Your best retirement plans could prove sadly inadequate if your employer is one of those companies reconsidering its obligations to you.
You may also find yourself revising your retirement savings plans if you take a job with a company that has already down-scaled benefits for new employees.
New accounting laws are forcing many companies to reconsider their subsidisation of your healthcare needs in retirement.
In the past, many companies simply continued to contribute to, or to pay in full, your medical contributions when you went on pension.
But as the number of pensioners that companies have on their books increases, and the cost of medical scheme membership continues to escalate, companies say they are being forced to reconsider their options.
Now a new accounting standard, that stipulates that employers must disclose the cost of employees' post-retirement benefits in their financial statements, is forcing all companies, and their shareholders, to face this liability.
More and more companies are likely to shift the responsibility for funding your post-retirement healthcare needs onto you.
Employer trends
A survey conducted last year by NMG-Levy Consultants and Actuaries, and the Old Mutual Healthcare survey released in May this year, both identify a trend among employers to limit liability for healthcare funding.
The actions companies are taking are similar to those that they have already largely taken with retirement benefits. Where previously companies offered you a pension for the rest of your life based on your final salary, called a defined benefit, many are now only offering you a lump sum based on the contributions you and your employer have made, plus whatever growth your fund achieves - a defined contribution.
With post-retirement healthcare benefits companies are moving from continuing to pay the same contribution they were paying when you were employed - a defined benefit, to making a defined contribution to your post-retirement healthcare benefits. However, unlike with your retirement savings, few companies are encouraging you to save towards post-retirement health care.
More than half of the companies surveyed by NMG-Levy said they are hiring new staff on the understanding that the company's liability towards their post-retirement healthcare funding would be limited. Another 40 percent said they were considering such a move.
A third of the companies surveyed said they had taken steps towards converting the defined benefit for existing staff to a defined contribution. Fewer companies are taking action against their pensioners, but about a sixth of the companies surveyed had taken such steps already.
NMG-Levy asked 150 companies, selected from South Africa's top 200 companies, to participate in a survey on post-retirement healthcare benefits. Only 25 companies responded. Nevertheless, the survey gives some insight into the companies' thinking. The size of the companies in the survey sample, ranged from 44 to more than 22 000 members and included a mix of both open and closed schemes.
Among those participating, 68 percent said they had examined employment contracts to ascertain whether or not they had a liability to provide healthcare benefits.
One company established that it had no legal liability, 11 believed they had a liability to provide a defined benefit and four said they had a liability to make a defined contribution.
More than 60 percent of the companies had gone as far as having their liability for providing these benefits assessed by actuaries.
Five companies had funded this liability fully. Another five had partially funded this liability.
Nine companies chose to fund the liability through their balance sheets and three used provident funds. Only seven had made provision for their employees to contribute towards post-retirement healthcare benefits. A number of companies said they are considering using surpluses in their retirement funds to reduce their liabilities for post-retirement healthcare funding.
According to current thinking in Parliament's Portfolio Committee on Finance, companies may be able to use their portion of the surplus to do this, but the surplus will only be divided among companies and employees after certain groups, such as pensioners and former members, are given their dues.
The Old Mutual survey showed that 60 percent of companies participating in that survey had identified not offering post-retirement healthcare benefits as a measure to control costs. Employers also indicated that their primary strategies for dealing with current pensioners included limiting employer contributions (34 percent) or not providing health care in retirement (17 percent).
The legalities
As you realise what could happen and contemplate your loyalty to your company, you may be wondering whether your company can limit or reduce the subsidy it is currently offering you.
Gerald Jacobs, a senior labour consultant with NMG-Levy Consultants and Actuaries, says companies can change your employment conditions but they must have compelling economic, or other, rationale for the change and the change must be preceded by a meaningful consultation process.
Jacobs says that in terms of common law, a contract may only be altered through negotiation and, ultimately, agreement. But an employment contract is different.
"This is because employment law, which is underscored by the philosophy of fairness, exists in parallel with the common law. This may lead to a situation where employers are justified in implementing unilateral changes to an employment contract," he says.
So with good reason, and after consultation with you, your company may change your benefits, and here Jacobs points out that consultation does not imply that there must be agreement.
