if they are injured or killed in the workplace or while on duty. These benefits may prove adequate for workers, but the point is that employers should provide benefits that top up what the government provides rather than duplicating them. Finally step three is to close the gaps. Cost will invariably be an issue, but employers must give serious consideration to the consiquences.

As a result of corporate activity, many companies have inherited legacy benefits, which result in potential inefficiencies and overlapping with existing schemes.

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1 Holzmann & JĂ¸rgensen (2001)

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INCAPACITY AND DISABILITY The relationship between disability benefit policies, incapacity policies and sick leave policies is prone to gaps, given the complexity of handling these issues.

The relationship between disability benefit policies, incapacity policies and sick leave policies is prone to gaps, given the complexity of handling these issues. The level of medical cover available to employees can also complicate these issues, as employees with greater access to medical services should be in a better position to prevent temporary illnesses and injuries from turning into permanent problems.

Incapacity and disability are distinctly different concepts. In the discussion that follows weâ&#x20AC;&#x2122;ll clarify the differences in definitions as well as the different gaps which can arise around each concept. Still, they are interlinked and when an employee applies for a disability benefit, companies need to do an incapacity investigation at the same time that they define the employeeâ&#x20AC;&#x2122;s disability.

INCAPACITY Incapacity is an employeeâ&#x20AC;&#x2122;s failure or inability to work according to the requirements of the job. It encompasses both poor work performance and the inability to perform due to ill-health or injury. The key point in this definition is that incapacity is defined according to job requirements. This means employees who may be unable to perform a specific job will be declared incapacitated even though they are capable of performing other jobs with that employer. For instance, a mineworker who experiences a slight deterioration in eyesight will be declared incapacitated in terms of his job requirements because he is unable to work underground. But he could still work above ground in some other role. Legislation does not define when an employee may be considered incapacitated, but rather forces employers to investigate

incapacity and take reasonable steps to accommodate the employee, either in a different job or with further training, or by rehabilitating them. One challenge in managing incapacity in the workplace is that work-related rehabilitation programmes or centres are rare in South Africa. Most employers find it easier and cheaper to replace an incapacitated employee rather than rehabilitate them. However, the number of holistic centres offering physiotherapy, occupational therapy, biokinetics and psychological services does seem to be increasing. Some insurance companies will pay for rehabilitation up to a stated maximum cost because, in the case of mild incapacity, it can reduce the length of the benefit payment period and hence the overall cost.

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DISABILITY The definition of disability varies depending on the duration of the disability. In the short term, usually 24 months, it is the inability of an individual to perform their own or a similar occupation at their existing employer for which they are reasonably suited in terms of education, training and qualifications. The long-term definition of disability relates to whether the individual is able to find any work in the open labour market. That is, if an individual can find any other employment, their benefit payments will stop. Employees are often unaware of this when considering their employment contracts.

COIDA provides definitions of permanent, temporary total and temporary partial disablement. The act is also a useful guide for determining the extent of disablement, and the compensation the court may award in each case. This can help to inform the structure of the disability cover an employer may offer. Prevalent forms of disability cover ■■ Income benefits provide a monthly benefit to replace income from employment while the individual is disabled. ■■ Lump-sum benefits provide a single payout if a member is deemed disabled.

This benefit is cheaper to insure, but there can be a major shortfall for members as the lump sum is unlikely to be enough to sustain them until retirement. Income disability policies are employerowned policies and governed by the Longterm Insurance Act. The employer carries the cost of these policies and has the most control over their design. The retirement fund owns capital disability policies. Note that an employer may also own a lump-sum disability benefit policy.

POTENTIAL GAPS 1. T he gap between sick leave and waiting periods Most disability policies include a waiting period that is typically either three or six months. The longer the waiting period, the lower the cost of insurance. If a company provides 30 days of sick leave in a three-year cycle, as stipulated in the Basic Conditions of Employment Act, but the waiting period on the disability policy is six months, this leaves a period of four months or more in which the employee receives no income. In some instances the employee may be able to claim from the state Unemployment Insurance Fund (UIF). 2. T ake-home pay levels Income disability benefits are usually 75% of the member’s risk salary. The employer defines the risk salary and this is the salary on which risk benefits are based. In most instances, the risk salary may be the same as the pensionable salary. When the risk salary is a proportion of the individual’s total cost to company (TCTC), employees end up taking home a fraction (less than 75%) of their pay after becoming disabled. Consider a 30-year-old male, who has a TCTC of R200 000. His risk salary is set equal to 50% of his TCTC, so R100 000. If he becomes disabled, his benefit of 75% of risk salary equates to R75 000 per year. The member still pays tax on this income, but will receive tax credits for medical aid benefits and be subject to the secondary rebate2. He will also still pay risk benefit premiums and retirement fund contributions as you can see in the diagram on the next page.

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2 The secondary rebate is the tax rebate that is paid to income earners between the ages of 65 and 75 and individuals classified as disabled.

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COMPARISON OF TAKE-HOME PAY LEVELS

Cost of benefits Tax Take-home pay

Income from employment before disability

Income from disability benefit paid by insurer

The long-term definition of disability relates to whether the individual is able to find any work in the open labour market.

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Letâ&#x20AC;&#x2122;s consider some practical examples that illustrate how costly gaps in cover can be for both employees and employers.

Case study 1 WAITING PERIODS

An employer in the finance industry with just over 100 employees chose a six-month waiting period for their permanent health insurance (PHI) policy. Since this client had a small number of employees, they estimated that the probability of disability was low and not worth the cost to reduce the waiting period. But they did not have any policy in place that would provide cover during the waiting period if an employee did become disabled. Shortly after policy inception, two employees became disabled in quick succession. Because of the presumed rarity of disability and lack of cover, they paid the first disabled employee their full salary during the waiting period. Having set a precedent, but still with no cover, they then faced a second disability. What made this particularly challenging was that most employees earned high salaries and it was expensive to pay out their full salaries for six months. They realised that they needed to have a clear policy in place.

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Case study 2 GAP BETWEEN PENSIONABLE PAY AND TOTAL PACKAGE

An employer in the telecommunications industry with over 1 000 employees had a standard PHI benefit that covered 75% of monthly pensionable pay. But their pensionable pay was only 60% of TCTC. Employees were unaware of this gap, and when the first disability occurred, there were huge complaints because a monthly disability payment of 45% of their salary was not what they expected. Subsequently, the company increased the monthly benefit to 90% of pensionable pay. It now uses communication to make employees aware of the gap between pensionable pay and their cost to company.

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Case study 3 INAPPROPRIATE BENEFIT STRUCTURE

An employer in the mining industry offered a lump-sum disability benefit. Occupational risk is higher on mines. This, together with the high claims experience of the industry, results in high premiums for disability policies. Opting for the lump sum, rather than an income benefit, seemed more cost-effective, but the company had a particularly young worker profile. A member became disabled at the age of 30 and received a lump-sum benefit of R200 000. The member was not able to return to work and had to survive until retirement on only a small lump sum.

Summary of these three case studies These three case studies highlight the kinds of issues which can arise when benefits are not designed with the needs of the specific employee population in mind. PHI benefits can be very costly. Perhaps a way to decrease the cost of such cover is to limit the definition of disability to a specific set of events, although this is less likely to occur.

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OTHER POTENTIAL GAPS TO CONSIDER ■■ In Benefits Barometer 2013, we raised the issue of gaps in coverage which can occur during strikes and mass exits. ■■ Another potential gap can arise when female employees are on maternity leave. Companies need a policy in place which guides what happens to retirement, risk and medical aid contributions during these months – both for paid and unpaid maternity leave. Childbirth can be dangerous, so risk and medical aid benefits need to be in place. Once the baby is born, the employee will need additional medical cover to provide protection for the child. If a company doesn’t cover the cost of risk benefits directly, they need to allow for the employee to continue whatever contributions they might otherwise miss, in their own capacity. A company should ensure that when an employee applies for maternity leave, she is informed about what will happen to her benefits and what choices may be available to her.

■■ At present, temporary workers are typically not offered any employee benefits. But changes to the Labour Relations Act suggest that any fixedterm contractor, with a contract for more than three months, will be entitled to the same benefits as permanent employees. This could have implications for the company’s risk profile and alter the costs of their benefits. So, in this process, it is important that reducing gaps for temporary employees doesn’t end up creating gaps for permanent employees. What follows is a table that sets out the gaps we have identified. Employers can use this as a tool when designing policies. It will help them to identify potential gaps in coverage so they can decide either to close the gap with additional insurance or to put a policy in place. When such a policy means the individual is still exposed, it is important to communicate this to members and offer them options to address those gaps in their own capacity, where possible.

When policies leave individuals exposed, it is important to communicate this to members and offer them options to address those gaps in their own capacity, where possible.

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DISABILITY INSURANCE AND INCAPACITY Gap identified

Applicable legislation

Key considerations

Disability insurance and incapacity:

▪▪Labour Relations Act (Act number 66 of 1995)

▪▪Review the applicable legislation

▪▪Benefits are payable at a percentage of the employees’ total remuneration, leaving them with reduced income at a time when their cost of living is likely to increase.

▪▪Basic Conditions of Employment Act (Act number 75 of 1997)

▪▪Key questions for case management:

▪▪Sick leave policies are not aligned with the waiting periods on insurance policies, leaving employees without protection for up to three months.

▪▪Compensation for Occupational Injuries and Diseases Act (Act number 130 of 1993)

▪▪In some industries, the definition of incapacity is so specific that employees will be dismissed even when they are able to perform another job with the employer. This problem can be overcome by setting up a rehabilitation programme or changing the definition of incapacities.

POSSIBLE EFFECTS OF CLOSING THE GAP

▪▪Employment Equity Act (Act number 55 of 1998)

▪▪Occupational Health and Safety Act (Act number 85 of 1993)

--What is the degree of disability/incapacity and how was it caused? --Are employees capable of performing some or most of their duties? --Can the working conditions or job type be adapted to suit the employee? --During the waiting period, will the employee be paid at 100%, 50% or less of their salary? --Can the employer terminate employment at this time?

Who sets the policies? ▪▪The insurer will set out the definition of disability, the term of payment of the benefit, the conditions under which the benefit is payable, in what form the benefit is payable, the exclusions and the price of cover. ▪▪Either the employer or insurer will define incapacity. ▪▪The employer will determine the amount of benefit, the waiting period and the employees who are eligible for cover. ▪▪The employer sets the policy with respect to rehabilitation of disabled or incapacitated employees, taking into account the cost and relevant legislation.

The main implication of closing the identified gaps is the cost to the employer of doing so. Disability income benefits (PHI benefits) are unapproved benefits for tax purposes. As a result, the employer, and not the fund, will own the policy. Decreasing the waiting period on the policy so that there is no gap between the use of all available sick leave and the start of payment of disability benefits will increase costs in general. Rehabilitation programmes will also result in greater costs for the employer. The cost of rehabilitation of incapacitated employees can, in some cases, be greater than the search costs of a replacement for the individual. Medical aid and medical insurance benefits will place employees in a better position to prevent temporary illnesses and injuries from becoming permanent. Where medical cover is unaffordable, the employer may consider subsidising this benefit.

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STAFF EDUCATION AND LEAVE POLICIES Gap identified ▪▪Often employers will not include study leave as part of an employee’s benefits package. As a result, the employee will have to use their annual leave.

POSSIBLE EFFECTS OF CLOSING THE GAP

Applicable legislation ▪▪No applicable legislation on study leave entitlements ▪▪Skills Development Act (Act number 97 of 1998)

Key considerations ▪▪A survey of the employees can be carried out to determine the importance of such a benefit for members.

Who sets the policies? ▪▪This policy will be set entirely by the employer, taking into account the needs of the workforce. ▪▪The Skills Development Act provides an institutional framework for devising and implementing workplace strategies to develop and improve the skills of the South African workforce.

In Benefits Barometer 2013, we identified training and skills development as a key priority for young workers. In a company that employs a large number of young workers or workers pursuing a particular profession requiring ongoing training, the result of not accommodating the needs of these workers may negatively affect both the attraction and retention of employees. The employer should consider allowing a reasonable number of study leave days such that the productivity of the business is not affected. Employers could also consider the use of a flexible benefits package, where the employee gives up part of their salary or some other benefit in exchange for study leave.

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MATERNITY LEAVE POLICIES Gap identified ▪▪Employees who are on unpaid maternity leave might not be covered for risk benefits while they are away and/ or the contributions towards retirement funding might cease while they are on leave.

Applicable legislation ▪▪Basic Conditions of Employment Act (Act number 75 of 1997) ▪▪Unemployment Insurance Act (Act number 63 of 2001)

Key considerations

Who sets the policies?

▪▪Review the applicable legislation.

▪▪Legislation sets out the leave entitlement of the employee.

▪▪What proportion of the workforce is female?

▪▪The employer will determine whether the employee will be entitled to paid or unpaid leave and whether the risk benefit premiums and retirement fund contributions will continue while they are away.

▪▪What is the cost of providing risk benefits? ▪▪Can the cost of the risk benefits be insured for this period and at what cost? ▪▪Should cover be provided for certain categories of workers or all workers? ▪▪Can the cost be recouped when the employee returns to work?

POSSIBLE EFFECTS OF CLOSING THE GAP

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The continuation of risk benefits ensures that the employee is not left vulnerable while they are away from work. If an employee is on unpaid maternity leave, the employer may have to pick up the costs of risk benefit premiums and retirement fund contributions, although this structure varies by company and according to fund rules. This money can be claimed from the employee when they return to work. Alternatively, the employer can ask the staff member if they would like to continue the benefits at their own cost.

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PROVISION OF BENEFITS FOR TEMPORARY/CONTRACT/SEASONAL WORKERS Gap identified ▪▪Temporary workers are often not entitled to the same benefits as permanent employees. As a result, these workers are left unprotected and without any savings at their retirement date.

Applicable legislation

Key considerations

▪▪Employment Equity Act (Act number 55 of 1998)

▪▪Review the applicable legislation.

▪▪Labour Relations Act (Act number 66 of 1995)

▪▪Prepare for anticipated changes in legislation regarding the treatment of contract workers employed for more than three months.

▪▪Basic Conditions of Employment Act (Act number 75 of 1997)

Who sets the policies? ▪▪The employer has power over which employees are eligible for fund membership. Usually this excludes workers employed on a contract basis who are only expected to be employed for the duration of a special project. ▪▪There is a proposal to amend the Labour Relations Act so that temporary workers who are employed by a particular client, and not a labour broker, for a period longer than three months, will be entitled to be treated on the whole not less favourably than the permanent employees of the client. This may mean that risk, healthcare and retirement benefits must be extended to these workers.

POSSIBLE EFFECTS OF CLOSING THE GAP

Again the main implication here is the cost involved in offering benefits to temporary workers. There may also be administrative complexity where individuals are employed on a fixed-term contract and choose to take accumulated benefits when changing jobs. Policy makers must consider how to treat accumulated fund credits of temporary workers when compulsory preservation is instituted.

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FUND CONSOLIDATION AND CORPORATE ACTIVITY Gap identified ▪▪In a merger or takeover, some members of the retirement fund may be prejudiced with regard to their retirement benefits, resulting in inequitable benefit structures. ▪▪Administrative complexity, and the cost of benefit provision, increases when there are multiple categories of fund members.

POSSIBLE EFFECTS OF CLOSING THE GAP

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Applicable legislation

Key considerations

▪▪Pension Funds Act (Act number 24 of 1956)

▪▪Review the applicable legislation.

▪▪Labour Relations Act (Act number 66 of 1995)

▪▪How many members are being transferred?

▪▪Employment Equity Act (Act number 55 of 1998)

▪▪Is the transfer occurring from a pension to provident fund? Should the benefits be preserved?

▪▪Income Tax Act (Act number 58 of 1962)

▪▪What is the cost of aligning IT platforms and benefit structures?

Who sets the policies? ▪▪Where a company has been involved in an amalgamation, transfer or other corporate activity, multiple employers would have been involved in setting the benefits policies for the workforce. Unless the predator company has a clear policy on the benefits that all employees are entitled to, workers will retain their original benefits structure. ▪▪Legislation will ensure that employees are treated equitably.

Moving all employees into a common benefits offering may increase or decrease the costs of insurance and administration. If all employees are brought onto a common policy, there may be cost savings that arise from economies of scale. But if the risk profile of new employees is worse than the original population, the premium could increase. Particular care needs to be taken when transfers are made from a pension to a provident fund. All benefits transferred will be taxed according to the Income Tax Act. From 1 March 2015, this rule will change so that benefits will not be taxed on transfer.

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STRIKE ACTION Gap identified ▪▪Workers embarking on strike action may not have risk benefit cover during this period. This depends on whether the strike is protected or unprotected.

Applicable legislation ▪▪Labour Relations Act (Act number 66 of 1995)

Key considerations ▪▪Review the applicable legislation. ▪▪What happens to the contributions to the retirement fund during the strike? Will the employer continue to pay them? ▪▪What exclusions exist? ▪▪Can the insurance cover be extended to workers who are on strike?

POSSIBLE EFFECTS OF CLOSING THE GAP

Who sets the policies? ▪▪The employer and trustees of the retirement fund will have discretion over whether the contributions to the retirement fund will continue when the member is on a protected strike. ▪▪Strike action may be listed as an exclusion in insurance policies.

We raised this issue in Benefits Barometer 2013 and said that 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. Medical underwriting can sometimes result in a gap in cover for up to three months. Extendable risk cover could be considered in sectors prone to strikes to reduce the impact of this gap.

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Conclusion Gaps and overlaps can arise between employer, insurer and union policies. Gaps can leave members without much needed protection at a time when they are most vulnerable, while overlaps in coverage may result in the inefficient allocation of scarce financial resources. Often these gaps are the result of legacy issues which have not been reconsidered in light of new developments elsewhere in the company or fund or within legislation. Identifying potential gaps in coverage and closing them can be a costly exercise. As such, employers will need to decide whether they will take action to close gaps and will accept these costs themselves. Whatever decision is made, it is important to communicate this to employees and offer them options to address those gaps in their own capacity, where possible.

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PART 2: THE WAY FORWARD

AT WHAT COST?

Understanding the link between costs and value

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Summary Costs are an increasingly contentious concern for clients of the financial services industry, especially given the effects they can have over the long term. Knowing whether costs are reasonable requires an understanding of what types of services add value and what types can destroy value. It also requires understanding of how different pricing structures will affect individuals in different circumstances and the range of ways that the effects of costs can be measured. We propose a new model for both consulting and asset management costs to address the upside down value chain.

Costs matter â&#x20AC;&#x201C; particularly when they are compounded over the time frame typically demanded by retirement benefit schemes. But until we grasp the dynamics of the full value chain of delivery to members, we will invariably focus on the wrong debates in our quest to control costs. What follows is a three-part study that analyses the problem of costs from three different perspectives:

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1. Asset managementâ&#x20AC;&#x2122;s contribution to the cost or value issue 2. The consulting industryâ&#x20AC;&#x2122;s contribution to the cost or value issue 3. Administration costs as they apply to different member needs More importantly, we also present a few radical proposals to try to move the debate around costs to a more realistic and effective outcome.

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GETTING TO THE BOTTOM OF THE COST PROBLEM

It is time for trustees to rethink what’s really worth paying for.

The issue of costs is multi-dimensional: 1. To begin with, different services in the value chain of delivery employ different charging structures. 2. How these different charging structures compound over the 40-year period a member is exposed to their retirement fund, is an important consideration in understanding which types of charges have the biggest impact on reducing value to members over that time frame. 3. By decomposing which decisions have the greatest impact on member

outcomes, trustees can begin to have more meaningful debates on where costs could be contained without compromising those outcomes to members. More importantly, perhaps it’s time trustees rethink where they should be more actively interested in what they are paying for.

To some extent, National Treasury’s paper on costs has already set out many of the issues relating to points 1. and 2. But a brief summary of the key points are important for our discussion here.

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If we were to take a snapshot of the charges allocated in a typical, segregated retirement fund at a given point in time, the distribution of charges for an average 35-year-old fund member will be as shown in the graph below.

In the context of this once-off snapshot in time. Most of the fees on the fund go towards asset management and administration costs.

DISTRIBUTION OF CHARGES ALLOCATED TO A SEGREGATED FUND FOR AN AVERAGE 35-YEAR-OLD FUND MEMBER A crude assessment of how these costs are distributed over the spread of services provided.

0.18% Actuarial valuations 0.27% 0.0% Annuity commission Ad hoc admin fees 2.5% 0.0% Unclaimed benefit admin fees Asset consulting 2.9% Employee benefits consulting 3.5% SARB billing

Group benefits commission

Administration costs

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3.7%

41.8%

45% Asset management fees

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However if we were to assess how the power of compounding would affect those allocations over the 30-year period these members would have until retirement, the allocation to asset management nearly

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doubles to 82.4% of total costs by the time the member retires. This translates into a weighted average of 66% for the whole period.

THE EFFECT OF COMPOUNDING ON FEE ALLOCATIONS OVER A 30-YEAR PERIOD This is primarily a function of the compounding effect of each of the charging types employed across the value chain.

0.83% Asset consulting 0.9% Employee benefits consulting 1.1% Group benefits commission 1.2% Ad hoc admin fees

Administration costs

0.08% Actuarial valuations 0.06% SARB billing 0.02% Annuity commission 0.01% Unclaimed benefit admin fees

13.3%

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This outcome is a function of the different ways these services are charged, effectively we have three different charging models: 1. The asset managers apply an assets under management (AUM) fee model This model represents an annual fee charged as a percentage of total assets under management, inclusive of whatever growth occurred each year. Most commonly, asset managers charge these fees. Because all the assets are charged year after year, the compounding effect over time has its impact. For example, over a 40-year period, a charge of 0.50% on assets under management would compound to a 7.7% drag on a member’s replacement ratio. 2. Consultants in this example charge a fixed service fee or retainer fee This fee is charged annually but is fixed based on specific services rendered with no reference to size of assets or frequency of cash flows. Of the three, this fee tends to have the lowest long-term impact on the ultimate

value to the member. Historically, actuaries and asset consultants have used this charging structure. Occasionally, though, asset consultants and implementation or fiduciary managers apply an AUM based fee. 3. The administration fee is based on new cash flows to the fund The charge in this case applies only to the amount of new cash flows to the fund, when they occur (typically monthly). Some administrators use a fixed rand amount, others base it on a percentage of a member’s salary, while others use a percentage of the member’s contribution. As such, the impact of these charges is significantly smaller over time. For example, for a new 25-year-old member contributing 15% and being charged a 0.50% of payroll fee on each of those new cash flows, there would typically be a 2.2% drag on the member’s replacement ratio after 40 years of contributions.

The outcome of the fee impact is a function of the different charging structures and the way they compound over time.

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DOES PAYING A PREMIUM FOR FUND MANAGER SKILL PAY OFF? Ironically, we often hear trustees argue that they have no problem paying a premium to fund managers if it means securing the top talent. But here is where we need to be completely clear about how this aspect of the value chain performs over time. Consider the reality of most long-term investment strategies for defined contribution funds.

Identifying top-performing managers Even if we could be fairly certain that we have selected a skilful manager, there is absolutely no assurance that the market will reward that manager’s particular skill set going forward. ■■ Chopping and changing managers in an effort to maintain exposure to top performing managers has been shown as a primary source of value destruction in study after study of long-term fund performance1. ■■ As such, very few funds employ a single manager because of this single manager risk.

The impact of manager diversification The problem is, once multiple managers are employed, the impact of this diversification significantly reduces any short-term performance. For example, individual managers may reflect tracking errors of up to 7% to their benchmarks, but the tracking error of the blended managers typically reduces to around 2%. This is not a bad thing – such a diversification strategy provides a significant improvement on the fund’s risk to return ratio. But the total return of the blend will be muted.

1 Stewart (2013) Goyal & Wohal (2008) Ellis (2012)

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The problem with performance fees Even assuming that manager fees are based on realised performance and not past performance, a fund could end up paying a high performance fee for a particular unspectacular outcome at the aggregate level. Performance fees are hugely problematic with multiple managers.

The impact of time on manager performance In reality, fund manager performance tends to go in swings and roundabouts over time. The longer the time frame, the more likely any exceptional manager performance simply evaporates due to the impact of diversification of managers and the flux and flow of manager returns.

Bottom line? Over the long term, performance outcomes are driven more by the long-term strategic asset allocation embedded in the investment strategy than they are by individual manager contributions.

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HOW MUCH OF A PROBLEM IS THIS? As an example we consider the full value chain of costs in one particular umbrella fund to test the effect of an active against a lower-cost passive investment strategy to the final member outcomes. We use identical member profiles and pricing structures. We also assume that the cost of the active strategy would be 0.85% of assets under management per annum against 0.35% for our passive strategy. By calculating the reduction in yield, a methodology that allows us to see the value erosion caused by the fee structure over a 40-year period, we can see that a switch to a passive solution would equate to an additional 5.63% points to the memberâ&#x20AC;&#x2122;s replacement ratio.

While every additional point in the final replacement ratio is important, keep this number in mind for later when we look at other sources of value erosion. Note that this analysis says nothing about performance differentials between the two strategies. But assuming that both strategies employ the same long-term strategic asset allocation strategy, for the active strategy to even match the outcome of the passive strategy, it would have to generate a consistent alpha of 50 basis points year after year for 40 years to compensate for the additional costs. Trustees would need to give serious consideration to whether this is realistic.

Should this even be an active against passive debate?

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INTRODUCING A WHOLE NEW MODEL Could a new model for asset management provide an answer?

It’s time we made a clearcut separation in asset management servicing between investing to win the top performance sweepstakes and investing to meet a member’s replacement ratio requirement.

We would like to be provocative here. The government provides a tax incentive for an individual to save for their retirement using pension and provident funds, preservation funds and retirement annuities in compulsory investing. We believe that for the world of compulsory investing to be viable, the issues of performance chasing and performance fees (or high fees) must be taken off the table. Perhaps it’s time we made a clearcut separation in asset management servicing between investing to win the top performance sweepstakes and investing

to meet a member’s replacement ratio requirement. It could be done – and done in a way that could create a far more robust and diversified asset management industry in general. Imagine an investment world where active managers would provide two types of asset management services: ■■ Mandates for compulsory savings vehicles ■■ Mandates for discretionary funds.

MANDATES FOR COMPULSORY SAVINGS VEHICLES The first mandate would be for the exclusive use of compulsory investment funds. The fee here would be capped at a reasonably low level, possibly halfway between what is currently charged for active and passive strategies for all retirement fund clients. The investment strategy on offer would be whatever the manager felt was feasible at that fee. But the irony here is that these mandates for compulsory retirement vehicles would be won or lost, not on performance, but on the manager’s ability to follow a targeted, riskbudgeted mandate. This quality of delivery is essential in a blended manager strategy, because it gives the manager of the blend the confidence that their managers will

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remain diversified. Managers would lose mandates if they couldn’t control their risk budgets. When compared to purely passive strategies, this blended strategy of riskcontrolled mandates, if robustly diversified, should provide incrementally better risk-adjusted returns over the long term than a purely passive strategy – and not necessarily because managers are hugely skilful. It’s actually the combination of the diversified mandates at a lower risk than the index that produces the magic. The graphs on the next page illustrate this point, employing a real blended manager solution. The first graph shows the variable,

rolling one-year performance of the different active managers in the blend over time. In the bottom graph the orange bars represent the aggregate outperformance of the blend of managers. In 2000, Allan Gray provided exactly this type of portfolio to multimanagers. It was a risk-controlled version of their Classic Equity portfolio, offered at a significantly lower fee. While Classic may have outperformed in certain market phases, this risk-controlled solution offered more robustness over time.

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VALUE OF DIVERSIFICATION UNCORRELATED PERFORMANCE OF THE UNDERLYING MANAGERS 8%

Rolling 1 year alpha

6% 4%

Foord African Harvest

Investec Equity

2000

2001

2002

2003

2005

2004

2006

-2% -4% Source: Advantage Asset Managers

VALUE OF DIVERSIFICATION REFLECTING A ROLLING 1–YEAR ALPHA GENERATION OF THE BLEND 12%

80%

Rolling 1 year alpha

10%

60%

40%

6% 20% 4% 0%

2% 0%

Portfolio – rolling 1 year alpha ALSI – cumulative return Portfolio – cumulative return

-20% 2000

2001

-2% Source: Advantage Asset Managers

2002

2003

2004

2005

2006

-40%

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WHY TWO DIFFERENT MANDATES? The other mandate active managers could offer would be exclusively for discretionary clients. This would be the same value proposition they are currently offering. But asset managers would be welcome to charge what they view as fair for their alpha generation potential. Why preclude compulsory savings funds from using the latter mandate?

What retirement investments need is more certainty of outcomes if they are going to meet the liability funding requirements over a 40-year investment period. The reality is that research repeatedly highlights that short-termism, and chasing return, has introduced one of the most important sources of potential value erosion in the active management space. For example, a study by Ron Bird and Jack Gray on the Australian Superannuation Fund

industry calculates that these two factors perpetuated as much as 3% of value erosion per year. Right now the balance of power is on the side of asset management marketing machines that continually hold out a promise of more return. Retirement funds don’t need more; they need consistency, certainty and simplicity – and of course, lower costs.

A proposal like this creates opportunities that are not only fair to all parties, but could develop a far more diversified industry.

THE VALUE-ADD TO THE WHOLE INDUSTRY While momentum is gathering to promote passive over active strategies in this space, we believe a proposal like this creates opportunities that are not only fair to all parties but would also develop a far more diversified industry. Consider the implications that such a model of separate mandates would have for asset managers – to say nothing of investors themselves: ■■ Because the necessity for aggressive alpha generation would be taken off the table, active manager fee demands would readily fall. ■■ Because outperformance would no longer be the primary criteria, the asset management industry could easily accommodate newer, greener, less well-known asset management brands, as long as there were adequate risk controls.

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■■ BEE managers could flourish in this environment and a few large players on both the active and passive side are far less likely to monopolise ‘the pot’. ■■ Active management, which seems to provide a better risk-adjusted return to index funds as long as costs are kept low, could still be considered a viable option for long-term retirement funds. ■■ Great alpha generators could still flourish and charge whatever the market will bear – but for a different market than a retirement savings plan. ■■ It would also mean that current performance reporting would need to be completely revamped. The target would be the liability, or the income replacement required by the fund member, and not the peer group.

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WHAT REALLY MATTERS TO MEMBER OUTCOMES In truth, we have dealt with only one part of the issue of the cost relative to value discussion – and while the fees that service providers charge have received the most attention to date, we need to understand other factors to address where value is destroyed for members. In 2012, retirees from our universe of funds retired on average with a replacement ratio of 32% (after an average 21.7 years of pensionable service)2. And this was over a time frame when markets were generally flourishing. For the last 15 years the average active balanced manager has generated around 10% real return – an impressive result. If we look at only a subset of retirees, for those who have been in the same fund for 30 years or more (and therefore have reasonable savings periods without interruption), the average realised replacement ratio is actually significantly higher, as would be expected. This shows that reasonable outcomes have at least been achievable from the investments – inclusive of current costs – given this favourable environment. So where are things going wrong? These numbers suggest that we need to examine the issue of cost from a different perspective. Instead of assessing what the service provider provides (and whether they deserve its associated fees), we should turn the analysis on its head by asking: Which decisions have the greatest impact on what ends up in members’ pockets when they retire? A careful analysis of the sources of value erosion, when measured at member level, suggests that even if the investment strategy was capable of delivering a 75% replacement ratio (after reducing it 5.63 points for cost), the combination of inadequate preservation and a lower

2 Benefits Barometer 2013

pensionable pay percentage proved to be significantly greater value destroyers. Given that the government has not yet made retirement funds compulsory for all employees, nor has it firmed up its position on preservation or pensionable pay allowances, this leaves a significant burden on employers, trustees and consultants to try to manage these shortfalls. Clearly to stem this value erosion, we need a more effective consulting framework.

WHAT AFFECTS MEMBER OUTCOMES MOST?

Whether the member preserves

Whether the contributions are a meaningful proportion of their salary (and is not reduced by pensionable pay choice)

When contributions start

The allocation of contributions between risk benefits vs retirement savings

Costs

Long-term asset allocation strategy

The additional value from fund managers above the long-term asset allocation strategy (alpha)

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RANKING THE VALUE-ADD OF SERVICE PROVIDERS LIABILITY MANAGER OR ACTUARY The most important link in the chain. Understands member structure in the fund and the liabilities it will likely generate. Establishes the right long-term strategy for specifically addressing those liabilities. Get the answer to this problem wrong and it really doesn’t matter how well the asset manager might perform, they would still miss the mark.

EMPLOYEE BENEFITS CONSULTANT

In many funds, the EB consultant may also be the liability manager. But their other role is to be the critical interface between the trustees, the fund structure and the employer. If the greatest source of value destruction comes from poor linkage with HR policies or member decision making, this is the person responsible for getting that message out.

RISK BENEFITS It’s critical to structure these protections efficiently so members only pay for what they need. For some members, the income and family protections rank significantly higher than accumulating savings for retirement. Trustees need to clearly identify and understand these preferences.

3 GOVERNANCE, LEGAL AND RISK MANAGEMENT

This is the command control centre for the fund. Shirking on these costs is not an option.

ASSET MANAGER Their AUM pricing model makes this the most expensive part of the value chain. The problem is much of the potential promise of outperformance from the more expensive managers gets diversified away by both time and the use of multiple managers.

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ADMINISTRATION

Fixed fees paid annually for services rendered

TRADING COSTS One of the costs trustees pay least attention to. High turnover strategies and multiple transitions with managers can eat up significant amounts.

Trustees need to clearly understand charging structures in the context of a fund’s membership base. Some charging structures are more advantageous to members with low fund credits and others more advantageous to members with high incomes.

Fees paid annually based on assets under management Fees paid annually on new cash flows

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An important question emerges: If these factors are at the heart of the value erosion to members (and not poor performance or potentially costs of fund managers), then who should be accountable for getting it right? From a legal perspective, that answer, of course, is the board of trustees or the management committee. But then who, in turn, is providing this incredibly broad aggregating function to the fiduciaries? Compare a board of directors of a publically listed company to a board of trustees of a retirement fund. The critical difference is that corporates typically have an executive management team that reports to the directors who are accountable for the day-to-day activities of the company. They provide the reality check on what is achievable, what isn’t, and what needs to be done to fulfil the board’s wishes. They bring technical depth and insight about the business to the table and can even be dismissed for not delivering the goods.

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A board of trustees is presented with a different challenge. With the exception of a handful of parastatal and large corporate funds, most retirement fund boards have no accountable executive that possesses a depth of technical insight and perspective on all the complex moving parts of delivery to members. While the new industry organisation, Batseta, is promoting the professionalisation of the principal officer role as a way of filling that gap, few boards have the tools and resources that can provide them with a holistic picture on where they are winning or losing in this delivery. This, in turn, means that boards of trustees are hugely dependent on their service providers – and not always in the healthiest way. The problem is, the way our industry is structured or ‘fragmented’, the most powerful entity in the value chain, from a compensation point of view, is the asset manager, but providing that critical linkage is clearly not their role.

If the true source of value erosion is not with fund managers, then who should be accountable for getting it right?

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INTRODUCING THE ÜBER-CONSULTANT The truth is, if we are going to get this right for members, we need to define a completely new role that integrates all these aspects of delivery. This suggests that to get these decisions right, what trustees and management committee members really need is a sort-of über-consultant who can:

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Create the critical link between the employer (and their HR departments) and the fund’s fiduciaries to eliminate any policy gaps.

Provide the relevant analysis of the membership demographics and behaviours to establish: a. Member needs b. Suitable targets c. Suitable default solutions and d. A suitable asset allocation and investment solution to meet member liabilities.

Define and manage an appropriate risk budget for the fund’s investment strategy.

Consider appropriate platform and cost structures to address member profiles.

Monitor member progress against established goals.

Measure and monitor the potential impact of trustee decisions on specific member outcomes.

Ensure appropriate communications of all these points to all relevant stakeholders.

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The problem is that providing this type of service requires significant resources: member monitoring tools, asset-liability modelling tools, risk budgeting tools, aggregated reporting and attributions analysis for funds, tools and models for member projections and for building asset class return assumptions. None of these tools are typically found in an asset manager’s range of capabilities, which begs the question once again: Who pays for this capability? Essentially, we have a vicious circle here. Trustees may be right to question the value that consultants add if consultants don’t

have the necessary technology or the opportunity to provide the holistic picture that trustees so desperately need. But not paying for a service that has the greatest potential impact on outcomes perpetuates the problem because consultants see no way to cover the cost of being properly resourced. The reality is that globally, boards of trustees appear to be either turning their backs on asset and employee benefits consultants or pushing down fees to unsustainable levels – probably with cause. Ultimately, the way these services are segregated in many consulting operations means there is simply

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no way the holistic picture, which seems so eminently sensible, can realistically be delivered. Two factors exacerbate this outcome: 1. Owing to the different levels of specialist skills required, we now have a highly fragmented consulting industry. 2. We also have a regulatory framework that encourages separation of servicing functions. Clearly it’s time for a new model of accountability and governance!

THE WORLD AS WE KNOW IT Employee benefit consultant

Actuary

Asset consultant

Asset manager

Administrator

Function

▪▪ Structure of the fund ▪▪ Benefits structure and delivery ▪▪ Fund administrators

▪▪ Asset-liability modelling (ALM) exercise

▪▪ Structures the investment solution to meet member needs ▪▪ Identifies who the best blend of managers would be

▪▪ Manages the assets

▪▪ Member record management

Output

▪▪ Fund rules, fund policies and benefit payouts

▪▪ ALM output with strategic asset allocation solution

▪▪ Monitors performance and compliance

▪▪ Alpha ▪▪ Beta

▪▪ Benefits statements ▪▪ Projection statements

Reality of role

▪▪ Spends more time doing administration functions than showing necessary value

▪▪ Only large funds typically request ALMs

▪▪ Spends more time selecting, defending or switching managers than assessing whether members are meeting their goals

▪▪ Manages the assets

▪▪ Considered a fairly commoditised service

Time required

▪▪ Quarterly ▪▪ Semi-annual ▪▪ Annual

▪▪ Once every three years

▪▪ Could be daily valuations but more likely monthly

▪▪ Daily focus

▪▪ Daily

Charge structure

▪▪ Retainer or fee

▪▪ Set fee

▪▪ Usually fee based but can be a percentage of AUM

▪▪ Percentage of AUM

▪▪ Variable: percentage of payroll, per transaction and so on

Fees for service (fees are declining)

Fees based on percentage of assets under management (fees are increasing)

Fees are variable Percentage of salary, fixed fee, etc. (fees are under pressure)

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We would like to believe that by creating a solution that provides a more efficient and focused way of delivering end value to the member, we can create a much more equitable value chain.

SO WHERE DO ALL THESE INSIGHTS INTO COSTS AND THE VALUE CHAIN LEAD US? We believe that the retirement industry as a whole desperately needs to rethink its value proposition to members. The reality is that a member’s fund credit can only withstand so much reduction in yield as a result of costs over the 40 years a member needs to be invested or drawing on risk benefits. We would like to believe that by creating a solution that provides a more efficient and focused way of delivering end value to the member, we can create a much more equitable value chain. We recognise too that everyone who enters this debate is conflicted at some level, including the authors, and readers may therefore treat this debate with some circumspect. That consideration is encouraged, but it should not preclude the debate. Trustees need to rethink how to fairly allocate that maximum cost to ensure that both critical points – the liability management and the asset management – are properly serviced and adequately resourced to get the job

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done comprehensively. We also need to recognise that only by insisting that these two skill sets become more effectively integrated will funds be able to get greater certainty that they will get the outcomes they require. Combined, the über-consultant or über-asset manager concept provides a powerfully appealing way of addressing our problems of delivering targeted outcomes at controlled prices. In total, we should be able to reduce costs. While asset manager fees would most definitely come down, we should also be able to compensate investors with better risk-adjusted returns that are meaningfully sustainable in a long-term investment strategy. On the consulting or actuarial side we’ve streamlined and focused the service to deliver measurable outcomes. A service this comprehensive and with this much greater potential for delivering necessary outcomes, given the current environment of reform, now warrants a more serious compensation consideration.

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HOW DO WE KNOW IF COSTS ARE SUITABLE TO A SPECIFIC MEMBER POPULATION?

We need to consider which pricing structures work best for which member profiles.

Lowest cost is not always the best deal for the member, when we consider value. Likewise, lowest average cost is not always the best deal for the individual member. In our last solution, we suggested that the long-term reduction in yields outcomes for individual members could vary significantly depending on that member profile, their income levels and their fund credit. To properly round out our assessments about cost structures, we need to understand: ■■ What are the criteria for payment? ■■ Where is it getting paid from? ■■ Who stands to benefit most from the cost structure?

The important point is that services are often priced with the end user in mind. As such, we need to consider which pricing structure works best for which market segment. Let’s use umbrella fund pricing structures as an excellent case in point. Comparing one umbrella fund’s cost structure with another can be fairly complicated, but some insight into how providers determine their pricing structure helps in determining which fee structure truly offers value for money for members, given their particular demographic make-up.

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An umbrella fund’s fee structure can be extremely complicated There are four broad categories of fees which a member in an umbrella fund will face: administration fees, governance fees, consulting fees or broker commission, and investment fees. These fees may be charged in a few different ways (initial or ongoing; fixed rand amount, percentage of salary, percentage of contribution, or percentage of assets). This makes it hard to compare apples with apples. For example, if Fund A charges a lower administration fee (as a percentage of salary) than Fund B, but a higher investment fee (as a percentage of assets), which fund is cheaper? And over what period? Increasing the complexity is the fact that many umbrella funds charge multiple layers of fees. For example, instead of charging one administration and governance fee per member, some umbrella funds charge an additional scheme expense or contingency reserve account levy to cover governance-related expenses (such as audit fees, trustee expenses, FSB levies, and fidelity insurance premiums). These funds may also charge additional administration-related fees such as participating employer fees, investment administration fees or asset-based fees, resulting in two or three different administrationrelated fees being charged.

Consider all fees when making comparisons When comparing umbrella funds, consider the total cost per member across all the different fees (administration, governance, consulting and investments) and not only the administration fee. National Treasury3 has commented that “employers may be easily persuaded by low up-front charges (that is, those deductible from contributions) to select a commercial umbrella fund that in fact, because of higher recurring charges [in other words, high investment fees], represents lower ‘value-for-money’ than other commercial umbrella funds”. This point is best illustrated through an example.

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3 National Treasury (2014)

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Case study JOE’S MANUFACTURING

Joe’s Manufacturing Ltd is a small manufacturing firm with 100 employees. These employees have a combined monthly pensionable salary of R1 million and total retirement fund savings of R30 million. The company is looking to join an umbrella fund and is comparing various options.

to the lower administration fee. We pay little attention to the investment fees as the difference between them is relatively small. However, if we calculate the combined rand administration and investment fee, we find that this fee is the same for both funds (R30 000 per month).

There is a significant difference in the administration fees quoted by two of the options: Fund A will charge a monthly fee of 0.5% of the member’s monthly pensionable salary, whereas Fund B will charge only 0.25%. The investment fees of these two funds are fairly similar: 1.0% per annum of assets for Fund A against 1.1% per annum for Fund B. So which option should Joe Manufacturing Ltd select?

Companies whose employees have managed to accumulate significant retirement fund savings need to be particularly aware of high investment fees. If the member has a choice of investment portfolios with differing investment fees, they should not choose the investment option with the lowest fees, as that option would typically be a money market fund offering a lower expected investment return. Rather the member should assess the potential benefit of such a portfolio against its cost.

Our initial reaction is that Fund B offers significantly better value thanks

Chapter 5

TOTAL ADMINISTRATION AND INVESTMENT FEE

Fund A

R30 000 per month

R25 000 Investment fee

R5 000 Administration fee

If you calculate the combined rand administration and investment fee, you’ll find that this fee is the same for both funds (R30 000 per month).

Fund B

R27 500 Investment fee

R30 000 per month

R2 500 Administration fee

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Different charging approaches favour different groups of members Note that there is not necessarily an optimal cost structure that suits all participants. The employer should balance the various trade-offs and select the cost structure most equitable to the majority of their employees. We can illustrate the point through two examples with Joe Manufacturing Ltd.

EXAMPLE 1 Administration fees are typically charged as a percentage of salary, whereas investment fees are charged as a percentage of assets. These different charging structures affect members with small and large retirement fund savings differently. Two employees at Joe Manufacturing Ltd each earn R420 000 per annum. The first employee has worked for 30 years and saved R3 million in his retirement fund. The second employee has worked for 10 years and saved R420 000 in his retirement fund. Although the company is indifferent to the two options at the outset from the previous example (Fund A or Fund B), the two employees should have strong preferences on which fund is selected.

The first employee, who has already saved a significant amount towards retirement, would prefer Fund A. This fund has higher up-front charges (charges that are calculated as a percentage of his monthly salary or contribution) and lower recurring charges (charges that are calculated as a percentage of his total assets). Fund A would result in this employee paying approximately R160 per month less in administration and investment fees combined (at the outset). The second employee would prefer higher investment fees as his retirement savings account is relatively small. Fund B would result in this employee paying approximately R50 per month less in administration and investment fees.

Employee 1 has already saved a lot towards his retirement and should prefer Fund A. This fund has higher up-front charges and lower recurring charges. Employee 2 would prefer higher investment fees and lower up-front fees as his retirement savings account is relatively small. 138

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TOTAL ADMINISTRATION AND INVESTMENT FEE EMPLOYEE 1 (R3 MILLION IN SAVINGS) R160 per month

Fund A

R2 500 Investment fee

R2 750 Investment fee

R175 Administration fee

R88 Administration fee

Fund B

TOTAL ADMINISTRATION AND INVESTMENT FEE EMPLOYEE 2 (R420 000 IN SAVINGS) R50 per month

R350 Investment fee

Fund A

R175 Administration fee

R385 Investment fee

R88 Administration fee

Fund B 139

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EXAMPLE 2 Different approaches to charging for the administration fee affect high-income and lowincome members differently. Fund A charges each member a monthly administration fee of 0.5% of their monthly pensionable salary. Fund C charges each member a monthly administration fee of R50. The total administration fee is the same for both umbrella funds (R5 000 per month) but the decision on which umbrella fund to select has significant implications to the individual members.

TOTAL ADMINISTRATION FEE FUND C

Factory worker Salary of R60 000 per year

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All members are charged the same administration fee on Fund C, regardless of earnings.

CEO Salary of R1 200 000 per year

R50 Administration fee

= 10% of monthly income

= 0.05% of monthly income

Fund C charges all members the same administration fee (R50 per month), irrespective of the size of their salaries or their total contribution. Administration fees may be charged for collecting a memberâ&#x20AC;&#x2122;s contribution and allocating it to their account, for example. Many of the expenses incurred in providing administration services have a fixed cost

per member, irrespective of the size of that memberâ&#x20AC;&#x2122;s contribution. Therefore, charging a fixed rand amount is viewed as the most equitable approach from a financial or costing perspective. The issue with this approach is that the administration fee may become prohibitive for low-income members, significantly reducing the amount allocated towards their retirement

savings and their expected replacement ratio outcomes. If a factory worker at Joe Manufactoring Ltd earns R60 000 per annum, of which he contributes R500 per month to his retirement fund, he ends up paying 10% of his monthly contribution towards administration fees.

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Chapter 5

The decision on which umbrella fund to select has significant implications for the individual members.

TOTAL ADMINISTRATION FEE FUND A

CEO Salary of R1 200 000 per year

Factory worker Salary of R60 000 per year R25 Administration fee

Charges are more socially equitable on Fund A, as contributions are reduced by the same percentage.

= 0.5% of monthly income Fund Aâ&#x20AC;&#x2122;s charging structure is more equitable from a social perspective, as the administration fee would reduce all membersâ&#x20AC;&#x2122; contributions by the same percentage (assuming the contribution rate is the same). The factory worker at Joe Manufactoring Ltd would pay an administration fee of R25 per month

(0.5% of his monthly salary), reducing his retirement fund contributions by 5%. The CEO earning R1.2 million per year and contributing R10 000 per month to his retirement fund would pay a far larger administration fee (R500 per month or 5% of his monthly contributions). Although this approach is more equitable, it

R500 Administration fee

= 0.5% of monthly income introduces cross-subsidies between highincome and low-income members within that employer group. Cross-subsidies need to be understood and managed over time.

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Make comparisons using prospective measures where possible All the examples make important points about how differential charging structures can affect members of a fund who may have different fund credits, annual salaries, or years to retirement. While these types of comparisons are easy to calculate and understand, they only represent a snapshot in time. When it comes to the long-term impact on the outcome to member, we need to be able to see how these charges compound over time.

The starting point for most decision-makers is the graph below. This graph provides a composite picture of the total charges for each type of umbrella fund pricing model. In this regard Fund X appears to be the cheapest. Often the decisionmaker will stop at this point and simply select the cheapest option.

CURRENT MONTHLY FEES (COMPANY OVERVIEW) R8 000

R7 510 R6 677

R6 000 R4 167 R4 000

R3 333

Investment Fees

R4 167

R2 000 R2 510 R0

R7 302

Fund X

R3 344

Fund Y

R3 969

Administration and Broker Fees

Fund Z

Company

But the real test comes by moving beyond the limits of this snapshot. To add the dimension of time and how compounding impacts the outcomes for various types of members, the chart on the next page provides the really critical information.

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This measures the reduction in yield in the member’s annual return after the required period of saving. So, for example, although the ‘average’ employee would appear to get the lowest reduction in fees from

Fund X. In truth, though, for those members of the fund who either have a high fund credit or a high annual salary, Fund Y would have turned out to have the lowest impact on member out comes. The key message here is that employers need to use more comprehensive measures in making their assessments of pricing differentials between umbrella fund fees. A tool that can take one through the debates we have described above can fill that need.

