Don’t underestimate your benefits as an employee
As this month is is Workers’ month, let’s look at what you may be receiving from your company in the way of employee benefits, which may be more substantial than you realise, and must be taken into account for financial planning purposes.
Your employer may be subsidising your medical scheme contributions and your contributions to a retirement fund (pension or provident fund).
If you are a member of an occupational retirement fund, a small part of your contribution will go towards group risk cover: this is insurance that covers you for death or permanent disability and, in some cases, dread diseases, such as cancer and stroke.
The life cover may be for a multiple of your annual salary. If you are permanently disabled and unable to do your job, the disability cover may pay out a lump sum or, as is more common nowadays, it will pay you a monthly income (typically about 70% of salary) until your retirement date.
Group risk cover is a substantial benefit that is often overlooked. There is no individual risk assessment (known as underwriting), which means that older, sicker members receive a higher level of cover than they would if they bought the insurance privately, if they could get private cover at all.
The biggest benefit you typically receive from your employer, apart from your salary, is the means to save for your retirement.
Mica Townsend, head of business development and an employee benefits consultant at 10X Investments, says it is for a very good reason that employers of choice are those interested in helping their employees to retire comfortably.
“Membership of a corporate fund gives workers structure for planning and saving, and they benefit from corporate pricing, which reduces the fees they pay. Having their contribution deducted upfront from their salary is another benefit, as is having the tax benefits applied every month rather than having to apply for a refund once a year,” Townsend says.
She says the obligation on employers should go further than providing the means: they should ensure that the fund has a solid chance of earning a decent return, that too much money isn’t lost in fees, and that employees have access to all the information they need about the fund.
“The more engaged with the fund that members are, the better their choices and their eventual retirement outcomes,” she says.
10X Investments’ Retirement Reality Report 2020 found that membership of corporate retirement savings schemes was widespread in South Africa, but most members admitted they had a poor understanding of the scheme they belonged to. Only 40% of members surveyed said they had a good understanding of their fund, more than a third said they wished they knew more, and 11% said they simply weren’t interested or trusted that the best choices were being made on their behalf.
EMPLOYERS IN TROUBLE
So what happens to your retirement savings if, as may have happened during the pandemic, your company gets into difficulties and either goes into liquidation or is bought out by another company?
Nashalin Portrag, head of Momentum’s Fundsatwork umbrella funds, says the law protects employees in these cases. “There are clear legislative processes that must be followed with regard to employee benefits during a merger or acquisition. Section 197 of the Labour Relations Act facilitates the business transfer, protects employees from being treated unfairly and protects their employment, which includes their employer-provided retirement and insurance benefits,” says Portrag. “The act determines that the new employer employs transferred employees on terms and conditions that may not, on the whole, be less favourable than those they had with the old employer.”
Portrag says new employers may allow transferred employees to keep contributing to their existing pension or provident fund or require them to move their savings into a new fund.
The transfer to the new fund must comply with section 14 of the Pension Funds Act, which ensures that process is reasonable and fair. It must also comply with the rules of the funds.
He cautions: “It is important to understand that employees are not entitled to their withdrawal benefits in such a transfer.”
If your company goes into liquidation, you will have access to your retirement fund savings, but only after the fund has been closed.
You may take your savings as cash, or may transfer them to a preservation fund or another retirement fund.
If your employer was part of an umbrella fund (a large fund run by a commercial provider, which houses a number of employers under one “umbrella”), you can preserve your retirement savings within the fund. You can also choose to withdraw some savings and preserve the rest until your normal retirement date. It is important that you talk to a qualified financial adviser when considering the different options, particularly to understand how tax will affect you.
Portrag notes that your group insurance benefits may change. “If your company undergoes fundamental restructuring, such as downscaling or changing its operating model, it may revise its group benefit structures to balance benefit levels and value with cost.” This may mean a lower level of benefits, which may be insufficient for your needs.
In the event of retrenchment, some group insurance schemes offer the option to convert to an individual private policy without medical underwriting.