THE ISSUES, THE BAROMETER AND THE DATA

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1 BOOK indb /08/02 11:11 AM

2 Unhealthy finances Unhealthy personal finances can lead to unhealthy employer finances. This is essentially all about employee financial well-being. Problems highlighted were: high employee turnover increased levels of absenteeism and presenteeism low employee morale employee healthcare problems increased levels of fraud, theft and on-the-job accidents In Benefits Barometer 2015 we catalogued the programmes that are emerging in the workplace to deal with debt, financial well-being and financial capability. We further detailed what appeared to be working and what didn t. Most importantly, we identifed what the financial services industry needs to do to better address these needs. This year, after a number of financial well-being programmes have emerged, we provided an analysis of how we felt such a programme could be optimally structured. Low-income earners and incentives In examining benefits for low-income earners in the South African system we found that: because of the means test for the Grant for Older Persons, saving for retirement simply doesn t make sense for many low-income earners low-cost risk benefits through a group arrangement are important for workers who support a large number of dependants joining a medical scheme doesn t make sense for workers earning under R a year because they lose access to free hospital treatment at government facilities Beyond government-provided benefits, retail products available to individuals are not cost-effective for low-income earners. Employers may need to include lower-income earners on occupational funds if they re not catered for by the government. In examining the incentive structure for savings, we propose that in an optimal benefit structure for low-income earners, the government should match contributions. Not only is this easier for workers to understand, but it also fosters partnership with the government. Absenteeism and presenteeism Absenteeism in the workplace is a direct cause of lost productivity for an employer. When absenteeism is not managed correctly, employees tend to view their sick leave as an entitlement, using their full benefit. Monitoring and managing sick leave effectively is critical to detect disability claims before they occur, since temporary absence may be a sign of a disability claim that could become protracted. Presenteeism is the practice of employees coming to work despite illness, injury or anxiety over personal issues. Presenteeism can also have a direct impact on productivity since, despite physically being at work, the employee produces sub-standard work, if any work at all. Recent research shows a strong link between unhealthy finances and presenteeism. This year, in Part 3: Chapter 3, we describe in detail how an employee wellness programme could be structured to minimise both absenteeism and presenteeism, to the benefit of employers and employees. 278

3 The strain experienced from incapacity in some industries may warrant early retirement. Key indicators include physical strain, emotional strain and use of physical strength and flexibility. Companies that manage incapacity in the workplace correctly can better mitigate cross-over into disability benefits and manage benefit premiums. In Benefits Barometer 2016 we described how employers can create more effective incapacity management programmes designed to get workers back on the job as quickly as possible. Temporary or contract workers include fixed-term contractors, project contractors and casual workers who work no more than 24 hours in a month. Their shared characteristics include: volatile and non-continuous pay high turnover varying employment periods temporary relationship with a given employer These characteristics make providing access to retirement funds and risk benefits extremely tricky. With the rise of the gig economy and the prospect of increasing longevity, we believe that policymakers and employers may have to give the concept of temporary workers a complete rethink. This means, however, that the need for some sort of savings and risk benefits protection for these types of workers is more necessary than ever. Choice Individuals face a multitude of choices but don t have a clear grasp of the interconnectedness and implications of their decisions, particularly when it comes to their finances. The challenge is to identify which decisions individuals need to make and how many are best managed by defaults, which preserve an individual s sovereignty but guide outcomes more carefully. The impetus from National Treasury for pension funds to include defaults for investments, preservation and annuitisation as a means to better address the choice dynamic is building. While defaults provide one answer to the problem, this option becomes more compelling if the solutions can be tailored to an individual s specific circumstances. These types of products will be appearing in the coming year. 279

4 PART 6 Bricks and books and beyond South Africans greatly value in-kind benefits from employers in two areas: housing (bricks) and education (books), and both act as partial substitutes for retirement savings (beyond). Given their importance, there may be reason to allow both pension-backed lending and pension fund withdrawal for these two purposes. Other ways employers could help employees with these two areas include subsidies and education trusts. The challenge here is to consider the tax implications of fringe benefits. Thie 2016 edition of Benefits Barometer described a new way we could more effectively integrate housing and education into a long-term savings framework. are a primary issue because of the unintended consequences for employee benefits. When members can t pay contributions towards group risk benefits or medical aid, these safety nets can vanish when workers need them the most. Another issue is that if employees are dismissed during the heat of negotiations, they may withdraw retirement savings to cover their lost income. We see an increasing need to change the conversation between employers and new members from debating contract terms to establishing an agreement. Instead of focusing on what the take-home pay will be, the new entrant needs to understand and appreciate that the employer will make available to them the means to maintain a certain level of mental, physical and financial well-being through their employee benefits offering. In turn, the employee needs to commit to maintaining those levels. In this year s Benefits Barometer we demonstrate ways to structure benefits packages that go much further in engaging with young workers and providing more effective ways to address their specific needs. This year we show additional ways in which employers can integrate housing, education and skills development assistance programmes into a benefits package BOOK indb /08/02 11:11 AM