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Chapter 5

REDUCTION IN YIELD (10 YEARS) â&#x20AC;&#x201C; ASSESSING IMPACT ON ALL MEMBERS Average fund credit 25%

100%

3.5% 3.0%

25%

2.5% 2.0% 1.5% 1.0%

1.5%

0.5% 0%

Fund A

Fund B

Fund C

100%

2.0%

2.2%

1.9%

1.5% 1.0% 0.5% 0%

Fund A

Fund B

Fund C

2.7%

2.5% 2.0%

2.3%

2.0% 1.5%

1.8%

1.5%

1.7%

1.2% 1.0%

1.2%

1.1%

Fund A

Fund B

Fund C

1.3% 0.9%

0.8% 0.6% 0.2%

Fund A

Fund B

Fund C

Fund A

Fund B

1.2%

1.3%

Fund A

Fund B

Fund C

1.4% 1.5%

1.7%

1.5%

1.2% 1.0%

1.1%

0.8% 0.6% 0.4% 0.2% Fund A

Fund B

Fund C

2.2% 1.9% 1.6%

0.5%

1.1%

0.4%

1.0%

1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0%

1.4%

2.5%

3.0%

400%

Average salary

2.5%

1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0%

400%

Fund A

Fund B

Although costs are important, value needs to be the determining factor. Good value in an umbrella fund is all about ensuring that the fund parameters are appropriate, investment options are suitable and

Fund C

1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0%

1.5%

Fund A

Fund C

1.5% 1.3%

Fund B

Fund C

appropriately priced, the fund improves member engagement and financial education, and there is firm and fair governance structure to mitigate against catastrophic failures or conflicts of interest.

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Conclusion Costs do matter. But paying the right amount for the value on offer also matters. Itâ&#x20AC;&#x2122;s a delicate balance. But with the right tools and the right understanding of the retirement fund value chain we should all be able to get to the right decisions about how to appropriately redress the imbalances that still exist in the market today. The important point, though, is that it is the aggregate of all these costs that the member or investor actually bears. That means that this aggregate cost has to be held up against the aggregate potential value that can be added â&#x20AC;&#x201C; and this is where is gets complicated. Until consumers are in a powerful enough position to shake down the value chain and demand fees that are commensurate with the value that the service contributes, the current cost hierarchy will remain. There is only so much total cost a retirement fund or investment solution can shoulder and still provide investors with reasonable outcome. The travesty is that in a world that believes emphatically in the value of active management, trustees are more likely to try to force down the costs in the other building blocks than take on the price-making top managers. But they do so at the risk of cutting back on the very services that are most important in that final delivery.

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PART 2: THE WAY FORWARD

COPING WITH COMPLEXITY

Balancing affordability and complexity in medical schemes

PART 2 Chapter 6

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Summary Rising medical costs have led to schemes implementing a range of measures to control these costs. Unfortunately, this increases complexity for the individual and often results in higher out-of-pocket expenses due to difficulties in understanding how their medical scheme covers claims. While communication and education could offer partial solutions, technology also makes it possible for experts to absorb the management of some of that complexity.

INCREASING HEALTHCARE COSTS Because the demand for medical care is potentially unlimited, balancing demand and supply through prices becomes particularly tricky.

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In Benefits Barometer 2013 we showed how healthcare costs keep rising in South Africa. In 2014 the trend has continued and in response, funders of healthcare â&#x20AC;&#x201C; primarily medical schemes â&#x20AC;&#x201C; have had to become ever more innovative in managing these costs. However, such innovation introduces further complexity which might actually be causing total costs to increase for members.

Because the demand for medical care is potentially unlimited, balancing demand and supply through prices becomes particularly tricky. National Health Insurance, in an ideal form, could improve some outcomes, but will be subject to the same tension.

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Chapter 6

Because of rising healthcare costs, funders of healthcare have to be more innovative in managing these costs.

WHY ARE COSTS INCREASING? Total healthcare costs are increasing for a number of reasons, including, but not limited to: ■■ Increasing the base costs of services provided. Medical professionals, as with many other professionals, expect salary increases above inflation. This is because of their limitations on labour productivity. At a certain point a medical professional1 can no longer be more productive without compromising the quality of care provided. By comparison, technology-driven parts of the economy can produce more per hour of labour without compromising quality. Think about it: a manufacturing company can produce more goods per hour of labour with more advanced machinery, but would you be happy if your doctor spent less time with you to see more patients so that they could increase their income? Unlikely. So, for your doctor to enjoy similar overall increases in income to the rest of the economy, they will need to be paid more per hour as they cannot

increase their productivity through more hours worked2. ■■ No guidelines for what is fair. At present, there are no guidelines for setting fair and reasonable fees for healthcare services. Although the Competition Commission has launched a market inquiry into the private healthcare sector, this is only due to be completed towards the end of 2015. ■■ Inflated charges for prescribed minimum benefits. By law, medical schemes have to pay for the diagnosis, treatment and care in full of certain conditions and treatments. These are referred to as prescribed minimum benefits (PMBs). Schemes are required to reimburse providers for their services and this rule has, at times, resulted in providers over-inflating their charges for PMB care. ■■ Increasing awareness results in increased use of healthcare. As people become more aware of symptoms and conditions, they use healthcare services more.

1 This relates to any professional in a service-related environment, such as teaching 2 Baumol (1967) 3 Mike et al (2005)

■■ An increasing burden of disease results in an increased use of healthcare. As the prevalence and impact of certain diseases increase, overall healthcare costs will also increase. ■■ Improvements and advancements in technology can increase costs: • Technology assists with early diagnosis of conditions that would previously have gone undetected. • Technology keeps sick people alive, and incurring medical costs, for longer. • New treatments are introduced, typically at extremely high prices. ■■ Poor health literacy levels result in individuals not understanding the seriousness of their condition – and whether to see a medical professional or not – or being too embarrassed to ask for help or information when they do not understand what their medical professional is explaining3.

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All of this means medical inflation runs higher than consumer price inflation. Over the last 13-year period, medical care and health expenses inflation has been on average 8.2% per year4, while CPI inflation was 5.9% per year4, resulting in a gap of 2.3% per year. During the same period, the average medical scheme contribution inflation was 7.5% per year5, showing that actual increases in medical scheme contributions per principal member exceeded CPI inflation by at least 1.6% per year. These gaps have reduced in recent years and this is most likely as a result of pressure from medical schemes in managing the costs charged by providers. While this would have a direct impact on medical scheme contribution increases, the further reduction in the gap between medical scheme contribution inflation and

CPI inflation appears to be a result of option buy-downs (when members move to a benefit plan with less comprehensive cover) and a reduction in the number of dependants covered by the policy due to affordability constraints. Explanation The increases in medical scheme contributions are based on the average contribution per principal member per month, and allow for normal medical scheme contribution increases, as well as buy-ups and buy-downs to other benefit options. Changes in contributions due to family size or family composition are also taken into account and as a result, these increases do not reflect pure increases in medical scheme contributions, which will be higher.

If annual increases in medical scheme contributions are 3% above annual salary increases, then after 40 years an individual could be directing nearly half of their income towards medical scheme contributions.

Consumer price inflation

Medical scheme contribution inflation

Medical inflation

5.9% per year

7.5% per year

8.2% per year

13-YEAR PERIOD 148

If this trend continues, a bigger proportion of an individualâ&#x20AC;&#x2122;s salary will go towards healthcare spending each year, which will eventually become unsustainable. The graph on the next page shows how the proportion of income directed toward medical scheme contributions will increase over time, assuming that the individual currently contributes 15% of salary towards medical aid cover and that their contributions increase by 1%, 2% or 3% higher than salary inflation respectively.

4 Statistics South Africa 5 Council for Medical Schemes Annual Reports

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An individual who starts off with a contribution rate of 15% towards medical aid cover, could be spending half of their income on healthcare after 40 years.

HEALTHCARE COST AS A PROPORTION OF REMUNERATION 50% 45%

Proportion of remuneration

40% 35%

Salary inflation +3%

30%

Salary inflation +2%

25% 20%

Salary inflation +1%

15% 10% 5% 0%

Year Source: Alexander Forbes Health (2014)

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SOME COST-MANAGEMENT MEASURES ARE INCREASING COMPLEXITY In an attempt to reduce the overall costs of healthcare, medical schemes are introducing various types of cost-management techniques, some of which directly increase the complexity for individuals. These include, among others:

ALTERNATIVE REIMBURSEMENT MODELS Alternative reimbursement models where the costs for certain procedures performed in hospital are negotiated upfront with the hospital group. For example, the fee for surgically removing an appendix may be agreed at a specific price. So, regardless of the actual cost of the appendectomy, the medical scheme will only pay that price and the hospital will benefit if the actual cost was lower or face a loss if the actual cost is more. These alternative reimbursement arrangements help medical schemes to stabilise costs, but more importantly, incentivise hospitals to be more efficient when performing procedures. A more efficient hospital would be able to reduce the actual cost of performing a procedure, thereby benefiting from the difference between the actual cost and the fee charged. Clearly, these types of arrangements would only work under tight monitoring and management of the quality and outcomes of care to avoid shortcuts being taken to reduce costs.

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APPROVED MEDICATION LISTS Many medical schemes have approved medication lists where they pay in full for medication on these lists. Sometimes the lists will be as simple as 'generic medication is paid in full', but at times the lists can become extremely complex and difficult to understand. The justification for these medication lists is to steer members towards medication that is not only cheaper, but also more effective in treating conditions and therefore keep follow-up costs to a minimum.

REIMBURSING SERVICE PROVIDERS Reimbursing service providers more when they perform procedures in doctorsâ&#x20AC;&#x2122; rooms and not in hospital. This should reduce the overall costs associated with certain procedures as the ward and theatre fees and the costs of anaesthetists and nurses are not incurred. To encourage this movement from in-hospital procedures to in-room procedures, some medical schemes impose co-payments for treatment obtained in a hospital. Members who are not aware of these conditions may choose to access care through hospitals without realising that they may incur a co-payment.

DISEASE MANAGEMENT PROGRAMMES Disease management programmes specify treatment plans and medicines that individuals must use if registered for certain diseases, such as chronic conditions. The treatment plans are designed to provide more appropriate and efficient care to individuals, with the intention to reduce complications and overall costs in the long term. This again is an area where confusion may arise for individuals.

NETWORKS AND DESIGNATED SERVICE PROVIDERS Introducing networks and designated service providers (DSPs) where members must access their healthcare services from specific, defined service providers for their claims to be paid in full. The justification for this is that medical schemes will negotiate reimbursement rates with these providers upfront, allowing for better management of overall costs as well as better control over negotiations. If members donâ&#x20AC;&#x2122;t want to incur copayments, they will visit providers who participate the network. Providers, wanting to ensure that their patient numbers do not decrease, may opt to join the network.

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COMPLEXITY MAY BE INCREASING COSTS EVEN FURTHER

Chapter 6

Complicated benefits

Not obtaining pre-authorisation for treatments

Not understanding underwriting and other legislation

Not being aware of the total cost of a procedure or consultation

Not following treatment plans correctly

The intention of cost-management measures is to reduce overall healthcare costs, but these measures can sometimes be so complex that without effective communication and member education, individuals may actually face higher total costs through additional out-of-pocket payments. When individuals don’t follow the rules, either by choice or lack of understanding, it can result in out-of-pocket expenses. Situations in which out-of-pocket expenses can arise include: ■■ Going into hospital for a planned procedure without obtaining preauthorisation from the medical scheme. This may also occur if an individual is admitted to hospital in an emergency and does not obtain the required preauthorisation within the specified time period after admission.

8 Section 29A, Medical Schemes Act 131 of 1998 9 Mike et al (2005)

■■ Certain benefits being extremely complicated (such as dentistry). Medical schemes will pay for a portion of treatments from day-to-day benefits, and another from hospital benefits, and sometimes may only cover check-ups. ■■ Not understanding underwriting and other legislation. Medical schemes can impose waiting periods, which means that, although a member is contributing towards a medical scheme, they are not entitled to the full set of benefits for a specified time period. One common waiting period is a 12-month waiting period for pre-existing conditions8. This often applies to members who move between medical schemes on a voluntary basis. ■■ Not being aware of the total cost of a procedure or consultation. Individuals should be able to discuss costs upfront with their doctors, but may feel

intimidated to do so9. ■■ Individuals who do not fully understand their condition or treatment plan may be embarrassed to ask for more detail9, which could result in further costs if they don’t follow treatment plans correctly and complications arise as a result. The list above is not exhaustive but illustrates how individuals could easily break some of their scheme’s rules. While these rules are designed to help manage costs and thereby benefit the member, their complexity sometimes makes it difficult for individuals to follow. It is therefore extremely important that members are well-informed and better guided to make the best decisions possible regarding their health.

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POSSIBLE SOLUTIONS While cost-management techniques may assist to reduce overall costs and hence the management of future increases in contributions within medical schemes, this may be outweighed by additional out-of-pocket expenses if members do not fully understand how to use their benefits efficiently.

Effectively, these techniques mean that the responsibility and costs are transferred from the experts who developed them to the members themselves, who naturally have a more limited understanding. It should therefore be up to these experts to ensure that members are adequately educated so that they can make informed decisions.

How do we manage this in the current environment?

Communication

Screening tests

Education

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Technology

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Chapter 6

One solution would be communication. We need to ensure that members have adequate access to information about the healthcare benefits they are entitled to, but balance this with the need for them to understand this information. There is no point in making reams of information available that nobody will understand if they bother to read through it at all. People tend to become interested in a topic once they know it will affect them directly. With this in mind, individuals may only become interested in the cover for a certain condition after they have been diagnosed with the condition. At this point, it may be too late to obtain adequate cover without underwriting penalties being applied.

2 3 4

Early diagnosis of conditions through screening tests at wellness days could assist in reducing overall costs by treating diseases before they become too complex. Many medical schemes now cover preventative care for this very reason. Health education with the intention of improving health literacy is extremely important. This should ensure that individuals seek medical assistance where necessary and before it is too late. Health education should give them a better understanding of their conditions and required treatment. This is where advances in technology may actually assist in bridging the gap between individuals and experts, so that they can make appropriate decisions about their medical treatment: ■■ Health information technology is helping to provide doctors with more information on patients from a variety of sources. This enables the doctor to get a more holistic understanding of the patient, their medical history and the treatments that have or have not worked historically. With this information at hand, doctors should be able to prescribe more effective treatment for patients, which should reduce costs in the long run. ■■ Online mobile health applications (or apps) that are accessible to members can also help in providing immediate information on where to go in an emergency or what medicines are approved under various treatment plans, thus simplifying the decisionmaking process. ■■ The use of telemetry can simultaneously assist medical providers and members where this technology is used to better manage the care of certain conditions. With closer, more frequent monitoring of key health indicators (such as blood sugar, blood pressure and cholesterol), care givers can pick up potential problems sooner and prevent further, more intense (and costly) health events, which could lead to hospitalisation and further complications at a later stage. Example Discovery Health Medical Scheme introduced telemetric glucometers into their benefits for 2014. Members registered on the chronic illness benefit for diabetes qualify for a telemetric glucometer, whereby they can actively monitor their blood sugar levels, and this information is transmitted to their smartphones via Bluetooth. If they are registered with HealthIDTM, their doctors can also monitor their blood sugar levels and better understand patterns and key drivers.

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Conclusion With the medical scheme environment in its current form and while we wait for the outcome of the Competition Commission's inquiry into the private healthcare sector*, communication seems to be the main solution available. The reality is that balancing complexity and affordability is likely to remain a challenge into the future. Where possible, experts need to manage that complexity for individuals among themselves (for instance, between schemes and providers, such as doctors) and provide what is crucial for individuals in an easily digestible form.

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* Provisional findings are expected to be published in October 2015.

PART 2: THE WAY FORWARD

STOP THE PRESSES! WE NEED TO TALK How we’ve lost the plot on member communications

PART 2 Chapter 7

STOP THE PRESSES! WE NEED TO TALK

Summary Despite the plethora of research on how good communication can help individuals make better choices, most employee benefits communications follow a tick-box approach designed to appease regulators or protect fiduciaries. By embracing research on how individuals respond to various forms of communication, we can design new material that can actually help members. We look at two specific applications: investment choice and projection statements.

THE MEDIUM IS THE MESSAGE When Polish anthropologist Bronislaw Malinowski coined the term ‘phatic communion’, he meant expressions whose primary function is social, not informative1. Ask a man on his deathbed how he is and he might instinctively respond in a seemingly bizarre way: “I’m well! And how are you?”. The dying man unconsciously recognises that this inquiry has nothing to do with health, but is rather about establishing a social bond through familiar ritual. We play these language games all the time2.

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1 Malinowski (1923) 2 Berne (1964) 3 McLuhan (1994)

Much of the communication that flows out of financial institutions is received in a similar way. Marshall McLuhan famously declared that the medium is the message3, and nowhere is this truer than in the distinctive patterns and rhythms of employee benefits communiqués. The professionally branded multipage reports with their colourful charts and tabular data swathed in insider jargon offer a secret coded message to their recipients:

We know what we’re doing. We’ve discharged our fiduciary responsibility by sending you this, but you really don’t need to understand any of it. After all, it’s our job to take care of these matters, not yours. What’s especially interesting is that it’s not clear that the authors of these communications intend (or are even aware of) their sub-textual impact.

PART 2

STOP THE PRESSES! WE NEED TO TALK

They’ve simply replicated time-honoured corporate (and regulator-approved) templates that insist on particular data elements and vocabulary choices.

playing field and making sure individuals get fair and transparent information which ensures they really understand all the facts they need.

Clearly, when the regulators began to recognise the asymmetrical nature of communication and distribution of information, they entered into the fray with notions of levelling the proverbial

The frustrating paradox is that in spite of all the facts and figures presented, these communications don’t actually inform their audience so much as provide the reassuring sense that they don’t need to be

Chapter 7

informed at all because of the expert nature of the service. The net effect on the reader is to soothe any anxiety they may feel about their financial health without forcing them to find out any more about it. A social contract between the corporate, the regulators and the client is fulfilled and with it a comforting illusion of financial security is imparted.

WHY WE REALLY DON’T KNOW WHAT’S RIGHT The danger of an environment where regulators impose minimum reporting standards is that communications end up being written to protect the communicator, not the individuals for whom the communication is intended. Lax governance practices brought this all upon us, so now the challenge is to determine how to best balance the two: ticking the compliance boxes and making sure members are adequately informed. The best communication programmes go out of their way to translate extremely

complex concepts into simple and engaging explanations. Plain language, generous use of vibrant colours and white space, cartoons, and even animated video clips are all part of the battery of tools contemporary communication programmes use. But are we measuring whether these communications are actually resulting in members making better decisions? We can measure whether a member has received a communication. We can measure whether they have read or watched the communication. But have we

measured whether the communication was comprehensive enough and engaging enough to prompt the right behaviour from members? The research available is not encouraging. A 2003 study by Bernheim and Garret concluded that programmes that rely on print media, like hard copy newsletters and leaflets with plan descriptions, have no effect on pension participation or contributions4. In truth, individuals don’t give much thought to their pension funds at the best of times.

In truth, individuals don’t give much thought to their pension funds at the best of times.

4 Bernheim & Garrett (2003)

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HOW DO WE BREAK THE SPELL? What you want to communicate has to do more than just communicate. It has to entertain, it has to please and be perceived as useful right from the start.

How do we break away from old templates, new tick-boxes and formulaic communication policies that do little to encourage members to become engaged? How do trustees, umbrella fund management committees and service providers fulfil their fiduciary responsibilities to communicate and report to members in a way that truly improves their understanding of: ■■ What they are actually exposed to or invested in. ■■ How to make meaningful choices about these benefit options or investments. ■■ How they are progressing over time to any end target. ■■ What they could potentially do to improve their lot. Over the last 10 to 15 years there has been a revolution in thinking about how individuals process and manage financial decisions. This knowledge has huge implications for how we need to present important information, how we offer choice, how we frame decisions, and how we talk to beneficiaries about such massively complex topics as retirement savings and employee benefits. And yet, very little has changed about the way we communicate these complexities to employees. Consider this: Over 83% of our learning happens visually5. That means that if we expect people to learn and retain information, then what we say will be far less important than how we illustrate it. Recent studies estimate that over 50% of the human brain is dedicated to visual processing6. John Medina, in his book Brain Rules, explains that vision trumps all other sensory experiences. “If information is presented orally, people

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5 6 7 8

Diamond (2013) http://web.mit.edu/newsoffice/1996/visualprocessing.html Medina (2011) Kahneman (2011)

remember 10% 72 hours after exposure. That figure goes up to 65% if you add a picture7.” Even more important: first impressions are everything. As the behavioural specialists tell us, thanks in part to the impact of technology, our average attention span has now reduced to just six seconds8. That means that whatever your eyes fall on first will have a huge impact on whether you stay the course. It means that what you want to communicate has to do more than just communicate. It has to entertain, it has to please and be perceived as useful right from the start. One new field of research that measures ‘engagement’, is something called eye tracking. Eye tracking measures where a person looks first on a report or website, where they look next, and so on. Eye tracking is an excellent way to determine not just what people pay attention to, but what they don’t pay attention to.

83% of our learning happens visually.

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Here are some powerful insights from this field: ■■ Keep headlines short to maximise the probability that a reader will engage with your information. Headlines of between 16 and 18 words have the highest click-through rates on websites and reports9. ■■ Keep your most valuable content above the fold (the part of the screen you see before you have to scroll down). This is what gets the greatest reader attention.

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■■ Next, readers will scan to the bottom of the page. This is the second most viewed part of a report, so put ‘calls to action’ at the bottom of the page. ■■ People scan when they read. According to the F-Shaped Pattern Study, they read the headlines first, then the first sentence and then they scan the subheads of paragraphs. Plan these with care! It means that big bold headlines are important.

EXAMPLE OF EYE TRACKING ON A WEBSITE

9 www.outbrain.com

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■■ Break your content down into short chunks of information, preferably with eye-catching titles. ■■ The left side of the page is important, so if you are including tables, make sure the most important information is in the left column. ■■ Leave lots of white space. This may seem counter-intuitive but negative space provides a ‘resting space’ for the

eye as it moves from one important point to the next. It’s important to keep your reader’s eye moving10. ■■ Keep it simple. Why? It’s critical to keep your pages visually simple when you present information because it encourages a predictable eye pattern. In other words, it gets people to read what they should, in the order that you want. Complex website designs

or communications tend to increase ‘unexpected paths’ and that can lead to unintended interpretations11. ■■ Colours matter. Whether because of ‘imprinting’ or ‘priming’, people have associations with colours that evoke emotions. The chart on the next page is a wonderful case in point.

THE F-SHAPED VISUAL SCAN

Break your content down into short chunks of information, preferably with eye-catching titles.

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10 Patel (2014) 11 Pan, Gray, Granka, Feusner & Newman (2014)

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CLARITY OPTIMISM

CHEERFUL

WARMTH

YOUTHFUL

CONFIDENCE

EXCITEMENT

IMAGINATIVE

BOLD

CREATIVE

DEPENDABLE

WISE

TRUST

GROWTH

STRENGTH

PEACEFUL

NEUTRAL

HEALTH

FRIENDLY

CALM

BALANCE

COLOUR AND EMOTIONS One final key point: culture and experience inform how we see things. This means that we may not all see the same thing. When designing any effective communication we need to properly understand ‘attention blindness’ – the concept that people see what experience and cultural experiences have biased them to see. The same basic wiring that helps us to spot a predator camouflaged in long grass, lets us easily spot outliers and recognise subtle patterns in visual data that would otherwise remain invisible were the data presented to us in raw numeric form. But, because data visualisation is a powerful tool for contextualising information, we should

12 http://queue.acm.org/detail.cfm?id=1805128 13 Krum (2013)

always remember the implicit risk of using this power as a bludgeon. As Randy Krum, author of Cool Infographics, warns: “…with great power comes great responsibility. All data visualization is biased13.” Many communicators overlook this crucial point. Choosing how to visually contextualise data fundamentally directs and shapes an audience’s understanding of it. In the next section, we use two case studies, namely investment choice and projection statements, to see if we can integrate our insights about how best to visually contextualise data and insights about how we humans make choices.

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Case study 1 FRAMING INVESTMENT CHOICES

Traditionally, when a fund has member investment choice as an option, trustees give members an array of fund fact sheets with basic information about fund benchmarks, asset allocations, performance histories and risk profiles.

Or as Principle 10 of Pension Fund Circular 130 guides us: “Where member investment choice is offered, the details of the investment options should be described, setting out the severity of any associated risk and the performance benchmarks, as

So far, so good. At least in terms of fulfilling reporting responsibilities. The words on our fact sheets suggest that these are very different portfolios performing very different functions. We are told to expect a higher return over the long term from portfolio 1, with portfolio 2 better suited to a shorter-term strategy. But directly below this information, the performance tables are presented. Remember, the laws of visual attraction – where do the eyes get drawn to first? The tables will turn out to be the focal point of any visual ‘investigation’, with the written text getting a passing glance at best. How then are members likely to perceive the differences between these two portfolios based on this new information?

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well as the underlying type of investments. Members should be able to make an informed decision from such information.” The fund fact sheets in the example on the next page have dutifully recorded these points:

Is portfolio 2 now the better portfolio because the 2008 returns (the top line) are better? Very often, the top line numbers (or bottom line) become the only numbers readers remember. Note that the bottom line on the tables is the five-year return. Once again, the top performer is portfolio 2. The point is there is no meaningful connection between the information in the table and the write-up about the fund’s differentiating characteristics. If anything, the two sets of information confuse the choice. Using cumulative performance graphs, another popular tool, would also give a poor framework for decision making.

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PORTFOLIO 2 FACT SHEET

PORTFOLIO 1 FACT SHEET Aim of the portfolio Best suited to…

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To grow your savings over the long term. An investor with seven years or more to save and would like the best returns.

How risky is the portfolio?

This portfolio has a low chance of capital loss over a seven-year period, although there is a big chance of capital loss over shorter periods of time.

Time frame

This portfolio will probably give you returns of around CPI (inflation) plus 5.5% over the long term and is not suited to an investor who can’t stay invested for the long term (seven years or more). In the short term your savings will be exposed to volatility.

Annual investment returns:

Aim of the portfolio

To give fairly consistent, stable returns over a one- to three-year period.

Best suited to…

An investor with, at most, three years to save: a short-term investment.

How risky is the portfolio?

This portfolio has a very low chance of capital loss over a short-term period. There is a chance of capital loss over the very short term, but these losses should be fairly small.

Time frame

This portfolio will probably give you returns of around CPI (inflation) plus 3.5% over the medium term and is not suited to an investor who has a long-term investment time horizon.

Annual investment returns:

Year

Return

Year

Return

2008

-9.88%

2008

6.64%

2009

18.09%

2009

11.97%

2010

14.99%

2010

12.07%

2011

8.11%

2011

7.96%

2012

19.54%

2012

14.05%

Average annual investment returns – as at 31 December 2012:

Gross return

1 year

19.54%

1 year

14.05%

3 years

14.10%

3 years

11.23%

5 years

9.59%

5 years

10.44%

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PORTFOLIO RESPONSES TO DIFFERENT MARKET CONDITIONS 30% 25%

Percentage

20%

Portfolio 1

15%

Portfolio 2

10% 5% 0% -5% -10% -15% 2007

2008

2009

2010

2011

2012

2013

Years Falling market

Rising market

Flat market

Source: Alexander Forbes (2014)

How could we present this information? At the start, each portfolio reflects a strategy with very different objectives and time frames. So, an individual needs to know, given the time frame specified for each, whether the portfolio actually achieved its objective. But this makes it impossible to directly compare the two portfolios. If the two portfolios are supposed to reflect a different responsiveness to market conditions, then perhaps this provides a more meaningful point of comparison. Rather than provide one-, three- and five-year comparisons, or even year-toyear comparisons, we could test how the

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portfolios responded to different market environments. Did the capital protection portfolio do better than the more aggressive portfolio in a collapsing market (say, 2008)? Did the more aggressive portfolio perform better in a rising market (2009, 2010, 2012, 2013)? If we look at it from this perspective, the graph above illustrates that both portfolios did exactly what they were supposed to do. This insight now forces the debate away from ‘which portfolio did better’ and back to the point of the exercise – helping members pick a portfolio that does what they need.

The point is, we have deliberately chosen an example that is almost universal in the member choice dynamic. Members get fund fact sheets that fulfil the regulator’s requirements, but fund fact sheets by themselves don’t really give members useful information. Given what we now understand about the way the human eye takes in the information on these fact sheets, to say nothing of the limited understanding the average member has the subtle differences in investment strategies, its little wonder that the decision-making process is full of problems.

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PRESENTING TABLES FOR INVESTMENT CHOICE SELECTION the left of the page, and members will go for those options. Put the aggressive portfolios first and members will choose that option. ■■ To try and avoid bias, trustees will often list portfolios alphabetically. Again, first come, first chosen. ■■ Also, in an attempt to avoid errors, trustees often leave the fund fact sheet details up to the product provider. But note the conundrum presented to

Let’s carry these conventions one step further. Many funds like to present their choices in neat tables, but as we learned in our opening discussion, when we present information in tables, it causes many unintentional biases in decision making: ■■ The majority of members typically choose the first option in the table. List all the more conservative choices on

investors in the following table. Only two product providers mentioned that their funds were Regulation 28 compliant. We may know that all the funds on offer for individual choice have to be Regulation 28 compliant, but most members don’t. So, it appears as though these two funds have something special that the others don’t.

EXAMPLE OF AVAILABLE MEMBER CHOICES

Trustee choices

Your investment choices

Life Stage Conservative

Life Stage Aggressive

Asset X Money Market Fund

Asset Y Secure Growth Fund

Asset Y Aggressive Growth Fund

Asset Z Passive Fund

Objective

CPI + 2% over a rolling 36-month period; no negative returns over a rolling 24-month period

CPI + 5% over a rolling 60-month period

No negative returns

CPI + 3.5% over a rolling 60-month period; no negative returns over a rolling 36-month period

CPI + 5.5% over a rolling 60-month period

CPI + 5% over a rolling 60-month period

Risk

Low

High

Very Low

Medium

High

Time frame

2-3 years

5+ years

Less than 1 year

3-5 years

5+ years

Investment approach

Invests in stable and income funds. Equity exposure capped at 40%.

Invests in specialist funds in line with the strategic asset allocation. Equity exposure capped at 75%.

Invests in cash and cash equivalents.

Invests in all asset classes, including derivatives.

Invests in all asset classes, in line with the strategic asset allocation.

Comments

Currently invests in Asset X Money Market Fund (35%) and Asset Y Secure Growth Fund (65%).

Currently invests in Asset Y Balanced Growth Fund (60%) and Asset Z Passive Fund (40%).

This portfolio seeks to beat cash returns and preserve capital.

This portfolio offers a 100% capital guarantee over 36 months.

This portfolio can be volatile. It is compliant with Regulation 28.

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GUIDED CHOICE ARCHITECTURE: NARROWING DOWN THE CHOICES TO MAKE BETTER DECISIONS Sheena Iyengar, in her book The Art of Choosing, emphasises the point that our ability to choose reduces as the number of choices on offer expands. In fact, in one of her earlier studies (Iyengar and Jiang, 2003) she found that the higher the number of investment choices, the lower the participation rates14. We know from much earlier work by George Miller that seven seems to be the limit on our capacity for processing information15. And Iyengar’s own famous jam studies showed that when

shoppers could choose from 24 flavours of jam, they simply abstained from buying any. But when they only had six choices to contend with, jam buying increased dramatically16. So how could we reframe the investment option choice so we can get members to where they need to get to without either freezing up or triggering a suboptimal choice?

By layering choices (maximum three layers) and then limiting the options at each level, McKinsey Consulting actually created a guided choice architecture – a way of presenting choices that helps individuals make better choices17. Let’s show here how the McKinsey Rule could be applied in our investment choice problem in our example below:

BY LAYERING CHOICES, AN INDIVIDUAL WOULD ONLY BE CONFRONTED WITH THREE OPTIONS AT ANY TIME. HERE’S HOW IT WOULD WORK:

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The first layer requires the investor to prioritise their investment objectives.

Growth

Income targeting

Capital preservation

The next layer asks the investor to select the investment philosophy preferred.

Specialist

Balanced

Passive

The final layer directs the investor to a limited number of appropriate portfolios.

Portfolio 1

Portfolio 2

Portfolio 3

14 15 16 17

Iyengar & Huberman (2003) Miller (1956) Iyengar (2010) Ibid

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Case study 2 MAKING PROJECTION STATEMENTS MEANINGFUL Providing projection statements is nonnegotiable. Not, perhaps, in the eyes of the regulators. Even PF130 makes no mention of this requirement. But if we are going to give members a sense that they are on a journey, that there is most decidedly a specific goal, and that from time to time we may overshoot that goal or undershoot it, then we had better give considerable thought to how we are going to present that information. If we can get members to engage in the progress they make on that journey and act when they need to to keep them on course, then we can gain significantly greater certainty that: ■■ They won’t abandon that journey. (because they don’t understand where they are) ■■ They won’t be surprised by the outcome. So, we have a choice. We can treat communications as part of our fiduciary duties and consider our duty done when we comprehensively tell employees how we invest their retirement savings. Or we can think of retirement funding as an ongoing, interactive process that uses communication to keep the member an active participant in the conversation. This is not the same discussion as our discussion on choice17. Here we are

17 Benefits Barometer 2013, pages 80-88 18 Laibson, (1997) 19 Rajan (2013)

addressing the reality that individuals tend to have problems determining how best to tackle a problem that has many moving parts with huge consequences on outcomes that only materialise decades in the future. We know that when members are confronted by the complexities of retirement planning, most do nothing. Inertia tends to be the dominant emotion. But we also have serious doubts about whether the ‘set-it-and-forget-it’ approach to retirement investing necessarily works anymore. Can we actually afford to be horribly wrong with members’ outcomes? The dynamic we believe is worth exploring is more closely aligned to the thinking around ‘smart defaults’ in Part 2, Chapter 3. Individual preferences are not likely to be stable over time. The decision maker will have different preferences over the same future plan at different points in time18. We need to be able to accommodate this. This is covered in more detail in Part 2, Chapter 10. As Create Research’s report A 360 Degree Approach to Preparing for Retirement highlights: “key decisions are not single events like buying a house. New

decisions are often forced by changes in job, family, health or market situations19.” So, how do we help members to engage in the journey and respond when it’s clear that they need to respond? Members need to understand: ▪▪ What does their future potentially look like? ▪▪ Are they on track for getting the income they need in retirement? ▪▪ How much uncertainty is in these projections? ▪▪ What can they do if they are off track? This means that while members most definitely need to see current basic information that the regulators require such as asset allocation, contributions, investment performance, fees and any new developments in the fund, they also need forward-looking information. A projection statement combines both what the member has already achieved and an expectation of what they could achieve in the future. So, how do we do this?

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To make projection statements meaningful, consider the following: 1. Don’t show members their total fund credit at the top of the page. 2. Avoid performance graphs that have little connection to member realities. 3. Help members understand uncertainty. 4. Give them options on what to do to improve outcomes.

DON’T SHOW MEMBERS THEIR TOTAL FUND CREDIT AT THE TOP OF THE PAGE

Take a few minutes to think about this. If I told you that you have a fund credit of R1.6 million, how would you feel? Excited? Sounds like a lot of money? Feel like you’re, well, a millionaire? And yet in Benefits Barometer 2013 we pointed out that you will need R1.6 million to cover just your postretirement comprehensive medical care requirements - only that! People don’t understand large numbers, particularly when those numbers need to be

How do we make this ‘conversation’ with the member more meaningful? The answer is to convert that fund credit into a post-retirement monthly income (in today’s terms). People understand what they need to live off monthly. And by comparing their current expenditures to what they’ll need to pay for post-retirement, they can get an immediate sense of whether they’re in trouble.

AVOID PERFORMANCE GRAPHS THAT HAVE LITTLE CONNECTION TO MEMBER REALITIES

Cumulative performance graphs are the common currency of performance reportbacks to members. But what exactly could a member do with that information? Are they winning the war on retirement income? Does this outperformance have anything to do with their ability to retire? The most important

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allocated across another 20 to 25 years for your living costs.

information that’s missing here is exactly what kind of an income they can buy given whatever gains they received. Is that not the most important information a member needs to act on? Outperforming benchmarks is a meaningless consideration if that benchmark has no bearing on where members need to get to.

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AVOID PERFORMANCE GRAPHS THAT HAVE LITTLE HELP MEMBERS UNCERTAINTY CONNECTION TO MEMBER UNDERSTAND REALITIES When Pablo Antolin and Olga Fuentes developed the pension risk simulator for the Chilean market, they found that participants had difficulty understanding what confidence intervals and probability distributions were exactly20.

Much of the concern about projection statements is driven by the number of risky, uncertain variables that will likely influence outcomes. If projection statements are deterministic, and the majority of them are, then the projection could become confused in the member’s mind as holding out some future promise. A number of providers integrate scenario stress tests into their projections to try and convey the magnitude of this uncertainty.

That said, understanding that there is a substantial amount of uncertainty in these projections is perhaps the most important message that we can convey to the member.

In theory, the more robust way of conveying projection information is to use stochastic modelling. Here, members would be given a range of probabilities for each of the outcomes. While this modelling is more likely to capture a real-world outcome, probabilities are notoriously difficult concepts for members to properly respond to.

Here is where visual representation of concepts can be critical. It is far easier to convey a message of variability of outcomes or probability of events with simple graphic representations than it is to have someone correctly internalise that ‘two out of seven times your fund may lose as much as 20% of its assets’.

GIVE THEM OPTIONS GIVE THEM OPTIONS If the annual report to a member is not a happy message, what then? “Contact your financial planner” is not particularly helpful. In truth, it’s a commercial. So should we get the board of trustees to hire new fund managers? Even if they do, that’s unlikely to improve the news. Poor replacement ratio outcomes are typically driven by lack of preservation, inadequate contribution levels, low pensionable pay or retiring too early. What members need is feedback on how any changes in those parameters would improve their situation. 20 Antolin & Fuentes (2012) 21 Goda, Manchester & Sojourner (2012)

If we want members to improve their contribution rates, we need to show them the impact of doing so. What happens if they increase their pensionable pay or contribution rate? What happens if they delay their retirement by a few years? What happens if they preserve their savings between jobs? Research21 shows that even simple projection statements that highlight when a member is off track and how to get back on track, can help improve decision making. So, getting projection statements right can make a difference!

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Conclusion Regulatory directives on what absolutely needs to be covered in a proper communication may address concerns that investors may not be adequately informed – but that issue pales in comparison to the issue of whether communications to members provide the basis for meaningful decisions. Unfortunately, many boards exhaust the time and resources they have available to them in focusing on the regulatory requirements first and foremost. As we have seen elsewhere in this book, members will only value their benefits if they understand the effect these benefits will have on their lives. Clear communication is essential, even if it is a challenge to implement. Furthermore, it’s in the interest of an employer to ensure that members do in fact see value in their benefits. But perhaps the real opportunity we are missing is to properly measure whether our communications actually result in the right behaviours and decisions from fund members. That exercise has two essential requirements: ■■ That we clearly identify any ‘calls to action’ to members. ■■ That we measure whether members took action and, if so, was it the right action for the circumstances? This is an opportunity that we are only just beginning to recognise.

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Why financial education is failing and what we can do about it

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Summary Conventional approaches to financial education are failing, because the focus has been more on teaching fundamentals and less on behavioural issues that affect individualsâ&#x20AC;&#x2122; resistance to learning or change. New research is helping us to identify more effective, if somewhat unconventional strategies. The employer has a key role to play in facilitating this, but we need to demonstrate why their investment will meet its objective and provide a financial benefit. We also provide suggestions on what to do when the employer is not an appropriate conduit.

Studies show that interventions to improve financial literacy have a mere

0.1% effect on financial behaviour 172

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EXAMINING THE CHALLENGES If financial education is supposed to be the antidote to the increasing complexity of financial decision making, we are losing the war and at a horrible cost.

Each year the number of credit-active consumers continues to rise. By the end of 2013 it was at an all-time high of 20.3 million1. This is huge if you take into consideration that there are only about 14 million South Africans who are employed. And of that number, only 11 million work in the formal sector2. On top of that, 9.8 million people – almost half of the credit-active population – have impaired credit records3. At the 2012 Midrand Debt Summit, statistics were shown suggesting there are approximately 3 million garnishee orders in circulation against between 10% and 15% of all employees4. Worse, where consumers have been unable to tap into established financial service providers for credit, they have been turning to unregistered ones, like loan-sharks, in spite of the sky-high interest rates they charge. This debt syndrome is clearly one of the factors that undermine the best intentions of National Treasury to build a viable savings culture in South Africa. As such, we all have a huge incentive to find a way to cope with the problem. Policymakers, regulators, boards of trustees, unions, financial services companies, and members all agree: there’s a critical need for greater financial literacy if South Africans are to make meaningful decisions about their financial welfare. The recent increased interest in this topic means there’s an abundance of financial

1 National Credit Regulator, December 2013 2 Statistics South Africa, Quarterly Labour Force Survey, Q4 2013 3 National Credit Regulator, December 2013 4 Peter Allwright, Garnishee Orders: Facts and Answers 5 Fernandez, Lynch & Natemeyer (2014) 6 Ibid

learning material, literature and on-line education programmes. These are targeted at adults, college students, high school students and even pre-schoolers, with more projects ready to hit the marketplace in just about every country where there’s a concerned financial regulator. But has this wealth of materials really made a practical difference in people’s lives? A recently released (February 2014) report, Financial Literacy, Financial Education and Downstream Financial Behaviours5, provides an analysis of the relationship between programmes promoting financial literacy and their success at improving financial behaviour. The results are disheartening. A dissection of 168 papers covering 201 prior studies shows that interventions to improve financial literacy explain a mere 0.1% of the variance in financial behaviours. Worse, those studies that target low-income groups showed even weaker results. If “financial education is supposed to be the antidote to the increasing complexity of financial decision-making, we are losing the war and at a horrible cost”6. The estimated yearly cost of these programmes globally is in the billions of dollars. And governments, employers and service providers throw more money at the problem every day – without the army of financial literacy or member education specialists pausing to understand why they don’t see any quantifiable results.

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INSIGHTS In our own analysis of the South African situation, three insights provide important keys to unlocking the problem: 1. W ho facilitates the access or delivery and how? This is a key factor in getting people to respond positively and permanently. 2. B y focusing on what we need to teach people to develop a reasonable level of financial literacy, these programmes tend to neglect the more critical question: how do we get people to pragmatically act in their own best financial interests? In effect, we haven’t properly addressed the ‘why’ – why people should bother. 3. None of this is meaningful unless we can continuously monitor and measure these efforts to determine which strategies work.

Who can meet this challenge? Before the shift from defined benefit (DB) to defined contribution (DC) schemes, employers played steward to their employees’ benefits packages. But in our current DC environment, where the individual bears all the risks of poor outcomes, financial literacy plays a central role in shaping success. In the end, it’s most often the poor choices members make that sink their chances for meaningful outcomes than the disappointing performance of any asset manager or even costs. Employers would seem to be a natural conduit for facilitating a stable financial journey for their employees. Remuneration passes through their hands and garnishee orders are typically processed at this payroll point. That means employers should have a natural self-interest in their employees’

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financial wellness. There is growing evidence that financial stress leads to absenteeism, presenteeism, lack of focus or capacity for effective decision making and even fraud or criminal activities. It would seem unwise from a human resources management perspective not to take an interest in your employees’ financial wellness. But, getting the employer to re-engage in the problem is not trivial. And it’s not necessarily because employers don’t value their employees’ welfare. Historically, employers have found the results from their efforts to promote employee financial wellness to be disappointing – if not downright disheartening. Some of the reasons why financial wellness programmes have not been as successful as hoped include:

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■■ Typically, those employees who need financial wellness programmes the most, are the ones too embarrassed or disengaged to participate7. ■■ It’s almost impossible to accommodate the wide range of literacy levels and needs with one financial wellness programme. This problem is made worse by the fact that people are often at different stages of receptiveness to change and the changes required may be different for different individuals. ■■ Knowing whether the programmes and services provided actually translate into better decisions or less stress for employees is the true test of the merit of any programme, but companies rarely test this and rather assume that it works.

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If we can’t change the model, or at least the conversation, then many employers will simply not see what value these additional services offer. Getting the employer back to the table will require that we help them identify whether there is a financial stress problem in their company, who is affected’ how prepared are they to address the problem and, most importantly, does solving these problems improve the bottom line for their business?

GETTING TO THE HEART (OR MIND) OF THE PROBLEM By focusing on what people need to know, we tend to ignore the more critical question: how do we get people to do something about the problem, to act in their best financial interests? Financial knowledge is of little value if an individual is not inclined or even able to apply it. While the textbooks tend to promote a myth of self-determining individuals who are capable of shaping their own behaviour independent of peers8, the reality is that our financial behaviours are powerfully shaped by the actions and beliefs of family and friends. There is more to changing these ingrained social practices than simply providing education and access to financial instruments9. As economist and Nobel laureate, George Akerlof, points out: “Individuals’ decisions are driven not only by idiosyncratic tastes,

7 Meier & Sprenger (2008) 8 Ibid 9 Mulaj & Jack (2012) 10 Akerlof & Krenton (2010) 11 Bikhchandani (1998)

but also by internalised social norms10.” The implicit desire for conformity, acceptability and social identity can powerfully affect decision-making11. In financial decision making, social context and emotions matter. It is far from a rational process. So, how do we catalogue these feelings, how do we chart an individual’s inclination to take financial action, and how do we establish their readiness to tackle their financial futures head on? What’s needed are some metrics to evaluate and monitor these psychological factors in new ways not ordinarily considered by financial education material. The strategy outlined in the following section shows an action plan that any employer can put in place from beginning to end.

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Strategy WHAT EMPLOYERS CAN DO

TAKING MEASURE A 25-year-old study by a cross-disciplinary group of American academics ultimately came to the realisation that understanding how individuals felt about their financial situation provided far better insights into how we could best produce behavioural changes12.

STEP 1

Measuring an individual’s level of financial distress Measuring an individual’s level of financial distress turns out to be a particularly effective (and fairly simple) way for employers to determine whether financial distress in their companies could turn into a productivity issue13. Prawitz et al14 determined that they only

12 P rawitz, Garman, Sorhaindo, O’Neill Kim & Drentea (2006) 13 Prawitz & Garman (2008) 14 P rawitz, Garman, Sorhaindo, O’Neill Kim & Drentea (2006)

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needed eight simple, but rigorously tested, questions to establish the level of stress an individual employee might be experiencing as a result of financial difficulties. With the Personal Financial Wellness Scale, it’s fairly easy to take the financial distress pulse of the full contingent of employees at any company.

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The questions that gradually emerged as most effective over the long term were roughly along these lines:

1 2 3 4 5 6 7 8

What, do you feel, is the level of your financial distress today? On a scale of 1 to 5, mark how satisfied you are with your present financial situation. How do you feel about your current financial situation? (This differs from question 2 by considering how overwhelmed or confident the respondent is rather than how satisfied they are.) How often do you worry about being able to meet your normal monthly living expenses? How confident are you that you could find money to pay for a financial emergency that costs about $1 000?* How often does this happen to you? You want to go out to eat, go to a movie or do something else and donâ&#x20AC;&#x2122;t because you canâ&#x20AC;&#x2122;t afford it. How often do you find yourself just getting by financially and living from paycheck to paycheck? How stressed do you feel about your finances in general?

* At the date of this study, that would have been approximately R7 000

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STEP 2

Having a measure of financial distress Having a measure of financial distress that can be applied across the company, irrespective of income or job level, not only helps employers know when they need to bring in help, but provides them with a benchmark by which they can ultimately measure whether the interventions they introduce yield results that may justify the expenditure. And providing corporates with a tangible measure of return on investment

(ROI) into a financial education programme helps justify the costs involved. This tool was designed by the Personal Finance Employee Education Programme. It calculates how much employee financial distress costs and estimates the employer’s return on investment for providing workers with quality workplace financial education.

EMPLOYER PROJECTED ROI FOR QUALITY FINANCIAL PROGRAMME Enter your information Total number of full-time employees

1000

Median annual salary

R450 000

Turnover and training cost to replace an employee

R112 500

Healthcare costs per employee

R79 200

Personal financial wellness (PFW) score for all employees

6 score

See what you can save R2 025 000

Turnover

Employer savings R5 420 490 Healthcare costs

R392 040

Job performance

R2 841 750

Other work outcomes

Source: Adapted from the Personal Finance Employee Education Foundation

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R161 700

Check out your ROI Employer’s cost of financial programme per employee

R1 500

Total employer’s cost for programme

R1 500 000

Employer’s first-year savings due to financial programme

R5 420 490

Your return on investment

2.61

3.6

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STEP 3

Chapter 8

Measuring preparedness for change Testing for financial distress only addresses half the problem. A 2007 study by researchers at the Personal Finance Employee Education Foundation16 found that: “even though employees are experiencing stress related to such financial topics as retirement planning, debt management and budgeting, about half are unwilling to learn more about these stressful topics in order to change their situations.”

change in areas of addiction. These studies identified six distinctive stages of preparedness in individuals that were invaluable for identifying not only how predisposed they might be to changing selfdestructive behaviour, but more importantly, what kinds of interventions were most effective for individuals at each of these six stages. The financial coaching fraternity quickly accepted and adapted this model17.

Clearly, before employers waste money on educational programmes that won’t be effective, it’s crucial to establish how receptive employees would be to these programmes and shape strategy to suit individual needs.

The table on the next two pages represents a hybrid of ideas and inputs on implementing this model. Our base is a template developed by Grubman, Bollerud & Holland as a Center for Financial Security working paper18. We have drawn from our own array of solutions to provide inputs as to what concepts might be most effective for which stage.

Measuring preparedness for change This challenge led the research to some interesting work done on behavioural

THE READINESS RULER SHOWING THE STAGES OF CHANGE IN OVERSPENDING

DENIAL

AMBIVALENCE

PREPARATION

ACTION

MAINTENANCE

< < < RELAPSE

16 Prawitz, Shatwell, Haynes, Hanson, Hanson, O’Neill & Garman (2007) 17 Xiao, Prawitz, Proschaska, O’Neill, Kim & Garman (2014) 18 Grubman, Bollerud & Holland (2012)

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General description

Relevance to the individual

1. Denial

Person has not yet considered the possibility of change because of lack of awareness of the problems or failure to see a need for change.

Individual does not recognise the long-term self-destructive implications of depleting principal, high credit card debt, inadequate savings, and failure to follow a financial plan.

▪▪Gamification (C) ▪▪TV soaps where debt and financial stress are the characters’ undoing.(S) ▪▪Public advertising (S) ▪▪SMS messaging about funding status or credit status

Person vacillates between reasons to change and reasons to stay the same.

Individual may see some benefits of curbing spending, but is unconvinced of the need for change or not ready to implement it yet. Individual may not be ready to let go of the apparent benefits of spending.

▪▪Gamification (C) ▪▪Interactive tools (C) (S) ▪▪New employee on-boarding experience (C) (S) ▪▪Social media campaigns

Person recognises they must do something but may not know what to do. Needs specific plans to implement the change and a supportive coach to provide guidance.

