South Africans are gaily contributing to retirement funds, unaware that in most cases the Aids pandemic is reducing the amount they will receive at retirement.
Most retirement schemes offer group life assurance to their members. Group life assurance is typically taken out by a group, such as a company or union, for employees. It is generally cheaper to have group life cover than for individuals to take out their own life policies.
The premiums for the life assurance part of the scheme are included in the total amount you and your employer contribute to your retirement fund every month. In other words, part of your premium goes towards group life cover and part goes to your retirement savings.
Since the HIV/Aids pandemic, the cost of group life assurance has crept up steadily by about 15 percent a year.
The reason is that people are dying younger, on average, because of Aids. With people dying younger, life assurance companies must collect more in premiums to make earlier pay-outs.
However, instead of the retirement fund trustees pushing up your total contributions to your pension fund, the proportion of your premiums going towards retirement savings is being reduced to pay the additional amount that is required for the group life cover.
The rate of increase of premiums is not the same for every scheme.
Nico van der Colff, the executive consultant for group assurance at Old Mutual Employee Benefits, says the increase in the premiums depends on the profile of the scheme concerned.
As a group, the members of some schemes are considered to be more at risk than others. The factors that are taken into account include age, gender, the province in which the members live and their level of education. Women, younger people, and those with a low level of education all have a higher HIV/Aids infection rate, while the province with the greatest incidence is KwaZulu-Natal.
Van der Colff says while premiums for group life assurance have been increasing, generally the total amount paid in contributions has not. Most companies spend about two percent of their salary bill on group life cover.
Van der Colff says schemes that do not make adjustments to premiums could eventually see all contributions going to group insurance cover.
Some employers have been reducing risk benefits (what you receive if you make a claim), which means although you are paying the same amount in contributions, the amount for which you are insured will be reduced. This can place your dependants in a predicament when you die.
What you can do
You can do anything about it, but you have to play smart and not leave everything in someone else's hands.
For people on a defined benefit fund, there is not much latitude because both the death benefits and pension are determined by how much you earn and the period of membership. So the employer, and not you, carries the risk and the cost. The only real option here is for an employer to limit the death benefits.
Against this, a defined contribution fund has more versatility because both you and your employer agree on how much should be contributed to funding your retirement savings and other benefits.
Defined contribution schemes are able to, say increase your group life benefits at times when you have young children and then reduce the amount of cover and the contributions when you are older, putting more of your money towards retirement savings.
You need to establish how much of your premium is going to group life assurance on an annual basis. If the cost goes up and your premiums are not being increased, you need to increase your retirement savings. Here are two ways you can do this:
- You can increase the amount you pay towards your retirement savings, depending on the rules of the fund. Many funds allow for additional voluntary contributions. These voluntary contributions are unlikely to be matched with additional contributions from your employer; and/or
- Take out a retirement annuity through a life assurance company.
You should not rely entirely on an employer-sponsored retirement fund to provide for your retirement. Very few retirement funds provide an income at retirement that will leave you financially secure.
You should have regular updates on your retirement plans by getting your financial adviser to take you through a financial needs analysis. This will help you identify how much you should be saving towards retirement and how much you can afford.
A financial needs analysis will also help you identify whether the group life assurance you have, through your retirement fund, will be sufficient to meet the needs of your dependants.