He also adds that while your employer's reduction of your benefits, such as medical scheme contributions or retirement benefits, may be acceptable in terms of employment law, the decision to reduce benefits must be guided by the potential remedies available to the employees, either acting individually or as a collective.
These, Jacobs says, include taking the case to the Labour Court or the High Court, or taking industrial action.
However, Jacobs says pensioners and employees dismissed for incapacity through illness or injury pose less of risk to an employer, because they can only seek redress in common law and not in labour law. This, he says, would enable the company providing the benefits, or the former employer, to act in a more "robust fashion".
The Siemens example
Siemens, the leading electrical engineering and electronics company, recently notified its pensioners that it is limiting the "generous practice" of subsidising the pensioners' medical aid subscriptions.
Pensioners were notified that the company would be taking out an annuity to cover the company contributions to pensioners' medical aid contributions. The annuity would be set at the level of the company's current contribution to each pensioner's scheme costs.
In a letter to pensioners, Siemens says the annuity will enjoy some inflation increases in the future, but this may not be enough to meet increases in scheme contributions. Pensioners are being given two options: They can stay on the scheme, and fund any increases above the increases in the monthly annuity themselves - or they can take the annuity in lieu of the company's contribution, resign from the scheme and find one they can afford.
If a pensioner is able to find a scheme that does not make use of the entire annuity, he or she can keep the balance, Siemens says, pointing out that there may be tax implications for pensioners who follow this route.
Pensioners are being asked to sign a document releasing Siemens from further liabilities - and anyone who doesn't sign will not receive the annuity. Those who reject the offer have to do so in writing, and the company says that although it does not intend to take their medical aid subscription away, future increases will not be paid.
It also says that in the "extreme" event of medical schemes disappearing in South Africa as a result of "crippling" legislation and diseases such as HIV/Aids, the subsidy will cease.
Siemens also says that in the past there were never contributions to post-retirement medical scheme contribution funding. The company simply paid contributions for pensioners out of com-pany income. However, the number of pensioners enjoying this benefit has steadily increased, as have medical scheme contributions.
This open-ended liability "can obviously not be tolerated by any business that wishes to survive", the company says in a communique.
Siemens says that in the past it subsidised subscriptions for active employees and pensioners 100 percent. This was reduced to 75 percent for active employees and pensioners from January 1 this year, and will almost certainly have to reduce further in future.
What you need
In its survey, Old Mutual Healthcare calculated that the present value of lifetime healthcare costs for an employee retiring at the age of 60 on January 1, 2001, was about R600 000.
Sanlam Employee Benefits recently estimated that you would need R500 000 in capital at retirement to fund the medical scheme contributions of a typical pensioner. Alternatively, it said, a typical employee who is 20 years away from retirement will need to save R600 a month, increasing with inflation, to build up sufficient capital for post-retirement healthcare needs.
Adrian Baskir, an actuary at Old Mutual Healthcare, noted in the Old Mutual survey that there was no suitable tax-efficient vehicle to do this. Baskir says that most industry experts believe retirement funds are the best available vehicles for this purpose, and that similar funds for the purpose of pre-funding these contributions, should be permitted.
What you should do
Peter Nieuwoudt, the senior director of Alexander Forbes Health Care Consultants, says to ensure you have affordable health care in retirement you need to take account of three principles:
1. Affordable health cover, including such benefits as for hospitalisation, chronic medication and major illness;
2. Avoid purchasing "top of range" or comprehensive cover. You shouldn't insure routine costs, which are foreseeable and can be budgeted for; and
3. Save money for adequate healthcare cover in retirement.
Nieuwoudt says there is no ideal
vehicle for this saving, but says you should consider flexibility, tax efficiency in the build-up and the end benefit; and security (protection against creditors).
Investment products that can be offered by employers are often overlooked, but could provide the best solution. Employer initiated vehicles include the following:
* Deferred Compensation, which can be linked to retirement or early retirement due to ill-health, and which can incorporate life and disability cover;
* Supplementary (Top-Hat) Pension Funds, where you pay more into a retirement fund, within the tax deductible limits; and
* Retirement Annuity Funds. This is a favourable option if it is offered on a group basis with voluntary participation, or if no up-front commission is paid.