This window of opportunity is genuine. Individual is open, motivated and interested in ideas and tools for new behaviours. Individual needs concrete help developing change strategies and a roadmap towards fiscal prudence.

▪▪Gamification (C) ▪▪Debtors Anonymous ▪▪New employee on-boarding experience (C) (S) ▪▪On-site advice kiosks ▪▪Financial education websites ▪▪Contact financial advisor

“Ignorance is bliss.” Pre-contemplation

2. Ambivalence “Well, maybe...” Contemplation

3. Preparation “I’m ready. What do I need to do?” Preparation

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What they may be responsive to

Stage of readiness

Carrot (fun - C) and stick (scare - S)

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What they may be responsive to

Stage of readiness

General description

Relevance to the individual

4. Action

Person learns what to do differently and acts to bring about the change. Needs a knowledgeable coach to finetune efforts, provide praise for success and lend support during setbacks

Individual works on spending issues despite the difficulty. Individual is receptive to input from the adviser and will benefit from coaching despite obstacles. As self-esteem and self-control improve, the change becomes real.

▪▪Debtors Anonymous ▪▪Interactive tools ▪▪On-line personal plan roadmap

Person works on efforts to sustain the change by cementing new behaviours. Needs to remain optimistic in the face of struggle and learn from relapse episodes. If successful, the new pattern is now the status quo.

Individual works to stay with the financial plan and maintain spending limits. Individual needs structure to sustain the change and avoid getting derailed. Needs input from a patient coach, adviser or sponsor about learning from relapse(s), anticipating relapse risks, and staying on track with restrained spending.

▪▪Debtors Anonymous ▪▪On-line personal plan roadmap ▪▪Breach reporting on your personal parameters ▪▪SMS messaging on funding status or credit status ▪▪Interventions at key ‘teachable moments’ (life changes or transitions)

A normal and sometimes necessary part of the change process. Relapses may occur in small or large ways as new behaviours struggle with old behaviours or with unexpected stressors.

Old habits reassert themselves and individual sometimes reverts to budget-busting behaviours. Emotional patterns also return, with embarrassment, helplessness and a sense of failure. Financial adviser or coach needs to help get client back on track and provide encouragement when individual feels depleted and discouraged.

▪▪Breach reporting on your personal parameters ▪▪Debtors Anonymous ▪▪On-line personal plan roadmap ▪▪Financial coach

“I’m doing it.” Action

5. Maintenance “I’m sticking with it.” Maintenance

Chapter 8

Carrot (fun-C) and stick (scare-S)

Throughout all stages Relapse “I screwed up.” Relapse

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STEP 4

Map an individual to the correct stage Once we understand the six stages of change, the next task is to map an individual (or a whole company of individuals) to the correct stage. Again a fairly simple questionnaire or interview process handles this mapping neatly. And again, because this is a simple questionnaire, you can apply it to quite a large sample size at any point in time. Both the Grubman19 and the Kerkmann20 studies provide examples of the type of questions that could tease out the right insights about an individual’s readiness for change. This, in turn, informs the type of financial education programme that best suits this particular group of individuals. Clearly, the value of such an evaluation tool is that it allows you to identify a group of like-minded individuals and target member education or financial wellness programmes

to best address their level of receptiveness. As research by Lusardi and Mitchell explains, “a short programme that is not tailored to a specific group’s needs, is unlikely to make much difference21.” Without such a step, then, the potential for wasting time, money and people’s patience is beyond measure. As an example at the end of this chapter, we include two strategies that have proven to be particularly effective with Stage 1, Stage 2 and Stage 3 individuals. Essentially, these are all individuals who are either disengaged or in total denial about their financial problems. Or they may be totally unaware that they have a problem because they never bothered to pay attention. The two strategies we consider are gamification and a support group called Debtors Anonymous.

The value of an evaluation tool that helps you map readiness for change is that it allows you to identify a group of like-minded individuals and target member education or financial wellness programmes to best address their level of receptiveness.

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19 G rubman Ballerud & Holland (2012) 20 K erkman (1998) 21 Mitchell & Lusardi (2013)

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STEP 5

Chapter 8

Measure the outcomes What’s clear is that we need to place greater focus on measuring the outcomes of our efforts, if for no other reason than because there is a considerable investment at stake. While researchers have little or no information about the quality or content of workplace seminars, the more important question is whether any of these programmes promote behavioural changes. Information in this area is almost non-existent. Even more importantly, “there has been no carefully-crafted costbenefit analysis indicating which sorts of financial education programmes are most appropriate, and least expensive, for which kinds of people22.” In South Africa, the Financial Services Board (FSB) has conducted an extremely thorough exercise to establish a baseline for how our population scores in its ability to take financial action. The FSB followed much the same model that the OECD applied to establish a financial literacy

baseline in other countries and identified the measurement23 areas shown in the graph on the next page. The analysis is comprehensive and looks not only at what people know, but how well they apply it to make the right choices, establish the right priorities and consider both the short- and long-term implications of their choices24. Unfortunately, because the FSB study doesn’t use exactly the same methodology as the OECD study in all the areas of analysis, we can’t compare the results to other countries in the OECD study. But what makes this an invaluable piece of measurement is that it can provide insights into what gaps exist, in which region of the country and with which population group in South Africa. It also means that we should be able to see if we’re making any progress from year to year, where and, hopefully, why.

What’s clear is that we need to place greater focus on measuring the outcomes of our efforts.

22 Kerkman (1998) 23 FSB (2013) 24 Ibid

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We need to see if we are making any progress from year to year, where and why

FSB STUDY ON FINANCIAL LITERACY IN SOUTH AFRICA OVERALL SCORE FOR EACH MEASUREMENT AREA, 2011-2012 2011

2012 2011

2012 Years

Financial control 61

Financial planning

2011

Appropriate product choice

2012

Financial knowledge & understanding

2011 2012

2011

2012

Overall financial literacy score

0 10

40 Score

Source: FSB (2013)

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HIGHLIGHTS OF THE FSB REPORT ON SOUTH AFRICA BEHAVIOUR AND ATTITUDES TO LONG-TERM PLANNING

52% of the adult population always or often sets and pursues long-term financial goals, 22% sometimes, 22% seldom or never.

39% finds it more satisfying to spend money than to save it for the long term.

29% tends to live for today and let tomorrow take care of itself.

42% believes that money is there to be spent.

Attitudes have not changed appreciably since 2010, but there are signs of a declining ability to save in the last three years. Source: FSB (2013)

MAKING ENDS MEET 45% personally experienced income shortfalls last year. Little difference in response between 2011 and 2012.

Two common coping responses: borrowing from family or friends (41%); cutting back on spending or doing without (43%) – nominal reliance on financial products. ■■ Increase in the share of South Africans cutting back on spending as a coping strategy between 2012 (43%), 2011 (35%) and 2010 (30%). ■■ Decline in the share of South Africans borrowing from family/friends as a response to income shortfall between 2012 (41%) and 2011 (55%).

Most important coping mechanism for South Africans is cutting back on expenditure or doing without. This was primarily a coping strategy more common among middle-income South Africans; the poor are more reliant on social networks.

Source: FSB (2013)

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Option 1 WHAT TO DO WHEN EMPLOYEES JUST DON’T ENGAGE IN THE PROBLEM

The games people play

In Mark Twain’s classic novel, Tom Sawyer, Tom dupes his hapless chums into whitewashing a fence for him by convincing them that the activity is so much fun that he doesn’t want their help at all. Framed in this way, he did not need any extrinsic rewards, his friends begged him for the opportunity to take over the back-breaking task. So, how do you convince average employees who may be in stages of deep denial or ambivalence that they need to face their financial troubles head-on? Simple, invite them to play computer games. At first, this approach may sound frivolous. But recent studies show the extraordinary educational value of games. Properly harnessed, they can be engines of productivity and learning. Companies that believe there’s no place for games in the office are mistaken. In 2003, a study conducted at Carnegie Mellon revealed that workers wasted an astounding 9 billion work hours playing Solitaire that year in the US alone26. Nobody would argue that collective procrastination is good for humanity, but

186

26 Rossignol J, This Gaming Life: Travels in 3 Cities 27 Koster (2005)

imagine the same lost time was instead captured by games teaching the principles of financial literacy. Games give people a structured experience with clear goals and a compelling sense of achievement and progress. Beating a tough level triggers a jolt of dopamine in the brain, increasing engagement. Learning does not feel like work when you’re playing a computer game. Instead it’s an effortless by product of exploring the game-world or solving the puzzles that will release more pleasurable chemicals into the brain. The best games gradually increase their difficulty in response to progress, tantalising players by keeping them on the edge of mastery as they seek ever more sophisticated information to conquer the next challenge. Importantly, these games leverage interactive global networks and provide forums for public ranking and social interaction that encourage participation. As game designer Ralph Koster puts it: “fun is just another word for learning27.”

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Option 2 WHAT TO DO WHEN THE EMPLOYER IS NOT THE RIGHT PLATFORM FOR ENGAGEMENT

Debtors Anonymous

When financial problems reach crisis mode, it’s understandable that the employer may be the last person an individual would want to inform or involve. Who can people turn to then? Particularly when the last thing they have the luxury to do is to pay someone for help? One of the more ambitious local financial education projects for the masses was Imali, an initiative of the Financial Education Fund, in collaboration with the Department of Trade and Industry, Finmark Trust, African Bank and the Credit Information Ombudsman. Establishing centres in Johannesburg, Cape Town and Durban, the primary objectives of the project were to provide both advice for specific financial issues and to enable capacity to help clients resolve their own issues in the future28. Most importantly, the service was free. Unfortunately, the project lasted for only two years. Finding continuous funding was one problem. But there were also important questions around whether the model was effectively structured to meet its mission.

28 Imali Matters June/July 2011 29 Imali Matters Impact Assessment, December 2011

While the programme may have achieved some measure of success in helping its clients sort out complex problems with their service providers, it failed to provide the continuous engagement or enablement necessary for long-term results. What was missing was continuity on every level (same person, constant feedback, a sympathetic ear). Unfortunately the model was just not designed to cater for that29. One thing was clear from the exercise. There’s definitely a need for free financial help, but there are also challenges: ■■ How do you create a framework that gives individuals a continuous touchstone to get to the root of their financial difficulties? ■■ How do you address the needs of a wide range of individuals in financial difficulty – not just the poorest of the poor? What model could possibly be wide-ranging but also free? ■■ How do you get people to participate when their embarrassment and shame about their situation may well prevent them reaching out for help?

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“The fact that financial counsellors use research about addictions and dysfunctional behaviour speaks volumes about why it’s so difficult to curtail the debt cycle.”

■■ How do you strike the right balance between helping people solve complex financial problems and recognising that there are serious behavioural issues that may have to be addressed as well? ■■ How do you provide ‘support’ without contravening the FAIS stipulations on ‘advice’? Though the research on financial capability programmes may be thin at best, one strategy that does appear to be bearing fruit is the use of self-help peer groups30. The fact that financial counsellors use research about addictions and dysfunctional behaviour speaks volumes about why it’s so difficult to curtail the debt cycle. Even if people are ready to act, they need support structures to ensure they do so timeously and stay the course in the longer term. Crucially, when people are in the ‘relapse’ stage, they need guidance and support to encourage them to try again. Addressing debt and bad financial decision making can hardly be handled in one or two sittings with a counsellor focused on a specific issue. As Mullainathan and Shafir discovered, when people are financially stressed, their ability to problem-solve declines dramatically. It’s as if they get ‘dumber’31. If breaking out of the debt cycle demands a complete lifestyle change, then we need to recognise that for most people, this challenge can only be addressed one day at a time. What we need is a programme that helps people learn how to put one foot in front of the other, until they can quietly build back their self-esteem and confidence to the point where they can start to learn more functional financial habits. We need a programme where people can emerge from the shame and embarrassment of financial difficulty. A programme where they can emerge because they’re sharing their experiences with others who won’t judge

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30 Kast, Meier, Pomerantz (2012) 31 Mullainathan & Shafir, Scarcity 32 http://debtorsanonymous.org/

them because they have been in a similar situation. But these peers have managed to work their way out of their financial hole and become teachers in their own right as a result of the experience. If this is all starting to sound a bit like Alcoholics Anonymous, it should. The concept behind Debtors Anonymous is almost identical. This 12-step programme is more than 40 years old and has gained traction in 22 countries around the world32. These 12-step programmes have been proven globally to be the most effective resource available to lead individuals back from the brink of crippling addictions or life crises. On many levels, Debtors Anonymous is particularly well-suited for the South African context. It draws on the power of the group, not an external professional or service provider, as the primary source of help and guidance. It understands the power of a belief system to carry people through adversities that elude a purely rational or intellectual approach. It provides individuals with simple rules of thumb to get through the smallest financial and emotional challenges each day. It understands that when individuals are in crisis, this is not going to be a productive time for learning complex accounting and budgeting skills. This is a voluntary group of individuals who come together for one reason: their lives have become unmanageable because of their financial difficulties and they desperately need a ‘safe harbour’ where they can gradually piece together their lives by learning coping mechanisms that address both their financial difficulties and the collateral damage brought on by these problems: broken families, lost jobs, shattered friendships. Most importantly, the programme incrementally helps people learn what to do to avoid slipping back into the debt hole.

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The power of sponsorship is that there is an individual who is prepared to be available 24/7. That’s the intensity of the support needed for dramatic behaviour changes.

Each member gets a sponsor, someone who has experienced the debt vortex but has learned how to navigate out of the crisis. The power of the sponsorship concept is that there is an individual who is prepared to be available 24/7 to the new member. And that’s the intensity of support required to encourage dramatic behavioural changes. How do these programmes get up and running? One thing is certain, no financial services company can or should be involved. No service provider specialising in debt counselling or financial advice or other professional services company can be involved, except by invitation. Debtors Anonymous steers clear of any literature or financial support that might give the

Chapter 8

impression that they’re associated with any particular interest group. One group that could be instrumental in facilitating Debtors Anonymous meetings are the unions. But this can only work if there’s a clear distance from any financial service operations the unions may be affiliated to. The bottom line is, for a group that exists to represent the best interest of workers without intruding on their lives, the idea that unions could be best placed to promote the concept of Debtors Anonymous, is worth exploring. Will it work? We think so.

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Conclusion The first research results are trickling in and the message is unequivocal: we urgently need to change the conversation around financial education. Our current strategies are failing dismally due to a myopic focus on content rather than on the emotional turmoil of their intended audience. But bit by bit we are seeing small breakthrough ideas that are beginning to bear fruit. We need to focus our attention and resources where we know we can win, introduce ideas that appear to be winning in other parts of the world (as well as in South Africa) and then, most importantly, start measuring whether they do indeed make a difference.

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MEASURING SUCCESS

How do we know if individuals are winning?

PART 2 Chapter 9

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Summary Whatever is done for individuals, in both design and implementation, needs to contribute to better outcomes. Knowing whether the situation for individuals has improved requires developing and using our ability to measure what is working and what isn’t. An expanding range of tools allows us to monitor retirement funds and their associated replacement ratios, investment strategies and medical aid selections.

Have we paid enough attention to the most important question: are these efforts actually producing better results for individuals?

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‘Measure your success’ is a theme that winds its way through this entire book. It’s simply something we haven’t tackled effectively as an industry or as fiduciaries. Over the years, we have acquired an impressive battery of dos and don’ts to help our funds and the individuals we serve achieve a better post-retirement income, design a more tailored employee

benefits programme, determine a better medical plan, earn a better investment return, and produce more attentiongrabbing communication materials and more substantive financial education programmes. But have we paid enough attention to the most important question: are these efforts actually producing better results for individuals?

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We have at least established a base-case benchmark against which we can measure our progress each year as we learn more effective and efficient ways to deliver.

To address this, we need to tackle two important questions:

Is the structure or design capable of delivering the goods? Have we got at least that part of the problem correct?

Have we measured what happens at the individual’s level, and do we understand what dynamics inhibit the translation of good concepts into good results? We can propose all sorts of intuitively appealing ideas to improve today’s conventional practices. But until we can

Chapter 9

demonstrate how these ideas actually change individual members' outcomes, they’re purely academic. We have used this book to propose a number of ideas that could be attacked on just such grounds: how do we know they will produce the results we would like? The frank answer is that for some of these ideas, we don’t. But it doesn’t mean we shouldn’t challenge convention and experiment. We want to start the conversations, and we welcome your thoughts in response. For a growing number of issues, though, we have at least established a base-case benchmark against which we can measure our progress each year as we learn more effective and efficient ways to deliver.

THREE EXAMPLES OF WAYS TO MEASURE SUCCESS:

1 Measuring success for members of a retirement fund. 2 Measuring the liability shortfall of an investment strategy for a defined contribution fund.

3 Measuring the suitability of a specific medical scheme option to a member’s requirement.

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MEASURING SUCCESS FOR MEMBERS OF A RETIREMENT FUND

It's time we start monitoring the decision makers and the aggregate value chain of delivery.

According to the Pension Funds Act, trustees have a fiduciary duty to look after the best interests of the members of the fund1. Although it is not yet an explicit requirement that trustees monitor their members’ outcomes, it is only logical that fiduciaries assess whether the decisions they make really are improving outcomes. For financial service providers, the introduction of Treating Customers Fairly (TCF) legislation leaves us no option. We need to ensure that we are delivering on promises made to members. Achieving this outcome will demand a rethink of current conventions. Simply looking at the results of the activities of service providers is no longer enough. It’s time we start monitoring the decision makers and the aggregate value chain of delivery. Each year, we need to assess whether outcomes for members have improved or declined as the result of our collaborative efforts. This means that technology will be key, and technology can now easily fulfil this role at little or no additional cost. In the case study that follows, we highlight the difference between monitoring the success of decisions at the hypothetical

194

1 Section 7C of the Pension Funds Act

member level (what most trustees typically are exposed to) and monitoring success once we incorporate real activities and member choices. The differences are stark; the added value of the exercise is undeniable. By doing this, we can also break down our assessment into its critical components: 1. Can the plan design deliver what’s required? 2. What changes should be made within the scope of the trustees that can improve outcomes? 3. Are there behavioural issues at the member level that might be affecting outcomes? Applying this analysis allows us to gain some important insights into what’s working, what isn’t, and what would be the most effective strategy for improving outcomes. The fund in the case study that follows belongs to the public sector – the sector with perhaps the highest success rates for their members. But how successful have they really been?

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STEP 1

Chapter 9

Can the design deliver? The graph on the next page captures the range of inputs and assumptions for the specific fund, including: ■■ Gross contributions average around 23% of pensionable pay per year. ■■ Costs, including for risk benefits, average around 2.5% per year. ■■ Investment costs average around 0.8% of assets under management per year. ■■ Expectations of performance of the fund’s strategic asset allocation, set out in the investment policy document, are for 4.5% real returns (in other words, after inflation) per year – for the next 40 years. ■■ We estimate that the alpha from the investment strategy is equal to the assumed average investment cost over 40 years. (Alpha is defined in the glossary). ■■ The fund’s normal retirement age is 63 years. ■■ Given most employees start work at 23, the investment term is about 40 years. ■■ We assume the pensionable pay represents 100% of employees’ take-home pay and when employees switch in or out of this fund, they preserve 100% of their fund credits. (While many boards of trustees start with these two basic assumptions, an important question that we will be asking is: are they correct?) Using these assumptions, we prepare a scatterplot that projects what replacement ratio each member of the fund is likely to achieve when they retire. This projection is based on the strategy that the individual is invested in today, their contribution rates and costs, and how well we expect their broader investment strategy to perform over the time period they have left until retirement. Each dot on the graph represents an individual member – showing both their age and their projected replacement ratio. It thus accounts for their savings history to date. In the top left of the picture we also see the projected replacement ratio for a new member entering into the fund at the age of 23 and continuing until retirement. Given the structure of all the inputs, costs and investment decisions, we would expect that new employee to be able to achieve a replacement ratio of 94% when they retire in 40 years’ time. It is this specific information that gives us an indication of whether the design of this fund is capable of delivering decent outcomes for individuals. This analysis suggests it can. Each coloured dot on the graph represents how healthy a specific member’s projected outcome is. If the member has a green dot, they are on track to achieve a replacement ratio of 75% or more. But if a member has a pink dot then they are unlikely to be able to retire with a sustainable level of income in retirement unless trustees or the employer intervenes.

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PROJECTED REPLACEMENT RATIO OF ACTIVE FUND MEMBERS

A B C

G D H E I F J

A B C D E

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Average replacement ratio for fund Projected replacement ratio for new member Gross contribution rate Risk benefits and administration costs Investment returns

F Pensionable salary percentage G Scatter plot H Projected replacement ratios greater than 75% I Projected replacement ratios between 50% and 75% J Projected replacement ratios below 50%.

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How do we stack up against other funds? While those results are definitely in line with what the fiduciaries were targeting, what we don’t know is how well this stacks up against other funds in the same industry, or perhaps even in the country. The table below contrasts this fund with other comparable sector funds in the Alexander Forbes Member WatchTM data set. This specific fund appears to stand head and shoulders above others in its industry – something an employer could really brag about. For many trustees this level of comparison may not seem relevant, given their assumed range of responsibilities. But we believe that this is where trustees can potentially play their most valuable role in the future. If comparisons with other comparable funds show that this fund’s structure is inadequate for its members to reach a reasonable replacement ratio, then trustees and employers need to collectively identify why shortfalls are occurring. Invariably the problem will sit somewhere between these two bodies. So far so good. But let’s continue probing.

BENEFITS BY THE NUMBERS

Fund-specific

Industry-specific

23.0%

16.0%

Contribution to death benefits as a percentage of pensionable pay

3.1%

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.4%

0.6%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.5%

0.8%

94.0%

74.2%

Average retirement age

60.5

61.4

Actual preservation rate

2.9%

6.0%

N/A

89.0%

Age-specific

3.5

Contribution to retirement savings as a percentage of pensionable pay

Projected replacement ratio for a member aged 23

Percentage of employers offering disability benefits Average insured death benefit as a multiple of pensionable pay Source: Member WatchTM 2013 data set

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STEP 3

Getting to the crux of the problem Up to this point, the data and outcomes weâ&#x20AC;&#x2122;ve been using employ the kinds of assumptions that most boards are shown: an idealised world where members behave and make all the right decisions. But what if we integrate the actual behaviour of members into our analysis? What happens to the outcomes then? Pensionable pay and its impact Letâ&#x20AC;&#x2122;s start with a point that often eludes boards of trustee or management committees. One of the first decisions a member may make (or the employer may make on their behalf) when they sign a contract of employment is what percentage of their total cost to company will be deemed pensionable. In other words, from what portion of the salary should the fund deduct their contributions and costs? The lower the pensionable pay percentage is, the higher the take-home pay. As such, there is often a strong shortterm incentive for employees to lower that pensionable pay. But if trustees or management committee members are not aware of those choices, they may easily fail to appreciate that targeting a 75% replacement ratio on what constitutes only 50% of someoneâ&#x20AC;&#x2122;s total cost to company is going to leave members severely short on retirement. As our model on the next page illustrates, under such conditions the replacement ratio for a new member decreases from 94% to 48% when compared to their total cost to company. The grey dots show the projected outcomes for members using our previous assumptions. The orange dots show what the projections look like using the reduced pensionable pay percentage.

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PROJECTED REPLACEMENT RATIOS OF ACTIVE FUND MEMBERS ON A LOWER PENSIONABLE SALARY PERCENTAGE

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STEP 4

How member decisions affect outcomes EMPLOYEE TURNOVER AND PRESERVATION One way that member behaviour can seriously affect fund outcomes is by changing jobs and not preserving fund credits when they do. To begin with, as the chart below highlights, the fund has an enviable record of low turnover with its employees. But particularly problematic is the point that when employees do switch jobs, they typically cash out their accumulated savings instead of preserving it. In fact, the preservation behaviour of members of this fund has been significantly lower than members in either the sector or our member base as a whole. Just imagine what would happen to the fund if this behaviour persisted – that members continued to cash out their fund credits instead of preserving them. The net effect of these two elements is that the true outcomes for members might be significantly different from what was initially projected. If we take the exit and preservation behaviour of members into account, and if we allow for the fact that pensionable salaries are 60% of an individual's total cost to company, the average replacement ratio across all fund members drops to 37.7%, as seen in the second graph on the next page. This insight appears to be something of a show-stopper and would indeed persist as one – known only to the members when they actually retire – if we are unable to integrate both the actual member experience in the fund and the projected experience. But just as this monitoring framework changes our focus dramatically, so does it allow us to see solutions through a more effective lens.

EXIT RATE OF MEMBERS OF DIFFERENT AGES

Proportion of members

5% 4% The average exit rate for the fund over the last year was 1.9%, while the average exit rate for the public sector was 7.8%.

3% 2% 1% 0% 15–20

20–25

25–30

30–35

35–40

40–45

Age band

200

Source: Alexander Forbes Research & Product Development (2014)

45–50

50–55

55–60

60–65

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Chapter 9

PRESERVATION RATE OF MEMBERS OF DIFFERENT AGES 14%

Proportion of members

12% 10%

The average preservation rate for the fund over the last year was 2.9% while the average preservation rate for the public sector was 6.0%.

8% 6% 4% 2% 0% 15–20

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band Source: Alexander Forbes Research & Product Development (2014)

AVERAGE PROJECTED REPLACEMENT RATIO 100% 90%

94.2%

80%

Percentage

70% 65.8%

60%

57.7%

50% 40% 30%

37.7%

Replacement ratio at normal retirement age with full preservation Average projected ratios across entire membership base

31.7%

20% 17.0%

10% 0% Fund experience

Industry

Member Watch™ Survey average

Source: Alexander Forbes Research & Product Development (2014)

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STEP 5

So what can be done? Given the effects of member behaviour, are there design features that trustees or employers can change to improve outcomes? For most boards, the following three options reflect their usual starting point: ■■ Could we change the investment managers and increase the alpha of the fund (return in excess of the strategic asset allocation benchmark)? ■■ Could we revisit our strategic asset allocation, or perhaps our estimates of expected returns on those asset classes? ■■ Could we gain significant advantages by lowering our costs? The question is whether any of them can take our member outcomes to a 75% replacement ratio. The surprising answers are: no, no and no! To move from a 37.7% replacement ratio to a 75% replacement ratio, the fund would have to generate more than 6.5% real return (in other words, after inflation and after costs) – consistently over the next 40 years. If we look back on the last 12 years, this seems relatively simple. We’ve easily achieved that average 6% real return. But in the wake of the global financial crisis, prospects going forward are grim at best. The same story applies to upping the potential for alpha in the fund. The operative word here is ‘potential’. To shift the fund to a 75% replacement ratio would demand a consistent, 40-year outperformance of the strategic asset allocation benchmark of 1.7%. Again – this was do-able during our extraordinarily strong bull market of the last decade – but for this to persist for another 40 years is highly unlikely. The other interesting part of this exercise, though, is that reducing costs also doesn’t have the impact we would expect. Because asset management fees are typically charged as a percentage of assets under management each year and administration fees are typically charged as once-off fees each time the funds flow in, reducing asset management fees has significantly greater impact than reducing risk benefit costs or administration fees. Over the course of 40 years for the fund, a reduction of 0.5% in fees for asset management can translate into an additional seven percentage points to the replacement ratio, whereas a reduction of 0.5% in administration and benefit fees adds a mere two percentage points to the final replacement values. By playing with all the relevant inputs, we can now see how hard it is to use design features to compensate for poor behaviour. To some extent, changing member behaviour links inextricably to the quality of communications trustees and management committee members provide to their fund members. But helping members understand the impact of their decisions provides only a small part of the required correction. Trustees and management committee members may have to engage with the employer to see if changes in HR policies and communications can limit the potential damage that employees could inflict on themselves. But again, it takes time and careful planning to make sure employment policies and retirement benefits are properly aligned. As we suggested at the outset, our ultimate level of assessment is to be able to measure the impact of every decision that we, the fiduciaries, make on the outcomes of each and every member. We know that the impact of each decision will likely be different on each member because their starting point, time frame and cost structures are all likely to differ. As such, monitoring at fund level for the average member simply isn’t going to cut it in the future.

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Chapter 9

IN SHORT What constitutes a successful strategy may well change over time, as employees and the environment change.

As of now, strategy dashboards can allow trustees to drill down to the individual member level and focus on an individual who has a particularly poor replacement ratio outcome (they have a pink dot). This informs the type of specific communications required to address the particular challenges that that member or group of members face. By doing this analysis, we radically enhance our ability to have meaningful conversations with our members. Whether we talk to them through a broad distribution communication strategy or one-on-one through their benefit projection statements, we can now reach out with specific advice on how exactly members could get back on course. We are able to give individuals specific recommendations on what they could do and, as such, what expectations could be reasonable in light of any changes they might act upon. An analysis of this nature would need to be carried out regularly to ensure that

any design changes or interventions implemented after the last analysis have truly improved outcomes. If changes like targeted communications or financial education programmes don’t result in the anticipated improvements, then we might well have to demand another approach. What constitutes a successful strategy may change over time, as employees and the environment change. For instance, an SMS communication to members who are ‘in the pink’ may work well for a few years, and then fail as apathy sets in. As such, all of these action plans and strategies must be part of an ongoing dynamic process – one that needs to be monitored and measured each and every year. All of this brings us back to the core message: it’s about the individual’s financial well-being. Monitor it and if things aren’t working, change them and then monitor those changes. If this is done correctly, over time, it can make a big difference.

By doing this analysis, we radically enhance our ability to have meaningful conversations with our members.

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MEASURING AND MONITORING INVESTMENT STRATEGY

Measuring fund managers' performance against their mandated benchmarks tells us something about how that service provider performed. This is an essential step. But it tells us nothing about whether we got value for money given the costs of that solution (or those underlying fund managers). We also don’t know if we were adequately rewarded for the magnitude of risks assumed by those underlying managers. Measuring our aggregate manager performance against a strategic asset allocation tells us something about whether the solution was well designed to beat that specific benchmark. But it tells us nothing about whether members can retire with an adequate income replacement. In effect, it’s time we rethink exactly what we are measuring in our investment strategies and why. Regulation 28 is quite explicit in what is required of us as fiduciaries. Members’ liabilities are central to the design and monitoring of a retirement fund’s investment strategy:

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“This duty supports the adoption of a responsible investment approach… that will earn adequate risk-adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities.” This then suggests that, of all the things we measure about our investment strategies, the most important one is knowing whether they are meeting our members’ liabilities. What this then implies is that trustees need to be able to demonstrate that: ■■ The fund’s investment strategy is appropriately designed to address member profiles and retirement income requirements. ■■ This strategy remains appropriate over time. Combine these two insights with conventional investment performance monitoring, and finally trustees will have a proper framework for assessing whether any components of their investment strategy have become suboptimal.

Liabilities, like assets, change all the time. As markets move, liabilities move. This means we need to give fiduciaries and key decision makers a tool that can assess these changes and their implications. Think of this as a live liability monitoring tool. Simply put, the tool provides regularly updated projections of returns and evaluates whether the existing strategy is still expected to meet a fund’s liability target. The tool’s purpose is to act as an early warning system for identifying inadequate expected returns, which may trigger a full ALM. What a full ALM can then add to the mix is whether the composition of the membership has changed in any way and if so, how this too can have an impact on whether the fund strategy is still appropriate.

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Chapter 9

TACKLING THE PROBLEM HEAD-ON Below we use the example of a typical member invested in a life stage investment range, targeting a replacement ratio of 75%. What makes this graph different from performance graphs that are generally presented to most investment committees, is the orange and grey stack bar. Taken together, this orange and grey stack represents the rate of return that is required to obtain an expected replacement ratio equal to the target. For example, here members need a return of 11.1% per year (0.6% plus 10.5%) from the highgrowth portfolio in their strategy to reach a targeted replacement ratio of 75%. The tool deconstructs this into the expected return based on the asset allocation of the portfolio (10.5% per year shown in grey in our example) and the current shortfall (0.6%

In the example used, new members could expect a replacement ratio of 66% (which assumes the pensionable salary is 100%). Here the tool calculates how much more members would need to contribute to achieve an expected replacement ratio equal to the target set. In our case study here, members would need to contribute an extra 2.6% of their salary to get an expected replacement ratio of 75%. Contributing 2.6% more would have the same impact as earning 0.6% per year alpha.

per year in our example). This 0.6% per year is effectively the alpha that would be required beyond that projected asset class returns if the solution is going to meet the member liabilities. Trustees should monitor this shortfall to ensure that the objectives in the fund and the strategies to reach these are reasonable. A large shortfall of projected return against required return may indicate a fund needs a change of asset allocation strategy. But there is only so much that an asset allocation strategy can be realistically tweaked without introducing unacceptable risks. Really large shortfalls may require trustees to consider alternative inputs into the projected outcomes, such as a change in contribution rates and retirement ages.

But really large shortfalls may also require a revisit to a detailed ALM exercise. At that point, our process starts again.

20% 18% Actual return

Percentage return

16% 14%

Benchmark

12% 10% 8%

0.6% 17.1%

15.2%

18.3% 10.5%

0.6% 16.2% 9.9%

13.9%

0.6% 14.4% 9.7%

12%

12.2%

0.6% 9.2%

10.8%

10.6%

0.6% 8.9%

Return shortfall

4% 2% 0%

Expected return

AF High Growth

AF High/ Medium Growth

AF Medium Growth

AF Medium/ Conservative Growth

AF Conservative Growth

Portfolios New fund members can expect to retire on 66% of their salary, on average. If members contribute a further 2.6%, they can expect to retire with 75% of their salaries, on average. The proportion of salary a member receives may differ significantly from these projections. Source: Alexander Forbes Research and Product Development (2014)

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MEASURING THE IMPACT OF HEALTHCARE INTERVENTION

In Part 2, Chapter 1 we discussed how members’ healthcare needs change over time. We also discussed the increasing levels of complexity in the healthcare system and how members struggle to understand exactly what they are covered for. In their role as experts, healthcare consultants will give employers advice on the range of healthcare cover to offer to their employees after taking into consideration the specific industry and the profile of the membership base. Based on the choices on offer, the healthcare consultants will then advise members on which choice of healthcare cover would suit them best.

While the decision of benefit design is not in the control of the employer or the employee in the open medical scheme market, one advantage members have in this environment is that they can change their option within their scheme once every year. This enables them to choose appropriate cover each year and should therefore aid in avoiding over- or underinsurance (without taking affordability into consideration). So how can we help members here? One way to promote a proactive response from members is to provide them with a measure of their utilisation rates in their plan’s benefits over the previous year. This gives us a retrospective insight into whether the member and their family are

over- or underinsured. We can then send intervention letters to members to prompt them to contact their healthcare consultant and get advice on the best option to choose for the upcoming benefit year. Because of confidentiality issues, the data available for this analysis is somewhat limited and only high level information on benefit utilisation is available. In addition, very few people record full information on out-of-pocket expenditure. That said, what data we do have is particularly valuable.

Even with limited data, we can send intervention letters for the following situations: ■■ Members who potentially face a large self-payment gap and hence out-of-pocket expenditure. This may be because they chose the wrong option or they used their day-to-day benefits inefficiently. ■■ Members who are overinsured. This is based on individuals’ medical savings account (MSA) balances, accumulation of day-to-day spend towards the threshold benefits, as well as whether they are registered for the chronic illness benefit. Where members are not registered for chronic conditions, have high MSA balances and are not expected to reach their above threshold benefits (ATBs) during the year, they are likely to be overinsured and may be able to benefit from downgrading to a lower cost option. The lower option would still give the member enough cover (based on the expected claims pattern), but they would save money they could use elsewhere. ■■ Members who are underinsured. This is based on the MSA balances. If the member’s full MSA is exhausted at a certain point during the year, it may indicate that they are underinsured and need more cover.

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The intervention analysis is based on only a subset of information and upon further investigation, which would occur as part of a full needs analysis, the overall recommendation may change. The additional information could include considerations such as affordability constraints, expected medical procedures in the future, once-off events that occurred in the previous year that are not expected to be repeated, the level of subsidy, or just-in-case cover. Overall, however, the intervention process should still help to prompt the majority of members who are deemed to be potentially on the wrong option, to consider a change. Measuring the number of interventions made each year, and whether members respond to these, would assist healthcare consultants to assess whether their advice is adding value to these individuals' lives. A lower proportion of interventions from

year to year would indicate that a larger proportion of the membership base is on the right option, and we could assume that this is a result of the advice provided. Additionally, measuring the number of option changes each year gives an indication of whether members are settling into their benefit options and understanding the benefits on offer. A high level of movements would indicate that members are on the wrong option, that their needs have changed, or that they are struggling to settle down. Putting these concepts into real terms, letâ&#x20AC;&#x2122;s consider a subset of our client base in 2013. During the year-end process, we performed the intervention analysis. The table below shows the percentage of members who were identified for intervention and of those, the percentage

of members who either upgraded, downgraded or did not change options. Note that not all members who received intervention letters would have sought advice or changed options. Of the group of members assessed, 22.8% received intervention letters and of these, 8.4% changed options. This may or may not have been as a direct result of the intervention letter, but it is likely that the letter prompted a more measured approach to their option choice for the 2014 benefit year. Further to this, the changes made resulted in a savings to total contributions of 0.7%, showing that intervening in membersâ&#x20AC;&#x2122; option choices each year helps them to choose the most appropriate cover and to not overspend on medical scheme contributions.

Reason for intervention

Excessive out-ofpocket expenditure (high self-payment gap)

Potentially underinsured (MSA exhausted)

Potentially overinsured (non-utilisation of chronic benefits and ATB)

Percentage of members identified for intervention

2.5%

13.1%

7.2%

22.8%

Percentage of option upgrades*

6.4%

5.1%

0.7%

3.9%

Percentage of option downgrades*

5.9%

2.3%

8.4%

4.6%

100%

Chapter 9

100%

Total

100%

Percentage of option continuations*

80.6%

81.1%

85.4%

82.4%

Percentage of exits*

7.1%

11.5%

5.5%

9.1%

Annual additional cost (or saving) from interventions

-0.6%

1.3%

-2.8%

-0.7%**

* Percentage of those members identified for intervention ** This is a weighted average effect based on the size of the contributions

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Conclusion Ultimately, the objective of everything we have discussed so far has been to improve outcomes to individuals in some meaningful way, whether they are a member of a pension fund or medical aid scheme, an employee or simply an interested investor. But what we have also highlighted throughout this discussion is that providing a comprehensive measure of these outcomes as they directly impact on individuals has been sorely lacking in our industry. We no longer have the luxury of simply stating that, as fiduciaries, we have confirmed that our funds are keeping pace with their benchmarks, or that we have adequately provided for health and risk needs, or that we have developed a good communications policy or financial education programme. We need to know that members are winning.

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PART 2: THE WAY FORWARD

THE JOURNEY

NOT JUST THE END GAME

PART 2 Chapter 10

THE JOURNEY

Summary Many employed South Africans face significant financial challenges but will never be in a position to engage with a financial planner. We explore how we could address these challenges by taking advantage of emerging research on decision making and financial literacy. We address the issue of how we can get individuals to engage and what will incentivise them to care.

Here is the proverbial catch-221: as we said in Benefits Barometer 2013, you can’t ask people to save more until you teach them how to spend less. And yet, given the way our financial services industry is currently structured, who is likely to assume that role? A catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules. Catch-22s often result from rules, regulations or procedures that an individual is subject to but has no control over.

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Several things are immediately apparent. Our financial advisory industry focuses on people who are interested in buying financial products and services – not in getting people to ‘not buy’. Add to this the insight that when people are living at the financial edge, it seems economically irrational to pay someone to keep you from falling off that edge. What those two points effectively add up to is a harsh reality: the bulk of workers in retirement funds are unlikely to ever be in a position to use the services of a financial adviser – at least not until they have to

make those critical decisions at retirement. Nor are they likely to be your typical ‘let’stry-out-the-latest-financial-tools-on-the-web’ type of person. Our audience is one that has never spent much time wondering about their financial wellness, because they already know that things probably aren’t well at all. Or, it could be that it’s just one of those things they have never given much thought to. So – the challenge here is how do we engage this broad segment of our economy?

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Chapter 10

MEETING A NEED – SETTING OUT THE CONCEPT South Africa has one of the most developed financial services industries in the world2. That level of achievement should bring a technological and intellectual prowess that, if properly deployed, can finally address the financial needs of a population that has been overlooked for far too long. This is not about the issues of the least wealthy among us or even the wealthiest among us. It’s about focusing on the vast middle group of workers and how we can work towards genuinely improving their financial wellness. By combining technological advances with a completely retooled financial servicing model, we can provide lower cost, highly targeted solutions that address many of the issues affecting the security of an individual’s whole financial journey. More importantly, if correctly structured, these solutions can allow individuals to evolve their level of financial literacy and decision making as they move through different life stages. Bit by bit, we can get them engaged.

How it could be done – engaging with our members

As fiduciaries, we need to start with the individual and their family. We start with trying to understand what it is that they don’t understand, what clouds their decision making, and when do the proverbial shutters come down in their minds when we introduce financial concepts. We need to consider what would motivate them to start paying attention. We don’t have to create the I-Robot equivalent of financial planning. We need to rethink how we engage with our members if we want to put them first. This demands that we draw from some new insights from the research in behavioural economics, psychology and financial education. On the next page we list a number of the key concepts that drive our thinking here. These concepts are fundamental to all the solutions we explore in this book.

We need to rethink how we engage with members by drawing on new insights from research in behavioural economics, psychology and financial education.

2 World Economic Forum (2013)

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TEACHABLE MOMENTS

JUST-IN-TIME EDUCATION

UNDERSTANDING BANDWIDTH

RULES OF THUMB

DEFAULTS

SMART DEFAULTS

TRANSLATE FUTURE INTO PRESENT

UNDERSTANDING TRADE-OFFS

THE RIGHT INCENTIVES

KEY CONCEPTS FOR ENGAGING WITH OUR MEMBERS

1 2

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3 Lynch & Woodward (2009).

The first is the idea of teachable moments. The reality is that there are moments in time when people have a higher vested interest in listening to and learning about what they need to know so that they can actually act on it. We stand a better chance of getting people to understand a problem if we harvest that teachable moment.

The second concept is about just-in-time education3 . This builds on the insight that even the most financially literate among us are unlikely to be able to apply something they learnt over time, if there werenâ&#x20AC;&#x2122;t opportunities immediately available to apply that knowledge. Just-in-time education provides exactly the information you need (and no more) to the problem you want to address at the time when you need to address it.

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THE JOURNEY

3 4 5 6 7 8 9

Chapter 10

Mullainathan and Shafir have highlighted the point that as an individual enters into a more and more stressful situation, whether it’s a point in time (life crisis) or state (poverty), their decisionmaking skills or bandwidth are severely affected4. This means we need to completely rethink how we approach this educational problem in terms of how we communicate complex concepts.

We know from Drexler, Fischer and Schoar that standard fundamentals-based teaching doesn’t lead to meaningful or lasting results in behaviour changes. But if we can create a set of heuristics, or simple rules of thumb that investors can use, this has been shown to produce the kind of demonstrable behaviour changes that we are looking for5.

We also have to think carefully about what decisions are best left on autopilot and where it is that defaults simply won’t be able to address a problem. In Part 2, Chapter 3 we discussed this distinction.

Where we need to introduce solutions that better address an individual’s specific circumstances, we need to combine the concept of nudging6 with just-in-time education to create smart defaults7. Here, you can use the additional information an individual might provide to limit the range of options they could choose from and not seriously prejudice the outcomes.

To make the decision making around these smart defaults that much more effective, we have to provide two extremely important facilities: First we need to be able to translate decisions that only begin to affect an individual’s life in the far distant future, into some present value for an appropriate comparison. In other words, if I do this today, even though it won’t affect me until 20 years from now, how do I translate that into today’s terms?

Second we need to provide tools that allow individuals to understand the trade-offs between options: if I cash out my retirement money to buy a new car instead of preserving it when I change jobs, how will that affect me over time?

We have to understand what incentivises people to make the decisions they do and how we can capitalise on this understanding to get people to do the right thing. In addition, we need to have some insight into what the right thing might be for an individual at each of life’s key milestones – but this alone is not enough.

In summary, we need to give individuals a workspace where they can stress-test their financial priorities. In doing so, they will learn to identify which decisions will have the greatest impact. 4 Mullainathan & Shafir (2013) 5 Drexler, Fischer & Schoar (2010) 6 Thaler & Sunstein (2008) 7 Goldstein, Johnson, Herrmann & Heitmann (2008)

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Addressing the technical challenges

Armed with our toolkit of key concepts, the next challenge is to determine how far we can use technology to address three important questions:

ow do we H start a conversation with that individual member?

ow do we maintain an H ongoing dialogue with that member so that they can determine how they are doing on their journey and what they could do to enhance the ride?

How do we develop a framework that guides individuals on how to pack their suitcases given the resources available?

a. When possible, this conversation has to start before the member even signs their employment contract. b. The member needs to be able to come back each year, or at any point in time, to a site (ideally electronic) that represents their own workspace or testing ground or storage vault for decisions.

Each individual member needs their own portal into a workspace that could track first their employment and then, at the same time, their financial journey.

Smartphone? Employer onsite kiosks? Such concepts have their own challenges, but we must find solutions.

This portal needs to be accessible â&#x20AC;&#x201C; if possible, at all times, even to people without access to the internet. It means we have to find multiple avenues, using multiple technologies â&#x20AC;&#x201C; old and new â&#x20AC;&#x201C; to create multiple touch points.

How do we help them determine when they really need something for that suitcase and when they should perhaps remove that item to make space for something else?

We need to give people an optimisation capability that lets them weigh up the trade-offs they face and understand the potential outcomes of their decisions.

Adopting these concepts would represent a sea-change in thinking about how the average individual could begin to interact with both their employer (and their full range of benefits) and their financial services provider. And therein lies the potentially greatest challenge: convincing those parties to help facilitate the delivery of such an offering. We know two things though, without their constructive participation, delivering this essential support will fail. And if this safety net fails to hold, South Africa as a whole will suffer.

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Chapter 10

THE ROAD LESS TAKEN

The road map starts at an individual’s first teachable moment – the instant they sign up for their first job.

What follows is an idealised road map – one that runs parallel to the course of an individual’s employee benefits track and yet allows them to evolve their personal financial wellness at the same time. The road map starts at the individual’s first critical teachable moment: the instant they sign up at their first job. It then tracks the individual through the various life junctures that may demand a rethink of the optimal strategy – how can they best

protect existing accumulated assets and guarantee the continuation of future asset accumulation? In an electronic delivery, the portal to this road map could be an online site or smartphone app that would be a dedicated interactive workspace for each employer and their employees. In a world without this technology, the road map provides an important engagement framework for the HR department and financial coaches.

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STEP 1

Understand the employee–employer contract Think back to your very first job. Think back to that very first employment contract. Did you really have any idea what was on offer? And yet this was potentially one of the most important moments in your life.

employment contract. For the sake of simplicity, our example will be drawn from an employer who uses a total cost to company basis for determining how to calculate that take-home pay.

What makes this moment so important is that it sets out the financial pact between an individual and their employer. Here is the make or break moment for helping the new employee understand the complex interplay between establishing a compensation structure that meets their immediate consumption needs, provides for future consumption needs (when they retire and no longer earn a salary) and provides the safeguards that both protect the individual’s earning power and asset accumulation as they move through life. If this one step can come right, it sets a powerful behaviour pattern for the future.

Typically, a new employee is provided with a salary package proposal that provides, at the top of the page, the total cost to company or basic pay that the company is prepared to offer. Then, on each line below this total package figure is a series of deductions that represent either the cost of some employee benefit (medical aid or risk benefits), or all the future deductions that may be channelled into savings vehicles or taxes.

We made exactly this point in Benefits Barometer 2013 8 . But in many employment environments, that important opportunity is wasted – simply because of fairly normal disjunctures that often occur between establishing that all-important take-home pay and clearly understanding the full range of other employee benefits that come with that contract. Typically, these are more fully explained to the individual at their first induction meeting, one or two months after they have started. And that’s too late. But let’s consider what most new employees actually see in that first

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8 Part 3, Issue 9: Young Workers

Each one of these items is deducted from an individual’s take-home pay. But if there is anything a young, first-time employee is going to do, it is trying to maximise that take-home pay. It at the bottom of the page, the take-home pay, that defines what the individual and their family will be living on each month. Now consider the psychological dynamic in this exercise. In the absence of any further information on the value of these additional benefit choices, the first instinct of individuals is that they reduce the burden of these additional benefits so as to maximise their take-home pay. So, how do we get them to think twice at this critical point?

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Chapter 10

A SALARY PACKAGE PROPOSAL

YOUR PRESENT

YOUR FUTURE

YOUR COVER

On your current package, you’ll take home

When you retire in 37 years, you’re projected to take home

For your insurance peace of mind, we’re deducting

per month (in today’s terms)

per month

R23 526,89 per month

R13 410,17

Your total cost to company package is

R30 000,00 per month

That’s 57% of your take-home pay today

ADJUST

R1 627,00 Disability

180.00

Group Life

150.00

Dreaded diseases

42.18

Medical aid

1 200

Spouse’s cover

54.00

ADJUST

We need to help the employee understand that for each deduction from their current take-home pay, there is a benefit that will vest further down the line.

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The first instinct of individuals is that they reduce the burden of additional benefits to maximise their take-home pay.