5 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 aiming to provide a post-retirement income that is 52.5% of the employee s pre-retirement income. From a tax perspective, the concept of pensionable pay has fallen away. But employers may still decide to retain the concept as it allows them to provide employees with higher take-home pay. If this is the case, companies will need to find more effective ways to communicate the concept, as employees continue to find it particularly confusing. Variability in salary inflation In previous years, real salary increases were above 9% for younger members. Salary increases raise an employee s standard of living but often translate into increased borrowing and consumption rather than savings. The result is that retirement savings don t keep pace with lifestyles. Another problem with high salary inflation is that it may well exceed the assumed rate used to calculate projections of replacement ratios. Unless members adjust their contribution rates or benefit expectations, there s likely to be a shortfall at retirement. Mass exits When a significant number of employees leave the company either through retrenchments or corporate activity, there s typically enough lead time for contingency planning. This is not the case with strike action. Being retrenched when the prospect of a new job is poor can lead to individuals using their retirement savings to fund their lifestyles. In the case of transfers, members sometimes have the option of accessing their funds even though they will likely join the new employer s fund. This would not be a bad thing if members acted responsibly, but low preservation rates indicate the opposite. 281

6 Men and women retiring at 65 can expect to live another 16 and 20 years respectively, of which seven to nine of those years will be spent in relatively good health. On average, defined contribution fund members could expect to retire on 39% of their final pensionable income. We are slowly moving towards a world where the concept of retirement may be dramatically altered. Not only will people find themselves too financially strapped to retire, but improvements in our health mean we will be able to contribute meaningfully for significantly longer. This year, several chapters in Benefits Barometer 2017 deal with the notion of the hundred-year life and how employers could rethink their engagements with workers who have passed retirement but are still capable of adding significant value to the organisation. This group includes informally employed domestic workers and gardeners, some types of construction workers, and hawkers and traders. In providing benefits for informal workers, the fund sponsor would have to deal with the following challenges: cost, which must be rock bottom administration, which must address the demands of a transient population of no particular fixed address or employment intermittent employment of indeterminate length High employee turnover This is a structural issue in a sector where large proportions of employees exit regularly as a result of either cyclical requirements in an industry with boom-bust dynamics or high levels of competition for skills. Long-term investment strategies or dynamic benefit structures that shift members benefit exposures according to their lifecycle requirements are interrupted when members transfer to new funds or strategies. Similarly, high employee turnover undermines such compelling strategies as auto-escalation, where employees contribution rates are gradually increased when their salaries are adjusted. If an employee is constantly switching companies, they would also always be on the lowest contribution band. With advances in HR data analytics, we now have models that can help employers identify which employees are likely to leave in the near term, thereby significantly reducing the cost impact of turnover. 282

7 DATA SET Member Watch 2016 data set The Member Watch data set is a database containing information of individual members of retirement funds administered by Alexander Forbes Financial Services. The analysis prepared for Benefits Barometer 2017 used data as at 31 December The number of funds in each sector was large enough to give credible results. Number of funds per sector Note that public sector funds in our analysis include a small number of municipalities that sit outside the Government Employees Pension Fund. Comments made about funds in the public sector are not necessarily applicable to members in the Government Employees Pension Fund. 283

8 Number of funds per sector The large number of members in each sector suggests the data on member behaviour is likely to be relatively credible. The retirement fund consists of members and funds. We combined this data with fund data where we could not find an appropriate sector classification or where the client s operations were diversified in holding companies, for example. 284

9 THE BAROMETER The concept behind the benefits barometer is to provide a constant barometric reading of the state of employee benefits in South Africa. To some extent this can be achieved by simply looking at the data. The Alexander Forbes Member Watch TM database gives a comprehensive view of the employee benefit offerings for all our employer clients, covering members. But the data can only take us so far. We also need to keep abreast of both the external and internal challenges that limit the opportunities for employers to do more and for employees to extract the full value of what s on offer. These external dynamics incorporate the state of the nation from an economic, political and social perspective. They relate to policy changes in labour law, pension reform, and reporting on environmental, social and governance issues. While these dynamics may be out of an employer s control, they certainly demand that employers stay up to date. Our discussions in the Issues segment of this chapter refer to some of those developments. Then there are the internal dynamics the aspects of corporate policy that reflect how employers are responding to their marketplace, the competition for talent, and the need for employee engagement. These choices also produce knock-on issues that may have far-reaching consequences for a company s sustainability. What the benefits barometer provides is a comprehensive collection of all these elements the data, the insights, and the measurement of impact so that employers can make better-informed decisions. The data can only take us so far. We also need to keep abreast of external and internal challenges that limit the opportunities for employers to do more and for employees to extract the full value of what s on offer. 285

10 CONSTRUCTION Bricks and books and beyond High employee turnover ENERGY Choice Variability in salary inflation EDUCATION Bricks and books and beyond MEDIA AND MARKETING High employee turnover The Alexander Forbes benefi ts barometer provides a measurement of which issues are likely to create the greatest impediments to implementing an employee benefi ts programme. Typically, we indicate whether a specifi c issue would be categorised as high priority, medium priority or low priority. We also present an aggregate picture of the high-priority issues for different South African sectors. BAROMETER PRIORITIES FISHING, FORESTRY AND AGRICULTURE Bricks and books and beyond MANUFACTURING Mass exits MINING Bricks and books and beyond Variability in salary inflation Mass exits HEALTH SECURITY High employee turnover PROFESSIONAL AND BUSINESS SERVICES Choice Variability in salary inflation Infl ation PUBLIC SECTOR Bricks and books and beyond RETAIL AND WHOLESALE High employee turnover HOSPITALITY TRANSPORT TELECOMMUNICATIONS Choice 286