Rising medical inflation, stagnant scheme participation, and mounting financial stress are challenging the traditional model.
Affordability is one factor creating friction among those who may be dealing with multiple financial pressures. Picture: iStock
The South African employment benefit industry is currently worth around R800 billion, comprising retirement funds, medical aid schemes and group insurance contributions.
But a pushback against forced membership of retirement funds and medical aid schemes is expected to increase, according to NMG Benefits, one of the country’s largest independent benefit brokers.
This is due to rising medical inflation, changing employee expectations and affordability pressures, NMG experts said during a media roundtable on Monday.
Employees empowered … but hamstrung
The future of employee benefits is increasingly in the hands of employees because cost-to-company salary structuring is now the default, says Geoff Baars, chair and CEO of NMG.
“Very few employers are subsidising medical scheme contributions after retirement. It is a cost that the employee has to bear.”
Yet many companies still prescribe membership of a retirement fund and medical aid scheme as a condition of employment.
Friction arises from the fact that the employee is forced to pay for the benefits and is being told which funds or schemes to belong to.
‘People are financially stressed’
“There is no doubt that people are financially stressed,” notes Lettesha Pillay, head of business development at NMG.
She says employers are receiving growing numbers of requests for salary advances, staff loans and leave-pay payouts – but many “have stopped offering staff loans for various reasons”.
“The pressure is evident from the letters employers are getting from casual lenders requesting confirmation of employment for them to ensure their loans will be repaid.”
Rethink needed by employers?
Baars says there is growing support for the idea that people should be free to decide how to spend their own money.
The employer should not prescribe to them what to do.
“We see this natural conflict. But the employer does have some – at least a moral responsibility – to help their employees make the best decisions.”
For example, there has been a tsunami of retirement fund members who have accessed money from their savings pot since the two-pot system was introduced in 2024 – showing the need for financial relief.
One concern, based on anecdotal evidence, is that some people are using this money – their retirement savings – to gamble, hoping to hit the jackpot.
Retirement savings
According to Baars, the biggest portion of the benefit industry is made up of retirement fund contributions (R500 million).
Around nine million of the 11 million people employed in the formal and non-agricultural sectors are retirement fund members.
Traditionally the employer or board of trustees made all the decisions around the retirement fund.
However, some of the practices in the industry regarding what people do with their money and the decisions they need to make haven’t changed enough.
Ideal income replacement ratio after retirement
Trevor Kingsley-Wilkins, head of retirement fund consulting at NMG, says the ideal income replacement ratio post-retirement is 75%, but the current NMG analysis shows that the net replacement ratio is 38%. “That is monstrous.”
It is attributed to people starting to save too late, contributing too little, failing to preserve retirement savings when changing jobs before compulsory preservation under the two-pot system, and investment returns not beating inflation (the norm should be inflation plus 5%).
Fees also play a role. Kingsley-Wilkins encourages people to look at the total expense ratio (TER) to be able to compare apples with apples.
NMG COO Siphamandla Buthelezi says at least more people are going to retire with some money because of the two-pot retirement fund reforms.
He warns however that people must realise that retirement is not about age. It is about financial stability.
Medical cover
Baars says when it comes to medical schemes, around 4.4 million are principal members and another 4.5 million are dependants. This number has been static for a long time.
When compared to population growth, the numbers are declining – mainly because of affordability and restrictions on schemes to come up with low-cost benefit options.
Karin Mitchelmore, head of healthcare consulting at NMG, says the healthcare industry is facing a “squeeze effect”.
The cost of clinical treatment is rising, and the pool of young healthy contributors is shrinking.
Medical schemes increases
This is forcing medical schemes to increase contributions – sometimes between 3% and 4% above inflation.
The average age of a medical scheme member in 2008 was 32. It is now 38.
“It is going to get worse because young healthy people are going to find alternative solutions,” says Mitchelmore.
“Their only other solution right now is medical insurance.”
This article was republished from Moneyweb. Read the original here.