The reality is that most individuals are completely at sea when it comes to fully grasping the implications of such a decision. In some companies, this is just a sheet of paper listing the different components of salary. Sometimes there is an HR representative available to explain the various lines – sometimes not. If we are going to change people’s attitudes towards their employee benefits, we have to completely change the process a new employee experiences – and continues to experience throughout their employment. What they need is a way to help them understand the total picture of what’s on offer – and what’s at stake. Tackling this change in mindset demands a multipronged approach. First prize would be the introduction of an interactive tool in companies with easy access to technology. Just-in-time education research indicates that if you can get individuals to test changes and ideas when they have to make decisions, both their learning experience and quality of decision making improve9. Similarly, before the new employee has even considered what they will do with their existing retirement savings, we want them to be able to stress-test the impact of not preserving their savings. This isn’t just about having the capability to illustrate what financial potential you forgo when you cash out of your retirement assets. It’s also about being able to show exactly what it would take should you decide to ‘fill in’ this hole in your savings at a later date. Additionally, they need to be able to interpret the future potential value of all their risk benefits. That means that every element in the interactive tool should provide a teaching opportunity. Move the cursor over each item on the deduction list and the information

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9 Fernandez, Lynch & Netemeyer (2014)

bubble gives you insights into the true value of those benefits (and the nature of the event that would trigger their release). Getting confused and need help? Press the ‘call’ button and get a real, live consultant to help you with your query (or, failing that, a realtime communicator capability that links you to a call centre). But we’re getting ahead of ourselves with our idealisations of our road map. Beyond interactive tools (or interactive HR departments) that are critical at that first point of decision making, the message needs to be constantly reinforced and constantly evolving. Monthly payslips provide an ideal opportunity to reinforce the message of the total rewards concept. This means that beyond agreeing to that initial contract, every time an employee opens their payslip they are reminded that their pact with their employer goes significantly beyond the provision of a salary. We are effectively designing a ‘living document’ that could be reviewed continually (or at least once a year) to understand how all the elements represented in that document would change dynamically over time. Every additional benefit, training opportunity or discounted services opportunity is given a mention and a value. Let’s go through some of the features that research suggests are essential:

Toggling between the ‘totals’ boxes: take-home pay versus retirement income To formulate a holistic picture of their compensation package, we need to help employees integrate the past, the present and the future all in one place. More importantly, if we make the tool interactive, we can demonstrate the knock-on effect of each decision on outcomes both today and in the future.

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TAKE-HOME PAY AGAINST RETIREMENT INCOME

Your monthly pensionable salary is

R25 500

How much of your pensionable salary would you like to contribute monthly to your retirement? How would you like to invest these contributions? Do you have existing savings you’d like to transfer from a previous retirement fund? What is the current value of your total retirement savings? When you retire in 37 years, you’re projected to take home

That’s 57% of your take-home pay today

17.5% Lifestage model My own portfolio choices Yes

? Risk benefit cost Note that a risk benefit cost of 2.25% will be deducted from this contribution, so a net 15.25% will go toward retirement savings.

R200 000 R13 410,17 per month (in today’s terms)

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The power of new contract design is inestimable. For the first time, a new employee has the ability to see how any adjustments to their deductions might affect not just their take-home pay, but, from day one (while there is still time to act) they see whether the structure of their pay package will be adequate for providing a viable income after retirement. Adjustments and critical decisions can be weighed out before the ink on the contract is even dry. Reduce your retirement fund contributions in the hopes of increasing your take-home pay, and instantly you would be able to see the impact on your potential income for retirement. Select a more conservative portfolio for your investment choice and see how that too has the potential to affect your eventual savings. Increase your risk benefit coverage or your medical policy coverage and again these can be translated into a financial value that you or your family could tap into should the need arise.

What a new employee would see would need to be displayed simply for best effect. The key here is not to overwhelm the decision maker, particularly at this critical point of potential stress: the new job. The best time to do all this is during that magical teachable moment. Not three months later during employee induction; not after you’ve already quit your previous employer and simply grabbed the cash and ran; but during the actual discussions you may have with your new employer about the salary package you require. But note that ‘repeat exercise, repeat exercise, repeat exercise’ is the mantra that will ensure the lesson persists and evolves. This is where reinforcing the message each time an employee receives a payslip that updates their total benefit package (and highlights areas of slippage) becomes the critical next step.

ADDING THE ICING TO THE CAKE There are many companies that have developed additional benefits for their employees like: ■■ Training programmes ■■ Low-cost housing or educational loans ■■ Preferential rates on short-term insurance ■■ Additional medical benefits. These additional sweeteners can and should be added on the opening page to provide an even more comprehensive picture of the total rewards potential that an employer offers. Here is where employers can advertise their compensation packages to greatest effect if the intent is to provide competitively attractive rewards to attract and retain employees.

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STEP 2

Chapter 10

What else could we add to this picture? Once we have built this first portal to an individual’s total rewards package, it’s relatively simple to turn this facility into an extremely powerful just-in-time selftraining tool for an individual who may be confronting complex financial decisions as they move through life. Here’s what our research suggests about how to maximise this potential: ■■ Just-in-time educational training experiences are most effective if answers are readily available and easy to understand. That means building in facilities that explain everything on display by simply moving a cursor over the word. ■■ Effective just-in-time educational experiences need to be able to deal with uncertainty in an instant. This means

that the most effective sessions will be linked to a communicator that allows the individual to ask specific questions and get immediate feedback. ■■ Many financial decisions have long-term implications that are extremely complex to compute. And yet, because of the magnitude of personal differences, these same decisions cannot be accommodated in a default solution. Conversely, most employees are unlikely to consult financial planners either because of cost or trust issues. Under these circumstances the most effective way to nudge the individual towards an optimal decision is to illustrate the trade-offs that each financial decision would trigger.

EXAMPLE 1

EXAMPLE 2

EXAMPLE 3

A preservation trade-off tool could help an individual see what the impact on their long-term potential savings would translate into (again using monthly income in today’s terms) if they don’t preserve. How much would they lose in long-term tax benefits? If they decided to make up the gap at a later date, how much more would they have to put aside each month to get back to their retirement target?

Various embedded tools in the package could allow an individual to test the impact of different pensionable pay, or contribution rates, or investment portfolios on their retirement income.

By creating a framework that also allows us to incorporate additional information about yourself and your family, you can also answer questions like: “Does my retirement fund provide adequate life coverage?” “Do I have appropriate disability coverage?”

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As the decision tool grows with the member and gradually accumulates more and more information, a valuable feedback mechanism evolves.

The framework we propose here allows the individual to dial up or dial down the simplicity or functionality according to their needs.

Members of pension funds span the full range of socio-economic possibilities, from the financially or technologically literate to the individual who is introduced to these concepts for the first time. Some have easy access to and are comfortable using online tools, others have no chance of access. What we know from the recent meta-analysis of where we are failing and where we are succeeding in the quest to get individuals to make better financial decisions, is that success accelerates when: ■■ We recognise that there is considerable heterogeneity among members in both their financial literacy and their economic behaviour and we design programmes that address these differences9. ■■ Members are provided with projection tools or tools that help them understand the potential trade-offs they may have to make with each financial decision. In fact, members tend to boost their contributions and contribution rates (or other similarly desirable financial actions) when such tools are available10.

We believe these concepts go significantly beyond traditional budgeting tools currently available. Setting a budget, and being able to combine all your expenditures, is the cornerstone of good financial planning. But our intent here is to give individuals the power and resources to assess the complex interplay of financial decisions on potential future outcomes. It’s like having an actuary in your pocket. This approach has the potential to assess all of an individual’s financial decisions: medical coverage, life and disability, motor and household insurance, as well as credit and debt considerations. Its primary role is to provide a just-in-time educational tool for anyone who needs any financial insight into their own choices. That insight is just the starting point. It then needs to be put into action – whether that means adding items, subtracting items, or simply rearranging the items in your suitcase.

The framework we propose here allows the individual to dial up or dial down the simplicity or functionality according to their needs.

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9 Lusardi & Mitchell (2013) 10 Goda, Manchester & Sojourner (2012)

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STEP 3

Chapter 10

Make the investment solution meaningful So, your bags are packed and you’re ready to go. Now what? Life happens. And this is where most individuals without financial planning support fall apart. But first, let’s just challenge a bit of convention here.

Changing the mindset on the investing approach

What if we could completely change the way we think about investments? Instead of dedicating a considerable amount of time and resources to ensure that your retirement and discretionary savings are all invested with the top performing manager in the country (and then invariably failing), what if we became a bit more circumspect with why we invest and what we want to achieve? Let’s take the problem of funding retirement income: the challenge for employees is to save enough over their 30 or 40 working years until retirement to buy a financial instrument (an annuity) that will give them the post-retirement income they need to live on for the rest of their lives. From the start, the expectation for most individuals does not appear unrealistic. The assumption is that your retirement savings will gradually grow – ahead of inflation – for most of your life. As such, you should be able to make the transition into retirement without having to make too dramatic a change in your life circumstances. In response to this expectation, life stage portfolios evolved as the preferred strategy for retirement funds. The life stage model appeared to be the best of both worlds. For the first 30 to 35 years of their employment, members would be

invested in a portfolio whose primary goal was to accumulate the highest possible return for the risk appetite of the member (usually aggressive for this period in the cycle). Whether members selected active portfolios that combined multiple specialist asset managers or a blend of active balanced managers or even a blend of passive asset class indices, knowing which strategy to use was effectively irrelevant. There was simply no way to know after a specific 35-year period which one of these strategies would perform better. But the real value-add in the life stage investment strategy was the fact that in the 5 to 10 years before retirement, this strategy would completely shift to one that tried to gain more certainty around the maximum income that an individual could buy in the annuities market (either by preserving capital or by targeting the cost of securing an income appropriate to the individual’s needs). Essentially, life stage investment strategies provided investors with the means to plan their retirement needs more effectively. But in many ways, life stage investment strategies at the fund level are like chainsaw art. Chainsaw art reflects an attempt by an artist to replicate an image or statue out of a block of wood with a very bulky chainsaw. The necessary result is at best a very crude representation of the original concept. While it’s better than doing nothing, it assumes that everyone entering into the derisking phases of a life stage strategy has the same fund credit and, more importantly, has the same expectations for their income requirements after retirement.

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Beyond chainsaw art

In fact, technology and financial modelling have moved to the level where it is theoretically possible for every individual in a fund, irrespective of their income or fund credit level, to have their own tailor-made solution that would consider exactly where they were coming from (had they preserved in the past or contributed enough?) and helped them maximise where they could go in the future, given the specific objectives12. Sounds excessively costly? Not if you employ low-cost passive building blocks to construct the myriad solutions. Think of each of these building blocks as targeting different investment requirements: longterm growth, short-term growth, capital preservation, income targeting, and so on. Different blends of these building blocks would solve just about any investment problem an individual might face. As an individual moves through their financial life, the blend of these building blocks will shift to

STEP 4

The shift in mindset would not be trivial. A particularly pressing concern for fiduciaries would be how to fulfil their monitoring responsibilities if every member potentially has a different strategy. But that assumes that the way we currently monitor and assess performance is correct. Consider the significant value destruction that occurs when trustees, members and their advisers chop and change managers or strategies that don’t outperform their benchmarks on time frames that may be completely meaningless given the context of the strategy. In our brave new world of optimised solutions for members, trustees would still be able to assess whether each of the building blocks was fulfilling its respective performance expectations.

And with technology now allowing us to track the progress of every member in a fund in meeting their long-term funding requirements, we would be able to immediately identify any journey that has gone off track. What the change in thinking would do though, is to significantly transform the effectiveness of a life stage investment strategy into something that far more neatly recognises the considerable variability that exists for members of a given retirement fund in their current fund credits and their aspirations for those savings. The important point to note, though, is that we have now, ever-so-subtly, introduced the first steps of financial planning to all members of a fund, irrespective of their income levels or level of financial sophistication and, with the right building blocks, we can do so cost-effectively.

How should you pack your bags?

Taking this new framework to the next logical step

Tailoring solutions to individual circumstances in the retirement space is hardly new. For example, although in its infancy, some funds have been introducing dynamic solutions in the risk benefit space that recognises that members have variable needs for different risk benefits as they move through life. By using an individual’s basic demographic information, we can create a far more efficient allocation of resources by ensuring that they only buy cover when circumstances demand it. Collect the necessary information such

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accommodate whatever strategy they need to maximise at that point in time.

as age, gender, marital status and family circumstances and this becomes a solution that’s reasonably straightforward to automate. But outside the pension fund, the real world and the real challenges await. Remember our suitcase problem: we each have our own size suitcase that requires us to consider trade-offs. If we want individuals to understand the critical interplay between their pension fund benefits and their families’ or dependants’ other day-to-day financial needs, we need an optimisation framework that allows us to get the optimal

balance, given the constraints of that suitcase, between: ■■ What the individual needs to consume now, with ■■ What they need to save for in the future, with ■■ What they need to cover home loans or debt, to ■■ What they need for their children’s education, to ■■ Maximising the opportunities they have to reduce tax, to ■■ Funding medical expenses both now and in the future (when they will likely increase).

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The real financial decision-making challenges are not with the adequately wealthy, but with people who are financially stretched.

The difference between this optimisation problem and the one that we used to solve for maximising our retirement funding, is that here individual families will want to prioritise for themselves what they believe is important in their lives. Does funding your child’s education take precedence over paying off your bond? What’s more important than protecting your ability to generate an income? Intriguingly, if more granular data about a family’s financial circumstances and priorities is available, we can create an even better decision-making framework that can weigh out the various trade-offs implicit in a full range of financial decisions.

Chapter 10

The link to Step 1 here is critical. The more information available, the more we can assist individuals by modelling the trade-offs. The framework we described in Step 1 gives an individual the opportunity to add other elements to create a holistic picture of all the financial demands on their income. Why should we bother? Because the real financial decision-making challenges are not with the adequately wealthy who may be trying to determine which of their savings vehicles they should draw from in retirement to achieve the greatest tax efficiency. Rather they are with people who are financially stretched, because this is where human beings make their worst decisions.

Perhaps Perhaps aa few few thoughts thoughts from from Mullainathan Mullainathan and and Shafir’s Shafir’s book book Scarcity Scarcity provide provide an an apt apt closure to this section: closure to this section: ■■ “ Scarcity captures our minds automatically. And when it does, we do not make trade-offs using a careful cost-benefit calculus.”14 ■■ “Scarcity alters the way we look at things; it makes us choose differently.”15 ■■ “Scarcity directly reduces bandwidth – not a person’s inherent capacity but how much of that capacity is currently available for use.”16 ■■ “Scarcity doesn’t just lead us to overborrow or to fail to invest. It leaves us handicapped in other aspects of our lives. It makes us dumber. It makes us more impulsive. We must get by with less mind available, with less fluid intelligence and with diminished executive control – making life that much harder.”17 Mullainathan and Shafir have used much of their research to tackle the issue of poverty. But we believe their thinking goes right to the heart of why it has been so difficult to build a savings culture in South Africa. A framework that helps individuals who are financially stretched make sense of the complex interplay of decisions and trade-offs must surely be an important step in creating more stability for the journey.

14 Mullainathan & Shafir (2013) 15 Ibid page 38 16 Ibid page 47 17 Ibid page 66

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STEP 5

Why should individuals bother? What’s the incentive? We can focus on solutions that ‘sleepwalk’ our members to retirement or we can introduce a framework that educates and helps individuals to properly prioritise their financial decisions. Clearly, we believe that the latter should be the top priority if this is within our means as an industry. But it would be naïve to think that the merits should be immediately obvious to the participants. Getting people to focus has been one of the great challenges. This leads us to the question of carrots. What’s in it for an individual to go through all the trouble if there’s no payoff for another 20 or 30 years? Or if there just seems to be so many other more important priorities? ‘What-if scenarios’ can only take us so far to motivate individuals to do the right thing for themselves. There are so many rewards programmes in the financial services sector, all trying to promote different behaviours. But none of them effectively promote a healthy financial journey. All the big players in the banking sector have launched rewards programmes, the oldest of which has been around for over 13 years. These are essentially ‘buy’ programmes. The more you buy, the more rewards you get. You are rewarded for improving the finances of the bank, not your own finances. These programmes help to create the exact problem we need to solve.

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On the other side of the coin, some companies have created rewards programmes for good behaviour. They are driven by regulation in these industries that rightfully prohibit ‘buy’ programmes and the behaviour they promote. Discovery, through their Vitality programme, radically changed our thinking about health by creatively rewarding us for meticulously cataloguing everything we could possibly do to promote our health – from eating better, to monitoring our vital signs, to following prescribed health routines tailored to our specific circumstances. What is the pay-off for doing this? Discounted travel opportunities, sunglasses, movies, golf, gadgets and other luxuries. They promote the right kinds of behaviour, but the rewards mechanism creates its own set of problems if we want to promote better financial decision making. Large retail discounts may not be the best way to reward people when our main objective is to minimise spending. But there’s clearly a point beyond which people are not willing to exert themselves, no matter what the promised retail reward and no matter what the implicit benefit of engaging with the programme.

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What does the financial services industry have to offer to this mix? There are companies that offer rewards programmes they claim to be financial wellness programmes, but they only reward people for buying their products or meeting with the advisers of that specific company.

We could consider the first three points collectively as financial incentives. Each reward has advantages and disadvantages. The point-of-sale discount system is becoming less popular, because it doesn’t encourage ongoing loyalty. Similarly, free units don’t encourage heavy buying.

Traditionally, companies offer financial rewards to customers on the programme if they do business with the company over a period of time. These loyalty programmes can consist of: ■■ Point-of-sale discounts at the originating company. ■■ Free units for each n units purchased. ■■ Financial incentives for own and partner organisations by accumulating points. ■■ Special treatment (access to goods and services that non-members don’t have access to. This could include education or targeted offers18).

Financial incentives work better than non-financial incentives19 and pointsaccumulation programmes have lower attrition than simple discount models20. Nobody has tested the effectiveness of the financial and special treatment components in betterment programmes, but researchers suspect the incentives are the driving factor.

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These rewards don’t address an individual’s full financial journey, only the element of it that can make the company money. These are essentially ‘buy’ programmes masked as financial wellness programmes. These programmes don’t build the trust needed

The travesty of most financial rewards programmes is that you are rewarded for improving the finances of the bank, not your own finances. These programmes create the exact problem we need to solve.

18 Berman (2006) 19 Furinto, Pawitra & Balqiah (2009) 20 Zhang & Breughelmans (2012)

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We need to start building programmes that don’t just engage and build loyalty, but rather change behaviour through effective partnering.

for someone to fully engage with them. In the financial wellness stakes it would hardly be appropriate to reward people who have made the right decisions about their savings and financial planning with opportunities to buy more goods or services – even at reduced rates. It’s also important to understand that the response to different rewards evolves constantly. What is exciting and motivating one day soon becomes stale and ineffective. Retail rewards may have been the 20th century solution, but are quickly becoming archaic. A financial wellness programme should provide appropriate and tangible measures for educating an individual about ways to improve their current position as well as rewarding them, not in a way that enhances the problem, but rather one that helps them along their journey, and ultimately helps them reach their end goals. A rewards programme needs to assist people to buy what they do need rather than adding to a whole new list of wants. The

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problem is that this may not be sexy enough to work in practice. The right solution is not always the one that works. Essentially, the promise to educate and guide people to improve their finances will not be enough of a tangible reward. We need to engage people’s emotions and natural impulses. We have to combine real monetary rewards with human behavioural elements – many of which are the basis of the soaring use of ‘gamification’ – like feelings of competition and accomplishment. It can’t be a boring process. Your financial life is a journey and we need to help you enjoy the ride. Rewards should complement the core purpose of the programme – to assist people with their financial journey. So, the space is wide open to create a whole new model of engagement here. We are rapidly learning what doesn’t work – and by ‘work’ we don’t mean the end game of making more money for the industry. We mean leading people to better outcomes. We need to start building programmes that don’t just engage and build loyalty, but rather change behaviour through effective partnering.

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STEP 6

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Know what would be ideal Finally, we end our discussion of The Journey by recognising that as much as people want to be able to set their own goals and agendas, they also need guidance about what is appropriate for their particular circumstances. We know from Akerlofâ&#x20AC;&#x2122;s work that one of the more powerful influencers on behaviour is the power of the social norm21. Conformity, acceptability and social identity can powerfully affect decision making22.

This concept ties directly into the financial wellness index we discussed in greater detail in Part 2, Chapter 2 on Targets. If we can couple these insights into what behaviour is optimal at what stage and under what circumstances, with an effective incentive programme that rewards decisions that lead to better outcomes, we think we could quietly nudge much of the country towards financial well-being.

One way to harness that motivator is to tell individuals what other people in their socioeconomic circumstances are likely to do. This could motivate them to do the same.

If we can couple these insights into what behaviour is optimal at what stage and under what circumstances, with an effective incentive programme that rewards decisions that lead to better outcomes, we think we could quietly nudge much of the country towards financial well-being.

21 Akerlof & Kranton (2010) 22 Bikhchandan (1998)

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Conclusion PULLING IT ALL TOGETHER

How we’re defining problems, what we’re learning, initial thoughts on solutions, what we still have to develop.

Problem to solve Introduction It’s difficult to get people to care about retirement savings at the end of their lives when their primary concern is maintaining their financial security over the course of their lives.

How much do we understand? Are there gaps in our knowledge?

Solutions or tools available

Challenges to address

To get people to care you need to demonstrate that a holistic employee benefits programme can address both the journey and the end goal.

Total rewards employment packages

We need to convince employers that this is a priority that will pay off for all stakeholders.

Design of risk benefits is often driven by legacy or market conventions. These designs can result in inefficient use of a member’s contributions and have little reference to specific needs of members.

Employee benefit efficiency index

There is a financial education component that is essential for making this work.

We need to start the conversation with members the minute they join a fund – not five years before they retire. Members need to feel we’re by their side every step of the journey – not just when we make money from them. Needs As individuals move through life they and their families have changing requirements for financial stability and security. The challenge is to develop an employee benefits framework that responds to those changes.

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Life cycle employee benefit programme

Cost containment is one challenge of an employee benefits programme that adjusts to members’ evolving needs.

Benefits Barometer Issues addressed • Unhealthy finances • Choice • Bricks and books and beyond • Young workers

• Choice • Bricks and books and beyond • Young workers

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Problem to solve Targets Having a meaningful target is an essential component of the defined contribution model. But what is the right number? I f employees constantly change jobs, replacement ratios make it difficult to keep track of where members are on their savings journey.

How much do we understand? Are there gaps in our knowledge? In truth, there is significant variability in members’ income replacement requirements. These are highly dependent on where a family or individual may be in their life cycle circumstances.

aximising a replacement ratio M could inadvertently lead to a sacrifice in risk benefit coverage. This may not be desirable.

We need a framework that helps employees understand what targets and coverage would be optimal given their specific circumstances.

Defaults Where can we employ ’default’ solutions effectively and where not?

Auto-enrolment, default investments and default contribution rates work.

Can we make defaults ‘smarter’?

Auto-escalation and adjusting risk benefits through the life cycle might work, but needs some engagement.

The great debate is between default models that simply ‘sleepwalk’ a member to retirement and those that engage the member to become more actively involved in making better decisions about both their savings and their journey. If we want to empower members to have a deeper understanding of their finances we need to promote engagement.

Defaults can be detrimental where we require more specific information about an individual to meaningfully add value. Default annuities might be a case in point.

Benefits Barometer Issues addressed

Solutions or tools available

Challenges to address

A consumption-smoothed basis of calculating a target would be a more viable option.

But the really optimal target would be one that would help individuals integrate and balance their long-term savings requirements with their income and family protection requirements.

The greatest challenge in establishing a meaningful target is employee mobility. We believe the time has come to promote standardised targets (in terms of their calculation methodology) across all pension funds that would enable an employee to move from one job to the next and maintain continuity in their savings and protections programmes.

• Unhealthy finances • Choice • Bricks and books and beyond • Low-income earners and incentives • Young workers • Pensionable pay • Variability in salary inflation

Smart defaults create a framework that allows for the introduction of enough additional member information for defaults to provide more tailored answers.

Auto-escalation deserves further investigation, but high employee turnover and South Africa’s relatively high inflation present obstacles.

• Unhealthy finances • Choices • Young workers

Target needs to be set with a member’s income and expenditure in mind.

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Areas where these could be employed are in investment defaults that provide automatic optimal solutions for every fund member based on their current fund credit and the date they intend to stop working; and potentially with an annuitisation decision.

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Problem to solve Gaps In Benefits Barometer 2013 we identified that the greatest factor contributing to poor employee benefit outcomes was the lack of an integrated discussion between stakeholders.

How much do we understand? Are there gaps in our knowledge? Closing these gaps is critical for all companies, but no one seems to be taking accountability for this.

How can we eliminate overlaps? Costs In the complex value chain of services that support the delivery of benefits to members, there is little understanding about which services have the most direct impact on outcomes for members and whether the fees charged for each entity in that value chain can be justified. Similarly, different pricing models affect members differently according to the size of their income, contributions, fund credit, membership numbers and such. We need a framework for understanding these dynamics.

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Challenges to address

Every fund should undertake an assessment every three years that would look at the link between HR policies and employee benefit structures.

Could there be similar gaps between what unions propose for their members and what the employers have on offer? This is another hugely important area for analysis.

• Unhealthy finances • Absenteeism and presenteeism • Incapacity • Low-income earners and incentives • Strikes • Pensionable pay • Mass exits

Convincing an entrenched industry that this model will be a boon to creating a more robust industry that is open to more diverse players will be the ultimate challenge.

• Choices • Pensionable pay • Mass exits

Such assessments could identify which gaps need to be closed and how it can be done costeffectively.

How do we ensure employers’ HR policies and their employee benefits mesh?

We need a model that ensures a comprehensive delivery of those services that will make the greatest difference to member outcomes. That said, over the 40 years that a member is exposed to their fund, it makes no sense to pay high fees to chase performance potential that gets diversified away.

Benefits Barometer Issues addressed

Solutions or tools available

We propose a twopronged approach that introduces the concept of the über-consultant who is accountable for integrating all the components that support member outcomes and the über-asset manager who provides a low cost, risk-budgeted portfolio exclusively to a compulsory savings vehicle. Additionally we propose a tool that allows trustees to assess the impact of different pricing models on their members.

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How much do we understand? Are there gaps in our knowledge?

Benefits Barometer Issues addressed

Solutions or tools available

Challenges to address

Technology presents one way for plan members to get on-the-spot information on their extent of coverage and their optimal options when cost is an issue. Tools that can help members with decisions around medical specialist options, treatment options and clarity of coverage would be invaluable.

We need to measure how effective our communications to members are in getting members to make better decisions about their optimal scheme choices.

• Unhealthy finances • Choice • Young workers

How do we help individuals navigate this complexity without burdening them with even greater costs.

Annual communication to members about their medical benefit usage provides a useful feedback mechanism for members who need to know if they are in the right scheme. But this is just a starting point.

Communication Effective communication with members is hampered by a greater focus on fulfilling regulatory reporting requirements than on understanding what individuals respond to and how they process information.

Visual learning is the way most people process information. As such we need to focus more on how we represent ideas visually that does not introduce unintended biases.

A simplified decisionmaking framework for making investment choices.

We need to start measuring whether our more targeted communication programmes are actually changing the way members make decisions.

• Choice • Young workers

The challenge is to create frameworks that simplify the whole decision-making process and communicate complex ideas about the future in terms that members can understand today.

Most people tend to simply ‘turn off’ rather than have to confront complex choices.

Problem to solve Health complexity Increasing medical costs have resulted in increasingly complex medical schemes.

Benefit illustration and projection statements that correctly position and frame the information that requires decision making – and doesn’t complicate the process with information that doesn’t.

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Problem to solve Financial education Financial education is failing globally in terms of getting better decisions from members about their financial well-being. How can we develop more targeted programmes that reflect different levels of needs or receptiveness to help? How can we determine whether these programmes are actually working or adding value to the lives of individuals and their employers? Measuring Success How do we know if our work as fiduciaries delivers the right outcomes to members? • Is the solution effectively structured to deliver the outcomes? • Are members responding appropriately? • How do we know if our medical scheme options are optimal?

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How much do we understand? Are there gaps in our knowledge? Financial education is less about knowing what fundamentals to teach and more about understanding the behavioural dynamics that make people receptive to teaching. Work in the area of addictions management is providing some interesting approaches here. We measure all sorts of things in this industry, but often fail to assess the outcomes for members. Member behaviours often hinder the best designed programmes and we need to measure the effects.

Benefits Barometer Issues addressed

Solutions or tools available

Challenges to address

Tools to assess how stressed individuals are, how ready they are for change and the potential return on addressing the issue.

The main failure in financial education is properly measuring whether an idea actually works. We haven’t had an opportunity to test our ideas, but we have been working with ideas that have been tested elsewhere.

• Unhealthy finances • Low-income earners and incentives • Choice • Strikes • Mass exits • Pensionable pay • Variability in salary inflation • Young workers • Longevity

We have only just begun to develop the tools behind these concepts, but the tools are massively effective for changing the conversation that drives the decision making.

• Unhealthy finances • Choice • Young workers

Frameworks for measuring success, based on behavioural change. Methods for addressing chronic debt, from work with addicts. Tools to measure outcomes for members in terms of replacement ratios and asset-liability management. Tools to measure past usage of health benefits.

PART 2

THE JOURNEY

Problem to solve The individual’s journey to financial well-being How do we get individuals to engage with their financial wellbeing? More importantly, how do we do it without a financial adviser? We need to start the conversation with members the minute they join a retirement fund, not five years before they retire. Members need to feel we’re by their side every step of the journey.

How much do we understand? Are there gaps in our knowledge? We’ve identified a number of concepts with good track records for getting individuals engaged, equipping them for decision making and evolving their self-maintenance skills set: Teachable moments Just-in-time-education Smart defaults Present-value representations Trade-off tools Incentives

Solutions or tools available

Challenges to address

What’s needed most are tools and training that can empower HR departments to be more effective employee enablers.

The key to getting this right is to have a technological support resource that allows us to ‘touch’ the individual through multiple technologies, multiple media, and at multiple points in the course of their lives.

A tool to manage the new employee/employer total rewards pact. Trade-off and present value tools that allow employees to make better decisions around preservation, pensionable pay, contribution rates, portfolio choices, benefit structures, and so on. Ability to create individualised optimal portfolios and risk benefit structures.

Capability to upload employee contracts and benefit summaries and that can provide a continual reference point for future decisions. Capability to help model complex decision making around the trade-offs individuals have to consider and the longterm implications to their financial stability.

Chapter 10

Benefits Barometer Issues addressed • Unhealthy finances • Low-income earners and incentives • Temporary workers • Informal workers • Choice • Bricks and books and beyond • Young workers • Pensionable pay • Variability in salary inflation • Mass exits • Longevity •

235

PART 2 Chapter 10

THE JOURNEY

If we can change the way we design, implement and monitor our employee benefits systems to directly address the outcome for each member, we believe we can finally solve our most daunting challenge â&#x20AC;&#x201C; getting individuals to engage and become effective financial decision makers.

236

PART 3: THE ISSUES

PART 3 THE ISSUES

INTRODUCTION THE ISSUES REVISITED

240

ISSUE 1

UNHEALTHY FINANCES

244

ISSUE 2

LOW-INCOME EARNERS AND INCENTIVES

245

ISSUE 3

ABSENTEEISM AND PRESENTEEISM

246

ISSUE 4 INCAPACITY

247

ISSUE 5

248

TEMPORARY WORKERS

ISSUE 6 CHOICE

249

ISSUE 7

250

BRICKS AND BOOKS AND BEYOND

ISSUE 8 STRIKES

251

ISSUE 9

YOUNG WORKERS

252

ISSUE 10

PENSIONABLE PAY

253

ISSUE 11

VARIABILITY IN SALARY INFLATION

254

ISSUE 12

MASS EXITS

255

ISSUE 13

INFORMAL WORKERS

256

ISSUE 14 LONGEVITY

257

ISSUE 15

258

HIGH EMPLOYEE TURNOVER

PART 3: THE ISSUES

Most people donâ&#x20AC;&#x2122;t save enough for retirement. To understand why, we consider 15 issues that drive dynamics in different sectors.

238

PART 3: THE ISSUES

9 7

14 13

239

PART 3 Introduction

THE ISSUES REVISITED

Summary Numbers can numb. As an industry, we devote so much attention to compiling numbers, sending out surveys and conducting market research. Indeed, Benefits Barometer 2014 devotes an entire section to numbers. But numbers only expose part of the story – in fact, sometimes numbers mask the true story. INTRODUCTION: THE ISSUES REVISITED When we launched Benefits Barometer 2013, we quickly saw from our data what the numbers were saying: South African employees were simply not reaching retirement with adequate savings. Nor was the potential value of an individual’s future income generation being adequately protected during the course of their employment. Finally, there was significant variability in our numbers OF the amount of healthcare benefits an individual might receive. In summary, employees weren’t achieving physical, mental or financial well-being. What we couldn’t immediately discern was why.

240

To unlock that critical insight, we had to work backwards. If we could disaggregate the data on our members and start trying to understand how their places of employment or the nature of their jobs might impact on the outcomes we were seeing, then perhaps we might be on to something. Intriguingly, while we could easily see that the results for the ‘average’ South African employee might be problematic, it emerged that there was considerable variability in results from one sector to the next. What we could begin to infer was that issues that might bring one sector to its knees might be totally trivial in another.

We began to understand that if we were going to change the course of outcomes for members, we needed to develop deep insights into what these issues were, which sectors were most affected by a given issue, what could be done to potentially alleviate their impact, and who should take on the task of the change agent. Understanding what these issues were and how they did or didn’t impact on a sector then became the focus of our analysis. This is why the next section of Benefits Barometer 2014 is essential to the overall project. This is Part 3: The Issues. In Benefits Barometer 2013 we identified 13 issues. In 2014 we added two more.

PART 3

THE ISSUES REVISITED

Introduction

This section of the book represents an important link between Part 4: Sector case studies and Part 2: The way forward.

Some of these issues relate to structural factors that trustees and employers need to be aware of because they often explain why outcomes might be considerably lower than expected. Our chapters on pensionable pay and variability in salary inflation would be cases in point. Other chapters deal with issues that relate to employees in terms of decisions or preferences that they exhibit that can impact on outcomes: the chapters on choices, unhealthy finances, absenteeism and presenteeism, incapacity, young workers and longevity are all good examples. Some Issues chapters deal with who should be in these funds and whether the benefit to them is adequate or appropriate: temporary workers, informal workers, low-income earners and incentives, and bricks and books and beyond. Finally, there were two issues that needed addressing that dealt with factors

that were potentially exogenous to the fund member: mass exits and strikes. For Benefits Barometer 2014 we split absenteeism and incapacity, added the concept of presenteeism to the absenteeism discussion, split temporary and informal workers, changed our coverage of high salary inflation to variability in salary inflation, and added high employee turnover as an issue we had previously not included in 2013. We have also absorbed the incentives issue into low-income earners and incentives, as both chapters looked at concerns for this group: what benefits were appropriate, and what incentives would motivate them. In Part 3: Issues, we provide brief summaries to each of these issues and include any new insights or developments

that may have emerged over the last year. But we also highly recommend that readers return to Benefits Barometer 2013 for the original in-depth discussion of each of them. Available as an e-book on our blog: BenefitsBarometer.co.za. This section of the book represents an important link between Part 4: Sector case studies and Part 2: The way forward â&#x20AC;&#x201C; potential solutions. As we did in Benefits Barometer 2013, we tried to identify issues that impacted on each sector. The three barometers at the end of the write-ups on each sector identify the high-, medium- and low-priority issues for each sector. In addition, we have also included a solutions element in each sector to identify small ways we could counter some of the issues in those sectors.

241

PART 3 Introduction

THE ISSUES REVISITED

We understand that if we are going to change the course of outcomes for members, we need to develop deep insights into what their issues are.

242

PART 3: THE ISSUES

THE ISSUES New insights

PART 3 Issue 1

THE ISSUES

UNHEALTHY FINANCES

SUMMARY

FROM BENEFITS BAROMETER 2013 Across boards of trustees, employers and members, we found that unhealthy finances is a pivotal issue. In Benefits Barometer 2013 we delved into international research for proof of how badly things could go for companies that didn’t set this as a priority. Problems highlighted were: High turnover of staff ■■ Increased levels of absenteeism and presenteeism ■■ Low morale among employees ■■ Healthcare problems among employees ■■ Increased levels of fraud, theft and on-the-job accidents. ■■

NEW INSIGHTS Further research highlights that when employees are financially distressed, the quality of cognitive processing and decision making also declines2 rapidly. But while it may be sensible to provide employees with financial wellness programmes, four factors appear to complicate the debate: ■■ How do we know who really needs help if people are reluctant to put up their hands? ■■ “You can lead a horse to water…”. Financial wellness programmes are often not well-attended. ■■ Programmes generally lack proper assessments of impact.

■■

And, finally, often the starting point for many companies is: How do they justify that the expense is worthwhile?

Tackling the problem of financial wellness demands multiple strategies because employees are often at different levels of awareness, acceptance and preparedness for change. This suggests that the common use of direct educational programmes in classrooms is perhaps the least effective. We considered the details in Part 2, Chapter 8.

As one American study noted: “Employees with money problems are like sharks swimming around the workplace taking bites out of the bottom line1”.

Tackling the problem of financial wellness demands multiple strategies because employees are often at different levels of awareness. 244

1 Prawitz & Garman (2008) 2 Mullainathan, & Shafir (2013)

PART 3

THE ISSUES

Issue 2

LOW-INCOME EARNERS AND INCENTIVES

SUMMARY

FROM BENEFITS BAROMETER 2013 In examining benefits for low-income earners, we analysed the South African system and found that: ■■ Because of the means test for the older person’s grant (OPG), saving for retirement does not make sense for many low-income earners. ■■ Low-cost risk benefits through a group arrangement are important for workers who support a large number of dependants. ■■ Joining a medical scheme doesn’t make sense for workers earning under R72 000 because they lose access to free hospital treatment at government facilities. We highlighted that costs are important for this group and that a fixed cost structure can be problematic at this level. So we need to completely rethink how best to design and price products for this area of the market. In examining the incentive structure for savings, we argued that in an optimal benefit structure for low-income earners the government should also match contributions. Not only is this easier for workers to understand, but it also fosters partnership with the government. 3 National Treasury (2014a) 4 Ibid 5 Ibid 6 Holzmann, Hintz, Tuesta & Takayama (2013)

NEW INSIGHTS As retirement fund reform proceeds, many issues in this area are shifting. The means test for the OPG, which we criticised in Benefits Barometer 2013, should be phased out by 20163. Reform is moving inexorably towards mandatory enrolment and preservation. The government is considering the following factors for low-income and vulnerable workers: ■■ The cost structure ■■ Their need to access retirement savings during unemployment or extreme financial need4. Although the incentives structure for both retirement and

non-retirement savings is taxed, the National Treasury recognises that low-income earners may need alternative incentives5. Work by the World Bank on governments matching pension contributions suggests that it can increase participation. However, it has a negligible effect on increasing contributions. Applying behavioural finance aspects in public policy seems to show more promise among low-income earners. One potential downside of matching is that households see the match threshold as advice from the government on how much to save6.

The National Treasury recognises that low-income earners may need alternative incentives. 245

PART 3 Issue 3

THE ISSUES

ABSENTEEISM AND PRESENTEEISM

SUMMARY

FROM BENEFITS BAROMETER 2013 Previously, we grouped absenteeism and incapacity together. But in Benefits Barometer 2014 we have separated them as they often affect different sectors. For instance, the education sector is subject to high levels of absenteeism, but incapacity is unlikely. In Benefits Barometer 2013 we identified absenteeism in the workplace as a direct cause of lost productivity for an employer. When absenteeism is not managed correctly, employees tend to view their sick leave as an entitlement, using their full benefit. Monitoring and managing sick leave effectively is critical to detect disability claims before they occur, since temporary absence may be a sign of a disability claim that could become protracted. Employee assistance programmes and absenteeism monitoring are costeffective interventions to prevent an illness or injury from turning into a permanent disability claim.

246

7 Adcorp (2013) 8 Adcorp (2013) 9 Circadian (2005) 10 Adcorp (2013) 11 Forum of Private Business (6 November 2013)

NEW INSIGHTS Absence due to sickness has increased over time. In 2013, at any time, 3.7% of South Africa’s workforce was on sick leave7. This is up from the 3.4% that was reported in 2012. In 2013 alone, lost output due to absenteeism totalled R4.29 billion in direct costs. Cumulatively since 2000, the economy has lost R55.2 billion (in real terms) due to absenteeism8. The direct cost of absenteeism is easily calculated as the costs of paying an employee who is absent from work their salary or wages. But the indirect cost of absenteeism is more difficult to measure. Some of the indirect costs include: ■■ A decline in the quality of output (where less skilled people are brought in) ■■ Dissatisfied customers ■■ The use of scarce management resources to monitor absenteeism ■■ The cost of bringing in temporary workers9. Studies have shown that around 43.7%

of agency workers are employed as substitutes for absent employees10. Industry rules of thumb indicate that the indirect costs of absenteeism can amount to as much as three times the direct costs of the employee being absent from work. Another pressing issue for employers is that of presenteeism – the practice of employees coming to work despite illness, injury or anxiety over personal issues. Presenteeism can also have a direct impact on productivity since, despite physically being at work, the employee produces sub-standard work, if any work at all. Employees who come to work despite illness may be contagious and could infect colleagues, making the situation even worse. Managing presenteeism by using employee engagement surveys and conducting regular performance reviews will save employers money in the long term11.

PART 3

THE ISSUES

INCAPACITY

SUMMARY

FROM BENEFITS BAROMETER 2013 Previously, we grouped absenteeism and incapacity together. Although the definition of incapacity varies, it generally refers to when an individual cannot perform their job as expected. The strain experienced in certain industries may warrant early retirement in these instances. Key indicators include physical strain, emotional strain and use of physical strength and flexibility12.

Managing incapacity will mitigate crossover to disability.

12 Filer & Petri (1988)

Issue 4

NEW INSIGHTS Fair labour practices require employers to provide assistance, within reason, to employees with medical conditions or impairments. They should attempt to retain these employees in the workplace as far as reasonably possible. At the same time, most forwardthinking companies understand that their human capital (comprising skill, capabilities, expertise and experience) is their most important and valuable asset. Schedule 8 of the Labour Relations Act obliges employers to investigate all forms of incapacity and to assist employees who need time off for valid medical conditions and rehabilitation. This results in additional costs on top of costs for time off, rehabilitation costs, realignment costs and so on.

Implementing a system of incapacity leave will assist employers in calculating the costs of incapacity and retaining the skills of the employees. Incapacity leave grants employees additional paid sick leave to recover from illness or injury after they have exhausted their 36 days of sick leave in a three-year cycle. Employees who have exhausted their normal 36-day sick leave may apply for one of the following forms of temporary incapacity leave: ■■ Over a short period (1–29 days of sick leave or less) ■■ Over a long period (30 days of sick leave or more). If companies manage incapacity in the workplace correctly, they will mitigate cross over into disability benefits and manage benefit premiums.

247

PART 3 Issue 5

THE ISSUES

TEMPORARY WORKERS

Proposals may require anyone on a fixed-term contract or employed for more than three months to receive the same benefits as permanent workers.

SUMMARY

FROM BENEFITS BAROMETER 2013 Previously, we grouped temporary and informal workers together. While these groups do share some characteristics, they tend to have different socioeconomic backgrounds and skill sets. Their shared characteristics include: ■■ Volatile and non-continuous pay ■■ High turnover ■■ Varying employment periods ■■ Temporary relationship with a given employer. These characteristics all make providing access to retirement funds and risk benefits extremely tricky. Temporary or contract workers include fixed-term contractors, project contractors and casual workers who work no more than 24 hours in a month.

248

NEW INSIGHTS Proposed amendments to the Labour Relations Act require any fixed-term contractor employed for more than three months to receive the same benefits as permanent employees. This has significant implications for companies with large numbers of temporary employees, such as those in the retail and wholesale sector.

PART 3

THE ISSUES

Issue 6

CHOICE

SUMMARY

FROM BENEFITS BAROMETER 2013 Individuals face a multitude of choices but do not have a clear grasp of the interconnectedness and implications of these decisions. Financial education is not the answer. Not when, as Olivia Mitchell and Steve Utkus pointed out, “an individual would have to have the computing capability to solve many interrelated decades-long, timevalue of money problems with massive uncertainties about their future earnings, health, tax rates, family composition and time of death13” – to say nothing about knowing what the market levels or cost of living will be – to get it right. When most individuals are faced with this reality, the natural human response to decision making under these conditions is inertia – in other words, do nothing.

NEW INSIGHTS Given this dilemma, we believe there are still some useful guidelines that we can apply: ■■ We need to identify which decisions individuals need to make and how many are best managed by defaults, which preserve an individual’s sovereignty but guide outcomes more carefully. Part 2, Chapter 3 deals with this discussion extensively. ■■ Wherever decisions have significant long-term consequences, translating those consequences into present-day terms is vital to getting to the right

■■

decision. This means developing tools that show individuals the trade-offs each decision represents. We discuss these in detail in Part 2, Chapter 10. Financial stress undermines effective decision making and makes financial education even less effective14. However, there is an alternative: simple 12-step programmes that reduce the stigma of financial difficulties and provide an ongoing support system, which we discuss in Part 2, Chapter 8.

An individual would have to have the computing capability to solve many interrelated decades-long, time-value of money problems. 13 Mitchell & Utkus (2004) 14 Mullainathan & Shafir (2013)

249

PART 3 Issue 7

THE ISSUES

BRICKS AND BOOKS AND BEYOND

There may be reason to allow both pension-backed lending and pension fund withdrawal for education and housing.

250

SUMMARY

FROM BENEFITS BAROMETER 2013 We identified that South Africans would value in-kind benefits from employers greatly in two areas: housing (bricks) and education (books). We argued that given their importance, there may be reason to allow both pension-backed lending and pension fund withdrawal for these two purposes. We also considered other ways employers could assist employees with these two areas, including subsidies and education trusts. The challenge here is to take into consideration the tax implications of fringe benefits to the individual.

NEW INSIGHTS As has been argued in our introductory chapters, Part 1, Chapter 2, we have realised that both housing and education act as partial substitutes for retirement savings. Employers often provide housing to attract workers to remote or poorly serviced areas. While these benefits can attract and retain labour, they provide little value in addressing post-retirement requirements. If anything, they exacerbate the problem. When an employee leaves the mine or farm, they lose their home, have no claim on any asset and have to start from scratch.

PART 3

THE ISSUES

Issue 8

STRIKES

Strikes is a primary issue because of the unintended consequences for employee benefits coverage they can unleash.

SUMMARY

FROM BENEFITS BAROMETER 2013 We identified strikes as a primary issue because of the unintended consequences for employee benefits coverage they can unleash. When members canâ&#x20AC;&#x2122;t pay contributions towards approved and unapproved group risk benefits, or medical aid, these safety nets can vanish when workers need them the most. Similarly, when employees are dismissed during the heat of negotiations, members may withdraw their retirement savings to cover their lost income.

NEW INSIGHTS Strikes have plagued certain industries, such as the public sector and the mining sector, and it is likely that they will remain a concern going forward. A proper assessment of the long-term impact of strikes is needed to understand the implications for employees, institutions and the economy.

This all suggests that business and labour need to ensure that retirement fund rules are structured to anticipate these potential problems and identify, in advance, how they will be dealt with and under what conditions.

251

PART 3 Issue 9

THE ISSUES

YOUNG WORKERS

SUMMARY

FROM BENEFITS BAROMETER 2013 We argued that although millennials are unlikely to be loyal to a single employer, employers can build greater employee buy-in by harnessing their preferences to be connected, involved and evolving. We also highlighted the importance of developing good habits at the outset and acknowledged the complexities of the environment millennials are joining – with many unlikely to find permanent employment for the first portion of their career.

The employer bears the responsibility for inculcating good savings and spending habits. 252

15 Lusardi, Keller & Keller (2009)

NEW INSIGHTS In their study on financial education, Lusardi, Keller and Keller15 speak about ‘teachable moments’ – those times when lessons reap substantial pay-offs simply because they represent moments when individuals have a significant vested interest in understanding the issues. The first job is full of teachable moments as the employer bears the responsibility for inculcating good savings and spending habits that may well remain with these employees for the rest of their lives. Getting this understanding right requires curbing the tendencies of young workers to put immediate self-interest ahead of longer-term interests of both the employee and their employer. The current generation of young workers appears to place retirement

savings and benefits nearly dead last in financial priorities. However, we can illustrate the immediacy of benefits which only pay out in future with tremendous effect by: ■■ Developing a critical variation on the simple employment contract by illustrating trade-offs between satisfying immediate consumption needs and longterm consumption demands. ■■ Providing a platform where employees can see what’s on offer in terms of group discounts, training and employee wellness programmes. This becomes a key aggregation source that allows an employee to fully grasp the depth and completeness of what their employer is capable of providing them, above and beyond a simple salary.

PART 3

THE ISSUES

Issue 10

PENSIONABLE PAY

SUMMARY

FROM BENEFITS BAROMETER 2013 Pensionable pay is embedded in many individuals’ contracts, but often goes completely unnoticed, or is misunderstood. The key problem with this is the gaps it creates in employee protection – both for retirement and risk. For instance, if an employee’s pensionable pay is 70% and their fund’s replacement ratio target is 75%, this means the fund is seeking to provide a post-retirement income that is 52.5% of the employee’s pre-retirement income. Because of the complexity of all these percentages, we argued that benefits should rather be communicated in rands and cents. Pensionable pay has its roots in defined benefit schemes. It aimed to limit the employers’ benefits obligations by eliminating volatile elements in the pay package like commissions or bonuses. These issues of volatility persist, but do not justify retaining this confusing and misleading concept.

NEW INSIGHTS With the legislative definitions of retirement-funding income and non-retirement funding income falling away, pensionable pay may well be an anachronism. However, companies face challenges with removing it from their terms of reference: ■■ Dropping it would probably require that most companies rewrite their employment contracts – an exercise that’s possibly not worth the cost if there’s no impact on the employer. ■■ For companies who still pay for their employees’ risk benefits, these benefits are often expressed as a multiple of pensionable pay.

■■

ompanies who still pay for C their employees’ risk benefits have to find a way to provide for contributions that derive from 100% of an individual’s pay. If companies don’t want to pick up the additional cost of risk benefits, they can simply allow the employees to pay for the additional amount.

Given that tax benefits for retirement savings will now be based on remuneration and taxable income, companies and funds will need to find ways to communicate in these terms, even if they retain the term pensionable pay.

oth these challenges can be B overcome in two ways: ■■ Employers can phase pensionable pay out of employment contracts over time.

253

PART 3 Issue 11

THE ISSUES

VARIABILITY IN SALARY INFLATION

SUMMARY

FROM BENEFITS BAROMETER 2013 In Benefits Barometer 2013 we addressed the effect of high salary inflation and salary increases that are well above official consumer price inflation. We found that over the previous two years, real salary increases were above 9% for younger members. Salary increases raise an employee’s standard of living, but often translate into increased borrowing and consumption rather than savings. The result is that retirement savings do not keep pace with lifestyles. But the real problem of high salary inflation is that it may well exceed the assumed rate used to calculate projections of replacement ratios. Unless members adjust their contribution rates or benefit expectations, there is likely to be a shortfall at retirement.

254

NEW INSIGHTS In Benefits Barometer 2014 we extend this section to take account of variable salary levels, that is, inconsistent pay from one year to the next. Volatile pay levels may affect commission earners, those employed in the service industry, real estate agents and individuals remunerated for services provided, like electricians. Even those who are formally and permanently employed may experience variable levels of pay. Employees who earn volatile levels of pay may receive a guaranteed minimum monthly income or ‘basic’, while commission and other incentives are additional items of pay. When it comes to employee benefits, some employers may set the pensionable salary so it excludes the variable portion of income or is equal to the basic pay. In this way,

the cost does not have a negative effect on an individual’s take-home pay. Some employers may even opt to set the pensionable salary at a lower level than basic pay. Where risk benefits and retirement fund contributions are based on this salary, employers need to note that this will usually result in inadequate protection for members and insufficient savings at retirement. One way around this is for an employer to base risk benefits and retirement fund contributions on a notional fund salary. They can use the average total earnings over the last twelve months to calculate this salary. Employers could also set the pensionable salary percentage at 125% or 150% of an employee’s basic earnings. This will ensure that employees maintain appropriate targets throughout the course of the savings programme.

PART 3

THE ISSUES

Issue 12

MASS EXITS

Mergers and acquisitions of companies with retirement funds can result in administrative complexity, increased costs of operating the fund and inequitable benefits between members.

SUMMARY

FROM BENEFITS BAROMETER 2013 We use the term mass exit to describe the situation when a significant number of employees leave the company – either through retrenchments or corporate activity. But unlike strike action, discussed earlier, there is typically enough lead time for more contingency planning. With the shift from defined benefit to defined contribution funds, retirement fund arrangements have little bearing on any purchase, sale or wind-down of a company. But failure to appreciate how critical the management of the retirement plan is to members’ post-employment livelihood would be a serious omission.

NEW INSIGHTS In Benefits Barometer 2014 we’ve highlighted corporate activity as another big issue for employers and trustees. Through mergers or acquisitions of companies, various occupational funds might consolidate into one large fund, containing different categories of members. This can result in administrative complexity, increased costs of operating the fund, and in some cases, inequitable benefits between members.

255

PART 3 Issue 13

THE ISSUES

LONGEVITY

SUMMARY

We need to give serious thought to de-linking the retirement age from the pension fund.

FROM BENEFITS BAROMETER 2013 We highlighted that on average, defined contribution fund members could expect to retire on 39% of their final pensionable income. One solution for this is to increase the normal retirement age, but it is a solution that does not apply equally across all industries and all classes of workers. For example, physically demanding work lends itself to earlier retirement, while jobs involving people skills or intellectual effort may lend themselves to later retirement. Because all of this links to productivity, we suggested de-linking the retirement age from the pension fund. How a company determines its retirement age is clearly a function of their recruitment needs and demand for skills.

256

16 Strauch (2010)

NEW INSIGHTS We understand that most people donâ&#x20AC;&#x2122;t realise that South Africa has no mandatory retirement age. Companies and retirement funds determine these. This means that there has been no public policy decision in favour of older workers over younger, whether based on concerns about youth unemployment or any other justification. In South Africa, we need to acknowledge that skills shortages can have as crippling an impact on economic growth as unemployment. Equally problematic is the additional state burden of providing for a ballooning population of retirees who are underfunded. Additionally, research16 on how the human brain ages highlights that the older brain often has a better capacity for strategic and visionary thinking; a greater capacity for the kind of empathetic insights that great leadership demands.

PART 3

THE ISSUES

INFORMAL WORKERS

A flexible fund sponsored by the government, the financial services industry or labour brokers could be a solution.

17 National Treasury (2014b)

Issue 14

SUMMARY

FROM BENEFITS BAROMETER 2013 Previously, we grouped temporary and informal workers together. The term informal workers is somewhat difficult to define, but includes: ■■ Informally employed domestic workers and gardeners ■■ Some types of construction or personal services workers ■■ Hawkers and traders.

NEW INSIGHTS The government’s latest proposal to offer non-retirement, tax-free savings accounts may offer one part of the solution. It requires solutions to be simple and cost-effective, fully transferrable between providers, and to pose no penalties for noncontinuous contributions17. But as most informal workers are also lowincome earners, is a tax incentive attractive enough to stimulate savings in this segment?

We identified a flexible fund sponsored by the government, the financial services industry or labour brokers as a potential solution. The fund sponsor would have to deal with three key challenges: ■■ Cost, which must be rock bottom ■■ Administration, which must address the demands of a transient population of no particular fixed address or employment ■■ Intermittent employment of indeterminate length.

257

PART 3 Issue 15

THE ISSUES

HIGH EMPLOYEE TURNOVER

NEW ISSUE High employee turnover represents a new addition to our array of issues. It refers to a structural issue in a sector where large proportions of a staff complement exit regularly. It may be due to cyclical requirements in an industry with boom-bust dynamics or due to high levels of competition for skills. High employee turnover plays havoc on trustees’ requirements as fiduciaries responsible for individual member outcomes. Long-term investment strategies or dynamic benefit structures that shift members’ benefit exposures in accordance with their life cycle requirements are interrupted when a member transfers to a new fund or strategy. Similarly, high employee turnover undermines such compelling strategies

258

18 National Treasury (2014a)

as auto-escalation where employees’ contribution rates are gradually increased when their salaries are adjusted. If an employee is constantly switching between firms, they would always be on the lowest contribution band. It would be a travesty if employers or trustees became indifferent to solving the long-term needs of employees simply because high turnover appears to undo, any efforts on their parts. While high employee turnover is a structural issue for some industries, employee turnover in general has also been rising globally. To cater for this, retirement reform is trying to create greater portability between funds and higher preservation rates18, so that savings follow individuals through time and across employers.

The focus should clearly be on how we get enough continuity between the basic elements of retirement funds so that: ■■ The member should be indifferent to which fund they belong to if they are all structured with the same outcome. ■■ The member should be able to access the same basic benefit requirements at approximately the same cost, irrespective of the size of the employer. In truth, to solve this problem correctly we need a model that provides solutions tailored to each individual’s requirement as they move through their lives, irrespective of where they work. There are now methodologies to do this cost-effectively. We just need to change the mindset of the industry to embrace the model.

PART4: SECTOR CASE STUDIES

PART 4 SECTOR CASE STUDIES

INTRODUCTION UPDATING THE SECTOR CASE STUDIES

262

SUMMING IT ALL UP

264

SECTOR 1

n CONSTRUCTION SECTOR

267

SECTOR 2

n ENERGY SECTOR

279

SECTOR 3

n FISHING, FORESTRY AND AGRICULTURE SECTOR

291

SECTOR 4

n MANUFACTURING SECTOR

303

SECTOR 5

n MINING SECTOR

315

SECTOR 6

n PERSONAL SERVICES SECTOR • Health • Education • Media and marketing • Security

327 330 340 350 360

SECTOR 7

n PROFESSIONAL AND BUSINESS SERVICES SECTOR

371

SECTOR 8

n PUBLIC SECTOR

383

SECTOR 9

n RETAIL, WHOLESALE AND HOSPITALITY SECTOR • Retail and wholesale • Hospitality

395 398 408

SECTOR 10 n TRANSPORT AND TELECOMMUNICATIONS SECTOR • Transport • Telecommunications

419 422 432

PART4: SECTOR CASE STUDIES

High priority issues in the ten sectors

MANUFACTURING ■■ Low-income earners

CONSTRUCTION

■■ Mass exits ■■ Pensionable pay

■■ Absenteeism ■■ Bricks and books ■■ High turnover ■■ Incapacity ■■ Low-income earners ■■ Strikes

FISHING, FORESTRY AND AGRICULTURE

■■ Temporary and informal workers

■■ Absenteeism

ENERGY ■■ Absenteeism ■■ Choice ■■ High salary inflation ■■ Incapacity

260

MINING

■■ Bricks and books

■■ Absenteeism

■■ Incapacity

■■ Bricks and books

■■ Low-income earners

■■ High salary inflation

■■ Pensionable pay

■■ Incapacity

■■ Strikes

■■ Mass exits

■■ Temporary and informal workers

■■ Strikes ■■ Unhealthy finances

PART4: SECTOR CASE STUDIES

PERSONAL SERVICES HEALTH

■■ Absenteeism

TRANSPORT AND TELECOMMUNICATIONS

■■ Incapacity ■■ Longevity ■■ Strikes

TRANSPORT

EDUCATION

■■ Incapacity ■■ Absenteeism

■■ Absenteeism

■■ Bricks and books ■■ Longevity ■■ Strikes

MEDIA AND MARKETING

■■ High turnover ■■ Longevity

PROFESSIONAL AND BUSINESS SERVICES ■■ Choice ■■ High salary inflation

■■ Young workers

■■ High turnover

SECURITY

■■ Pensionable pay

■■ High turnover ■■ Low-income earners

RETAIL, WHOLESALE AND HOSPITALITY

TELECOMMUNICATIONS ■■ Choice ■■ Temporary and informal workers

RETAIL AND WHOLESALE

■■ Longevity

■■ High turnover

■■ Low-income earners

■■ Young workers

■■ Pensionable pay

■■ Temporary and informal workers

■■ Temporary and informal workers ■■ Unhealthy finances

PUBLIC SECTOR

■■ Young workers

■■ Absenteeism

■■ Low-income earners

■■ Bricks and books

HOSPITALITY

■■ Longevity

■■ Temporary and informal workers

■■ Strikes

■■ Young workers

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PART 4 Introduction

SUMMING IT ALL UP

Summary We examine ten different sectors and their employee benefits. We identify how each sector performs in meeting both benefits and savings requirements for its members and what issues may be evolving. HOW TO INTERPRET THE ALEXANDER FORBES BENEFITS BAROMETER

BAR

T OME

F ITS

BAR

T OME

HIGH PRIORITY

MEDIUM PRIORITY

These issues are significant because they will have a large impact if they happen, are very likely to happen or both.

These issues are important but are less likely to happen, will have a smaller impact than high priority issues or both.

DIU

M PRIOR ITY

H PRIORITY

H PRIORITY HIG

F ITS

M PRIOR ITY

W PRIORITY LO

DIU

W PRIORITY LO

262

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

F ITS

BAROM

LOW PRIORITY These issues are unlikely to happen or will have a small impact or both.

PART 4

SUMMING IT ALL UP

What has become clear over the last year is that many of the issues that employees in each sector face have gone unresolved. In fact, employee wellness programme provider ICAS reports an increase in the number of issues employees in their client base reported. The graph below shows the top ten most commonly reported problems over 2013. Across most industries, relationship issues appear to be the most pressing concern for individuals, with stress-related issues in second place. However, construction, energy, agriculture and manufacturing reported organisational issues most frequently. One of the most important things that we can take away from the graph

is that concerns over mental well-being (stress and mental illness) and financial well-being (money management) appear among the most commonly reported issues. This serves as a reminder of how pressing these problems are. So, in line with the theme of this yearâ&#x20AC;&#x2122;s edition of Benefits Barometer we have also tried to include a solution that could either counter some of the issues in each sector, or show how the ideas presented in Part 2: The way forward may apply in that particular sector.

Introduction

Investment returns can be volatile from year to year and such volatility can reduce the confidence that individuals place in the published results. As a result, we have decided to adopt a more stable, long-term view of future investment returns for the calculation of replacement ratios. Although there is only a slight difference between the numbers that are reported in this and the first edition of the Benefits Barometer, the numbers shown here and in future editions of the book will be more indicative of the outcomes members can expect at retirement.

Finally, we note the change in the way we calculate the projected replacement ratios in each of the industry chapters.

MOST COMMONLY REPORTED PROBLEMS ACROSS ALL INDUSTRIES 20%

Relationship issues Stress

14.3% 10%

Problem cluster

Organisational issues 8%

Legal issues Mental illness/psychiatric

Child & family care

5.6% 5.2%

Money management Trauma

4.5%

Information & resources

4.2%

Loss issues

4% 0%

10%

15%

20%

Proportion of all cases reported Source: ICAS (2014)

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PART 4 Introduction

SUMMING IT ALL UP

SUMMING IT ALL UP: ALLOCATION OF CONTRIBUTION RATE â&#x20AC;&#x201C; ALL INDUSTRIES 0.9% 0.8% 1.4%

Telecommunications

12.9%

0.9% 1.1% 1.8%

Transport

14.1%

1% 0.8% 1.3%

Hospitality

13.7%

1% 0.9% 1.2%

Retail and wholesale

14.4%

0.8% 0.6% 1.4%

Public sector

17.7%

0.9% 0.8% 1%

Professional and business services

0.8% 0.8% 1.7%

Security Media and marketing

0.7% 0.8% 1.4%

Education

1% 0.7% 1.4%

Health

0.7% 1.3% 1.3%

Mining

0.7% 0.9% 1.7%

12.1%

1% 1%

Fishing, forestry and agriculture

14.6%

Construction 0%

14.4%

15.7%

12.8%

14.8%

10%

12%

Percentage of employers

264

Contribution to retirement savings as a percentage of pensionable pay

14.8%

1.7%

0.9% 1%

Contribution to death benefits as a percentage of pensionable pay

13.4%

0.7% 0.8% 1.2%

Energy

Contribution to disability benefits as a percentage of pensionable pay

15.5%

1.1% 0.9% 1.5%

Manufacturing

Contribution to retirement funding costs as a percentage of pensionable pay

12.2%

14%

16%

18%

PART 4

SUMMING IT ALL UP

Introduction

SUMMING IT ALL UP: PROJECTED REPLACEMENT RATIO FOR NEW FUND MEMBERS 49.9%

Telecommunications Transport

55.7% 54.5%

Hospitality

52%

Retail and wholesale

74.2%

Public sector Professional and business services

47.7%

Security

49.9%

Media and marketing

62.8%

Education

56.8% 53.9%

Health

56.9%

Mining Manufacturing

60.4%

Fishing, forestry and agriculture

59.9%

Energy

51.3%

Construction

61.5% 0%

10%

20%

30%

40%

50%

60%

70%

80%

Percentage

265

PART 4 Introduction

SUMMING IT ALL UP

SUMMING IT ALL UP: RISK BENEFITS OFFERED IN EACH SECTOR Transport Telecommunications

49% 0%

Retail and wholesale Public sector Professional and business services

65%

Manufacturing Hospitality Health Fishing, forestry and agriculture Energy Education

95%

43%

71%

0% 0%

83%

67% 0%

87%

7% 56% 56%

100%

0% 0% 58% 56%

57%

Approved lump sum death cover

85%

0% 2% 64%

59% 59%

Funeral cover

77%

0% 0%

82%

89%

72%

66%

Unapproved lump sum death benefits

83%

0% 0%

80%

48%

84%

0% 0% 67%

76% 88%

0% 0% 56%

96%

0% 0% 55%

59% 82%

0% 0% 55%

70% 85%

2% 4%

20%

40%

Lump sum disability benefits

89%

1% 3%

48%

Disability income benefits

86%

4% 4%

Construction

266

70%

0% 0%

Mining Media and marketing

98%

29%

Security

56%

60%

Percentage of employers

80%

100%

PART 4: SECTOR CASE STUDIES

CONSTRUCTION SECTOR

PART 4 Sector 1

CONSTRUCTION

ECONOMIC CONTEXT Some construction companies reacted to poor local opportunities by venturing into Africa to capitalise on largescale concession and infrastructure opportunities.

There is no doubt that the construction sector plays a vital role in South Africa by providing the physical infrastructure for economic activity. On the other hand, it relies heavily on the general state of the economy and that of other sectors for its own fortunes, and the going has been tough. In slow times, the construction sector relies on government spend in particular to see it through. However, there has been significant under-spending by local and provincial government due to capacity constraints1. Given this backdrop, it should not be surprising to hear that the construction industry has been through a difficult patch over the last three years. This is reflected in the Construction Industry Development Boardâ&#x20AC;&#x2122;s Small and Medium Enterprise Business Conditions Survey2, which shows that confidence has been in negative territory for some time. Some construction companies reacted to poor local opportunities by venturing into Africa to capitalise on large-scale concession and infrastructure opportunities. This has helped many of the large construction companies to deliver strong financial results in 2013, despite subdued local conditions. Venturing into Africa, particularly when taking employees with you, brings about an often complex array of employee benefits

268

1 Oxford Business Group (2013) 2 Construction Industry Development Board & Bureau for Economic Research (2013) 3 Oxford Business Group (2013)

considerations. Companies in the industry must make arrangements to ensure continuity of local insured benefits through the employee benefits arrangements that may be in place. They should also investigate the implications for employeesâ&#x20AC;&#x2122; personal policies. Local medical aid cover may lapse and it would be a good idea to ensure employees have travel or medical evacuation cover. Not being on local medical cover may also result in late joiner penalties when staff members return to South Africa. Despite the difficulties the sector has experienced in recent years, it does have a couple of strong underpins that should help sustain it in the long term3. The continued urbanisation trend builds demand for residential housing and should spill over into demand for local infrastructure as growing populations in dense areas place strain on existing infrastructure and amenities. In addition, the government has mandated the Presidential Infrastructure Coordinating Commission to expedite infrastructure development in South Africa by developing a 20-year pipeline of projects, which should add some stability to the sector. This stability should help the Construction Education and Training Authority (CETA) and other educational institutions and the industry to build skills. The significant infrastructure-spend planned by stateowned enterprises, such as Eskom and Transnet, should benefit the sector greatly.

PART 4

CONSTRUCTION

Sector 1

SECTOR ECONOMIC ANALYSIS4 Key stakeholders

R357.05 bn GDP contribution (2013 prices)

3.42%

% contribution to GDP in 2013

Companies ▪▪Aveng-Grinaker ▪▪Basil Read Holdings ▪▪Murray and Roberts Holdings ▪▪Pretoria Portland Cement Co ▪▪Stefanutti ▪▪Wilson Bayly Holmes-Ovcon

Government ministries

4.53%

Real increase in GDP 2012–2013

Approximate employment5

820 000

Formal sector

384 000

Informal sector

4 Statistics South Africa (2013a) 5 Statistics South Africa (2013b)

▪▪Department of Economic Development ▪▪Department of Human Settlements ▪▪Department of Public Works ▪▪National Planning Commission

Unions ▪▪Broadcasting, Electronic Media and Allied Workers Union (BEMAWU) ▪▪Building Wood and Allied Workers Union of South Africa (BWAWUSA) ▪▪Building Workers Union (BWU) ▪▪Building, Construction & Allied Workers Union (BCAWU) ▪▪National Construction Building and Allied Workers Union (NACBAWU) ▪▪Noordelike Bouwerkersvakbond (NBV) ▪▪Association of Mineworkers and Construction Union (AMCU)

269

PART 4 Sector 1

CONSTRUCTION

BENEFITS OVERVIEW While there is significant variation, most employees in this sector are low-income earners. Another complicating factor is the high number of informal workers in the sector, as these employees are not entitled to basic benefits such as pension and medical aid benefits. Employment in this sector is also seasonal and cyclical, which results in high employee turnover.

E BAROM

HIGH PRIORITY ■■ Absenteeism and presenteeism ■■ High employee turnover ■■ Incapacity ■■ Low-income earners and incentives ■■ Strikes ■■ Temporary workers ■■ Informal workers

F ITS

E BAROM

MEDIUM PRIORITY ■■ Longevity ■■ Mass exits ■■ Unhealthy finances ■■ Young workers ■■ Bricks and books and beyond

DIU

M PRIOR ITY

H PRIORITY

H PRIORITY HIG

F ITS

M PRIOR ITY

W PRIORITY LO

DIU

W PRIORITY LO

270

Industrial action over wage increases has raised the priority of strikes in this sector over the last year.

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

Absenteeism and incapacity remain high-priority issues. As a result of project deadlines and costs incurred, some employers choose to replace workers instead of rehabilitating them. This exacerbates the problems of turnover in this sector.

F ITS

BAROM

LOW PRIORITY ■■ Choice ■■ Variability in salary inflation ■■ Pensionable pay

PART 4

CONSTRUCTION

Sector 1

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

14.8%

Contribution to death benefits as a percentage of pensionable pay

2.0%

Contribution to disability benefits as a percentage of pensionable pay

1.0%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.9%

Projected replacement ratio for a member aged 25

61.5%

Average normal retirement age

64.1

Average actual retirement age

62.7

Actual preservation rate

7.3%

Average insured death benefit as a multiple of pensionable pay

3.6 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE As we reported in Benefits Barometer 2013, young workers are brought on as fixed-term contractors, while skilled employees tend to have longer tenures. The result is a skewed pensionable salary picture, with many younger members having pensionable salaries in the range of R24 000 to R60 000 per year, while older members, who are close to retirement, have pensionable salaries of more than R120 000 per year. Salary increases in the construction sector have been muted and in line with

6 Benefits Barometer Consultants Survey 2014

inflation for younger members, with below inflation increases being granted to older members. Following industrial action late in 2013, indications are that the sector will experience higher wage increases in the coming year. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. Therefore, if 75% of total cost to company is pensionable, the replacement

ratio of 61.5% of pensionable pay actually works out to 75% of 61.5% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this sector the pensionable pay percentage is 85%6.

271

PART 4 Sector 1

CONSTRUCTION

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: CONSTRUCTION SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

There is a skewed pensionable salary picture. Younger members have pensionable salaries in the range of R24 000 to R60 000 per year, while older members have pensionable salaries of more than R120 000 per year. 272

PART 4

CONSTRUCTION

Sector 1

Following industrial action late in 2013, indications are that the sector will experience higher wage increases in the coming year.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: CONSTRUCTION SECTOR 16%

Salary increase per year

14% 12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member WatchTM 2013 data set

273

PART 4 Sector 1

CONSTRUCTION

The projected replacement ratio for new fund entrants is

61.5% RETIREMENT ANALYSIS The projected replacement ratio for new fund entrants is 61.5%. This is one of the highest expected ratios across the retirement fund industry and higher than the projection for this sector in Benefits Barometer 2013. About 85% of members in the 20-to-30-year age group are projected to achieve replacement ratios of between 45% and 75% at retirement. However, high turnover and low preservation mean that the picture is very different for the 40-to-50-year olds, where the position is reversed and 85% of the members can only expect a replacement ratio of 45% or less. A key reason for low replacement ratios at older ages is the high mobility of the workforce. When switching employers, members live off their retirement savings between jobs. Some schemes have waiting periods in place before members can claim their benefits in cash so that they do not access their retirement benefits if they regain employment in the sector within the waiting period.

274

PART 4

CONSTRUCTION

Sector 1

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: CONSTRUCTION SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Higher turnover and low preservation mean that 85% of members can only expect a replacement ratio of 45% or less.

275

PART 4 Sector 1

CONSTRUCTION

A key reason for low replacement ratios at older ages is the high mobility of the workforce.

EXIT RATE: CONSTRUCTION SECTOR 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: CONSTRUCTION SECTOR 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Sector experience

5% 0% 20–25

25–30

30–35

35–40

40–45 Age band

276

45–50

50–55

55–60

60–65

PART 4

CONSTRUCTION

Sector 1

Many workers in the sector are low-income earners or informal workers or both.

RISK BENEFIT ANALYSIS This sector has higher insurance costs per rand of cover, due to higher claims rates. 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 level of cover provided for disability benefits depends on the demographics of the particular scheme. Funds for higher-income earners typically provide a disability income benefit, whereas bargaining council funds and funds targeted to low-income earners tend to prefer lump sum disability benefits.

HEALTHCARE ANALYSIS Because so many workers in the sector are low-income earners or informal workers or both, most members battle to reach reasonable levels of medical coverage. Some employers may provide on-site medical facilities during a project. However, there may still be a large proportion of workers who rely on the state for healthcare benefits.

277

PART 4 Sector 1

CONSTRUCTION

What can be done? Extended cover benefits With a highly mobile workforce that moves between employers in different parts of the sector to secure employment, there is a risk that members will experience gaps in their insured benefit cover. If an employee within the construction sector were to become disabled or die during one of these periods of gaps in cover, the employee and their family could be left destitute. Another scenario where we see these gaps in cover arising is where wage earners become ill and are subject to a ‘no work no pay’ arrangement. Where there is no pay, there is often no contribution paid to the retirement fund which, in turn, means that there is no premium available to pay to the insurer that underwrites the risk benefits. So, if a claim were to arise, it would be rejected on the grounds of non-payment of premiums.

There are some solutions to avoid this: ■ F unds could arrange with the risk benefit providers that no premiums are payable during the disability benefit waiting period. These premiums would either be funded by an increase in the overall risk premium rate or by allowing the insurer to deduct the premiums payable during the waiting period from the ultimate benefit paid. The latter approach is often preferred as the claimant carries the cost rather than the entire fund. ■ Funds could arrange with the insurer for members to continue to enjoy their risk benefits for a period of time after they have left the fund (while between jobs). The level and duration of the extended cover can be tailored to the fund’s particular requirements or adjusted to take into account the member’s period of service. For example: a fund might offer extended cover for three months at 50% of the usual benefit entitlement for members with less than five years’ service and offer cover for 12 months, at 100% of the usual benefit, for members with more than five years’ service. The aim of structuring cover is to ensure that there are no gaps in cover where members are essentially still in the construction industry, even if they are between jobs.

278

PART 4: SECTOR CASE STUDIES

ENERGY SECTOR

PART 4 Sector 2

ENERGY

ECONOMIC CONTEXT The government has developed the South African Renewables Initiative to develop an innovative solution to financing the incremental costs of renewable energy in South Africa.

Any advancements or setbacks in this sector will have an immense impact on the other sectors and ultimately the economy as a whole. South Africa’s energy sector is critical to our economy. The country relies heavily on the large-scale, energy-intensive coal mining industry. The country has limited proven reserves of oil and natural gas and uses its large coal deposits to meet most of its energy needs, particularly for electricity. Most of the oil consumed in the country is used in the transportation sector. It is imported from Middle Eastern and West African producers in the Organization of the Petroleum Exporting Countries (OPEC) and refined locally. South Africa also has a sophisticated synthetic fuels industry, producing gasoline and diesel fuels from the Secunda coal-to-liquids and Mossel Bay gas-to-liquids plants. The synthetic fuels industry accounts for nearly all of the country’s domestically produced petroleum as crude oil production is very small1. Coal-generated electricity, through Eskom’s nineteen coal-fired power stations, provides more than 70% of South Africa’s energy demands and is responsible for around 90% of the state-owned power utility’s electricity supply2. Load shedding, however, has reignited concerns about the impact of inadequate power supply on the economy3. Some of the major developments in the energy sector since Benefits Barometer 2013 are: ■■ Shale gas exploration in the Karoo: In April 2011, the government enacted

280

1 US Energy Information Administration (2014) 2 Oxford Business Group (2013) 3 Maswanganyi, N (2014) 4 US Energy Information Administration (2014) 5 Ibid 6 BP (2013) 7 South Africa’s renewable energy shift (2012)

a moratorium on the licensing and exploration of shale resources because of environmental concerns over hydraulic fracturing (fracking) and water use. In September 2012, the government lifted the moratorium, and some international companies, like Shell, submitted applications to explore the shale region4. It is widely expected that shale gas will provide the country with a reliable alternative fuel to coal. South Africa is in the early stages of developing a shale gas industry, with regulatory uncertainty and environmental concerns continuing to delay exploration activity5. ■■ Renewable energy projects: In 2012, 72% of South Africa’s total primary energy use came from coal, followed by oil (22%), natural gas (3%), nuclear (3%), and renewables (less than 1%, primarily from hydropower)6. The government developed and unveiled the South African Renewables Initiative as an initial concept at the Cancún Climate Change Summit in 2010, with the vision of working to develop an innovative solution to financing the incremental costs of renewable energy in South Africa. Wind and solar projects are expected to be integrated into the country’s national energy grid during 20147. Although the energy sector contributed only about R201.4 billion or 1.93% of the country’s gross domestic product (GDP) in 2013, this sector unequivocally fuels and powers the South African economy.

PART 4

ENERGY

Sector 2

SECTOR ECONOMIC ANALYSIS8 Key stakeholders

R201.4 bn

GDP contribution (2013 prices)

1.93%

% contribution to GDP in 2013

-1.20%

Real increase in GDP 2012–2013

Approximate employment9

126 000 1 000

8 Statistics South Africa (2013a) 9 Statistics South Africa (2013b)

Companies ▪▪African Oxygen ▪▪BP Southern Africa ▪▪Chevron ▪▪Engen Petroleum ▪▪Eskom Holdings ▪▪Sasol ▪▪Shell South Africa ▪▪South African Petroleum Refineries ▪▪Total South Africa ▪▪Tullow South Africa

Government ministries ▪▪Department of Energy ▪▪Department of Environmental Affairs ▪▪Department of Water Affairs and Forestry

Formal sector

Unions

Informal sector

▪▪Chemical, Energy, Paper, Printing, Wood and Allied Workers’ Union (CEPPWAWU) ▪▪Pelindaba Workers Union (PWU) ▪▪South African Chemical Workers Union (SACWU)

281

PART 4 Sector 2

ENERGY

BENEFITS OVERVIEW Absenteeism remains a high-priority issue within the energy sector, although this is more pertinent among the bluecollar workforce. The sector, which employs limited resources with scarce and specialised skills, tends to remunerate its employees well.

H PRIORITY HIG

F ITS

E BAROM

HIGH PRIORITY ■■ Absenteeism and presenteeism ■■ Choice ■■ Variability in salary inflation ■■ Incapacity

282

F ITS

E BAROM

MEDIUM PRIORITY ■■ Bricks and books and beyond ■■ Mass exits ■■ Unhealthy finances

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

The delicate balance between offering employees the flexibility to make their own decisions, but steering clear of unsuitable options, has been a matter of priority for many of the large defined contribution funds operating in the energy sector.

F ITS

BAROM

LOW PRIORITY ■■ High employee turnover ■■ Longevity ■■ Low-income earners and incentives ■■ Pensionable pay ■■ Strikes ■■ Temporary workers ■■ Informal workers ■■ Young workers

PART 4

ENERGY

Sector 2

BENEFITS BY THE NUMBERS 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

0.8%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.7%

Projected replacement ratio for a member aged 25

51.3%

Average normal retirement age

63.5

Average actual retirement age

60.5

Actual preservation rate

15.5%

Average insured death benefit as a multiple of pensionable pay

3.7 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE Given the nature of this sector, employee compensation far outstrips other sectors in the economy, competing most notably with the financial services sector. Merit and cost of living increases also exceed the average level of increases observed in our client base. This data is skewed by the fact that most blue-collar employees in this sector are not enrolled in the funds in this data set, but are instead members of union funds. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories

of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 51.3% of pensionable pay actually works out to 75% of 51.3% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy.

283

PART 4 Sector 2

ENERGY

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: ENERGY SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

This data is skewed by the fact that most blue-collar employees in this sector are not enrolled in the funds in this data set, but are instead members of union funds.

284

PART 4

ENERGY

Sector 2

Given the nature of this sector, employee compensation far outstrips other sectors in the economy.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: ENERGY SECTOR 16%

Salary increase per year

14% 12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member WatchTM 2013 data set

285

PART 4 Sector 2

ENERGY

The projected replacement ratio for new fund entrants is

51.3% RETIREMENT ANALYSIS With the skills required in this sector, pensionable pay is generally higher than in other sectors. This means that the projected replacement ratios may offer a far more accurate picture of retirement outcomes for employees than in other sectors. The projected replacement ratio for a 25-year-old entering a fund in this sector is 51.3%. In the older age groups, there are large numbers of employees whose projected replacement ratio is less than 45%, which may be driven by high salary increases. As a result, boards of trustees may need to be made aware of this issue when reviewing strategies. Preservation rates are marginally better than the retirement fund industry experience for members below the age of 50. Members with higher fund credits, who are older than 50, tend to be more aware of the implications of not preserving their benefits. For this reason, preservation rates improve significantly for the older age bands.

286

PART 4

ENERGY

Sector 2

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: ENERGY SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

There are large numbers of employees whose projected replacement ratio is less than 45%, which may be driven by high salary increases.

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Preservation rates are marginally better than the retirement fund industry experience for members below the age of 50.

EXIT RATE: ENERGY SECTOR 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: ENERGY SECTOR 60%

Percentage

50% Retirement fund industry experience

40% 30% 20%

Sector experience

10% 0% 20–25

25–30

30–35

35–40

40–45 Age band

288

45–50

50–55

55–60

60–65

PART 4

ENERGY

Sector 2

In addition to offering healthcare cover, many of these employers also offer a subsidy for medical scheme contributions during retirement.

RISK BENEFIT ANALYSIS The costs of death and disability benefits account for 2% of the contributions to the funds in this sector. Death benefits are relatively high, offering average coverage of 3.7 times annual pensionable salary, though there is a lot of underlying variability. Certain funds offer insured death benefits based on the memberâ&#x20AC;&#x2122;s full service period which, given long periods of tenure in this sector, can result in generous death benefits.

HEALTHCARE ANALYSIS Many employers in this sector run in-house, restricted medical schemes. These include the BP Medical Aid Society, Engen Medical Benefit Fund and Sasolmed. The Afrox Medical Aid Society recently amalgamated with Discovery Health Medical Scheme. In addition to offering healthcare cover through restricted medical schemes, many of these employers also continue to offer a subsidy for medical scheme contributions during retirement. Post-retirement subsidies used to be a method of attracting and retaining quality employees and with the specialised skills required in this sector, it is clear why these benefits are so generous.

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What can be done? High annual salary increases, which run ahead of the investment targets for most of the funds, are a key tension in this sector. This leads to an annual deterioration in replacement ratios. As was mentioned in variable salary levels, when salary increases outstrip returns earned on pension fund savings, the memberâ&#x20AC;&#x2122;s salary, and hence their standard of living, increases faster than their retirement savings. This means they may not be able to support the same standard of living post retirement with that money. While this deterioration in replacement ratios is not as much of a concern as it may be in other sectors since it reflects the rising standard of living of the employees, some boards of trustees have already taken note. They have begun investigating a Regulation 28 compliant aggressive portfolio, which could include allocations to local equity, offshore equity, and local listed property only.

Rather than increasing investment risk, another option for this sector, given its high increases and low exit rates, is auto-escalation, discussed in the Defaults chapter. What this means is that each year an employeeâ&#x20AC;&#x2122;s contribution rate automatically increases between 0.5% and 2%. Auto-escalation can also help with attracting and retaining young workers, as starting contribution rates can be lower than normal and then rise later in life as retirement becomes more of a priority. This is a strategy used extensively in the United States and can significantly improve retirement outcomes, keeping them more in line with standard of living increases, without taking on excessive investment risk. An alternative is to introduce additional contribution categories so that members are able to contribute more than they do currently.

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PART 4: SECTOR CASE STUDIES

FISHING, FORESTRY AND AGRICULTURE SECTOR

PART 4 Sector 3

FISHING, FORESTRY AND AGRICULTURE

ECONOMIC CONTEXT The fishing, forestry and agriculture sector has gone from one that has historically been one of the most important contributors to GDP to now making only a marginal contribution. However, it continues to play a key role in export earnings (through exports like fruit and wine) and the rural economy. It faces numerous challenges, both in the short term with many of its key markets under severe economic pressure, and in the long term with environmental issues such as climate change. Agriculture and forestry South Africaâ&#x20AC;&#x2122;s most valuable agricultural products continue to be cattle, dairy, poultry, sugar and maize1, but beyond these five products, there continues to be a diverse mix of agricultural markets in which South Africa participates. Because of the homogeneity of agricultural produce, South Africa has intense competition in this sector, extending even to dumping disputes with Brazil over chicken. In 2012, about 5 million chickens were brought into the South African market each week at artificially low prices. Definition Dumping dispute: a trade dispute between countries where products are deliberately sold at prices below cost in an export market

292

1 Oxford Business Group (2013) 2 Ibid 3 Business Day (2013)

To make its products more distinctive, a number of agricultural segments want to establish themselves in organic and responsible farming practices. A similar trend exists in the forestry sector, with the two largest producers, Sappi and Mondi, both embracing certification by the Forest Stewardship Council. Agriculture has to deal with increasing cost pressures as well as social challenges. Costs are increasing substantially, both in terms of administered and market prices2. Labour disputes and strikes have led to an increase in the minimum wage from R69 to R109 per day from April 2013, but whether this has really benefited employees is an open question as many farmers have compensated by reducing non-cash benefits. On the social side, the challenge is to be able to achieve land reform while keeping land productive, as well as bringing smallholder farmers more securely into the sector. Fishing Environmental and social sustainability remain challenges in the fishing sector. The effect of climate change and overfishing mean that it is increasingly difficult to maintain catch sizes. On the social side, while the sector has made great strides in terms of BEE, it faces challenges in quota allocation.

Fishing is the most transformed of all the sectors, having started with 1% black ownership and now sitting at 66%. This is a significant achievement, but there have been issues with quota3 allocations, resulting in increasing numbers of quotas going to individual quota-holders. These issues have put more than 1 000 quotas and 10 000 jobs potentially at risk5. The transformation in this sector is also something of a double-edged sword, given that fishing offers such an uncertain lifestyle, with incomes relying on catches. Definition Quotas: the number of fish a fisherman is allowed to catch over a certain time period. Across the fishing, forestry and agriculture sector, employees tend to have low levels of education. This makes this sector a valuable one for providing the kind of employment which is so rare in South Africa â&#x20AC;&#x201C; jobs for low-skilled labour. But it does mean that basic education and financial literacy form a key focus in the sector, with many employers rolling out basic educational programmes that focus on teaching workers the principles of budgeting, debt management and planning for retirement.

PART 4

FISHING, FORESTRY AND AGRICULTURE

Sector 3

SECTOR ECONOMIC ANALYSIS4 Key stakeholders

R254.6 bn

GDP contribution (2013 prices)

2.44%

% contribution to GDP in 2013

4.48%

Real increase in GDP 2012–2013

Companies ▪▪Afgri ▪▪Astral Foods ▪▪Illovo Sugar ▪▪Mondi ▪▪Oceana Group ▪▪Sappi ▪▪Sea Harvest Corporation ▪▪Tongaat Hulett

Government ministries ▪▪Department of Agriculture, Forestry and Fisheries ▪▪Department of Environmental Affairs ▪▪Department of Rural Development and Land Reform ▪▪Department of Water Affairs

Approximate employment5

713 000

4 Statistics South Africa (2013a) 5 Statistics South Africa (2013b)

Unions ▪▪Building and Allied Workers Union of South Africa (BAWUSA) ▪▪Chemical, Energy, Paper, Printing, Wood and Allied Workers Union (CEPPWAWU) ▪▪Commercial, Stevedoring, Agricultural and Allied Workers Union (CSAAWU) ▪▪Food and Allied Workers Union (FAWU) ▪▪National Certificated Fishing And Allied Workers Union (NCFAWU) ▪▪South African Farming and Commercial Workers Union (SAFCWU) ▪▪South African Fishermen’s Trade Union (SAFTU) ▪▪South African Food, Retail and Agricultural Workers Union (SAFRAWU) ▪▪Trawler and Line Fishermen’s Union (TALFU) ▪▪Wood Electrical Printing Union (WEPU)

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BENEFITS OVERVIEW Employees in this sector earn particularly low incomes. Even with assistance, most farm workers struggle to make ends meet. Many permanent employees, particularly on farms, enjoy several additional benefits which are not regarded as pensionable, but make up a significant portion of their annual earnings. Farm workers have a heavily subsidised standard of living (farm schools, subsidised housing and municipal services) while they are employed, which is not maintained after retirement.

are excluded from any formal retirement funding arrangement. They also have no access to risk benefits.

The use of seasonal workers, at harvest time or when certain large quotas are caught, creates a large pool of workers who

Those affected by incapacity, due to either injury or ill-health, often live in outlying or remote areas without access to transport.

H PRIORITY HIG

F ITS

E BAROM

HIGH PRIORITY ■■ Absenteeism and presenteeism ■■ Bricks and books and beyond ■■ Incapacity ■■ Low-income earners and incentives ■■ Pensionable pay ■■ Strikes ■■ Temporary workers ■■ Informal workers 294

F ITS

E BAROM

MEDIUM PRIORITY ■■ High employee turnover ■■ Unhealthy finances

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

In the fishing sector, pensionable pay has been kept artificially low as members are remunerated based on tonnage caught. In addition, when fishing is sparse, dipping into retirement savings is seen as a quick fix for the current lack of income with individuals often resigning to gain access to their pensions.

Even when transport is available, the afflicted member is either unable to travel due to the level of incapacity or lack of funds. This is particularly relevant when a benefit is subject to annual review and possible suspension if the member is unable to arrive for an examination or submit the required medical evidence. Further, given the low education levels, there is minimal scope for disability recipients to be retrained, reskilled or redeployed should they be deemed to have recovered in terms of the policy conditions.

F ITS

BAROM

LOW PRIORITY ■■ Choice ■■ Variability in salary inflation ■■ Longevity ■■ Mass exits ■■ Young workers

PART 4

FISHING, FORESTRY AND AGRICULTURE

Sector 3

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

15.7%

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 fund expenses and fees as a percentage of pensionable pay

1.0%

Projected replacement ratio for a member aged 25

59.9%

Average normal retirement age

62.7

Average actual retirement age

60.4

Actual preservation rate

7.2%

Average insured death benefit as a multiple of pensionable pay

3.1 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE The graph on the next page clearly shows the extent of the low salary levels within the sector, with significant proportions at every age earning less than R5 000 per month in pensionable pay. While increases were high in the last year, this may not have strong knock-on effects on the well-being of workers when other forms of support, like subsidised living expenses, are reduced. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories

6 Benefits Barometer Consultants Survey 2014

of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 59.9% of pensionable pay actually works out to 75% of 59.9% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy.

Our survey, based on a subset of our own clients only, estimates that in this sector the pensionable pay percentage is 75%6. We believe this estimate to be very high. In the case of agriculture, this may only reflect the relationship between the basic pay and pensionable pay, not including the significant non-monetary benefits. For fishing, this is likely to exclude the significant variable pay which is based on the catch tonnage.

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PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: FISHING, FORESTRY AND AGRICULTURE SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

There are low salary levels within the sector, with significant proportions at every age earning less than R5 000 per month in pensionable pay.

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Pay packages in this industry may include variable elements.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: FISHING, FORESTRY AND AGRICULTURE SECTOR

Salary increase per year

25%

20% Retirement fund industry experience

15%

10%

Sector experience

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member Watch

2013 data set

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FISHING, FORESTRY AND AGRICULTURE

The projected replacement ratio for new fund entrants is

59.9% RETIREMENT ANALYSIS The hypothetical replacement ratio for a 25-year-old new fund entrant is 59.9%. Older fund members have poor prospects for attaining a reasonable replacement ratio. This is primarily because of membersâ&#x20AC;&#x2122; low contribution rates and more conservative investment strategies to address the concerns about the security of their investment. While exit rates in the 2013 data set were below industry experience, the lack of preservation, particularly among older members, serves to compound the problem as, in some instances, members are accessing their accumulated savings to resolve debt-related issues.

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Sector 3

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: FISHING, FORESTRY AND AGRICULTURE SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Low replacement ratios are a function of low contribution rates and conservative investment strategies.

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The lack of preservation, particularly among older members, could be because some members access their accumulated savings to resolve debt-related issues.

EXIT RATE: FISHING, FORESTRY AND AGRICULTURE SECTOR 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: FISHING, FORESTRY AND AGRICULTURE SECTOR 60%

Percentage

50% Retirement fund industry experience

40% 30% 20%

Sector experience

10% 0% 20–25

25–30

30–35

35–40

40–45 Age band

300

45–50

50–55

55–60

60–65

PART 4

FISHING, FORESTRY AND AGRICULTURE

Sector 3

Employers in this sector should consider alternative insurance products which are suitable for low-income earners.

RISK BENEFIT ANALYSIS Most workers have access to death, disability and funeral benefits but these are at lower levels than other industries due to lower pensionable pay. Cost of cover remains a concern and the high incidence of claims may lead to a reduction in benefits to remain within a risk cost cap. Lump-sum disability benefits are regarded as a means of keeping costs in check, as income benefits are more expensive and difficult to administer. The average level of death cover of 3.1 times annual pensionable pay will in most cases prove inadequate as a single breadwinner often supports an extended family. There have been requests for increased funeral cover â&#x20AC;&#x201C; in one case, cover of R40 000 was investigated, but it was prohibitively expensive. Funds are considering extended family funeral benefits, but eligibility restrictions about what constitutes an extended family, and the price of such benefits, have prevented more widespread implementation.

HEALTHCARE ANALYSIS Given that the majority of employees in this sector have pensionable salaries below R60 000 per year, membership for just one person on a basic medical scheme option would represent around 15% of their earnings. Employers in this sector should consider alternative insurance products which are suitable for low-income earners.

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What can be done? In the fishing sector, many fund members depend on actual tonnage of fish caught to earn a salary. This means their incomes vary from month to month and deducting retirement and risk contributions from fluctuating incomes can make other living expenses unaffordable, particularly in months where income is at its lowest.

A solution is to amend the fundâ&#x20AC;&#x2122;s rules to allow for the payment of contributions within the seven-day post month-end requirement, but only in those months in which sufficient fish are caught to pay the contribution, on condition that the total contribution due for the member in a particular year is paid during that year. This means that if there is a good catch early in the fishing season, a member can pay the full contribution for the year in the first three months and the fund can regard all subsequent contributions, as and when members are able to make them, as additional voluntary contributions by that member. As the pelagic fishing season runs from January to October, the employer contribution for the 12 months is paid over the 10-month fishing season to ensure continuity of cover and to meet the costs of running the fund. Employer contributions are based on predetermined contribution salaries per category of crew member.

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MANUFACTURING SECTOR

PART 4 Sector 4

MANUFACTURING

ECONOMIC CONTEXT The manufacturing story is a tale of two sides. On the one hand, South Africa has been shifting to a service-driven economy. On the other, the government has introduced a significant number of policies to promote manufacturing sub-sectors.

The manufacturing sector consists of a large and varied group of sub-sectors including chemical and plastics, electrical and components, food and beverages, metals, motor vehicles, pharmaceuticals and textiles. The manufacturing story is a tale of two sides. On the one hand, South Africa has been shifting to a service-driven economy, with manufacturing’s contribution to the GDP falling over time. On the other, the government has introduced a significant number of policies, within its role as a developmental state, to promote manufacturing sub-sectors in support of the South African growth path and for employment. Since 2008, like other sectors in South Africa, the success and growth of the manufacturing sector has been marred by the usual suspects, including1: ■■ The continued instability in labour relations, exacerbated by ongoing strikes ■■ Increasing labour and energy costs ■■ Stagnation in job creation ■■ The volatile rand ■■ A slowdown in consumer spending. The success of a turnaround in this sector is supported by various policy frameworks aimed at national economic expansion and job creation developed by the Department of Trade and Industry (DTI), in particular the Industrial Policy Action Plan. The DTI’s approach is deeply influenced by the concept of a developmental state that identifies key sectors and uses regulation to align private sector efforts in the promotion of that sector.

304

1 Manufacturing Circle (2013)

The government has targeted two key sub-sectors within manufacturing, namely motor vehicles and textiles. The motor vehicles sub-sector plays a key role in promoting employment in historically disadvantaged areas, such as the Eastern Cape. The textiles sub-sector has been frequently identified in literature on the developmental state as the critical nexus for industrial development. In the late 80s and early 90s many employers migrated from defined benefit to defined contribution funds, particularly in manufacturing. The changing retirement fund landscape has also prompted a consolidation of retirement funds within employers. Employees in this sector generally enjoy a reasonably comprehensive set of benefits. But because the sub-sectors are so diverse, what is valued in different sub-sectors is highly varied, although the benefit design itself tends to cater for the average manufacturing employee. With the continued financial pressures on employers to meet greater wage demands, improved benefit offerings and increasing input costs, this sector will remain volatile. Short time is also a function of these pressures and influences the level of salary for wage earners to be allocated towards retirement savings and benefits. In an attempt to lower production costs, manufacturers may seek to reduce their staff complement by offering workers voluntary retrenchment and retirement packages to avoid compulsory retrenchments. Most employees who choose to take the package cash in their accumulated retirement savings.

PART 4

MANUFACTURING

Sector 4

SECTOR ECONOMIC ANALYSIS2 Key stakeholders

R1.75 trillion GDP contribution (2013 prices)

16.88%

% contribution to GDP in 2013

3.82%

Real increase in GDP 2012–2013

Companies ▪▪AECI ▪▪Allied Electronics Corporation ▪▪Barloworld Imperial Holdings ▪▪BMW ▪▪Consol ▪▪Foodcorp ▪▪Ford ▪▪Highveld Steel and Vanadium Corp ▪▪Macsteel ▪▪Mittal Steel ▪▪Nampak ▪▪Omnia ▪▪Pioneer Foods ▪▪Reunert ▪▪Tiger Brands

Approximate employment3

Government ministries

1 538 000

Formal sector

▪▪Department of Trade and Industry

228 000

Informal sector

Unions ▪▪Chemical, Energy, Paper, Printing, Wood and Allied Workers Union (CEPPWAWU) ▪▪Food and Allied Workers Union (FAWU) ▪▪National Union of Metal Workers of South Africa (NUMSA) ▪▪South African Clothing and Textile Workers Union (SACTWU) ▪▪South African Chemical Workers Union (SACWU) ▪▪South African Furniture and Allied Workers Union (SAFAWU) ▪▪Wood Electrical Printing Union (WEPU)

2 Statistics South Africa (2013a) 3 Statistics South Africa (2013b)

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BENEFITS OVERVIEW The cyclical nature of this sector can make it a volatile one for employees, with routine reductions in the workforce. What makes this volatility particularly worrying is that many employees in the sector are lowincome earners, which means they have

E BAROM

HIGH PRIORITY ■■ Low-income earners and incentives ■■ Mass exits ■■ Pensionable pay

F ITS

E BAROM

MEDIUM PRIORITY ■■ Absenteeism and presenteeism ■■ Bricks and books and beyond ■■ Choice ■■ High employee turnover ■■ Incapacity ■■ Strikes ■■ Unhealthy finances ■■ Young workers

DIU

M PRIOR ITY

H PRIORITY

H PRIORITY HIG

F ITS

M PRIOR ITY

W PRIORITY LO

DIU

W PRIORITY LO

306

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

less ability to absorb shocks. Phenomena like short time and low pensionable pay percentages place further pressure on employees and makes it even less likely that they will have a reasonable income in retirement.

F ITS

BAROM

LOW PRIORITY ■■ Variability in salary inflation ■■ Longevity ■■ Temporary workers ■■ Informal workers

PART 4

MANUFACTURING

Sector 4

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

14.4%

Contribution to death benefits as a percentage of pensionable pay

1.5%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Contribution to fund expenses and fees as a percentage of pensionable pay

1.1%

Projected replacement ratio for a member aged 25

60.4%

Average normal retirement age

64.2

Average actual retirement age

61.0

Actual preservation rate

7.9%

Average insured death benefit as a multiple of pensionable pay

3.4 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE Younger employees have lower incomes, but salary improves with age. Salary increases, mainly driven through bargaining council agreements for blue-collar workers, have been above inflation and tend to have a greater impact for younger individuals. These taper down as individuals approach retirement, with employees outside the bargaining council agreements tending to get lower increases, especially as they age. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is

4 Benefits Barometer Consultants Survey 2014

pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 60.4% of pensionable pay actually works out to 75% of 60.4% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this sector the pensionable pay percentage is 79.5%4.

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PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: MANUFACTURING SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

Salary increases, driven through bargaining council agreements for blue-collar workers, have been above inflation. These taper down as individuals approach retirement.

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Sector 4

Above-inflation salary increases have a greater impact on younger individuals.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: MANUFACTURING SECTOR 16%

Salary increase per year

14% 12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member Watch

2013 data set

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The projected replacement ratio for new fund entrants is

60.4%

RETIREMENT ANALYSIS The average contribution rate for the sector is 14.4%, which is slightly lower than the average of 14.6% reported in the Benefits Barometer 2013. In assessing the percentage split of membersâ&#x20AC;&#x2122; projected replacement ratios, a younger member has the ability, based on the average contribution rate, to achieve a reasonable replacement ratio in retirement. The older members, especially those over 40, have poor replacement ratios with the bulk of them on target to replace between 0% and 30% of pre-retirement pensionable salary. This is a function of high exit rates, particularly for younger members, and extremely low preservation rates, with an overall average rate of preservation of 7.9%. Aside from the actual percentage contribution rate applied, salaried employees may be remunerated on a total cost to company basis where a lower percentage of this package is pensionable, resulting in a disconnect between the savings and the income individuals are accustomed to living off. Wage earnersâ&#x20AC;&#x2122; contributions are based on basic pay, but the timing and frequency of payments result in a fluctuating contribution rate. This is even more so during short time, where the level of rand contributions declines as a result of lower pay, negatively affecting these employees. Take-home pay is a major factor for these employees, especially during uncertain times, with some employees preferring not to contribute at all to the fund during this time and only maintaining risk benefit cover, with their immediate need for income outweighing the long-term need to set aside capital for retirement. For a large number of employees in this sector, their accumulated capital in a retirement fund is their largest asset, making pension-backed lending popular. Employees are able to use their accumulated retirement benefits to access housing loans, which potentially reduces their future outcomes in retirement, but does address their immediate needs, while the house purchased may be an asset in retirement.

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Sector 4

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: MANUFACTURING SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Take-home pay is a major factor for these employees, especially during uncertain times.

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Poor replacement ratios for older members are a function of high exit rates and extremely low preservation rates.

EXIT RATE: MANUFACTURING SECTOR 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: MANUFACTURING SECTOR 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Sector experience

5% 0% 20–25

25–30

30–35

35–40

40–45 Age band

312

45–50

50–55

55–60

60–65

PART 4

MANUFACTURING

Sector 4

Without access to flexibility individuals do not have the facility within a group arrangement to address any gaps.

RISK BENEFIT ANALYSIS The death benefits in this sector are primarily provided through the retirement fund, coupled with disability insurance and funeral benefits. The average insured death benefit multiple is 3.4, which is in line with the retirement fund industry average. A few companies provide additional benefits, such as accidental death and dread disease benefits, but most generally limit any flexibility. The quantum of the benefits is mainly dependent on the level of the pensionable salary upon which contributions are based, and a potential gap in the risk benefit cover arises where the pensionable salary is less than total cost to company. All benefits, except where that benefit is a flat amount, like funeral cover, would be a function of the pensionable salary resulting in a gap in the cover. Without access to flexibility, individuals do not have the facility within the group arrangement to address any gaps and may need to do so in their personal capacity.

HEALTHCARE ANALYSIS The healthcare benefits offered in this sector vary across the sub-sectors. Pharmaceutical companies tend to offer generous post-retirement subsidies of medical scheme contributions, although this benefit is rarely offered to new employees. Some companies within the food and beverages sub-sector, such as Tiger Brands, manage their own medical scheme in-house.

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PART 4 Sector 4

MANUFACTURING

What can be done? Managing increasing costs Cyclicality and structural change have both contributed to mass exits in this sector. Declining growth in the sector has affected the number of members in funds, which has then served to increase the cost per member in many funds.

One way to minimise rising costs and continue to benefit from economies of scale is to switch into umbrella funds. Furthermore, because of increased governance, rising costs and responsibilities placed on trustees, there has been a migration from stand-alone or privately administered funds to umbrella fund arrangements or industry funds to benefit from cost efficiencies.

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PART 4: SECTOR CASE STUDIES

MINING SECTOR

PART 4 Sector 5

MINING

Over recent years, the mining sector has been characterised by labour unrest and trade union rivalry. This has farreaching implications for this sector.

ECONOMIC CONTEXT The mining sector in South Africa is the world’s fifth largest and currently accounts for approximately 5% of South Africa’s GDP1 from 20 January to 20 March 2014. According to Statistics South Africa, there are around 422 000 people employed formally in this sector. Entire towns like Rustenburg are often built around the mining sector and depend on the continued functioning of the sector for their survival.

that are significantly above inflation are a dangerous combination for platinum mining companies.

The mining sector in South Africa is made up of a variety of industries including diamond, gold, platinum group metals, coal and iron ore, with the greatest revenue being produced in coal and gold2. This sector relies heavily on the global economy and foreign exports. Mining companies have benefited from the fall in the domestic currency, which has boosted profits despite the strike action in this sector over the same period.

Mining is a cyclical sector and should recover with the global economy. However, South African mining failed to take advantage of the last commodity boom and there remains significant risk that a resuscitation of demand may not be enough to revive the local sector.

Over recent years, the mining sector has been characterised by labour unrest and trade union rivalry. These issues were highlighted in the Benefits Barometer 2013, and have gained more momentum since then. Labour unrest has far-reaching implications for this sector. The FTSE/JSE Africa Platinum Mining Index, a gauge of the performance of six South African platinum mining stocks, has declined around 3% since the announcement of strike action in this sector3. Low platinum prices coupled with loss of production and wage increases

316

1 Oxford Business Group (2013) 2 Ibid

Many mining houses are already exploring alternative, less labour-intensive mining techniques, with an increasing number of mines turning to mechanisation. As this trend continues, it could significantly reduce the demand for unskilled labour.

Retirement funding arrangements in the mining sector are largely based on the defined contribution model, although there are legacy defined benefit structures in place, which are mostly winding down. Labour unrest has an impact on a number of areas pertaining to retirement funding. Most companies in this sector adopt a ‘no work no pay’ principle in the event of strike action. This means that during strikes, workers typically suspend their contributions to retirement funding and the payment of risk premiums. The result is that cover under the risk policies may be compromised as well. The employer may fund the payment of risk premiums during the strike period.

PART 4

MINING

Sector 5

SECTOR ECONOMIC ANALYSIS3 Key stakeholders

R581.1 bn

GDP contribution (2013 prices)

5.57%

% contribution to GDP in 2013

-0.34%

Real increase in GDP 2012–2013

Companies ▪▪African Rainbow Minerals ▪▪Amplats ▪▪Anglo American ▪▪Anglogold Ashanti ▪▪Assmang ▪▪Assore ▪▪BHP Billiton ▪▪De Beers Consolidated Mines ▪▪Goldfields ▪▪Harmony Gold ▪▪Impala Platinum Holdings ▪▪Kumba Iron Ore ▪▪Lafarge Mining ▪▪Lonmin ▪▪Xstrata

Approximate employment4

Government ministries

422 000

Formal sector

▪▪Department of Mineral Resources ▪▪Department of Public Enterprises

4 000

Informal sector

Unions ▪▪Association of Mineworkers and Construction Union (AMCU) ▪▪National Union of Metal Workers of South Africa (NUMSA) ▪▪National Union of Mineworkers (NUM) ▪▪Solidarity ▪▪United Association of South Africa (UASA)

3 Statistics South Africa (2013a) 4 Statistics South Africa (2013b)

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PART 4 Sector 5

MINING

BENEFITS OVERVIEW Labour unrest, as a result of wage demands, has contributed to salary increases well over inflation in the mining sector. Non-traditional benefits form a large part of the total rewards systems. On-mine benefits can include housing, regular meals and mine medical facilities. There’s a strong emphasis on education for miners’ children and many mines have on-site schools.

due to illegal strike action, reduces fund membership numbers, and thus economies of scale.

Mass exits, as a result of retrenchments as well as termination of employment

While safety is a priority for mining companies, incapacity levels remain high.

H PRIORITY HIG

F ITS

BAR

T OME

HIGH PRIORITY ■■ Bricks and books and beyond ■■ Variability in salary inflation ■■ Incapacity ■■ Mass exits ■■ Strikes ■■ Unhealthy finances

318

F ITS

BAR

T OME

MEDIUM PRIORITY ■■ Choice ■■ Low-income earners and incentives ■■ Temporary workers ■■ Informal workers ■■ Young workers ■■ Absenteeism and presenteeism

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

Unhealthy finances are another area of concern and can often fuel the wage demands seen in the sector, which are less about the actual money workers get and more about their standards of living.

For employees to work underground, they have to undergo a stringent process to ensure they are equipped to function well in those conditions. Disability insurance premium rates are therefore typically high in the mining sector. However, the definition of disability often does not match the employer’s criteria in this regard. This is an area employers need to manage closely and is covered in Part 2, Chapter 4.

F ITS

BAROM

LOW PRIORITY ■■ High employee turnover ■■ Longevity ■■ Pensionable pay

PART 4

MINING

Sector 5

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

14.8%

Contribution to death benefits as a percentage of pensionable pay

1.7%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.7%

Projected replacement ratio for a member aged 25

56.9%

Average normal retirement age

62.9

Average actual retirement age

61.8

Actual preservation rate

13.3%

Average insured death benefit as a multiple of pensionable pay

3.5 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE

5 Benefits Barometer Consultants Survey 2014

The graph on the next page shows that the average pensionable pay in this sector is not low, with very few employees earning less than R5 000 per month. From age 50 onwards, more than 20% of employees earn more than R480 000 in annual pensionable pay. As expected from our earlier discussion on labour unrest, salary inflation remains high relative to price inflation and the retirement fund industry. It must be noted that our sample excludes many blue-collar workers who often belong to union funds.

company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 56.9% of pensionable pay actually works out to 75% of 56.9% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy.

It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees who are on total cost to

Our survey, based on a subset of our own clients only, estimates that in this sector the pensionable pay percentage is 76.7%6.

319

PART 4 Sector 5

MINING

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: MINING SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

Age band Source: Member WatchTM 2013 data set

This graph shows that the average pensionable pay in this sector is not low.

320

60+

PART 4

MINING

Sector 5

Salary inflation remains high relative to price inflation and the retirement fund industry.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: MINING SECTOR

Salary increase per year

25%

20% Retirement fund industry experience

15%

10%

Sector experience

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member Watch

2013 data set

321

PART 4 Sector 5

MINING

The projected replacement ratio for new fund entrants is

56.9% RETIREMENT ANALYSIS More than 70% of members in the 20- to 30-year-old age category are expected to retire with a replacement ratio of more than 60%. However, in the older age categories, the proportion of members who are expected to retire with a replacement ratio of more than 60% reduces drastically. At age 60 and older, almost 70% of members are retiring with replacement ratios of under 30%. Only 5% of members aged 60 and older are on track to retire with replacement ratios of 60% and more. Exit rates in the mining sector appear to be lower than the retirement fund industry as a whole, which is potentially due to longer periods of service in the mining sector. However, as indicated earlier, mass exits remain a concern. Although preservation rates in this sector are higher in a number of age bands than the retirement fund industry as a whole, they remain a concern.

322

PART 4

MINING

Sector 5

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: MINING SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Only 5% of members aged 60 and older are on track to retire with replacement ratios of 60% and more.

323

PART 4 Sector 5

MINING

Exit rates in the mining sector appear to be low but, mass exits and strikes remain a concern.

EXIT RATE: MINING SECTOR 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: MINING SECTOR 60%

Percentage

50% Retirement fund industry experience

40% 30% 20%

Sector experience

10% 0% 20–25

25–30

30–35

35–40

40–45 Age band

324

45–50

50–55

55–60

60–65

PART 4

MINING

Sector 5

In a high-risk environment, having enough medical cover is an important need.

RISK BENEFIT ANALYSIS The mining sector places great value on death benefits provided by the fund. The average lump sum death benefit, at 3.5 times annual pensionable salary, compares favourably with the retirement fund industry as a whole (which has an average death benefit multiple of 3.3 times annual pensionable salary), though this might not be sufficient to meet the needs of employees. As the claims experience on the death and disability insurance schemes are typically high, insurance premium rates are high as well.

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. Because of 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 consultations 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 claim 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 continue to provide competitive benefits into the future.

325

PART 4 Sector 5

MINING

What can be done? The total pay package of workers in this sector is comprised, not only of a cash component, but also many non-traditional benefits and subsidies. As mentioned earlier, on-mine benefits can include housing, regular meals, mine medical facilities and education for children. The importance of such benefits to the low-income earners in this sector cannot be underestimated, as their take-home pay alone would not be enough for them to afford the quality of life they experience on the mines. With demands for wage increases, many employers may find it impossible to support the cost of non-traditional benefits going forward. Therefore, they must consider alternative ways of helping these workers.

For instance, there are ways that the fundsâ&#x20AC;&#x2122; risk benefits can help with providing security for housing loans, without which these workers may not be able to secure the required credit. Since life cover is available at a lower cost through the retirement fund, trustees can raise the group life assurance benefit, for instance, from cover of 3 to 5 times annual pensionable salary. The additional cover of 2 times annual pensionable salary helps employees get funding for housing loans. Also, by providing security for the housing loan specifically, in the event of death the loan settlement does not deplete the capital available for dependants. Whatever decision is made, one point is pertinent; this sector would greatly benefit from highly simplified communication that clearly illustrates the total rewards package.

326

PART 4: SECTOR CASE STUDIES

PERSONAL SERVICES SECTOR

PART 4 Sector 6

PERSONAL SERVICES

INTRODUCTION Medical services, education, media and marketing, and security are very different fields, but they all require the personal delivery of a service.

The personal services sector spans a wide range of fields, including medical services, education, media and marketing, and security. Although very different in many respects, these are all industries that require the personal delivery of a service. About 47% of the employees in the sector within our client base work in healthrelated activities. Education is the second largest employer, with 30% of the workers in this sector.

SECTOR ECONOMIC ANALYSIS1

R633.7 bn

GDP contribution (2013 prices)

4.29%

Real increase in GDP 2012â&#x20AC;&#x201C;2013

6.08%

% contribution to GDP in 2013

328

1 Statistics South Africa (2013a) 2 Statistics South Africa (2013b)

Approximate employment2

3 079 000

Formal sector

159 000

Informal sector

PART 4

PERSONAL SERVICES

Sector 6

Key stakeholders Health

Education

Companies

▪▪Life Healthcare ▪▪Corporation ▪▪Netcare

▪▪ADvTECH ▪▪Curro ▪▪Educor Holdings

Government ministries

▪▪Department of Health

▪▪Department of Basic Education ▪▪Department of Higher Education

Unions ▪▪Medical Association of South Africa (SAMA) ▪▪National Education Health and Allied Workers Union (NEHAWU) ▪▪Democratic Nursing Organisation of South Africa (DENOSA) ▪▪Health and Other Service Personnel Trade Union of South Africa (HOSPERSA) ▪▪South African Democratic Nurses Union (SADNU)

Unions ▪▪National Education Health and Allied Workers Union (NEHAWU) ▪▪National Professional Teachers’ Associations of South Africa (NAPTOSA) ▪▪National Teachers Union (NATU) ▪▪National Tertiary Education Union (NTEU) ▪▪Professional Educators Union (PEU) ▪▪South African Democratic Teachers Union (SADTU)

Media and Marketing

Security

Companies

▪▪African Media Enterprises ▪▪Caxton and CTP Publishers and Printers ▪▪Independent Newspapers ▪▪Naspers ▪▪Primedia ▪▪SABC ▪▪Times Media Group

▪▪ADT Security ▪▪Altech Netstar ▪▪Chubb ▪▪Fidelity Security Group ▪▪G4S ▪▪Protea Coin Group ▪▪Tracker Network

Government ministries

▪▪Department of Arts and Culture ▪▪Department of Communication

▪▪Department of Defence and Military Veterans ▪▪Department of Police ▪▪Department of Safety, Security and Liaison ▪▪Private Security Industry Regulatory Authority

Unions ▪▪Bemawu (Broadcasting, Electronic, Media & Allied Workers Union) ▪▪Chemical, Energy, Paper, Printing, Wood and Allied Workers Union (CEPPWAWU) ▪▪Media Workers Association of South Africa (MWASA) ▪▪South African Union of Journalists (SAUJ) ▪▪South African Typographical Union (SATU)

Unions ▪▪National Security Workers Union (NASWU) ▪▪South African Private Security Workers Union (SAPSWU) ▪▪South African Transport and Allied Workers Union (SATAWU) ▪▪Security Officers Civil Rights and Allied Workers Union (SOCRAWU)

329

PART 4 Sector 6

PERSONAL SERVICES

HEALTH

HEALTH INDUSTRY

ECONOMIC CONTEXT South Africaâ&#x20AC;&#x2122;s health industry is the largest in Africa and is one of the key focus areas for government spending. The result of this focus can be seen when considering that per capita spend on healthcare is one of the highest in Africa, split almost equally between spending in the private and public sectors3. The focus on the health industry comes with the planned implementation of a National Health Insurance (NHI) system, which is aimed at ensuring that everyone in South Africa will have access to appropriate, efficient and quality health services4. When it comes to employee benefits, there is a big difference between employees working in the public and private sectors. Employees in the public sector qualify for generous employee benefits which are largely subsidised, but the working conditions in the industry are poor and there is a significant shortage of skills. This puts pressure on the public healthcare system. Those in the private healthcare system also enjoy employee benefits but these are generally not subsidised. In nursing, private health companies struggle to compete with the public sector for pay and non-cash benefits.

330

3 Oxford Business Group (2013) 4 Department of Health (2011)

Doctors and specialists usually operate as part of a small private practice with a limited number of employees. The result is that they do not have access to adequate employee benefits or it is very expensive to access such benefits, because of the lack of economies of scale. Financial services companies, like PPS, provide products which seek to bridge this gap for professionals, leaving administrative staff potentially uninsured. The impact of the introduction of the NHI on employees within this industry is expected to be significant. The successful implementation of an NHI system would require healthcare professionals to be properly trained and remunerated. This could result in more individuals choosing healthcare as a career path and, at the same time, help to reduce the exodus of doctors to other countries. In addition, working conditions within the public sector would need to improve. This is expected with the major infrastructure changes that are planned over the next few years.

PART 4

PERSONAL SERVICES

HEALTH

Sector 6

BENEFITS OVERVIEW Within the health industry, public sector workers are prone to strike action, particularly with nursing staff tending to demand higher than average increases each year. Strikes have an impact on productivity levels and place an already pressured system under more pressure. This is made worse by high absenteeism in the industry.

H PRIORITY HIG

F ITS

BAR

T OME

HIGH PRIORITY ■■ Absenteeism and presenteeism ■■ Incapacity ■■ Longevity ■■ Strikes

F ITS

BAR

T OME

MEDIUM PRIORITY ■■ Bricks and books and beyond ■■ Choice ■■ High employee turnover ■■ Low-income earners and incentives ■■ Temporary workers ■■ Informal workers ■■ Unhealthy finances ■■ Young workers

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

The average age of people retiring in the industry is in line with the average seen in other sectors. At the same time, longevity has been identified as one of the industry’s high priority issues. With employees retiring earlier but living longer, individuals need to ensure that their retirement and other savings are enough to last them through a longer-than-average retirement period.

F ITS

BAROM

LOW PRIORITY ■■ Variability in salary inflation ■■ Mass exits ■■ Pensionable pay

331

PART 4 Sector 6

PERSONAL SERVICES

HEALTH

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

13.4%

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 fund expenses and fees as a percentage of pensionable pay

0.7%

Projected replacement ratio for a member aged 25

53.9%

Average normal retirement age

63.6

Average actual retirement age

60.2

Actual preservation rate

7.9%

Average insured death benefit as a multiple of pensionable pay

2.9 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE Most employees in this industry have a pensionable salary between R60 000 and R240 000 per year, with a very small proportion of older employees earning more than R480 000 per year. The rates of salary increases in this industry for 2012 are approximately 4% lower than the rest of the retirement fund industry, although employees still appear to be receiving increases higher than general inflation in most age bands. The trend of smaller increases at older ages is similar to the rest of the retirement fund industry.

332

5 Benefits Barometer Consultants Survey 2014

It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 53.9% of pensionable pay actually works out to 75% of 53.9% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This

means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this industry the pensionable pay percentage is 70%5.

PART 4

PERSONAL SERVICES

HEALTH

Sector 6

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: HEALTH INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

The salaries shown here reflect the data on the Alexander Forbes client base which are primarily private sector clients.

333

PART 4 Sector 6

PERSONAL SERVICES

HEALTH

The rates of salary increases in this industry for 2012 are approximately 4% lower than the rest of the retirement fund industry.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: HEALTH INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member Watch

334

2013 data set

45–50

50–55

55+

PART 4

PERSONAL SERVICES

HEALTH

Sector 6

The projected replacement ratio for new fund entrants is

53.9% RETIREMENT ANALYSIS The average contribution rate of 13.4% is relatively low compared with the rest of the personal services sector, higher only than the security sub-sector. As a result, and with the exception of employees under the age of 30, most employees in this industry have poor projected replacement ratios with very few expected to reach a replacement ratio of more than 45%. A hypothetical new fund entrant in this industry can expect a replacement ratio of 53.9% when they reach retirement. This is far below the replacement ratio target of 75% which many funds attempt to achieve as a fund objective. Turnover in the industry for 2012 appears to be lower than the average turnover seen in the whole Member Watchâ&#x201E;˘ data set. However, for those withdrawing, preservation rates are lower than the average suggested by the Member Watchâ&#x201E;˘ data, in most age categories.

335

PART 4 Sector 6

PERSONAL SERVICES

HEALTH

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: HEALTH INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Most employees in this industry have poor projected replacement ratios due to the relatively low contribution rate.

336

PART 4

PERSONAL SERVICES

HEALTH

Sector 6

Average turnover appears to be lower than the retirement fund industry experience, but for those withdrawing, preservation rates are also lower.

EXIT RATE: HEALTH INDUSTRY 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Industry experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: HEALTH INDUSTRY 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Industry experience

5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

337

PART 4 Sector 6

PERSONAL SERVICES

HEALTH

Health professionals risk exposure to communicable diseases and may be forced to withdraw from the workforce and be placed on disability.

RISK BENEFIT ANALYSIS The healthcare industry contributes a higher percentage of pensionable pay towards disability benefits and a lower percentage to death benefits, an average of 1.3% of pensionable pay for each benefit, compared to the rest of the retirement fund industry. Although their work may not be as physically demanding as other occupations, health professionals risk exposure to communicable diseases through the treatment of patients and, as such, may be forced to withdraw from the workforce and be placed on disability.

HEALTHCARE ANALYSIS A natural assumption in this industry is that individuals working in a healthcare environment would have access to adequate healthcare themselves. However, members may not be covered through medical aid or other medical insurance. In the public sector, employees are eligible for membership of the Government Employees Medical Scheme (GEMS), in which a large percentage of contributions are subsidised. In the private sector, most employees would participate in an open medical scheme chosen by their employer. Many employees would not receive a subsidy during employment but may be eligible for a subsidy once retired. Some employers still operate restricted schemes â&#x20AC;&#x201C; an example of this would be Netcare.

338

PART 4

PERSONAL SERVICES

HEALTH

Sector 6

What can be done? Approximately 80% of employees in this industry are female6 and many employees work in shifts that don’t coincide with the regular working hours most childcare facilities aim to accommodate.

Employers in this industry could consider childcare facilities as a non-traditional benefit. Providing these facilities can help with employee engagement and improved productivity, as workers are no longer distracted by worrying about the well-being of their children. Also in a similar manner to the mining sector where schools and other facilities are set up in remote areas to cater for employees’ families, a similar solution may work for healthcare providers working in remote, rural areas. Reflecting these additional benefits from a total rewards perspective would be an important aspect of communication.

6 Member Watch™ 2013 data set

339

PART 4 Sector 6 6 Chapter

PERSONAL SERVICES

EDUCATION

EDUCATION INDUSTRY

ECONOMIC CONTEXT The education industry is a key building block in South Africa’s strategy, under the National Development Plan (NDP), to reduce inequality and eliminate poverty. Quality education, at both schools and tertiary institutions, is critical to reduce youth unemployment – running at 48.9% for those aged between 15 and 247. One way to do this is expanding the types of educational opportunities available. This can be done through technical schools, further education and training (FET) colleges, and private colleges. The public sector dominates education. Approximately 93% of school pupils attend government schools8 – though some teachers in government schools are employed by school governing bodies. In 2012, there were 28 public tertiary institutions, with 88 registered private tertiary institutions. Public institutions are typically much larger than private ones9. Private tertiary education has been growing to meet demand since the liberalisation of this industry in the 1990s. Each year the public universities turn away about 80 000

340

7 Statistics South Africa (2013b) 8 Ibid 9 Ibid 10 Ibid 11 Barry, H (2014) 12 Part 3, Issue 12: Mass exits

students, creating potential opportunity for private institutions to fill the gap for students who do not make it into public institutions. Private institutions tend to focus on vocational qualifications10. The range of institutions in the industry results in a variety of employee benefits structures. In the public schooling sector, employees will receive similar benefits to other public sector employees, including a defined benefit retirement fund through the Government Employees Pension Fund (GEPF), subsidised healthcare through the Government Employees Medical Scheme (GEMS) and housing subsidies. In the private sector and for those employed by governing bodies, employees may get higher cash salaries – though not always11 – but their benefits are unlikely to be as generous as for those employed by the public sector. Tertiary institutions, even those in the public sector, have their own benefit structures, which have often been complicated by the numerous mergers in this industry, as discussed further in Benefits Barometer 201312.

PART 4

PERSONAL SERVICES

EDUCATION

Sector 6

BENEFITS OVERVIEW

H PRIORITY HIG

F ITS

BAR

T OME

HIGH PRIORITY ■■ Absenteeism and presenteeism ■■ Bricks and books and beyond ■■ Longevity ■■ Strikes

13 National Planning Commission (2010) 14 Ibid

F ITS

BAR

T OME

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

Given the cerebral nature of this industry, it should be easy for employees to work longer. However, the average actual age at which employees retire is lower than the average age at which they have to retire, both of which are below 65. This suggests employees could take more advantage of their ability to extend their working lives and build up additional retirement capital.

H PRIORITY

M PRIOR ITY

H PRIORITY

DIU

A key benefit, at school and tertiary level, is reduced fees for children and, in the case of tertiary institutions, sometimes spouses. Given the costs of education, this can be a significant incentive and may contribute to long periods of tenure in this industry.

HIG

tertiary institutions also face challenges with absenteeism and some strike action.

HIG

The NDP’s diagnostic report identified absenteeism as a key issue, with 20% of teachers absent on Mondays and Tuesdays and absenteeism rising to 30% at month-end13. This is exacerbated when teachers strike, as it reduces the number of teaching days. The NDP’s diagnostic report estimated that strikes reduce the number of teaching days by as much as 10 days per year, or 5% of the teaching year14. Some

F ITS

BAROM

MEDIUM PRIORITY

LOW PRIORITY

■■ Choice ■■ Variability in salary inflation ■■ Pensionable pay ■■ Temporary workers ■■ Informal workers ■■ Unhealthy finances

■■ High employee turnover ■■ Incapacity ■■ Low-income earners and incentives ■■ Mass exits ■■ Young workers

341

PART 4 Sector 6

PERSONAL SERVICES

EDUCATION

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

0.7%

Contribution to fund expenses and fees as a percentage of pensionable pay

1.0%

Projected replacement ratio for a member aged 25

56.8%

Average normal retirement age

63.1

Average actual retirement age

62.3

Actual preservation rate

14.1%

Average insured death benefit as a multiple of pensionable pay

2.8 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE The Alexander Forbes clients in the Member Watch™ data belong to universities, associated research institutions and independent schools. Employees in this industry tend to be well-paid relative to the South African experience. Except for the youngest age band, the majority of employees across the age bands earn pensionable salaries between R120 000 and R480 000. The rate of increase in salaries has fallen from being above the average

342

for the retirement fund industry in Benefits Barometer 2013 and is now below the average. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 56.8% of pensionable pay actually works out to 75% of 56.8% in the member’s

PART 4

PERSONAL SERVICES

EDUCATION

Sector 6

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: EDUCATION INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

This data reflects members working in universities, associated research institutions and independent schools.

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PERSONAL SERVICES

EDUCATION

The rate of increase in salaries has fallen from being above the average in 2013 to below the average this year.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: EDUCATION INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member WatchTM 2013 data set

344

45–50

50–55

55+

PART 4

PERSONAL SERVICES

EDUCATION

Sector 6

The projected replacement ratio for new fund entrants is

56.8% RETIREMENT ANALYSIS Although contribution rates have remained static at 14.6% since Benefits Barometer 2013, the projected replacement ratio improved from 50% to 56.8%. This may be attributed to an increase in the normal retirement age of some clients. In Benefits Barometer 2013, employees in the age band 20 to 25 displayed the highest exit rates, but now all age bands are below the rest of the retirement fund industry. Furthermore, while the preservation rate has increased significantly from 1.1% to 14.1%, this is still much too low. This could be due to the fact that the withdrawal rate from this industry is so low that the decisions of a small number can result in a big swing. Across age groups, preservation rates are higher than across the retirement fund industry as a whole, particularly for employees over 50. In spite of reasonable contributions, long service periods and relatively good preservation behaviour, projected replacement ratios for older employees remain poor. More than 50% of the employees in each age band above age 40 have projected replacement ratios below 45%.

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PERSONAL SERVICES

EDUCATION

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: EDUCATION INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Projected replacement ratios for older employees remain poor.

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PERSONAL SERVICES

EDUCATION

Sector 6

Turnover across all age bands is lower than the retirement fund industry experience, while preservation rates are higher.

EXIT RATE: EDUCATION INDUSTRY 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Industry experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: EDUCATION INDUSTRY 60%

Percentage

50% Retirement fund industry experience

40% 30% 20%

Industry experience

10% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

Age band

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PERSONAL SERVICES

EDUCATION

Disability cover represents greater value for teachers as they generally have long working lives.

RISK BENEFIT ANALYSIS In Benefits Barometer 2013 we noted that the death benefits for this industry were on the low side. These have subsequently reduced even further. Occupational risks in this industry are much lower than in other sectors included in the Barometer such as mining and construction, so it may not be as significant a problem but there may still be identifiable gaps that the member needs to be aware of. Disability cover represents greater value for teachers since they generally have long working lives, as well as a steady and decent level of income. These are both attributes that should increase the preference for disability cover.

HEALTHCARE ANALYSIS The majority of employees in this industry access medical cover through their employers, though a significant minority still donâ&#x20AC;&#x2122;t. In tertiary institutions, a large number of restricted medical schemes and even post-retirement subsidies remain.

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PERSONAL SERVICES

EDUCATION

Sector 6

What can be done? Most employees in this industry do work which is cerebral, especially teachers and lecturers, but it could also apply to clerical staff. This means that many of these employees have the ability to work beyond age 60. While there is a level of physical activity involved in teaching or lecturing, it is of a light nature and unlikely to have a negative impact on health.

This means there is significant scope for this industry to help educators extend their working lives and take a more graduated approach to retirement. This includes extending the normal retirement age for funds in this industry, as well as offering opportunities for retirees to continue to work on a part-time or contractual basis to supplement their income and savings. Funds could facilitate this with the types of annuity options they offer. They could also help retirees who continue to work with savings options for those portions of their income that they do not yet need. As noted before, more than 50% of employees in this industry over 40 have not saved enough for retirement. If theyâ&#x20AC;&#x2122;re allowed to work longer, they benefit in two ways: they will be retired for a shorter period and so need less money to sustain them, and it will help them save more money for when they do retire. Also, education is a key linchpin in South Africaâ&#x20AC;&#x2122;s growth strategy. Being able to retain knowledge and skill in this industry for as long as possible would benefit the education system and the economy as a whole.

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PERSONAL SERVICES

MEDIA AND MARKETING

MEDIA AND MARKETING INDUSTRY

ECONOMIC CONTEXT Both media and marketing stretch across a range of platforms including radio, television, print and digital. On the media side, radio continues to dominate with 89% of adult South Africans tuning in at least once a week15. Digital media, particularly with the increased use of smartphones, poses a significant threat to print media, with the possible exception of the tabloid market16. While a shift in the delivery mechanisms has a muted impact on journalists whose skills are transferable, it has a material impact on blue-collar workers, for instance in printing. Another challenge is to find ways to make money from digital media, which consumers often expect to be free17. On the marketing side, the 2010 Soccer World Cup allowed the industry to weather

350

15 Oxford Business Group (2013) 16 Ibid 17 Ibid 18 Ibid 19 Ibid

the recessionary storm. Marketing remains a highly competitive space, including international players as well as small, niche agencies that focus on a single delivery mechanism or market. The largest spenders on advertising in South Africa are the fast-moving consumer goods (FMCG), telecoms and financial companies18. While digital media is also making in-roads on the marketing side, traditional media is likely to continue to dominate in the short term19. In addition to dealing with the shifting competitive landscape in this industry, employees also have to deal with the risk of corporate activity and, in some cases, with an impermanence characterised by the use of casual and contract labour.

PART 4

PERSONAL SERVICES

MEDIA AND MARKETING

Sector 6

BENEFITS OVERVIEW This industry is fast-paced, attracting large numbers of young, energetic people. It has a high exit rate, because of the large number of young employees, but this stabilises as the workforce ages within

H PRIORITY HIG

F ITS

E BAROM

HIGH PRIORITY ■■ High employee turnover ■■ Longevity ■■ Young workers ■■ Temporary workers

F ITS

E BAROM

MEDIUM PRIORITY ■■ Choice ■■ Low-income earners and incentives ■■ Pensionable pay ■■ Informal workers ■■ Unhealthy finances ■■ Mass exits

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

the industry. Despite the tilt towards young workers, this is an industry where employees could work to later ages than in other sectors. This is particularly true for those who have specialised skills.

F ITS

BAROM

LOW PRIORITY ■■ Absenteeism and presenteeism ■■ Bricks and books and beyond ■■ Variability in salary inflation ■■ Incapacity ■■ Strikes

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MEDIA AND MARKETING

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

15.5%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.7%

Projected replacement ratio for a member aged 25

62.8%

Average normal retirement age

63.7

Average actual retirement age

60.4

Actual preservation rate

18.2%

Average insured death benefit as a multiple of pensionable pay

2.8 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE Very low-income earners, with pensionable salaries below R5 000 a month, are rare in this industry, with the bulk of the industry having pensionable salaries between R60 000 and R240 000 a year. Only around 10% of workers aged 35 and older have pensionable salaries above R480 000. In our last report, salary increases were above the industry as a whole, while in

352

this report, they are below. In both cases, increases remained above inflation, with the exception in 2013 of the highest age band. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to

company is pensionable, the replacement ratio of 62.8% of pensionable pay actually works out to 75% of 62.8% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy.

PART 4

PERSONAL SERVICES

MEDIA AND MARKETING

Sector 6

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: MEDIA AND MARKETING INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

Low-income earners are rare in this industry, with the bulk of the industry having pensionable salaries between R60 000 and R240 000 a year.

353

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PERSONAL SERVICES

MEDIA AND MARKETING

Salary increases remain above inflation, with the exception of the highest age band.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: MEDIA AND MARKETING INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member WatchTM 2013 data set

354

45–50

50–55

55+

PART 4

PERSONAL SERVICES

MEDIA AND MARKETING

Sector 6

The projected replacement ratio for new fund entrants is

62.8% RETIREMENT ANALYSIS Contributions towards retirement savings have increased to 15.5% from Benefits Barometer 2013â&#x20AC;&#x2122;s 15.1%, which is high compared to other sectors and the highest within the personal services sector. This increase may be partially responsible for the improvement in the projected replacement ratio for a 25-year-old new employee from 54.0% to 62.8%. However, the actual projected replacement ratios for current employees remain a concern as the majority continue to expect replacement ratios below 30% from ages 40 and up, which may be a result of historical non-preservation and high turnover. The actual retirement age has increased slightly to 60.4. The preservation rate has improved significantly from 6.5% to 18.2%. However, this could be due to the size of the sample. What is particularly interesting is that the preservation rate is highest for those aged between 25 and 45, which is above that of the retirement funds industry, but then dips in the age category 45â&#x20AC;&#x201C;50.

355

PART 4 Sector 6

PERSONAL SERVICES

MEDIA AND MARKETING

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: MEDIA AND MARKETING INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Actual projected replacement ratios for current employees remain a concern.

356

PART 4

PERSONAL SERVICES

MEDIA AND MARKETING

Sector 6

The preservation rate has improved significantly from 6.5% to 18.2%.

EXIT RATE: MEDIA AND MARKETING INDUSTRY 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Industry experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: MEDIA AND MARKETING INDUSTRY 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Industry experience

5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

357

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PERSONAL SERVICES

MEDIA AND MARKETING

The drop in contributions to disability benefits may be a concern given how young the workforce is.

RISK BENEFIT ANALYSIS The coverage of death benefits has dropped from 3.6 times pensionable pay to 2.8 times, while the contribution, which indicates the cost, has remained the same. This could indicate an increase in the cost of death benefits relative to a cost cap in place on the funds. The drop in contributions to disability benefits may be a concern given how young the workforce is.

HEALTHCARE ANALYSIS In this industry, employees generally have access to their employerâ&#x20AC;&#x2122;s appointed medical scheme(s), which may be an open or restricted scheme. Cost constraints, however, limit an employeeâ&#x20AC;&#x2122;s ability to have adequate cover for their needs. To help low-income employees, some employers allow for voluntary or no participation for employees below a defined income bracket. The risk to employers using this strategy is that of higher absenteeism ratios and the associated costs among those employees who do not participate in the scheme.

358

PART 4

PERSONAL SERVICES

MEDIA AND MARKETING

Sector 6

What can be done? For an industry that is particularly media-savvy, we need to identify more engaging communications strategies.

Given how media-savvy many employees in this industry are, this would be a good industry in which to use more digitally-based communication strategies. In our Communications chapter, we have looked at various principles behind how to communicate employee benefits and a few examples of specific mechanisms. The more digital solutions, such as online decision-making tools (discussed in Part 2, Chapter 10) could be particularly relevant for this industry. Also, exploring ways to provide individualised messages and using different types of platforms would be valuable. Critically, what needs to happen is that different types of messages need to be monitored for response rates, both in terms of the number engaging with the message and those making actual changes to their employee benefits package, where such decisions exist. Such monitoring is facilitated by the digital medium which allows for tracking of click-through rates for requests for information and â&#x20AC;&#x2DC;calls to actionâ&#x20AC;&#x2122;. This is an industry that would benefit significantly from introducing a total rewards reporting framework.

359

PART 4 Sector 6

PERSONAL SERVICES

SECURITY

SECURITY INDUSTRY

ECONOMIC CONTEXT South Africa’s private security industry is one of the largest in the world, and greater in numbers than the South African Police Service (SAPS). Current estimates show that there are almost ten private security guards for every SAPS employee20. Until recently, this burgeoning industry went unregulated. However, the Private Security Industry Regulatory Authority (PSIRA) has committed itself to exercising effective control over security service providers in the interests of all South Africans21. Currently, PSIRA has over 1.9 million registered security guards on its database, with the majority of the employee base being male22. There are also around 9 031 registered security businesses, making up an industry worth, reportedly, in excess of R50 billion. There has been marked growth in this industry over the last decade. In 2004 there were only 4 212 companies registered, while just under ten years later there are

360

20 South African Police Service (2013) 21 Private Security Industry Regulatory Authority (2013) 22 Ibid 23 Irish (1999) 24 Private Security Industry Regulatory Authority (2013)

over 9 000 companies registered. There are no signs that the growth of this industry will decline, because: ▪▪Insurance companies are increasingly insisting on private security measures as a condition of home owners’ insurance. ▪▪Private security companies are listed on the Johannesburg Stock Exchange and investors have realised that the private security industry is a growing and profitable one. ▪▪There is room for expansion of South African security businesses into Africa where a number of services could be provided, including guarding of mining installations and government property23. ▪▪The ongoing urbanisation of South Africa creates an increase in demand for private security and armed response. The breakdown of security companies by province shows that the majority of businesses are active in Gauteng24. If urbanisation increases, this may indicate future growth in demand for security guards in this area.

PART 4

PERSONAL SERVICES

SECURITY

Sector 6

BENEFITS OVERVIEW This industry experiences high turnover. This could be because employees work long hours but earn low levels of income. The industry could consider incentives for low-income earners to improve the

H PRIORITY HIG

F ITS

E BAROM

HIGH PRIORITY ■■ High employee turnover ■■ Low-income earners and incentives ■■ Temporary workers ■■ Informal workers

F ITS

E BAROM

MEDIUM PRIORITY ■■ Pensionable pay ■■ Strikes ■■ Unhealthy finances ■■ Young workers

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

savings behaviour of this group. Despite registration requirements, workers in this industry may be employed on a temporary or contract basis only, leaving them without access to much-needed employee benefits.

F ITS

BAROM

LOW PRIORITY ■■ Absenteeism and presenteeism ■■ Bricks and books and beyond ■■ Choice ■■ Variability in salary inflation ■■ Incapacity ■■ Longevity ■■ Mass exit

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PERSONAL SERVICES

SECURITY

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

12.1%

Contribution to death benefits as a percentage of pensionable pay

1.7%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.8%

Projected replacement ratio for a member aged 25

49.9%

Average normal retirement age

64.0

Average actual retirement age

63.4

Actual preservation rate

4.3%

Average insured death benefit as a multiple of pensionable pay

4.0 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE While the cost of running a security company has been increasing, companies choose to undercut their competitors to secure clients. In some companies this is achieved by underpaying employees. The graph on the next page shows the high proportion of employees who earn low levels of income despite working long hours. Workers in the security industry became protected by minimum wage and maximum work hour stipulations only recently. Over the last year, most employees in this industry had pensionable pay between R24 000 and R60 000 per year.

362

It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 49.9% of pensionable pay actually works out to 75% of 49.9% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper

comparisons with these numbers, you need to understand each individual company’s policy. The graph on the next page shows that salary increases at all ages are well below the average for the rest of the Member Watch™ survey participants. Employees older than 40 received increases below inflation, implying that their salaries reduced in real terms.

PART 4

PERSONAL SERVICES

SECURITY

Sector 6

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: SECURITY INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

Workers in the security industry became protected by minimum wage and maximum work hour stipulations.

363

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PERSONAL SERVICES

SECURITY

Employees older than 40 received increases below inflation.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: SECURITY INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member Watch

364

2013 data set

45–50

50–55

55+

PART 4

PERSONAL SERVICES

The projected replacement ratio for new fund entrants is

SECURITY

Sector 6

49.9%

RETIREMENT ANALYSIS PSIRA requires employers in this industry to register their employees as members of the security industry retirement fund. An employer may choose to opt out of the industry fund if they can demonstrate that the benefits offered by a commercial benefits provider are superior to that offered by the industry. However, superior benefit design may not mask poor member choices and low contribution rates. The average contribution rate towards retirement savings is 12.1%, which is one of the lowest rates across all economic sectors. It is far below the 17.0%* needed to reach a replacement ratio of 75%. As a result of the low contribution rates, a 25-year-old joining a fund in this industry can only expect to replace 49.9% of their pre-retirement earnings in retirement. As the graph on the next page illustrates, the majority of employees in this industry can expect replacement ratios between 0% and 30% when they reach retirement age. This may be due to late savings, insufficient contribution rates and broken service, resulting in leakage of accrued benefits. A higher allocation to risk benefits may also be a factor. Turnover in this industry was higher than the Member Watchâ&#x201E;˘ survey average at some ages. The average preservation rate is 4.3% and this may be because these low-income earners may not have other sources of funds, such as discretionary savings or income replacement benefits, at their disposal. Besides unemployment income from UIF, their accrued retirement benefits may be the only source of unemployment insurance for these employees.

* Based on calculations performed by Alexander Forbes Research and Product Development. The calculation assumes a 25-year-old new fund entrant planning to retire at age 65 and targeting a replacement ratio of 75%.

365

PART 4 Sector 6

PERSONAL SERVICES

SECURITY

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: SECURITY INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

Age band Source: Member WatchTM 2013 data set

The majority of employees in this industry can expect replacement ratios between 0% and 30%.

366

60+

PART 4

PERSONAL SERVICES

SECURITY

Sector 6

Besides UIF, workers in this industry may not have other funds at their disposal while unemployed.

EXIT RATE: SECURITY INDUSTRY 18% 16% 14% Percentage

12%

Retirement fund industry experience

10% 8%

Industry experience

6% 4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: SECURITY INDUSTRY 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Industry experience

5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

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PART 4 Sector 6

PERSONAL SERVICES

SECURITY

The majority of employees are low-income earners, which means that without employee benefits they would have no protection for disability, old age or death.

RISK BENEFIT ANALYSIS Death cover and funeral benefits are perceived to be more valuable than long-term retirement savings. The average contribution towards death benefits is 1.7%, higher than many other sectors due to the nature of the job as there is greater risk of death. As a result, this higher cost is also accompanied by a higher than normal benefit as the average multiple of pensionable salary offered as a death benefit is 4 times â&#x20AC;&#x201C; the highest across all sectors. Ironically, this benefit may still not be enough for the lowincome earners in this industry. The fact that the majority of employees in this industry are low-income earners means that without employee benefits they would have no protection for disability, old age or death.

HEALTHCARE ANALYSIS Because of the competitive nature of this industry, employers may choose to forgo the cost of the medical aid and other medical insurance benefits to achieve a lower total pay package for employees. There is generally low medical coverage in this industry and lack of affordability makes it almost impossible for individuals to access private healthcare.

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PERSONAL SERVICES

SECURITY

Sector 6

What can be done? How do we make these funds more engaging for these low-income earners?

Funds should consider implementing rand-based contributions rather than percentage of payroll contributions to accommodate low-income earners. The FSB recently granted such a dispensation in which it allowed funds to create contribution categories that can accommodate incremental rand-based member contributions. This will allow those members who have a limited understanding of financial matters and are struggling financially to understand how much they are saving for retirement and be able to budget accordingly. Employer contributions can be calculated as a percentage of payroll and converted to a rand amount to illustrate the total contribution. To try and provide appropriate levels of death and disability cover, which are funded from the employer contribution, the salary on which contributions are based can differ from the salary on which retirement benefits are based.

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PERSONAL SERVICES

About 47% of the employees in the personal services sector work in health-related activities. Education is the second largest employer, with 30% of the workers in this sector.

370

PART 4: SECTOR CASE STUDIES

PROFESSIONAL AND BUSINESS SERVICES SECTOR

PART 4 Sector 7

PROFESSIONAL AND BUSINESS SERVICES

ECONOMIC CONTEXT Remuneration in professional services follows an unusual path.

This sector spans financial services, legal and accounting firms, engineering and other consultancies and the real estate industry. It has largely recovered from the effects of the global financial crisis, although the economy as a whole is still being affected. Financial services, specifically, is facing a rapidly evolving regulatory framework. The regulatory structure is in the process of significant reform that will tighten both prudential and market conduct regulations. Experts often see regulation as an obstacle to growth, but in the case of financial services it may be exactly what the sector needs. It will provide better consumer protection through the introduction of guidelines like the Treating Customers Fairly (TCF) regulation, improved market conduct and financial integrity, and the promotion of better internal governance. The governance responsibility is increasing rapidly, resulting in companies needing to expand their compliance departments. This has resulted in increasing demand in this area and challenges in sourcing appropriate talent. Growth opportunities in this sector include the possibility of expanding operations into

372

the rest of Africa, which will require talent with global experience as well as leadership skills and adaptability. With the current shortage of such talent, companies often have to pay significant salary premiums to retain and attract employees with such skills. Further to that, growth potential and political stability are also important considerations for executives. Professionals often have unusual career paths, which may result in short periods within a particular employerâ&#x20AC;&#x2122;s formal employee benefits structure. They often start working later due to extended studies and completing articles, and they also often leave large firms to start their own businesses or to go into a new line of work. Their remuneration also tends to follow unusual paths. Salaries may follow a step-wise pattern while they are qualifying for a profession. Later on, many professionals may receive the bulk of their income in commissions, cash bonuses, share incentives, profit shares, dividends for partners and, in some cases, sign-on bonuses. As these are often not pensionable, they will affect an individualâ&#x20AC;&#x2122;s living standard without improving their longterm savings or protection.

PART 4

PROFESSIONAL AND BUSINESS SERVICES

Sector 7

SECTOR ECONOMIC ANALYSIS1 Key stakeholders

R2.5 trillion GDP contribution (2013 prices)

24.22%

% contribution to GDP in 2013

7.55%

Real increase in GDP 2012–2013

Approximate employment2

1 879 000

Formal sector

159 000

Informal sector

1 Statistics South Africa (2013a) 2 Statistics South Africa (2013b)

Companies ▪▪Absa ▪▪Alexander Forbes ▪▪Bowman Gilfillan ▪▪Coronation ▪▪Dimension Data ▪▪Discovery Holdings ▪▪EY ▪▪First Rand ▪▪Investec

▪▪Liberty Holdings ▪▪MMI Holdings Limited ▪▪Nedbank ▪▪Old Mutual ▪▪PwC ▪▪Sanlam ▪▪Standard Bank ▪▪Webber Wentzel

Government ministries ▪▪National Treasury

Unions ▪▪Banking, Insurance, Finance and Allied Workers Union (BIFAWU) ▪▪Insurance and Banking Staff Association (IBSA) ▪▪Professional Employees Trade Union of South Africa (PETUSA) ▪▪SASBO ▪▪Society of State Advocates of South Africa (SOSASA)

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PROFESSIONAL AND BUSINESS SERVICES

BENEFITS OVERVIEW Employees in this sector are assumed to be knowledgeable about financial issues and so employers give them greater choice, relying on them to know what to do. But retirement outcomes suggest that employees in this sector may not be as informed about benefits as expected. The war for talent in this sector means that pay packages may be structured to enhance short-term compensation rather than long-term protections. This war on talent results in high turnover.

E BAROM

HIGH PRIORITY ■■ Choice ■■ Variability in salary inflation ■■ High employee turnover ■■ Longevity ■■ Pensionable pay ■■ Young workers

F ITS

E BAROM

MEDIUM PRIORITY ■■ Bricks and books and beyond ■■ Mass exits ■■ Unhealthy finances

DIU

M PRIOR ITY

H PRIORITY

H PRIORITY HIG

F ITS

M PRIOR ITY

W PRIORITY LO

DIU

W PRIORITY LO

374

Bonus and commission structures can also make earnings highly volatile. Many young workers enter this sector due to the lure of high salaries, which can lead to the neglect of long-term savings and protection.

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

The exit rate is very high, with individuals often switching for higher pay. This is perpetuated, at older ages, by individuals exiting to start their own firms.

F ITS

BAROM

LOW PRIORITY ■■ Absenteeism and presenteeism ■■ Incapacity ■■ Low-income earners and incentives ■■ Strikes ■■ Temporary workers ■■ Informal workers

PART 4

PROFESSIONAL AND BUSINESS SERVICES

Sector 7

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

12.2%

Contribution to death benefits as a percentage of pensionable pay

1.0%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.9%

Projected replacement ratio for a member aged 25

47.7%

Average normal retirement age

63.1

Average actual retirement age

61.1

Actual preservation rate

8.4%

Average insured death benefit as a multiple of pensionable pay

3.3 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE The graph on the next page shows that most members’ pensionable salaries in this sector fall within the R240 000–R480 000 range. Last year, nominal salary increases were below the rest of the industry, while this year they are above. This demonstrates the volatility of salary increases in this sector. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to

3 Benefits Barometer Consultants Survey 2014

company is pensionable, the replacement ratio of 47.7% of pensionable pay actually works out to 75% of 47.7% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this sector the pensionable pay percentage is 65.3%3.

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PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: PROFESSIONAL AND BUSINESS SERVICES SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

Age band Source: Member WatchTM 2013 data set

Most members’ pensionable salaries in this sector fall within the R240 000–R480 000 range.

376

60+

PART 4

PROFESSIONAL AND BUSINESS SERVICES

Sector 7

Last year, nominal salary increases were below the industry average, while this year they are above.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: PROFESSIONAL AND BUSINESS SERVICES SECTOR

Salary increase per year

25%

20% Retirement fund industry experience

15%

10%

Sector experience

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member WatchTM 2013 data set

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PROFESSIONAL AND BUSINESS SERVICES

The projected replacement ratio for new fund entrants is

47.7% RETIREMENT ANALYSIS The theoretical projected replacement ratio for an individual entering this sector is 47.7%, but the graph on the next page shows that the actual replacement ratio for most individuals in this sector is below this number. One reason would be the low average contribution rate towards retirement savings of 12.2% of pensionable salary compared to an average of 13.5% of the overall industry. The low preservation rate (8.4%), though higher than that observed in the 2013 Benefits Barometer, would also be a major contributor. The deterioration of replacement ratios from age 40 onwards may be an indication of pension fund cash withdrawal or of salary increases outpacing growth in contributions. As noted earlier, pensionable salaries in this sector often exclude incentives, dividends or commissions, so the replacement ratios may be overstated relative to the total income an individual earns. Many professionals have the mistaken belief that their salary trajectory should more than compensate for a longterm need to save.

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PROFESSIONAL AND BUSINESS SERVICES

Sector 7

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: PROFESSIONAL AND BUSINESS SERVICES SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Replacement ratios may be overstated relative to the total income an individual earns.

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PROFESSIONAL AND BUSINESS SERVICES

The war for talent leads to high turnover. Over-confidence about future salary potential leads to lack of preservation.

EXIT RATE: PROFESSIONAL AND BUSINESS SERVICES SECTOR 30% 25%

Percentage

20%

Retirement fund industry experience

15% Sector experience

10% 5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: PROFESSIONAL AND BUSINESS SERVICES SECTOR 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Sector experience

5% 0% 20–25

25–30

30–35

35–40

40–45 Age band

380

45–50

50–55

55–60

60–65

PART 4

PROFESSIONAL AND BUSINESS SERVICES

Sector 7

Employees experience high levels of stress. This can take a toll on an individualâ&#x20AC;&#x2122;s health.

RISK BENEFIT ANALYSIS The average insured death benefit in this sector is 3.3 times pensionable salary. This is lower than the benefit offered in other sectors, but as this is a sector with low occupational risk, it may be reasonable. Also, given the high salaries prevalent in this sector, there is significant scope for individuals to top up their cover.

HEALTHCARE ANALYSIS Most employees in this sector would need to join the employer-appointed medical scheme, although some may be able to participate on a voluntary basis due to affordability constraints at lower income levels. In the 2013 Benefits Barometer chapter on Absenteeism and Incapacity, we drew attention to the fact that in sectors like this, where employees experience high levels of stress, we may see higher levels of early retirement due to the toll stress can take on an individualâ&#x20AC;&#x2122;s health. So, even though employees in this sector are involved in more cerebral work, they may be highly prone to poor health.

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What can be done? As discussed before, salaries in this sector can be complex as some employees receive significant portions of their income in some form of incentive or commissions. For commission-earners, their income aside from commission is often negligible and in many cases they donâ&#x20AC;&#x2122;t receive employee benefits.

In cases where their low base salaries are pensionable, they should be allowed, and encouraged, to top up their contributions from their commission and be able to top up their risk cover, if possible as part of the group cover to save costs. Where commissionearners are currently not enrolled in the fund, eligibility requirements should be extended to include them in fund rules. Contributions will be based on either a set basic income or on a variable income. It is more cost-efficient for members to participate in the group scheme to access risk and retirement benefits, and in addition members will be more disciplined in contributing to a retirement fund. For employees who receive incentives, these typically take place as once-off, lump-sum receipts. Some companies do give employees an option of paying a portion of the bonus into their retirement fund. However, the disadvantage is that itâ&#x20AC;&#x2122;s paid with after-tax money. It would be an added incentive if this could be paid with pre-tax money. This sector would benefit significantly from using a total rewards framework for salary discussions.

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PUBLIC SECTOR

PART 4 Sector 8

PUBLIC SECTOR

ECONOMIC CONTEXT The public sector in South Africa employs about 2 million people according to Statistics South Africa1, making it the single largest formal employer in the country, contributing 15.29% to GDP in 2013. The sector has both defined benefit (DB) and defined contribution (DC) funds. National and provincial employees are enrolled in the Government Employees Pension Fund (GEPF), a DB fund, and the Government Employees Medical Scheme (GEMS). Typically, municipal workers have their own funds and options for medical coverage, as set out in the South African Local Government Associationâ&#x20AC;&#x2122;s list of accredited funds and schemes. State-owned entities, universities and other scheduled entities in the public sector also have their own sponsored funds.

Industry description National departments

A report on the review of state-owned entities (SOEs) issued in 2013, followed by the adoption of the National Development Plan (NDP), emphasised the impediments to the mobility of employees across spheres of government and the implications on service delivery in a developmental state. The review on SOEs analysed the differences in remuneration and conditions of service, and a requirement to harmonise these. The NDP went a step further to recommend that to build the capacity of the state, the government should enable the use of placements and secondments,

and employees should be developed to the extent that they can have experience working in other parts of the government. There have already been a number of policy shifts within the public service in 2014. In March the National Council of Provinces passed the Public Administration and Management Bill and introduced the framework for mobility across the public sector through transfers or secondments. This will invariably affect conditions of service, despite the fact that it asserts that the remuneration and benefits will be more favourable than those currently afforded before the transfer. Another change is a set of regulations intended to make it mandatory for senior government officials in local government to belong to a registered pension fund and medical aid.

Number of employees in the public sector June 2012

September 2012

December 2012

March 2013

June 2013

451 356

453 993

448 486

454 757

452 261

1 086 937

1 097 204

1 087 444

1 084 197

1 093 170

Other government institutions

138 450

140 185

132 983

164 383

143 640

Local government

257 460

260 979

269 758

269 681

273 290

1 934 203

1 952 361

1 938 671

1 973 018

1 962 361

Provincial departments

Total Source: Statistics South Africa (2013)

384

In total, there are 166 public sector funds registered with the FSB, excluding the GEPF and Transnet. There are over 1.2 million active members within the GEPF and about 700 000 public servants belong to GEMS, with the rest catered for in other medical schemes.

1 Statistics South Africa (2013b)

PART 4

PUBLIC SECTOR

Sector 8

SECTOR ECONOMIC ANALYSIS2 Key stakeholders

R1.6 trillion GDP contribution (2013 prices)

15.29%

Government ministries ▪▪Department of Public Service and Administration ▪▪Department of Public Works

Unions

% contribution to GDP in 2013

5.20%

Real increase in GDP 2012–2013

Approximate employment3

▪▪Independent Municipal and Allied Trade Workers Union (IMATU) ▪▪National Union of Public Service and Allied Workers (NUPSAW) ▪▪Police and Prisons Civil Rights Union (POPCRU) ▪▪Public and Allied Workers Union of South Africa (PAWUSA) ▪▪Public Servants Association of South Africa (PSA) ▪▪South African Municipal Workers Union (SAMWU) ▪▪South African Policing Union (SAPU) ▪▪South African State and Allied Workers Union (SASAWU) ▪▪United National Public Servants Association of South Africa and Allied Workers Union (UNIPSAWU)

1 962 000

2 Statistics South Africa. (2013a) 3 Statistics South Africa. (2013b)

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BENEFITS OVERVIEW The public sector is one of the largest employers in the country and offers not only generous cash remuneration for some occupations, but generous benefits packages including risk and retirement benefits, housing subsidies and medical aid subsidies. The value of additional benefits to employees in this sector, such as housing subsidies, cannot be underestimated. This sector struggles to attract young workers and has not addressed the

E BAROM

HIGH PRIORITY ■■ Absenteeism and presenteeism ■■ Bricks and books and beyond ■■ Longevity ■■ Strikes ■■ Temporary workers

386

H PRIORITY

H PRIORITY HIG

F ITS

E BAROM

IUM PRIORIT Y W PRIORITY LO

D ME

W PRIORITY LO

IUM PRIORIT Y H PRIORITY

D ME

The government also employs many temporary workers on a contract basis, who might not have access to employee benefits.

HIG

IUM PRIORIT Y

HIG

D ME

longevity problem either. Absenteeism and the abuse of sick leave continue to be a major problem in this sector. Because the sector has a history of strikes over wage increases, strikes remain an issue going forward.

F ITS

BAROM

MEDIUM PRIORITY

LOW PRIORITY

■■ Choice ■■ Variability in salary inflation ■■ Informal workers ■■ Unhealthy finances

■■ High employee turnover ■■ Incapacity ■■ Low-income earners and incentives ■■ Mass exits ■■ Pensionable pay ■■ Young workers

PART 4

PUBLIC SECTOR

Sector 8

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

17.7%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.6%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.8%

Projected replacement ratio for a member aged 25

74.2%

Average normal retirement age

64.2

Average actual retirement age

61.1

Actual preservation rate

6.0%

Average insured death benefit as a multiple of pensionable pay

3.5 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE Less than 2.5% of members in the sector earn less than R60 000, which is generally consistent with the grading system in government and levels of work. From 30 onwards, most workers in every age band earn between R120 000 and R480 000 in pensionable salary per year. Salary increases have been below the retirement fund industry average but above price inflation. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is

4 Benefits Barometer Consultants Survey 2014

pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 74.2% of pensionable pay actually works out to 75% of 74.2% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this sector the pensionable pay percentage is 60%4.

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PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: PUBLIC SECTOR 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

The majority of workers earn pensionable salaries between R120 000 and R480 000 per year, from age 30 onwards*. * This does not include members of the GEPF.

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PUBLIC SECTOR

Sector 8

Salary increases have been below the retirement fund industry average but above price inflation.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: PUBLIC SECTOR 16%

Salary increase per year

14% 12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55+

Age band Source: Member WatchTM 2013 data set

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The projected replacement ratio for new fund entrants is

74.2% RETIREMENT ANALYSIS Please note that these numbers reflect the Alexander Forbes data set and would not include the GEPF. As would be expected due to the generosity of their benefits, the hypothetical replacement ratio for a 25-year-old entering the public sector is 74.2%. This is reinforced by the large proportion of young workers expected to retire with replacement ratios over 75%. Older age bands are projected to have poorer outcomes, though significant proportions are still on track for very high replacement ratios. While exit rates in this sector are very low, preservation behaviour is poor and may be driving the poor outlook for some public sector employees older than 40.

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Sector 8

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: PUBLIC SECTOR 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Significant portions are on track for very high replacement ratios*. * This does not include members of the GEPF.

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PUBLIC SECTOR

While exit rates in this sector are very low, preservation behaviour is poor.

EXIT RATE: PUBLIC SECTOR 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Sector experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: PUBLIC SECTOR 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Sector experience

5% 0% 20–25

25–30

30–35

35–40

40–45 Age band

392

45–50

50–55

55–60

60–65

PART 4

PUBLIC SECTOR

Sector 8

RISK BENEFIT ANALYSIS The cost of risk benefits accounts for an average of 2% of the contribution rate. The average death multiple of 3.5 times annual pensionable salary is in line with the average relative to other sectors, but may hide significant variation in the actual underlying benefit offerings.

HEALTHCARE ANALYSIS There is a generous medical aid subsidy in place for public servants. Under this subsidy, public servants are able to participate on the lowest benefit option on GEMS at no cost to themselves. The current subsidy would cover the full monthly contribution for the member and their dependants. Contract workers are only eligible to join GEMS if their contract is six months or longer, and new employees who joined the public sector after 1 July 2006 are not eligible for a subsidy on other medical schemes. The combination of these two factors

results in temporary and short-term contract workers employed in the public sector not having full access to affordable healthcare cover. In the local government environment, there are five medical schemes accredited for these employees, namely Bonitas, SAMWUMED, HOSMED, LA Health and Keyhealth medical schemes5. Local government employees also receive a subsidy for their medical scheme contributions before and after

retirement. The local government subsidy does not cover 100% of contributions, even on lower options. Overall, the medical scheme subsidies available in the public sector are more generous than those available in any private sector industries. However, the major limitation for cover in the public sector is the difference in the treatment of permanent and temporary employees.

MEDICAL SCHEME MEMBERSHIP: PUBLIC SECTOR 350 000

Number of members

300 000 250 000

GEMS members

200 000

Other schemes

150 000

Uncovered lives

100 000 50 000 0

R0–R5 000

R5 001–R10 000

R10 001–R20 000

R20 001–R30 000

R30 000+

Salary band Source: PERSAL payroll data for public servants (2013); used with the permission of GEMS 5 South African Local Government Bargaining Council (2014)

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PUBLIC SECTOR

What can be done? One of the most contentious topics of discussion in recent times has been that of fund consolidation. With around 166 registered public sector retirement funds each offering a unique set of benefits, ensuring equality of the benefits between funds can be a difficult ask.

In line with the Public Administration and Management Bill and the framework it proposes for mobility across the public sector through transfers or secondments, fund consolidation would help to further this aim. Some of the advantages of fund consolidation include economies of scale in pricing and improved benefits for employees who previously had lower levels of benefits. However, fund consolidation is not without its drawbacks. If the unique benefit structures from the original funds are carried over into the new fund, multiple benefit structures can be difficult and costly to manage. There may also be legacy issues, particularly with old administration systems that are difficult to update to present-day technology and members may feel they have a closer relationship with trustees of decentralised funds. Different types of members may prioritise what they want from their benefits structure very differently. Low-income earners may be more interested in risk benefits like funeral cover, while highly skilled workers may want greater choice in their structures. In combining funds, this may also change risk profiles and affect the pricing of risk benefits.

394

PART 4: SECTOR CASE STUDIES

RETAIL, WHOLESALE AND HOSPITALITY SECTOR

PART 4 Sector 9

RETAIL, WHOLESALE AND HOSPITALITY

INTRODUCTION Retail and wholesale trading involves the sale of goods to individuals or companies.

Retail and wholesale trading involves 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. 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, we will consider trading and hospitality separately.

SECTOR ECONOMIC ANALYSIS1

R1.46 trillion GDP contribution (2013 prices)

6.38%

Real increase in GDP 2012â&#x20AC;&#x201C;2013

14.04%

% contribution to GDP in 2013

396

1 Statistics South Africa (2013a) 2 Statistics South Africa (2013b)

Approximate employment2

2 192 000

Formal sector

1 032 000

Informal sector

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

Sector 9

Key stakeholders Retail and wholesale

Hospitality

Companies

▪▪Clicks Group ▪▪Edcon ▪▪Foschini Retail Group ▪▪JD Group ▪▪Massmart Holdings ▪▪Mr Price Group ▪▪Pepkor ▪▪Pick n Pay ▪▪Shoprite ▪▪Truworths ▪▪Woolworths

▪▪City Lodge Hotels ▪▪Gold Reef Casino Resorts ▪▪Peermont Global ▪▪Sun International ▪▪Tsogo Sun Holdings

Government ministries ▪▪Department of Trade and Industry

Unions ▪▪Federal Council of Retail and Allied Workers Union (FEDCRAW) ▪▪South African Commercial, Catering and Allied Workers Union (SACCAWU)

Government ministries ▪▪Department of Sport and Recreation ▪▪Department of Tourism ▪▪Department of Trade and Industry

Unions ▪▪Confederation of South African Workers Unions (CONSAWU) ▪▪Entertainment, Catering, Commercial and Allied Workers Union of South Africa (ECCAWUSA) ▪▪Federated Hospitality Association of South Africa (FEDHASA) ▪▪Hospitality Industry and Allied Workers Union (HIAWU) ▪▪Hotel, Liquor, Catering, Commercial and Allied Workers Union of South Africa (HOTELICCA) ▪▪South African Commercial, Catering and Allied Workers Union (SACCAWU)

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RETAIL AND WHOLESALE

RETAIL AND WHOLESALE INDUSTRY ECONOMIC CONTEXT Retail and wholesale trading involves the sale of goods to individuals and companies. The South African wholesale and retail sales industry has, over the longer term, benefited from the country’s increasingly prosperous consumers and emerging middle class. However, in the shorter term, retail sales growth numbers have been under pressure, despite the rise in unsecured lending that kept consumers in the stores. The improved and modern infrastructure in the country has allowed for more rigorous economic activity3. The retail industry has benefited through efficient distribution of goods to urban centres, townships and rural areas. Shopping centre development has shifted. Where it was previously concentrated in inner cities, it has now moved to suburbs and townships.

Given the predominance of food and beverages and other household goods, many retailers and wholesalers have a logistics focus, and hence have characteristics in common with the transport industry. The industry has also seen the advent and increased take-up of online shopping. According to the report3, the total amount spent on online retail goods in the country increased from R470 million in 2004 to R2.6 billion in 2011. But, in contrast to the overall total, online retail is in its infancy in South Africa. In 2011, Stats SA reported that retail sales from physical retail reached R541.3 billion4. Sector trends to watch include: ▪▪Opening stores in centres in townships and rural areas

SOUTH AFRICA RETAIL SALES: CHANGE YEAR ON YEAR Percentage change

10% 8% 6% 4% 2% 0%

Jul/11

Jan/12

Source: www.tradingeconomics.com | Statistics South Africa

398

3 Gauteng Provincial Treasury (2012) 4 Statistics South Africa (2011)

Jul/12

Jan/13

Jul/13

Jan/14

▪▪Targeting communities in lower-income groups ▪▪Expanding the number of stores or trading space through growth and acquisition ▪▪Buying back franchised outlets to improve quality control ▪▪Loyalty or rewards programmes. Although the industry has some challenges, opportunities also present themselves in various ways with the interest of large global players in South African companies. The entrance of global players changes not only the competitive environment, leading to mass exits, but also the corporate culture. Given that the total rewards system must be embedded in and supported by the corporate culture, this could have a real impact on benefits.

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

“Retail plays a vital role in the South African economy and shopping centres are at the heart of this significant economic activity. Furthering excellence in retail is of wide benefit and represents vast positive outcomes for consumers, retailers, shopping centres, service providers and the economy in general.” Amanda Stops, General Manager: South African Council of Shopping Centres, 2011

H PRIORITY HIG

F ITS

BAR

T OME

HIGH PRIORITY ■■ High employee turnover ■■ Low-income earners and incentives ■■ Pensionable pay ■■ Temporary workers ■■ Informal workers ■■ Unhealthy finances ■■ Young workers

F ITS

BAR

T OME

MEDIUM PRIORITY ■■ Absenteeism and presenteeism ■■ Variability in salary inflation ■■ Incapacity ■■ Strikes

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

This industry has a high number of both low-income earners and young workers. It also has a high employee turnover and unhealthy finances, particularly among young workers. The seasonal nature of retail sales, combined with the large informal sector, results in significant numbers of temporary and informal workers. Pensionable pay is particularly low in this industry, creating gaps for both retirement and risk.

H PRIORITY

DIU

Sector 9

BENEFITS OVERVIEW

HIG

RETAIL AND WHOLESALE

F ITS

BAROM

LOW PRIORITY ■■ Bricks and books and beyond ■■ Choice ■■ Longevity ■■ Mass exits

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PART 4 Sector 9

RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

14.4%

Contribution to death benefits as a percentage of pensionable pay

1.2%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Contribution to fund expenses and fees as a percentage of pensionable pay

1.0%

Projected replacement ratio for a member aged 25

52.0%

Average normal retirement age

61.9

Average actual retirement age

58.3

Actual preservation rate

3.1%

Average insured death benefit as a multiple of pensionable pay

3.5 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE The pensionable salary distribution, as with many other sectors in South Africa, indicates lower salaries on average at younger ages, with increasing proportions of higher wages at older ages. However, the graph on the next page also demonstrates that at least 60% of the workforce earns pensionable salaries of less than R120 000 per year, with higher proportions at younger ages. The issues affecting low-income earners are therefore relevant. Employees’ lifestyles will be based on their overall post-tax income and not an arbitrary pensionable salary measure. It’s important to understand the difference between total earnings and pensionable

400

5 Benefits Barometer Consultants Survey 2014

pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 52% of pensionable pay actually works out to 75% of 52% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this industry the pensionable pay percentage is 78.5%5.

It is clear from the graph on the next page that the average real increases in earnings are 8-9% for younger members, while older members are receiving between 2% and 3% above price inflation. This is also higher than the retirement funds industry average, in general.

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

Sector 9

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: RETAIL AND WHOLESALE INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

At least 60% of the workforce earns pensionable salaries of less then R120 000.

401

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RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

Average real increases are between 8% and 9% for younger members, while older members are receiving between 2% and 3% above inflation.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: RETAIL AND WHOLESALE INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member Watch

402

2013 data set

45–50

50–55

55+

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

The projected replacement ratio for new fund entrants is

RETAIL AND WHOLESALE

Sector 9

52%

RETIREMENT ANALYSIS The average contribution rate towards retirement benefits is 14.4%, which is higher than the retirement fund industry contribution rate. Someone joining the industry at 25 and retiring at 65 can expect to replace around 52% of their pensionable income when they retire. However, it appears that the older workers fall into one of two camps: the minority who have either worked at the same employer for many years (or preserved previous benefits) and can thus expect replacement ratios over 50% or the majority who, because of short service and assumed lack of preservation, face the prospect of retiring with replacement ratios of less than 30%. The short periods of service mentioned can be seen in the relatively higher staff exit rates and very poor preservation rates (shown in the graph on the next page), especially at the older ages, when the effect is most catastrophic to an individualâ&#x20AC;&#x2122;s outcome. This suggests workers retire with lower retirement benefits than the projections depict, as these assume full preservation into the future and retirement at normal retirement age, when in fact employees in this industry tend to retire earlier at around 58.3 years of age, on average.

403

PART 4 Sector 9

RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: RETAIL AND WHOLESALE INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

Age band Source: Member WatchTM 2013 data set

Most older workers face the prospect of retiring with replacement ratios of less than 30%.

404

60+

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

Sector 9

The shorter periods of service can be seen in the relatively high exit rates.

EXIT RATE: RETAIL AND WHOLESALE INDUSTRY 30% 25%

Percentage

20%

Retirement fund industry experience

15% Industry experience

10% 5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: RETAIL AND WHOLESALE INDUSTRY 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Industry experience

5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

405

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RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

Funeral benefits are highly valued and popular, and for the lower income earners can represent a fair proportion of their income.

RISK BENEFIT ANALYSIS The risk benefits are relatively unremarkable in this industry. Employers typically offer approved (in-fund) death benefits which average 3.5 times annual pensionable salary (which is an increase from 3 times in the 2012 data). Disability cover varies by employer and the level of benefit is a function of the cost. However, we do find that funeral benefits are highly valued and popular, and lower income earners will often dedicate a fair proportion of their income to these benefits. These benefits provide financial assistance immediately in the event of death and in most cases will cover not only the employee but their immediate family as well.

HEALTHCARE ANALYSIS The larger companies in this industry have historically been just large enough to offer restricted medical schemes, and several of these companies do offer restricted schemes. Examples of these are the Foschini Group Medical Scheme and the Pick n Pay Medical Scheme. Many employers also offer participation in one or more open medical schemes. Given the inability of employees to access private medical care due to income constraints, medical scheme membership is typically not compulsory. There may be employer subsidies for active employees, but limited subsidies postretirement. Occupational health insurance products are gaining popularity to address some of the affordability issues.

406

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RETAIL, WHOLESALE AND HOSPITALITY

RETAIL AND WHOLESALE

Sector 9

What can be done? As we have seen, this industry has poor projected replacement ratios, high salary increases relative to both the industry and inflation, high exit rates at young ages and poor preservation.

One way to potentially remedy this is by using a form of auto-escalation as discussed in Part 2, Chapter 3. However, because of the high exit rates, using a generic form of auto-escalation based on tenure probably wouldnâ&#x20AC;&#x2122;t work. An alternative to this method could be to set a contribution path based on age so that contributions at young ages are low and increase more rapidly at older ages when retirement becomes a more pressing issue. This graduation in the contribution path would accommodate for the very low salaries earned at young ages and take advantage of the high salary increases that continue to prevail at older ages. Our research into companies in this industry has shown that, in some cases, salary increases have a tendency to increase at older ages, making this kind of auto-escalation even more of a natural fit.

407

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RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

HOSPITALITY INDUSTRY

ECONOMIC CONTEXT The National Development Plan (NDP) views tourism as an area in which South Africa has a comparative advantage and which can significantly contribute to export earnings and rural development. The hospitality industryâ&#x20AC;&#x2122;s ability to provide employment to low-skill segments, sometimes in outlying areas, makes it a key linchpin in the countryâ&#x20AC;&#x2122;s growth strategy. The hospitality industry took a knock after its investment in the 2010 World Cup, which led to an extended period of excess supply exactly when its primary source markets in the developed world experienced a recession. While growth in tourism from developed markets remains muted, there has been an increase in tourists from Australasia and Africa6. The World Cup did create a platform for South Africa to build its role in the meetings, incentives, conferences and exhibitions market. What makes this market so attractive is that global figures show that attendees at these kinds of events extend their stay 40% of the time

408

6 Oxford Business Group (2013) 7 Ibid 8 Ibid 9 Grant Thornton (2013)

and bring a partner 40% of the time. And because much of the cost of the stay is paid by an employer, it means that these kinds of visitors have higher levels of disposable income7. In comparison to other international destinations, South Africa remains a competitive place to invest in hospitality8. International companies are growing their presence in the South African market. At the same time, South African companies, such as the Protea Hospitality Group and City Lodge, are expanding their presence in the rest of the African continent. At the end of 2013, the Tourism Business Index showed that the industry remains confident of its short-term prospects. Within tourism, accommodation-related businesses such as hotels, motels and bed and breakfasts had a negative long-term outlook for future revenue generation and its ability to attract new employees. One of the key drivers of this is the cost of labour9.

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

Sector 9

BENEFITS OVERVIEW Despite the fact that the cost of labour is a concern for employers, employees in this industry tend to be low-income earners. They may earn a large part of their income in tips, which will raise their standard of living but not improve their employee benefits. Furthermore, a large proportion of employees in the industry are young workers, which means they may prefer higher take-home pay to employee benefits.

H PRIORITY HIG

F ITS

E BAROM

HIGH PRIORITY ■■ Low-income earners and incentives ■■ Temporary workers ■■ Informal workers ■■ Young workers ■■ High employee turnover

F ITS

E BAROM

MEDIUM PRIORITY ■■ Bricks and books and beyond ■■ Mass exits ■■ Pensionable pay ■■ Unhealthy finances

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

Because of the seasonal cycles in this industry, there are significant numbers of temporary and informal workers. These cycles do not all run concurrently, with holiday destinations following one cycle and business destinations another.

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

There does seem to be evidence that concerns over take-home pay drive mobility in this industry. This is reflected in the high turnover rates.

F ITS

BAROM

LOW PRIORITY ■■ Absenteeism and presenteeism ■■ Choice ■■ Variability in salary inflation ■■ Incapacity ■■ Longevity ■■ Strikes

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HOSPITALITY

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

13.7%

Contribution to death benefits as a percentage of pensionable pay

1.3%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Contribution to fund expenses and fees as a percentage of pensionable pay

1.0%

Projected replacement ratio for a member aged 25

54.5%

Average normal retirement age

63.5

Average actual retirement age

59.9

Actual preservation rate

7.3%

Average insured death benefit as a multiple of pensionable pay

3.3 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE It is important to remember that a large proportion of workers in this industry are young workers and as such have low pensionable salaries. The numbers reflected in our analysis do not include union funds which are active in this industry. In the last year, increases in pensionable salaries were lower than the retirement industry as a whole, but higher than price inflation across all age bands.

410

8 Benefits Barometer Consultants Survey 2014

It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 54.5% of pensionable pay actually works out to 75% of 54.5% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk

benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this industry the pensionable pay percentage is 75%8.

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

Sector 9

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: HOSPITALITY INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

A large proportion of workers in this sector are young and have low pensionable salaries.

411

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RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

In the last year, salary increases were lower than the retirement industry as a whole, but higher than inflation.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: HOSPITALITY INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member WatchTM 2013 data set

412

45–50

50–55

55+

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

The projected replacement ratio for new fund entrants is

HOSPITALITY

Sector 9

54.5%

RETIREMENT ANALYSIS The average contribution to retirement funding increased from 12.6% in 2012 to 13.7% in 2013. Accordingly, the projected replacement ratio for a hypothetical 25-year-old joining the industry has also risen from 43.0% to 54.5%. While the hypothetical case for young members has improved, the reality for members in these funds, particularly older members, remains dire. Over 70% of members in the 50-60 age band are expected to retire with less than 30% of their pensionable salary. The situation for older members is even worse. Poor preservation behaviour seems to be the cause of this outcome. Low rates of preservation raised concerns in Benefits Barometer 2013 and over the last year the average preservation rate was found to be even lower, deteriorating from 11.9% to 7.3%. This is not only an issue for older members, as this industry has lower than average preservation rates at all ages. This is particularly odd for older ages, as not preserving near the end of your career can make it impossible to make up the gap in the short amount of time left. Exit rates in this industry look quite different from Benefits Barometer 2013. Previously, these rates were almost flat across ages, whereas they now reflect a more normal downward pattern with more stability in the older age bands.

413

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RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: HOSPITALITY INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

Age band Source: Member WatchTM 2013 data set

The retirement outlook for members in these funds, particularly older members, remains poor.

414

60+

PART 4

RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

Sector 9

This industry has lower than average preservation rates at all ages.

EXIT RATE: HOSPITALITY INDUSTRY 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Industry experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: HOSPITALITY INDUSTRY 60%

Percentage

50% Retirement fund industry experience

40% 30% 20%

Industry experience

10% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

415

PART 4 Sector 9

RETAIL, WHOLESALE AND HOSPITALITY

HOSPITALITY

Given the age profile of the industry, disability benefits are important.

RISK BENEFIT ANALYSIS The average death benefit of 3.3 times is fairly normal compared to other sectors, though it’s probably not sufficient for all employees’ dependants in the event of an employee’s death. Death benefits in this industry can be quite variable and in some cases increase with length of service up to a cap. While benefits increase with the length of service, they may fail to take into account shortfalls or cater for the needs of younger members. When union death benefits are more generous than those offered in staff funds, this can act as a significant draw to union funds. Given the age profile of the industry, disability benefits are important, as younger workers will potentially have more human capital to protect than older workers.

HEALTHCARE ANALYSIS The young age profile in this industry contributes to the success of restricted medical schemes and as such they appear to be sustainable in the long term. Younger members will be healthier on average, allowing medical schemes to continue to offer sufficient benefits at lower costs than open medical schemes. One of the key benefits of this is that these restricted medical schemes are able to offer cost-effective medical aid to the low-income earners in this industry.

416

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HOSPITALITY

Sector 9

What can be done? The young age profile in this industry, simultaneously increases the need for disability benefits and reduces the cost of such benefits. Importantly, benefits that are paid out as an income stream rather than a lump sum will ensure that employees who become disabled at an early age have appropriate protection.

For companies in this industry it may be worthwhile to conduct an in-depth health analysis to be used as a basis for optimising disability benefits. In Benefits Barometer 2013 we reported that 90.5% of employers across the range of Alexander Forbes clients in the hospitality industry offer disability benefits. Given the high proportion of young workers in this industry, disability benefits that are appropriate for membersâ&#x20AC;&#x2122; needs and are sufficient in terms of amount should be top of mind. For companies with cost-effective restricted medical schemes, sickness should be better managed than for low-income earners in other sectors without access to quality medical care, which could also help to prevent the development of long-term disability.

417

PART 4 Sector 9

RETAIL, WHOLESALE AND HOSPITALITY

Hospitality shares some characteristics with retail and wholesale trading, and others with personal services.

418

PART 4: SECTOR CASE STUDIES

TRANSPORT AND TELECOMMUNICATIONS SECTOR

PART 4 Sector 10

TRANSPORT AND TELECOMMUNICATIONS

INTRODUCTION The National Development Plan rightfully positions transport and telecommunications as engines of growth.

The National Development Plan (NDP) rightfully positions transport and telecommunications as engines of growth and catalysts for national economic integration. The combined sector accounts for a substantial number of jobs in South Africa’s economy. It also enables other industries to play their economic and social role more effectively.

SECTOR ECONOMIC ANALYSIS1

R1.05 trillion GDP contribution (2013 prices)

4.27%

Real increase in GDP 2012–2013

10.13%

% contribution to GDP in 2013

420

1 Statistics South Africa (2013a) 2 Statistics South Africa (2013b)

Approximate employment2

715 000

Formal sector

246 000

Informal sector

PART 4

TRANSPORT AND TELECOMMUNICATIONS

Sector 10

Key stakeholders Transport

Telecommunications

Companies

▪▪ACSA ▪▪Comair ▪▪Grindrod Freight Services ▪▪Larimar ▪▪RTT Intelligent Logistics ▪▪South Africa Airways (SAA) ▪▪Transnet ▪▪Unitrans Supply Chain Solutions ▪▪UTi Sun Couriers

▪▪Cell C ▪▪Datatec Ltd ▪▪MTN ▪▪Neotel ▪▪Sentech ▪▪Telkom SA ▪▪Vodacom Group

Government ministries

▪▪Department of Economic Development ▪▪Department of Trade and Industry ▪▪Department of Transport

▪▪Department of Science and Technology ▪▪Department of Telecommunications and Postal Services

Unions ▪▪Aviation Union of South Africa (AUSA) ▪▪Communication Workers Union (CWU) ▪▪Motor Transport Workers Union (MTWU) ▪▪Professional Transport and Allied Workers Union (PTAWU) ▪▪South African Communications Union (SACU) ▪▪South African Postal Workers Union (SAPWU) ▪▪South African Railway and Harbour Workers Union (SARHWU) ▪▪South African Transport and Allied Workers Union (SATAWU) ▪▪Transport and Allied Workers Union of South Africa (TAWU)

Unions ▪▪Communication Workers Union (CWU) ▪▪South African Postal Workers Union (SAPWU)

421

PART 4 Sector 10

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

TRANSPORT INDUSTRY ECONOMIC CONTEXT The transport industry can be grouped into eight sub-industries: taxis, road, maritime, rail, buses, domestic aviation, forwarding and clearing, and the public sector. By volume, road freight is the most significant sub-industry. Nearly 89% of freight tonnage is transported by road and only 11% by rail, according to the Council for Scientific and Industrial Research (CSIR) annual state of logistics survey3. The freight and logistics industry is made up of a small number of large companies, the balance consisting of small to medium companies that include one-person businesses. The Gauteng Freeway Improvement Project has added another 561 kilometres of upgraded and newly constructed roads in Gauteng. The rail industry has been characterised by under-investment in passenger rail for almost 30 years. This has caused significant deterioration in infrastructure. The average age of the metropolitan rail commuter networks range between 60 and 80 years and these networks still support old technology. Public transport has a key role to play in the National Development Plan (NDP) in terms of correcting inequities of social mobility, where the great majority of employees

422

3 CSIR (2012) 4 Barrett (2011) 5 Ibid 6 Ibid

continue to live in displaced townships far from work and other amenities. For the users of public transport, the cost of mobility and the time spent commuting are hugely draining. The South African Transport and Allied Workers Union (SATAWU) estimates that there are approximately 763 000 workers employed directly in transport activities in South Africa. These are broken down into4 the sub-industries shown in the table below. Taxi drivers are employed under very precarious conditions. They are usually paid on a trip basis, without any regulation of working hours and leave, and with no benefits. The minimum wage of a driver in the taxi industry is lower than the minimum wage in the bus industry and this is exacerbated by the fact that few

taxi employers adhere to minimum wage requirements, while most bus operators pay above the industry minimum5. The conditions of employment, including minimum wages, in the rail industry are also considerably better than those of the road freight industry. For example, at the time of the report, the minimum wage of an ultra heavy-duty truck driver was R5 951 per month, compared to the minimum wage of a mainline train driver of R14 7516. The transport industry employs a large number of migrant workers. Their work is often characterised by uncertainty, poor working conditions, part-time jobs and low wages.

Sub-industry

Number of employees

Taxi

300 000

Road freight

250 000

Maritime (mainly ports)

60 000

Rail and rail engineering

50 000

Bus

50 000

Aviation

50 000

Pipelines

3 000

PART 4

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

Sector 10

BENEFITS OVERVIEW Working in transport is not characterised by the typical ‘9 to 5’ working hours. Several studies indicate that transport employees work long days and weeks. Transport workers often suffer from health hazards associated with atypical working hours, including insomnia, longterm fatigue and digestive problems, which affect the health and well-being of

H PRIORITY HIG

F ITS

E BAROM

HIGH PRIORITY ■■ Incapacity ■■ Absenteeism and presenteeism ■■ Low-income earners and incentives

F ITS

E BAROM

MEDIUM PRIORITY ■■ Variability in salary inflation ■■ High employee turnover ■■ Mass exits ■■ Strikes ■■ Temporary workers ■■ Informal workers ■■ Unhealthy finances ■■ Young workers

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

employees. Health-related issues often lead to incapacity and absenteeism, requiring employers to implement comprehensive schemes to protect them and their employees against the potential health and safety risks prevalent in the transport industry. Many workers in this industry are also low-income earners.

F ITS

BAROM

LOW PRIORITY ■■ Bricks and books and beyond ■■ Choice ■■ Longevity ■■ Pensionable pay

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PART 4 Sector 10

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

14.1%

Contribution to death benefits as a percentage of pensionable pay

1.8%

Contribution to disability benefits as a percentage of pensionable pay

1.1%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.9%

Projected replacement ratio for a member aged 25

55.7%

Average normal retirement age

63.3

Average actual retirement age

61.0

Actual preservation rate

5.8%

Average insured death benefit as a multiple of pensionable pay

3.4 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE In every age group at least 20% of employees have pensionable salaries of less than R5 000 per month, with typically another 40% having pensionable salaries between R5 000 and R10 000. In Benefits Barometer 2013 average nominal pensionable salary increases were above the retirement fund industry average for all ages. Since then, the average nominal salary increases have fluctuated around the retirement fund industry average, with increases tending to be

424

7 Benefits Barometer Consultants Survey 2014

higher for younger age groups and lower for older age groups. Surprisingly, middle-aged workers in this industry are receiving lower increases than older workers. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 55.7% of pensionable pay actually

works out to 75% of 55.7% in the member’s hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this industry the pensionable pay percentage is 87.5%7.

PART 4

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

Sector 10

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: TRANSPORT INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

In every age group, at least 20% have pensionable salaries of R5 000 per month.

425

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TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

Increases have fluctuated, tending to be higher for younger age groups and lower for older age groups.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: TRANSPORT INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member WatchTM 2013 data set

426

45–50

50–55

55+

PART 4

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

Sector 10

The projected replacement ratio for new fund entrants is

55.7% RETIREMENT ANALYSIS A hypothetical employee joining the industry at 25 would only be able to retire on 55.7% of their pensionable salary at retirement. This means that funds in the transport industry, on average, are not optimally structured to replace employeesâ&#x20AC;&#x2122; incomes at retirement. The structural issues are exacerbated by individual behaviour, such as low preservation rates and early retirement. The actual preservation rate in the transport industry is only 5.8% and employees typically retire early. Averages across the retirement industry normally indicate that older employees are better at preserving their benefits. However, in the transport industry the average preservation rate remains below the 10% preservation mark until age 60.

427

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TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: TRANSPORT INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Funds in the industry, on average, are not optimally structured to replace employees’ income at retirement.

428

PART 4

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

Sector 10

The average preservation rate remains below 10% until age 60.

EXIT RATE: TRANSPORT INDUSTRY 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Industry experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: TRANSPORT INDUSTRY 30%

Percentage

25% Retirement fund industry experience

20% 15% 10%

Industry experience

5% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

429

PART 4 Sector 10

TRANSPORT AND TELECOMMUNICATIONS

TRANSPORT

RISK BENEFIT ANALYSIS An average death benefit of 3.4 times annual pensionable salary could be regarded as typical in the retirement funds industry, but this may be far below what is required to ensure the well-being of the employeeâ&#x20AC;&#x2122;s dependants. The average premium for death and disability benefits seems within acceptable levels given the particular environment, namely low-income earners who are engaged in potentially hazardous occupations.

HEALTHCARE ANALYSIS A large number of Alexander Forbes clients in the transport industry offer medical scheme membership8. However, these numbers exclude the informal sector such as taxi drivers and owner-driver truck operators, the majority of whom do not belong to a medical scheme and have no disability insurance. The health and safety of employees in the transport industry are critical considerations, not only for the employees themselves, but also for members of the public being transported or involved as bystanders. Most employers in the formal sector expect transportation employees, especially in the airline industry and drivers, to take periodic medical examinations to verify that they are physically and mentally fit to meet the regulatory requirements. Workersâ&#x20AC;&#x2122; vision and hearing are tested, as well as colour vision, muscular strength and flexibility. The transport industry is fraught with challenges to employee health and safety. Workers involved in loading and unloading cargo and in storing, stacking and retrieving materials are prone to injuries. Those operating and maintaining vehicles and other machinery are not only vulnerable to injuries but also to the toxic effects of fuels, lubricants and exhaust fumes. If ergonomic principles are not heeded in the design of vehicles, trains and planes, the employees in those sectors will not only be subject to some disorders and fatigue, but will also be prone to operating mishaps that can lead to accidents9.

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8 Benefits Barometer Consultants Survey 2014 9 Warshaw (2011)

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TRANSPORT

Sector 10

What can be done? The health and safety of employees in the transport industry are critical considerations, not only for the employees themselves, but also for members of the public being transported or involved as bystanders.

Companies in this industry could benefit from health risk management to compensate for concerns about health and safety. This involves a review of the incidence of disability, and absenteeism rates and their causes within a particular company. It will also assist with incapacity management and rehabilitation case management. Such an assessment allows a company to ensure that their benefits structure, wellness programmes and rehabilitation programmes are optimally structured to address their key risks and improve the health of their employees.

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TELECOMMUNICATIONS

TELECOMMUNICATIONS INDUSTRY

ECONOMIC CONTEXT The mobile telecommunications industry has grown dramatically over the last decade. At the end of 2003, there were a little over one billion unique subscribers worldwide. By the end of 2013 this figure had increased to 3.4 billion unique subscribers10. It is expected that there will be some 3 billion new mobile connections globally by 2017, with Africa accounting for 20% of this growth. Growth in data is equally explosive, with global mobile data traffic in 2012 alone exceeding all previous years combined. Smartphones are driving this growth, their uptake being spurred on by more affordable devices and faster download speeds11. The telecommunications industry is a popular choice for graduates because of better pay packages and progressive

432

10 GSMA (2014) 11 Vodacom (2013)

career opportunities. For the same reasons, there have also been a growing number of experienced professionals from the fields of finance, marketing, human resources and engineering moving into the telecoms industry. Despite all these benefits, telecoms companies, especially in the mobile space, are experiencing high employee turnover due to fierce competition within the industry. In this high-tech environment, employers often revert to non-traditional benefits in an attempt to attract and retain the best talent available in the market. Some of the more interesting non-traditional benefits include mobile pamper services for the benefit of on-site de-stressing and relaxation, company-sponsored car wash services and a shuttle service for Gautrain users.

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TELECOMMUNICATIONS

Sector 10

BENEFITS OVERVIEW Employees in this sector are accustomed to using technology and prefer self-help portals for doing business online. They want to have choice and are able to access information to better inform their decisions, but this doesn’t

H PRIORITY HIG

F ITS

BAR

T OME

HIGH PRIORITY ■■ Choice ■■ Temporary workers ■■ Informal workers ■■ Young workers ■■ Unhealthy finances ■■ Pensionable pay

F ITS

BAR

T OME

MEDIUM PRIORITY ■■ Bricks and books and beyond ■■ Longevity ■■ Mass exits ■■ High employee turnover

DIU

M PRIOR ITY W PRIORITY LO

W PRIORITY LO

DIU

H PRIORITY

HIG

M PRIOR ITY

H PRIORITY

DIU

HIG

necessarily mean that outcomes in this sector are particularly good. To complicate matters further, just over a quarter of workers in this sector are classified as informal workers and are unlikely to have access to employee benefits.

F ITS

BAROM

LOW PRIORITY ■■ Absenteeism and presenteeism ■■ Variability and salary inflation ■■ Incapacity ■■ Low-income earners and incentives ■■ Strikes

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TELECOMMUNICATIONS

BENEFITS BY THE NUMBERS Contribution to retirement savings as a percentage of pensionable pay

12.9%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Contribution to fund expenses and fees as a percentage of pensionable pay

0.9%

Projected replacement ratio for a member aged 25

49.9%

Average normal retirement age

63.0

Average actual retirement age

61.0

Actual preservation rate

17.7%

Average insured death benefit as a multiple of pensionable pay

2.7 times

Source: Member WatchTM 2013 data set

EMPLOYEE PROFILE The average pensionable salary in this industry is indicative of a highly skilled workforce. About 75% of members aged 50-55 earn a pensionable salary of more than R240 000 per year and about 5% earn a pensionable salary of more than R960 000 per year. Salary progression is lower than the retirement funds industry experience, which points to the fact that employees are remunerated above industry standards, with

434

12 Benefits Barometer Consultants Survey 2014

less room for negotiation of large aboveinflation increases by unions. It’s important to understand the difference between total earnings and pensionable pay. With some companies or categories of employees on total cost to company packages, only a portion of the salary is pensionable. So, if 75% of total cost to company is pensionable, the replacement ratio of 49.9% of pensionable pay actually works out to 75% of 49.9% in the member’s

hands at retirement. In some circumstances it can also mean the employee’s risk benefits coverage is reduced by the same ratio. This means that if you want to make proper comparisons with these numbers, you need to understand each individual company’s policy. Our survey, based on a subset of our own clients only, estimates that in this industry the pensionable pay percentage is 70%12.

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Sector 10

PROPORTION OF MEMBERS BY AGE IN EACH PENSIONABLE SALARY CATEGORY: TELECOMMUNICATIONS INDUSTRY 100% 90% 80% R960 000+

Proportion of members

70%

R480 000–R960 000 60%

R240 000–R480 000

50%

R120 000–R240 000 R60 000–R120 000

40%

R24 000–R60 000

30%

R0–R24 000 20% 10% 0%

20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60+

Age band Source: Member WatchTM 2013 data set

The average pensionable salary in this industry is indicative of a highly skilled workforce.

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TELECOMMUNICATIONS

Employees are remunerated above industry standards, with less room for negotiation of large above-inflation increases by unions.

AVERAGE NOMINAL INCREASE IN PENSIONABLE SALARY: TELECOMMUNICATIONS INDUSTRY 16%

Salary increase per year

14% 12% 10%

Retirement fund industry experience

8% 6%

Industry experience

4% 2% 0%

20–25

25–30

30–35

35–40

40–45

Age band Source: Member WatchTM 2013 data set

436

45–50

50–55

55+

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The projected replacement ratio for new fund entrants is

TELECOMMUNICATIONS

Sector 10

49.9%

RETIREMENT ANALYSIS The average net member contribution rate towards retirement savings is 12.9% of pensionable salary, which is just below the average for the retirement funds industry as a whole and well short of the contribution rate required to achieve a reasonable replacement ratio in retirement. This is indicative of massive competition for skilled resources in the industry. Companies typically sacrifice retirement fund contributions in an attempt to improve employeesâ&#x20AC;&#x2122; take-home pay. Exit rates are higher among younger members in the telecoms industry, which is aligned with the experience of other sectors. The overall staff turnover rate is lower in the telecoms industry than the average retirement funds industry experience across all age groups. The industry is still in an expansionary phase and retention of skilled labour is essential for employers to remain competitive in a rapidly changing environment. We do see a higher exit rate for younger members, who in all likelihood are skilled and actively looking for fresh opportunities in this environment. Members across all age groups in the telecoms industry are better at preserving their benefits than the average member in the retirement funds industry experience. Yet this does not seem to be making a meaningful difference to replacement ratios in this industry. The projected replacement ratio for a hypothetical 25-year-old joining the fund is 49.9% of pensionable pay. The projected replacement ratios for employees between 20 and 30 years are not very promising. Only a small proportion of members would be able to achieve a 75% replacement ratio at retirement. This raises serious concerns about the structure of these funds.

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TELECOMMUNICATIONS

PERCENTAGE SPLIT OF MEMBERS’ PROJECTED REPLACEMENT RATIOS: TELECOMMUNICATIONS INDUSTRY 100% 90% 80%

Proportion of members

70% 75%+ 60%

60%–75%

50%

45%–60% 30%–45%

40%

0%–30%

30% 20% 10% 0% 20–30

30–40

40–50

50–60

60+

Age band Source: Member WatchTM 2013 data set

Replacement ratios of young employees raise serious concerns about the structure of these funds.

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TELECOMMUNICATIONS

Sector 10

Retention of skilled labour is essential for employers to remain competitive in a rapidly changing environment.

EXIT RATE: TELECOMMUNICATIONS INDUSTRY 16% 14%

Percentage

12% Retirement fund industry experience

10% 8% 6%

Industry experience

4% 2% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

PRESERVATION RATE: TELECOMMUNICATIONS INDUSTRY 60%

Percentage

50% Retirement fund industry experience

40% 30% 20%

Industry experience

10% 0% 20–25

25–30

30–35

35–40

40–45

45–50

50–55

55–60

60–65

Age band

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TELECOMMUNICATIONS

IT experts often work on a contract basis, in which case they would not receive any form of benefits.

RISK BENEFIT ANALYSIS The average death multiple of 2.7 times annual pensionable salary is lower than that of other sectors, presumably also in an attempt to reduce death benefit premiums and to improve employeesâ&#x20AC;&#x2122; net take-home pay in an environment where younger workers value take-home pay more than the promise of intangible future benefits.

HEALTHCARE ANALYSIS Information technology experts often work on a contract basis, in which case they would not receive any form of benefits, and a number of employees would belong to their spousesâ&#x20AC;&#x2122; medical scheme. It is important to ensure that individuals are aware of the need to be on a medical scheme, as joining only later in life could result in schemes applying late joiner penalties.

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TELECOMMUNICATIONS

Sector 10

What can be done? Employers in the telecoms industry have to balance attracting highly skilled and scarce resources by offering attractive take-home pay packages with competitive employee benefits in the form of retirement fund contributions and insurance against death and disability. As a result, employee benefits are often sacrificed to improve take-home pay, with adverse effects on long-term savings and protection.

Proper communication with employees is essential to inform them of their projected income in retirement and give them options to improve their situation if they want to make additional contributions into their retirement fund. Given the high incomes in this industry, it is imperative that employees take full advantage of tax-efficient benefit offerings and that they understand the long-term implications of short-term decisions. Stakeholders need to take into account that employees in this industry live in a realtime environment where information is available at their fingertips. They expect their service providers to keep up with the latest technological developments. By providing communication that allows for real-time interaction, this could significantly improve employeesâ&#x20AC;&#x2122; motivation to take corrective action before itâ&#x20AC;&#x2122;s too late. In addition, any solutions need to be simple, easily understood and even easier to implement, through online portals, for example. A seamless preservation offering or default annuity that requires minimal action or involvement on the part of the member, but is structured to take care of immediate needs, would benefit these members.

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As technology develops, telecommunications and information technology are likely to become more closely linked.

442

APPENDIX

APPENDIX Glossary

444

References

455

Data

465

Thank you

469

APPENDIX Glossary

APPENDIX: GLOSSARY

GLOSSARY

444

Above threshold benefit (ATB)

Additional day-to-day cover that becomes available on certain medical scheme plans once the medical savings account has been exhausted and total day-to-day claims add up to a pre-determined limit.

Absenteeism

An employee’s deliberate or habitual absence from work.

Accrued benefit

Total amount of a pension plan as on a specified date.

Alpha

Additional performance in an investment that is above the benchmark’s performance.

Alternative reimbursement model (ARM)

A payment arrangement that a medical scheme enters into with a hospital group or other service provider, by which a fixed price is set for certain types of treatment, regardless of the actual cost of treatment.

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 used primarily to secure a steady cash flow for an individual during their retirement years, for the remainder of their lives.

Approved benefits

Approved benefits are provided through scheme-owned policies and attract certain tax benefits.

Approved lump sum death benefits

A group life insurance policy that the scheme owns and in which the employer’s premiums are tax-deductible but the lump sum payable on death is subject to tax.

Approved medication list

A list of preferred medications that your medical scheme will pay for.

Asset-liability modelling (ALM)

An approach to examining pension risks which allows the sponsor to set informed policies for funding, benefit design and asset allocation.

Asset management fees

A charge that an investment manager levies for managing an investment fund. Usually an annual fee calculated as a percentage of assets under management (AUM).

Assets under management (AUM)

The market value of assets that an investment company manages on behalf of investors. AUM is a measure of success against the competition. AUM consists of growth or decline due to both capital appreciation and losses and new money inflow or outflow.

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.

Bandwidth (jargon)

An expression of the breadth of intellectual or emotional capacity available to complete a task.

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, creating market inefficiencies.

APPENDIX

APPENDIX: GLOSSARY

Beneficiary

A person who benefits from a trust, will, medical scheme or life insurance policy.

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.

Burden of disease

A measure used to assess and compare the impact of different diseases and injuries on populations.

Capital disability cover

An occupational disability benefit that pays out a once-off lump sum if you become totally and permanently disabled before your normal retirement age and can no longer work.

Capital market

The part of a financial system concerned with raising capital by dealing in shares, bonds and other longterm investments.

Choice architecture

This is the way that we make decisions based on how the choices are presented to us.

Chronic condition

An illness or disease which requires treatment on a long-term or permanent basis and which could be life threatening if not treated appropriately.

Chronic illness benefit

The part of medical scheme benefits that specifically covers medicine for chronic conditions.

Claims experience

The claims history (including frequency and trends in claims history) on a policy or group of policies.

Collective bargaining

Collective bargaining is a type of negotiation that employees use to establish conditions of employment with their employers. During a collective bargaining period, workersâ&#x20AC;&#x2122; 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.

Community rating

A concept usually associated with medical schemes, which requires providers to offer membership within a given territory at the same price to all persons without medical underwriting, regardless of their health status. In South Africa, medical schemes may only differentiate contributions based on income and family size.

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.

Consumption smoothing

A way to project a stable path of financial demands throughout retirement by estimating total consumption needs for retirement and then allocating them over time.

Contribution rate

The regular payments made to a 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 beneficiaryâ&#x20AC;&#x2122;s life.

Glossary

445

APPENDIX Glossary

446

APPENDIX: GLOSSARY

Day-to-day benefits (medical schemes)

The part of medical scheme benefits that covers claims that occur regularly, such as doctor’s visits or medication claims.

Deductible

The amount you have to pay from your own costs (out-of-pocket) for expenses before the insurance company or medical scheme 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 and expenses.

Dependency structure

The number of individuals who depends on an individual’s income.

Designated service provider (DSP)

A group of healthcare providers who have entered into contracts with medical schemes in which they agree to provide certain services at pre-determined prices.

Disability income benefits

Benefits that will provide employees with a regular income until the earliest of death, retirement or recovery. Benefits may only be paid when a listed condition is diagnosed. The provider may impose exclusions and waiting periods.

Disease management programme

Multidisciplinary efforts aimed at improving the quality and cost-effectiveness of care for patients with chronic illness.

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 diagnosis of a disease that has a significant impact on lifestyle and longevity and which incurs high costs.

Education trusts

Money held in a trust to support someone’s education or to support a school.

Employee assistance programme

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.

Employee benefits

Indirect and non-cash compensation paid to an employee to meet their needs. Some benefits are mandated by law (such as UIF), while 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.

Employee wellness programme

An approach that employers use to improve employees’ health. Wellness programmes include activities such as company-sponsored exercise, weight-loss competitions, educational seminars, tobaccocessation programmes and health screenings that are designed to help employees eat better, lose weight and improve their overall physical health.

APPENDIX

APPENDIX: GLOSSARY

Exclusion clause

Provision in a contract that excuses one party to the contract from listed conditions, circumstances or situations.

Expected return

An estimate of the investment return from a specific investment or combination of investments.

Extended sick leave benefit

A benefit for an employee who cannot work due to an injury incurred at work or an illness for which they should be compensated according to the Compensation for Occupational Injuries and Diseases Act.

Fiduciary

A person who has a legal duty to act in another person’s interest. Typically, a fiduciary takes care of property or money for a beneficiary.

Fiduciary duty

The legal duty of a fiduciary to act in the best interests of the beneficiary.

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.

Fund credits

The benefit entitlement of each fund member within each of their retirement funds. This is effectively the liability in a DC fund.

Garnishee order

A drastic measure for collecting debt that allows the creditor to deduct money owed from employees’ salaries, for example.

Gross contribution rate

The total contribution rate that is deducted from an employee’s salary and comprises the allocation towards retirement savings, risk benefits, administration costs and other ad hoc expenses.

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 every year. 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 used primarily 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.

Healthcare benefits

Benefits relating to healthcare cover, whether in the form of medical scheme cover or medical insurance products.

Health information technology (HIT)

The application of information and communication technology to collect, store, retrieve, share and use medical information for communication and decision making.

Health insurance

Contingency insurance covering losses due to ill-health. The Short-term and Long-term Insurance Acts, rather than the Medical Schemes Act, govern these products. They may not cover the direct costs of medical care but benefits would rather be a fixed amount regardless of the treatment received.

Glossary

447

APPENDIX Glossary

448

APPENDIX: GLOSSARY

Hospital benefit

The part of medical scheme benefits that provides cover for medical care obtained once admitted to a hospital.

Human capital

The anticipated value of future labour earnings.

Incapacity

The state in which a person is physically or mentally unable to do something or to manage their affairs.

Informal worker

A person who works in the informal sector and does not receive protection from the government. Informal workers may be found in the construction or agriculture industry.

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 differs from the income received from a workerâ&#x20AC;&#x2122;s compensation plan.

Inflation-linked annuity

Provides an employee with a guaranteed monthly pension with annual increases equal to inflation.

Investment policy statement

A document drafted between a portfolio manager and a client that outlines general rules for the manager.

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.

Just-in-time education

Education that is offered when a decision needs to be made.

Late joiner penalty

A penalty or fine 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 when an individual changes jobs, for example.

Libertarian Paternalism

A term that Richard Thaler and Cass Sunstein coined. Libertarian Paternalism is paternalism in the sense that it tries to influence choices in a way that will make decision makers better off. But itâ&#x20AC;&#x2122;s 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 by which a memberâ&#x20AC;&#x2122;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 because people tend to live longer than anticipated.

APPENDIX

APPENDIX: GLOSSARY

Management committees

A management committee is like a board of trustees of a retirement fund or medical scheme. The committee is usually made up a group of skilled and knowledgeable people who meet regularly to review the way a retirement fund or medical scheme is run and governed. Employers who offer an occupational retirement fund for their workers may establish a management committee to make decisions on behalf of members.

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.

Maternity benefit

The part of your medical scheme benefits that covers claims related to pregnancy, childbirth and postnatal care.

Mass exit

This is when a significant number of employees leave the company – either through retrenchments or corporate activity.

Means test

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 contribution Inflation

The increase in the contributions/premiums payable by members of medical schemes.

Medical cover

See Healthcare benefits.

Medical inflation

The increase in the cost of medical care, driven by increased prices as well as increased demand for services.

Medical savings account (MSA)

A form of day-to-day benefit that a medical scheme provides, by which a percentage of a member’s gross annual contributions are set aside at the start of the benefit year, for use by that specific member on day-to-day care.

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.

Millennial

A person born between 1980 and the early 2000s who would therefore reach adulthood after the new millenium.

Musculoskeletal condition

A condition where a part of the musculoskeletal system is injured over time.

Non-financial motivators

In general, indirect and non-cash compensation paid to an employee.

Non-retirement funding income

The total amount of taxable earnings (including income and fringe benefits) which is not used when retirement fund contributions are calculated.

Glossary

449

APPENDIX Glossary

450

APPENDIX: GLOSSARY

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.

Occupational fund

A fund that an employer organises 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 350 for adults between the ages of 60 and 74, and R1 370 for people aged 75 and over.

Open medical schemes

Medical schemes in which membership is not limited to individuals who meet certain criteria, such as being employed by a certain employer or within a certain industry.

Out-of-pocket payment

An expense for medical costs that an individual, rather than the medical aid, incurs and pays for.

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.

Pension-backed lending

An alternative form of housing finance where the loan is secured using the member’s retirement fund savings.

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%.

Permanent disability

The permanent inability of an employee to perform any work as a result of an accident or occupational disease for which compensation is payable.

Permanent health insurance (PHI)

A form of insurance that provides up to 75% of an employee’s salary, until retirement, during prolonged illness or disability.

Post-retirement medical aid benefit

An employer’s subsidy of medical scheme contributions for former employees during their retirement.

APPENDIX

APPENDIX: GLOSSARY

Prescribed minimum benefits (PMBs)

A set of defined benefits to ensure that all medical scheme members have access to certain minimum health services, regardless of the benefit option they have selected. These include costs related to the diagnosis, treatment and care of a pre-defined list of 27 chronic conditions and 270 other medical treatments.

Presenteeism

This is when you are physically present at your place of work, but stress or distraction means that your productivity declines. Presenteeism is also characterised by employees who work longer hours than is required because of concerns over job security.

Preservation

This is when the money saved for retirement through pension, provident and preservation funds remains in those funds until you retire, or is rolled over into another similar retirement savings scheme without incurring taxes or penalties when you change 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.

Protected strike

A strike that complies with the requirements of the Labour Relations Act (LRA).

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 healthcare services and was used as a base to determine the costs of medical services and the reimbursement of medical providers. It is no longer in use.

Rehabilitation

This is, for example, when someone who has become disabled is helped to adjust to their changing circumstances and restored to optimal function.

Reimbursement rate

The rate at which a medical scheme pays for medical services rendered (either to a medical scheme member or directly to a medical provider). This is commonly known as the medical aid rate.

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.

Required return

The return or gain that an investor needs to accept for a given level of risk. The higher the level of risk exposure an investor assumes, the greater the required returns on their investment.

Retirement funding income

The total amount of taxable earnings (including income and fringe benefits) used when retirement fund contributions are calculated.

Restricted medical schemes

Medical schemes in which membership is limited to individuals who meet certain criteria, such as being employed by a certain employer or within a certain industry.

Retirement savings

Amount of money saved to cover the cost of your living expenses when you retire.

Glossary

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Risk-adjusted return

A concept that defines an investmentâ&#x20AC;&#x2122;s return by measuring how much risk is involved in producing that return.

Risk benefits

See Group risk benefits.

Risk budgeting or allocation

This refers to setting up a plan for how much risk you want to take with your investments. It is the process of identifying, quantifying and spending risk. This involves grouping the aggregate risk of a portfolio into risk factors and drivers, setting risk limits or budgets to each asset class, allocating assets in compliance with risk budgets, monitoring the use or abuse of risk budgets, analysing the results and improving the investment process.

Risk equalisation fund (REF)

Money set aside to reduce or eliminate the difference in contribution rates arising from different medical schemes simply because of different risk profiles. Schemes with worse-than-average risk would receive funds from the REF whereas schemes with a better-than-average risk would be required to pay funds into the REF.

Risk profile

An evaluation of an individual or organisationâ&#x20AC;&#x2122;s willingness to take risks, as well as the threats to which an organisation is exposed.

Rules of thumb

A simplified set of principles that are easy to remember.

Screening tests

Tests that identify high-risk factors that could lead to more serious diseases if not identified and managed early. Such tests can assist with early diagnosis of certain conditions and diseases, and are usually in the form of a simple blood test. Some examples include tests for blood sugar levels, blood pressure and high cholesterol.

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.

Secondary tax rebate

A refund from income tax, in addition to the primary rebate, that is available to taxpayers aged 65 years and older or others who may be entitled to such a rebate as stipulated by the Income Tax Act.

Self-payment gap

For medical scheme options with an above threshold benefit, the self-payment gap is the portion of claims that must be self-funded once the medical savings account has been depleted, and before the above threshold benefit can be accessed.

Share options

A benefit that a company gives to an employee as an option to buy a share in the company at a discount or at a fixed price.

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.

Smart defaults

A default solution that employs additional information about an individualâ&#x20AC;&#x2122;s specific circumstance to create a more tailored outcome.

APPENDIX

APPENDIX: GLOSSARY

Social protection

The set of institutions within a society that seeks to protect those who cannot earn an income, reduce economic risk and address poverty and vulnerability.

Solvency level (medical scheme)

The accumulated reserves of a medical scheme, expressed as a percentage of gross annual medical scheme contributions. The regulatory requirement is that this percentage should be at least 25%.

Solvency margin

The amount of assets the regulators need an insurer or pension scheme to hold above their supervisory liabilities.

Spouseâ&#x20AC;&#x2122;s death benefit

A death benefit paid to the spouse of the deceased, often as a monthly income for life.

Stated benefit insurance

This policy covers a company when any employee is disabled, killed or injured in an accidental, violent, external and visible way.

Stokvel

A savings or investment society to which members regularly contribute an agreed amount and from which they receive a lump sum.

Strategic asset allocation

A portfolio strategy used to set target allocations for various asset classes. From time to time the portfolio is rebalanced to the original allocations when they deviate too much from the initial settings as a result of differing returns from various assets.

Tax credit

An amount of money that a taxpayer can subtract from the amount of tax that they owe to the government.Â

Teachable moment

The time at which learning a particular topic or idea becomes possible or easiest.

Telemetry

The science and technology of automatic measurement and transmission of data by wire, radio or other means from remote sources, as from space vehicles to receiving stations for recording and analysis.

Temporary partial disability

The temporary partial inability of an employee, as a result of an accident or occupational disease for which compensation is payable, to perform the whole of the work at which they were employed at the time of the accident or at the start of the occupational disease.

Temporary total disability

The temporary total inability of an employee, as a result of an accident or occupational disease for which compensation is payable, either to perform the work at which they were employed at the time of the accident or at the start of the occupational disease or to perform similar work.

Temporary worker

An employee who is hired to assist employers to meet business demands, allowing the employer to avoid the cost of hiring a regular employee.

Term of cover

The time frame over which an insurance policy is active.

Trade-offs

Situations that involve losing one quality or aspect of something in return for gaining another.

Treating Customers Fairly (TCF)

The TCF legislation aims to raise standards in the way firms carry out their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry.

Glossary

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Total cost to company (TCTC)

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).

Underinsurance

This is when you do not have enough insurance cover.

Underwriting

See Medical underwriting.

Unsecured debt

A loan that is not backed by an underlying asset. Unsecured debt includes credit card debt, medical bills, utility bills and any other type of loan or credit that was extended without a collateral requirement. It presents a high risk for lenders since they may have to sue to get the money theyâ&#x20AC;&#x2122;re owed if the borrower doesnâ&#x20AC;&#x2122;t repay the full amount owed. As a result of this high risk, unsecured debt tends to come with a high interest rate.

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 (disability benefits)

The period of disability that must elapse before a benefit becomes payable.

Waiting period (medical scheme)

A specified time period during which a medical scheme member pays contributions to the medical scheme but may not access some or all benefits of the medical scheme. This is usually imposed as a 3-month general waiting period or a 12-month condition-specific waiting period for conditions existing at the time of registration with the medical scheme.

Waiting period (occupational pension fund)

The period during which an employee doesnâ&#x20AC;&#x2122;t meet the eligibility conditions for membership of the occupational scheme.

Wealth to earnings ratio

This shows the extent to which you can replace your earnings in retirement.

Wellness days

These days provide the employer with the ideal opportunity to raise awareness of the health and wellness issues in the company, and assist the employees in managing any health issues properly.

Workplace accommodation procedures

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.

APPENDIX

APPENDIX: REFERENCES

References

REFERENCES PART 1: CHAPTER 1 – WHY IT MATTERS? Alderman, H and Yemtsov R. 2012. Productive role of safety nets. Social protection and labour working paper 1203. Washington, DC: World Bank. Barrett, CB, Carter, MR & Ikegami, M. 2008. Poverty traps and social protection. Social protection and labour working paper 0804. Washington, DC: World Bank. National Planning Commission. 2012. NDP 2030: Our future – Make it work. http://www.npconline.co.za. Accessed June 2014.

PART 1: CHAPTER 2 – WHAT IS THE CONTEXT? Collins, D, Murdoch, J, Rutherford, S & Ruthven, O. 2009. Portfolios of the poor: How the world’s poor live on $2 a day. Princeton, NJ: Princeton University Press. Deaton, A. 1989. Saving in developing countries: Theory and review. World Bank Economic Review. Proceedings of the World Bank Annual Conference on Development Economics, pp. 61–96. Finmark Trust. 2013. FinScope SA 2013 consumer survey. http://www.finmark.org.za/wp-content/uploads/Pres_FSSA_2013_excludingvideos1.pdf. Accessed June 2014. Holtzmann, R, Mulaj, F & Perotti, V. 2013. Financial capability in low-and middle-income countries: Measurement and evaluation. http://www.finlitedu.org/team-downloads/overall-tf/financial-capability-in-low-and-middle-income-countries-measurement-and-evaluation.pdf. Accessed June 2014. Mpahlele, N. 2011. Why it is important for a stokvel to have a properly drafted constitution. Stokvel Voice 2(2), XX), March–April. http://bskmarketing.co.za/docs/Stokvel%20Voice%202.pdf. Accessed June 2014. Mullainathan, S and Shafir, E. 2013. Scarcity: Why having too little means so much. London: Penguin. Ntowiya, Z. 2012. Stokvels – A hidden economy. African Response. http://www.africanresponse.co.za/PressReleases/Documents/2012St okvelHiddenEconomy.pdf. Accessed June 2014. O’ Malley, BR, Dorrington, RE, Jurisich, SC, Valentini, JA, Cohen, TM & Ross, BJ. 2005. An investigation of the mortality of South African assured lives, 1995–1998. South African Actuarial Journal 5, 27–59. OECD. 2013. Pensions at a glance 2013: OECD and G20 indicators. OECD Publishing. http://www.oecd.org/pensions/...pensions/ OECDPensionsAtAGlance2013.pdf. Accessed June 2014. Old Mutual. 2013. Savings and investment monitor. Research Update Edition 8, July. Roth, J, Rusconi, R & Shand, N. 2007. The poor and voluntary long term contractual savings. Working paper 48. Geneva: ILO. South African Reserve Bank. 2014. Quarterly Bulletin 271. https://www.resbank.co.za/Publications/Detail-Item-View/Pages/Publications. aspx?sarbweb=3b6aa07d-92ab-441f-b7bf-bb7dfb1bedb4&sarblist=21b5222e-7125-4e55-bb65-56fd3333371e&sarbitem=6140. Accessed June 2014.

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University of Cape Town Unilever Institute. 2005. Black diamond 2005 report. Cape Town: UCT Unilever Institute. University of Cape Town Unilever Institute. 2013. 4 million and rising. Cape Town: UCT Unilever Institute. Woolcock, M and Narayan, D. 2000. Social capital: Implications for development: Theory, research, and policy. World Bank Research Observer, 15(2): 225–249. World Economic Forum. 2013. The global competiveness report 2013–2014. http://www+.weforum.org/reports/global-competitivenessreport-2013-2014. Accessed June 2014. Zungu, T. 2012. Join up at a stokvel, but beware of scammers. Sowetan Live, 13 February 2012. http://www.sowetanlive.co.za. Accessed June 2014.

PART 1: CHAPTER 3 – HOW HAS IT CHANGED? Rusconi, R. 2004. Defined contribution: A giant leap too far? Sexauer, S and Siegel, L. 2013. A pension promise to oneself. Financial Analysts Journal 69(6).

PART 1: CHAPTER 4 – WHO’S RESPONSIBLE Department of Health. 2011. National health insurance in South Africa: Policy paper. Hardin, G. 1968. The tragedy of the commons. Science 162(3859), 1243–1248. National Planning Commission. 2012. NDP 2030: Our future – Make it work. http://www.npconline.co.za. Accessed June 2014. Poundstone, W. 2011. Prisoner’s dilemma. Anchor: Random House LLC.

PART 2: INTRODUCTION – GETTING PEOPLE TO CARE Holzmann, R and Jørgensen, S. 2001. Social risk management: A new conceptual framework for social protection, and beyond. International Tax and Public Finance 8(4): 529–56. Mullainathan, S and Shafir, E. 2013. Scarcity: Why having too little means so much. London: Penguin. National Treasury. 2014. 2014 Budget update on retirement reforms. http://www.treasury.gov.za/publications/RetirementReform/. Accessed June 2014.

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PART 2: CHAPTER 1 – THE HEART OF THE MATTER: WHAT DO INDIVIDUALS NEED? True South Actuaries and Consultants. 2013. The SA insurance gap. http://www.truesouth.co.za/images/True_South_2010_Insurance_ Gap_Study_-_report.pdf. Accessed June 2014.

PART 2: CHAPTER 2 – WHAT’S THE POINT? MAKING TARGETS MEANINGFUL TO MEMBERS Bernheim, BD, Forni, L, Gokhale, J & Kotlikoff, LJ. 2000. How much should Americans be saving for retirement? American Economic Review, 90(2), 288–292. Burns, SA and Widdows, R. 1990. Sensitivity of a retirement analysis framework to changes in retirement analysis parameters. Financial Counseling and Planning, (1), 37–56. Butler, MBJ. 2011. Estimation of retirement adequacy targets for one- and two-adult households from official South African data. MSc dissertation. School of Statistics and Actuarial Science, University of the Witwatersrand, Johannesburg. Butler, MBJ and Van Zyl, CJ. 2012a. Consumption changes on retirement for South African households. South African Actuarial Journal 12, 1–29. Butler, MBJ and Van Zyl, CJ. 2012b. Retirement adequacy goals for South African households. South African Actuarial Journal 12, 31–64. Butler, MBJ. 2014. Retirement adequacy goals revisited: The South African experience of goal estimation for one- and two-adult households. Working paper prepared for the International Congress of Actuaries, 30 March–4 April. Goda, GS, Manchester, CF & Sojourner, A. 2012. What will my account really be worth? An experiment on exponential growth bias and retirement saving. National Bureau of Economic Research working paper 17927. Greninger, SA, Hampton, VL, Kitt, KA & Jacquet, S. 2000. Retirement planning guidelines: A Delphi study of financial planners and educators. Financial Services Review, 9(3), 231–245. Mitchell, OS and Moore, JF. 1997. Retirement wealth accumulation and decumulation: New developments and outstanding opportunities. National Bureau of Economic Research working paper 6, 178. Mitchell, OS and Moore, JF. 1998. Can Americans afford to retire? New evidence on retirement savings adequacy. The Journal of Risk Insurance, 65, 371–400. Palmer, BA. 1989. Tax reform and retirement income replacement ratios. The Journal of Risk and Insurance 56(4), 702–725. Palmer, BA. 1992. Establishing retirement income objectives: The 1991 RETIRE project report. Benefits Quarterly 8(3), 6–15. Palmer, BA. 1994. Retirement income replacement ratios: An update. Benefits Quarterly 10(2), 59–75. Palmer, BA. 2008. 2008 GSU/AON RETIRE project report 08-01, Georgia State University, Georgia. http://rmictr.gsu.edu/Papers/RR08-1.pdf. Accessed 14 March 2010. Tacchino, K and Saltzman, C. 1999. Do accumulation models overstate what’s needed to retire? Journal of Financial Planning, 12(2), 62–73.

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PART 2: CHAPTER 3 – THE JOURNEY ON AUTOPILOT: KNOWING WHEN AND HOW TO USE DEFAULTS Beshears, J, Choi, JJ, Laibson, D & Madrian, BC. 2010. The impact of employer matching on savings plan participation under automatic enrollment. In DA Wise (Ed.). Research Findings in the Economics of Aging. Chicago, IL: University of Chicago Press: 311–327. Bronchetti, ET, Dee, TS, Huffman, DB & Magenheim, E. 2011. When a nudge isn’t enough: defaults and saving among low-income tax filers. National Bureau of Economic Research working paper 16887. Butler, MBJ, Hu, B & Kloppers, D. 2013. A comparison of probability of ruin and expected discounted utility as objective functions for choosing a post-retirement investment strategy. South African Actuarial Journal 13, 185–219. Carroll, GD, Choi, JJ, Laibson, D, Madrian, BC & Metrick, A. 2009. Optimal defaults and active decisions. The Quarterly Journal of Economics, 124(4), 1639–1674. Choi, J, Laibson, D & Madrian, B. 2006. Reducing the complexity costs of 401(k) participation through quick enrollment. National Bureau of Economic Research working paper 11979. Fernandes, D, Lynch Jr, JG & Netemeyer, RG. 2014. Financial literacy, financial education, and downstream financial behaviors. Management Science. Johnson, EJ and Goldstein, DG. 2004. Defaults and donation decisions. Transplantation, 78(12), 1713–1716. Thaler, RH and Benartzi, S. 2004. Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy 112.S1:S164-S187. Van Derhei, JL. 2012. Increasing default deferral rates in automatic enrollment 401(k) plans: The impact on retirement savings success in plans with automatic escalation. Employee Benefit Research Institute Notes 33(9).

PART 2: CHAPTER 5 – AT WHAT COST? UNDERSTANDING THE LINK BETWEEN COSTS AND VALUE Bird, R & Gray, T. 2009. Submission to the Superannuation system review September 2009. Hodgson, TM, Breban, SJ, Ford, CL, Streatfield, MP, Urwin, RC, Breaban, SJ & Hunt, A. 2001. The concept of investment efficiency and its application to investment structures. British Actuarial Journal, 348–364. Goyal, A & Wahal, S. 2008. *The selection and termination of investment management firms by plan sponsors. National Treasury. 2014. 2014 Budget update on retirement reforms. http://www.treasury.gov.za/publications/RetirementReform/. Accessed June 2014. Republic of South Africa. 1998. Medical Schemes Act 131 of 1998, Section 29 A Government Gazette, 402 (19545): 79.

PART 2: CHAPTER 6 – COPING WITH COMPLEXITY: BALANCING AFFORDABILITY AND COMPLEXITY IN MEDICAL SCHEMES Baumol, WJ. 1967. Macroeconomics of unbalanced growth: The anatomy of urban crisis. The American Economic Review, 57(3), 415–426. Mika, VS, Kelly, PJ, Price, MA, Franquiz, M and Villarreal, R. 2005. The ABCs of Health Literacy. From Community Health. Vol.28. No.4. Stewart, S. 2013. Manager selection, Research Foundation of the CFA Institute.

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PART 2: CHAPTER 7 – STOP THE PRESSES! WE NEED TO TALK: HOW WE’VE LOST THE PLOT ON MEMBER COMMUNICATIONS Antolin, P and Fuentes, O. 2012. Communicating pension risk to DC plan members, the Chilean case of a pension risk simulator. OECD working papers on finance, insurance and private pensions, 28. Berne E. 1964. Games people play – The basic hand book of transactional analysis. New York: Ballantine Books. Bernheim, BD and Garrett, DM. 2003. The effects of financial education in the workplace: Evidence from a survey of households. Journal of Public Economics, 87, 1487–1519. Diamond, S. 2013. The visual marketing revolution. Indianapolis, IN: Que Publishing. Goda, GS, Manchester, CF & Sojourner, A. 2012. What will my account really be worth? An experiment on exponential growth bias and retirement saving. National Bureau of Economic Research working paper 17927. Iyengar, S. 2012. The art of choosing. New York: Twelve. Kahneman, D. 2011. Thinking, fast and slow. New York: Farrar, Straus and Giroux. Krum, R. 2013. Cool infographics: Effective communication with data visualization and design. Indianapolis, IN: John Wiley. Laibson, D. 1997. Golden eggs and hyperbolic discounting. The Quarterly Journal of Economics, 112(2), 443–478. Malinowski, B. 1923. The problem of meaning in primitive languages. In Charles K Ogden & Ian A Richards (Eds.). The meaning of meaning. London: Routledge: 146–152. McLuhan, M. 1994. Understanding media: The extensions of man. Cambridge: MIT Press. Medina, J. 2011. Brain rules. Victoria, Australia: Scribe Publications. Miller, G. 1956. The magical number seven, The Psychological Review. Volume 63. Pan, B, Hembrooke, HA, Gay, GK, Granka, LA, Feusner, MK & Newman JK. 2004. Determinants of Web page viewing behavior. Proceedings of the 2004 Symposium on Eye Tracking Research & Applications, Cornell University. Patel, N. 2014. 8 Powerful takeaways from eye tracking studies, May 2014. http://www.quicksprout.com/2014/04/16/8-powerfultakeaways-from-eye-tracking-studies/. Accessed June 2014. Rajan, A. 2013. A 360 degree approach to preparing for retirement. Turnbridge Wells, UK: CREATE-Research. Ogden, CK and Richards, IA. 1989. The meaning of meaning. London: Routledge. Sethi-Iyengar, S, Huberman, C & Jaing, W. 2004. How much choice is too much? Contributions to 401(k) retirement plans. In OS Mitchell & S Utkus (Eds.). Pension design & structure: New lessons from behavioural finance. Oxford: Oxford University Press: 83–95.

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PART 2: CHAPTER 8 – FAILURE TO LAUNCH: WHY FINANCIAL EDUCATION IS FAILING AND WHAT WE CAN DO ABOUT IT Akerlof, GA and Kranton, RE. 2010. Identity economics: How our identities shape our work, wages, and well-being. Princeton, NJ, Princeton University Press. Bikhchandani, S. 1998. Learning from the behaviour of others: Conformity, fads and informational cascades. The Journal of Economic Perspectives 12(3): 151–170. Fernandes, D, Lynch Jr, JG & Netemeyer, RG. 2014. Financial literacy, financial education, and downstream financial behaviors. Management Science. Grubman, J, Bollerud, K & Holland, CR. 2012. Motivating and helping the overspending client: A stages-of-change model. Center for Financial Security working paper 2012-CFS 1, 62 Kast, F, Meier, S and Pomeranz, D. 2012. Under-savers anonymous: Evidence on self-help groups and peer pressure as a savings commitment device. Discussion paper series, Forschungsinstitut zur Zukunft der Arbeit 6311). http://nbnresolving.de/ urn:nbn:de:101:1-201204239864. Accessed June 2014. Kerkmann, BC. 1998. Motivation and stages of change in financial counseling: An application of a transtheoretical model from counselling psychology. Association for Financial Counseling and Planning Education. Koster, R. 2005. A theory of fun for game design. Phoenix: Paraglyph Press. Lusardi, A and Mitchell, O. 2013. The economic importance of financial literacy: Theory and evidence. National Bureau of Economic Research working paper 18952. Meier, S and Sprenger, C. 2008. Discounting financial literacy: Time preferences and participation in financial literacy programs. Federal Reserve Bank of Boston. Public policy discussion papers. Mulaj, F and Jack, W. 2012. Evaluating the efficacy of mass media and social marketing campaigns in changing consumer financial behavior. World Bank social protection & labour discussion paper 1220. Mullainathan, S and Shafir, E. 2013. Scarcity: Why having too little means so much. London: Penguin. Prawitz, AD and Garman, ET. 2008. Education to promote employee financial well-being: What role for employers? Article for inclusion in GTZ Case Study Book on Financial Wellness. Prawitz, AD, Garman, ET, Sorhaindo, B, O’Neill, B, Kim, J & Drentea, P. 2006. InCharge financial distress/financial well-being scale: Development, administration, and score interpretation. Proceedings of the Association for Financial Counseling and Planning Education. Prawitz, AD, Shatwell, P, Haynes, G, Hanson, KC, Hanson, EW, O’Neill, B & Garman, ET. 2007. Lifestyle risk factors, health status, and financial distress: Framing interventions using the transtheoretical model of change. Proceedings of the Association for the Financial Counselling and Planning Education. Rossignol, J. This gaming life: Travels in 3 cities. Ann Arbor: MI: University of Michigan Press, p. 103. Xiao, JJ, Prawitz, AD, Proschaska, JM, O’Neill, B, Kim, J & Garman, ET. 2014. Strategies for motivating employees to develop positive financial behaviors, special publication of the personal finance employee education foundation, pp. 1–8. http://www.pfeef.org/questions/ Strategies-on-Website-Oct-08.pdf. Accessed June 2014.

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PART 2: CHAPTER 10 – THE JOURNEY: NOT JUST THE END GAME Akerlof, GA and Kranton, RE. 2010. Identity economics: How our identities shape our work, wages, and well-being. Princeton, NJ: Princeton University Press. Berman, B. 2006. Developing an effective customer loyalty program. California Management Review, 49(1), 123–148. Bikhchandani, S. 1998. Learning from the behaviour of others: Conformity, fads and informational cascades. The Journal of Economic Perspectives, 12(3), 151–170. Drexler, A, Fischer, G & Schoar, A. 2010. Keeping it simple: Financial literacy and rules of thumb. Center for Economic Policy. Furinto, A, Pawitra, T & Balqiah, TE. 2009. Designing competitive loyalty programs: How types of program affect customer equity. Journal of Targeting, Measurement and Analysis for Marketing, 17(4), 307–419. Goda, GS, Manchester, CF & Sojourner, A. 2012. What will my account really be worth? An experiment on exponential growth bias and retirement saving. National Bureau of Economic Research working paper 17927. Goldstein, DG, Johnson, EJ, Herrmann, A & Heitmann, M. 2008. Nudge your customers toward better choices. Harvard Business Review 86(12), 99–105. Lynch, JG and Woodward, SE. 2009. A recommender system to nudge consumers to choose mortgages and houses that match their risks and tastes. Paper presented at the Rand Behavioral Finance Forum: US-UK Conference on Behavioral Finance & Public Policy. Washington DC. Lusardi, A and Mitchell, O. 2013. The economic importance of financial literacy: Theory and evidence. National Bureau of Economic Research working paper 18952. Mullainathan, S and Shafir, E. 2013. Scarcity: Why having too little means so much. London: Penguin. Thaler, RH and Sunstein, CR. 2008. Nudge: Improving decisions about health, wealth, and happiness. New Haven, CT: Yale University Press. World Economic Forum. 2013. Global competiveness report. http://www.weforum.org/reports/global-competitiveness-report-2013-2014. Accessed June 2014. Zhang, J and Breugelmans, E. 2012. The impact of an item-based loyalty program on consumer purchase behavior. Journal of Marketing Research, 49, 50–65.

PART 3: THE ISSUES Adcorp. 2013. Adcorp Employment Index, August 2013. http://www.adcorp.co.za/Industry/Pages/AEIAugust2013.aspx. Accessed June 2014. Circadian. 2005. Absenteeism – The bottom-line killer. http://www.workforceinstitute.org/wp-content/themes/revolution/docs/AbsenteeismBottom-Line.pdf. Accessed June 2014. Filer, RK and Petri, PA. 1988. A job-characteristics theory of retirement. The Review of Economics and Statistics 70(1), 123–128.

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Forum of Private Business. 2013. How to deal with presenteeism in the workplace. http://www.fpb.org/hottips/1782/How_to_deal_with_ presenteeism_in_the_workplace.htm. Accessed June 2014. Holzmann, R, Hinz, R, Tuesta, D & Takayama, N (Ed.). 2013. Matching contributions for pensions: A review of international experience. Washington, DC: World Bank. Lusardi, A, Keller, PA & Keller, AM. 2009. New ways to make people save: A social marketing approach. National Bureau of Economic Research working paper 14715. Mitchell, OS and Utkus, SP. 2004. Pension design and structure: New lessons from behavioral finance. Oxford: Oxford University Press. Mullainathan, S and Shafir, E. 2013. Scarcity. London: Allen Lane. National Treasury. 2014. 2014 Budget update on retirement reforms. http://www.treasury.gov.za/publications/RetirementReform/. Accessed June 2014. National Treasury. 2014. Non-retirement savings: Tax-free savings accounts. http://www.treasury.gov.za/publications/RetirementReform/. Accessed June 2014. Strauch, B. 2010. The secret life of the grown-up brain. New York: Viking.

PART 4: ALL CHAPTERS Department of Labour. List of registered trade unions. http://www.labourguide.co.za/general/registered-trade-unions-in-south-africa-561. Accessed June 2014. FTSE-JSE industry classification, as used by the Johannesburg Stock Exchange. South African government information. National Departments. http://www.info.gov.za/aboutgovt/dept.htm. Accessed June 2014. Statistics South Africa. 2013. Gross domestic product, Quarter 4. Statistical release P0441. Pretoria: Statistics South Africa. Statistics South Africa. 2013. Quarterly labour force survey, Quarter 4. Statistical release P0211. Pretoria: Statistics South Africa.

PART 4: CHAPTER 1 â&#x20AC;&#x201C; CONSTRUCTION SECTOR Construction Industry Development Board & Bureau for Economic Research. 2013. Business Conditions Survey, Quarter 2. http://www. cidb.org.za/Documents/KC/cidb_Publications/Ind_Reps_SME_archive/ind_reps_cidb_SME_Business_Condition_Survey_2013_Q2.pdf. Accessed June 2014. Oxford Business Group. 2013. The report: South Africa 2013. London: Oxford Business Group.

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PART 4: CHAPTER 2 – ENERGY SECTOR BP. 2013. Statistical review of world energy 2013. http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-ofworld-energy-2013.html. Accessed June 2014. Oxford Business Group. 2013. The report: South Africa 2013. London: Oxford Business Group. South Africa’s renewable energy shift. 2012. http://www.southafrica.info/business/economy/infrastructure/energy-061112.htm. Accessed June 2014. US Energy Information Administration. 2014. South Africa. http://www.eia.gov/countries/cab.cfm?fips=SF. Accessed June 2014. Maswanganyi, N. 2014. Economic week ahead: Good news on current account expected. Business Day. http://www.bdlive.co.za/ economy/2014/03/10/economic-week-ahead-good-news-on-current-account-expected. Accessed June 2014.

PART 4: CHAPTER 3 – FISHING, FORESTRY AND AGRICULTUREL SECTOR Business Day. 2013. Empowerment: The A to Z of BEE. Cape Town: Paarl Media. Oxford Business Group. 2013. The report: South Africa 2013. London: Oxford Business Group.

PART 4: CHAPTER 4 – MANUFACTURING SECTOR Manufacturing Circle. 2013. Manufacturing bulletin: Quarterly review, Quarter 3. http://www.manufacturingcircle.co.za/docs/85227-Bulletin3rd-qrt-2013LR.pdf. Accessed June 2014.

PART 4: CHAPTER 5 – MINING SECTOR Oxford Business Group. 2013. The report: South Africa 2013. London: Oxford Business Group.

PART 4: CHAPTER 6 – PERSONAL SERVICES SECTOR South Africa. Department of Health. 2011. Green Paper: National Health Insurance in South Africa. Irish, J. 1999. Policing for profit: The future of South Africa’s private security industry. http://www.issafrica.org/uploads/Mono39.pdf. Accessed June 2014. National Planning Commission. 2010. Diagnostic overview. http://www.npconline.co.za. Accessed June 2014. Oxford Business Group. 2013. The report: South Africa 2013. London: Oxford Business Group. Private Security Industry Regulatory Authority. 2013. Annual report 2012/13. Pretoria: PSIRA. South African Police Service. 2013. Annual report 2012/13. Pretoria: SAPS. Barry, H. 2014. Teacher salaries: Who earns more? Moneyweb. http://www.moneyweb.co.za/moneyweb-south-africa/teacher-salarieswho-earns-more. Accessed June 2014.

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APPENDIX References

APPENDIX: REFERENCES

PART 4: CHAPTER 8 – PUBLIC SECTOR South African Local Government Bargaining Council. 2014. Accreditation of medical schemes in the local government sector. www.salgbc.org.za. Accessed June 2014.

PART 4: CHAPTER 9 – RETAIL, WHOLESALE AND HOSPITALITY SECTOR Gauteng Province Provincial Treasury. 2012. The retail industry on the rise in South Africa. Quarterly Bulletin. http://www.treasury.gpg.gov. za/Document/Documents/QB1%2520The%2520Retail%2520Industry%2520on%2520the%2520Rise.pdf+&cd=1&hl=en&ct=clnk&gl=za. Accessed June 2014. Grant Thornton. 2013. The TBCSA FNB tourism business index, Quarter 4. Johannesburg: Grant Thornton. Oxford Business Group. 2013. The report: South Africa 2013. London: Oxford Business Group.

PART 4: CHAPTER 10 – TRANSPORT AND TELECOMMUNICATIONS SECTOR Barrett, J. 2011. Transport and climate jobs – SATAWU research paper. http://www.climatejobs.org.za. Accessed June 2014. CSIR. 2012. 9th Annual state of logistics survey for South Africa 2012: Connecting neighbours – Engaging the world. http://www.csir.co.za/ sol/. Accessed June 2014. GSMA. 2014. The mobile economy 2014. http://www.gsmamobileeconomy.com/. Accessed June 2014. Vodacom. 2013. Integrated report for the year ended 31 March 2013. http://www.vodacom.co.za. Accessed June 2014. Warshaw, LJ. 2011. Challenges to workers’ health and safety in the transportation and warehousing industry. In L. Byrd (Ed.). Encyclopedia of occupational health and safety, Jeanne Mager Stellman, Editor-in-Chief. International Labor Organization: Geneva. http://www.ilo.org/oshenc/part-xvii/ transport-industry-and-warehousing/item/907-challenges-to-workers-health-and-safety-in-the-transportation-and-warehousing-industry. Accessed June 2014.

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APPENDIX

APPENDIX: DATA

Data

DATA Member Watchâ&#x201E;˘ 2013 Data Set The Member WatchTM Survey is an annual analysis that we perform on data for retirement funds administered by Alexander Forbes Financial Services. The analysis prepared for Benefits Barometer 2014 used data as at 31 December 2012. The number of funds in each sector was large enough to give credible results.

NUMBER OF FUNDS PER SECTOR 95

Transport and telecommunications 35

Retail, wholesale and hospitality

105

Professional and business services 91

Personal services

Public sector

Mining

214

Manufacturing

Fishing, forestry and agriculture

Energy

26 43

Construction 0

100

150

200

150

Every industry had a relatively large number of funds, except for security and the public sector. This means we may need to interpret comments made about fund design with caution as the sample may not be representative of the industry. The fund data corresponded to 520Â 148 lives that can be classified by sector.

465

APPENDIX Data

APPENDIX: DATA

NUMBER OF MEMBERS PER SECTOR 59 953

Transport and telecommunications

73 207

Retail, wholesale and hospitality Professional and business services

103 249

Personal services

86 500

Public sector

28 302

Mining

34 029

Manufacturing

76 298

Fishing, forestry and agriculture

10 213

Energy

11 751

Construction

19 693 0

20 000

40 000

60 000

80 000

100 000

120 000

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. The retirement fund industry consists of 691 861 members and 1 851 funds. We combined this data with fund data where we could not find the industry classification or where the client’s operations were diversified in holding companies, for example.

466

APPENDIX

APPENDIX: DATA

Data

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 28Â August and 7Â September 2012. Employee benefits managers were requested to fill out an online survey on current and future benefit offerings. The analysis is based on 31 respondents. The distribution of funds in each sector is shown below.

NUMBER OF MEMBERS PER SECTOR

Construction

Transport and telecommunication

1 1

Mining

Retail, wholesale and hospitality

4 10

Personal services

Manufacturing

Fishing, forestry and agriculture

Professional and business services

Source: Future of Employee Benefits Employer Online Survey 2012

467

APPENDIX Data

APPENDIX: DATA

Benefits Barometer 2014 Consultants Survey The Benefits Barometer 2014 Consultants Survey is an analysis based on data collected both from online responses by employee benefits consultants and paper-based responses directly from the HR departments of various Alexander Forbes clients. The survey was run between 06 December 2013 and 31 January 2014. Questions related to both traditional and non-traditional benefits in the employee benefits offering. The analysis is based on 102 responses. The distribution of funds in each industry is shown below.

NUMBER OF EMPLOYERS PER INDUSTRY Fishing, forestry and agriculture

Energy Construction

Transport Telecommunications

Retail and wholesale

Public sector

Professional and business services

14 Personal services: media and marketing

Source: Benefits Barometer 2014 Consultants Survey

468

Hospitality

Mining

Personal services: education

Personal services: health

Manufacturing

APPENDIX

APPENDIX: THANK YOU

Thank you

THANK YOU Benefits Barometer 2014 stands as a testimony to Alexander Forbes’s commitment to serve our clients, the people of South Africa. Without our clients, and our desire to improve their quality of life and create peace of mind for each of them, it would not be possible to even attempt to get to the heart of how employee benefits touches each life. It’s 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 our clients who answered surveys and who allow us to analyse their data on an ongoing basis. To ICAS for sharing their data and insights with us. To the editorial and writing committee: Anne Cabot-Alletzhauser

Kristin-Ann Cronjé

Kelsy Moodley

Amy Underwood

John Anderson

Megan Butler

Alison Counihan

Juan Da Silva

Dean Furman

Chris Jones

Edward Kieswetter

Dwayne Kloppers

Vickie Lange

Saul Leeman

Lindsay Lofstedt

Iva Madjarova

Shiva Makotoko

Ruth Mathabathe

Duane Naicker

Deslin Naidoo

Laurence Phillips

Michael Prinsloo

Matthew Ryder

Myrna Sachs

Rivash Sahadev

Andrew Steenkamp

Belinda Sullivan

Martin Teubes

To the additional contributors:

To those who critiqued, cajoled and cameoed: Craig Bentley

Clive Bydawell

Joseph Chen

Reuven Coenen

Lindi Dlamini

Youri Dolya

Gary Fisher

Gigi Kightley

Michael Kirkpatrick

Ryan Knipe

Thabo Mashaba

Wayne Sunker

Deslin Naidoo To those who supplied, analysed and managed data: Consultants across the Alexander Forbes Consultants & Actuaries and Alexander Forbes Retirement Fund divisions. To external parties who shared their insights: Betty Linda

Rob Rusconi

Phopho Thwala

Alex van den Heever

To those in the Alexander Forbes Communications team: Nina Atkinson

Ziska Baumgarten

Nkgomo Bojosinyane

Priscilla Botha

(Designer)

(Editing/proofreading)

(Designer)

(Senior designer)

Sharmaine Chanee

Kim Jonson (DTP)

Sharon Stephen (Digital designer)

Irene Stotko

(Production)

Myrsheila Wessels

Michelle Wilson

(Project manager)

(Art director/design)

Thank you!

(Editing/proofreading)

469

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