You must include healthcare in your retirement plans if you want to be financially secure in your retirement, Mark Arnold, the managing director of health risk management consultants Glenrand MIB, told the recent Discovery Health / Personal Finance Health Focus seminars.
If you are still planning for your retirement, you are going to have to take the initiative to save additional money to pay for post-retirement healthcare, because your employer is unlikely to be able to subsidise your medical scheme contributions in retirement and many have already cut back on subsidies for existing pensioners, Mark Arnold says.
Already most employers are only offering new employees subsidies for their medical scheme contributions which cease at retirement.
Arnold says that many pensioners who had relied on receiving an employer subsidy for their medical scheme contributions in retirement are finding that employers are either capping the amount they are prepared to pay in subsidies to pensioners, or are ceasing payments altogether.
The only way that this will be reversed is by government intervention, Arnold says.
Employers are capping subsidies to pensioners or stopping them altogether for a number of reasons, including:
- The ever-rising cost of medical scheme cover;
- Because people are living longer (necessitating the payment of subsidies for longer periods); and
- Changes in accounting requirements introduced in 2001, forcing companies to declare the future liabilities (cost) of funding pensioner subsidies on their balance sheets. As a result many companies that had appeared financially sound may no longer be so as their liabilities will now be far greater.
Arnold says these liabilities are significant and that some larger companies have liabilities of between R200 million and R500 million. For example, Naspers has future pensioner subsidy liabilities of R260 million, Tiger Brands R400 million and Nampak R550 million.
"In the past, many companies paid these liabilities out of annual cash flow as they occurred (as the subsidies fell due). Companies simply cannot afford to take these kinds of future liabilities onto their balance sheets."
Arnold says the problem for employers, however, does not stop with the liabilities they are forced to place on their balance sheets. The changing business environment is creating new priorities for the money available to be spent on non-core activities, such as the requirement for an improved level of corporate governance, mandatory skills development for staff, black economic empowerment and socially responsible investment and spending.
Companies have to weigh up where they will receive the greater benefits in spending on all these issues. With a limited number of people being affected by subsidies, other issues are likely to be given priority.
Arnold says many employers have reacted in wide-eyed panic to the new accounting standards.
He says while some companies have created reserves to cover future subsidies, many others have cut subsidies for both employees and pensioners.
Creating reserves to cover liabilities using special-purpose investment vehicles has been difficult for employers, Arnold says, because the investment vehicles available are not tax efficient, costs are high and few employers have the cash reserves to make the required funding available to cover the future subsidy liabilities.
He says initial expectations by employers that the liabilities would, in fact, reduce fairly rapidly - because of a reducing number of employees entitled to the subsidies - have been been realised, mainly as a result of high medical inflation and subsidised employers living longer.
In 1995, 71 percent of employers subsidised medical scheme contributions for pensioners and employees. This year, 43 percent of employers are subsidising medical scheme contributions for pensioners and employees.
New benefit structures
Employers are renegotiating benefit structures for existing employees, basing them on core plans (which in many cases means members have to move to less expensive medical scheme options); moving to a fixed rand subsidy (that does not automatically increase in line with medical inflation); and offering sweeteners to employees and pensioners to forego a medical contribution subsidy system.
Arnold says the problems for existing members are not nearly as serious as those faced by many pensioners who are having their subsidies reduced or removed altogether.
Pensioners who are facing cuts or the removal of their subsidies are in a very uncertain legal position and they do not have the same protection in law as employees have.
He says that there are varying opinions on their legal position. The two main and contradictory legal opinions are that: a subsidy can be removed on notice from an employer; and employers are bound to continue paying a subsidy.
Arnold says a subsidy payment to pensioners is a normal contractual arrangement, which like all contracts, is subject to renegotiation.
He says there are legal precedents for courts limiting open-ended liability. So, if you went to court following a subsidy reduction or removal, a court is likely to accept an argument from an employer that it is unfair to expect an employer to continue paying an ever-increasing subsidy.
"The commercial reality of the costs of medical scheme contribution subsidies is likely to force the hands of employers and they know that pensioners are in a weak bargaining position," Arnold says.
"Pensioners do not enjoy protection of the Labour Relations Act, Commission for Conciliation, Mediation and Arbitration (CCMA) or the Labour Court; and the cost of litigation in the High Court is prohibitive."
Arnold says all that most pensioners can do is rely on their former employers to adopt a moral approach, government intervention, or, as a last resort, the public health system for their healthcare needs.
On top of the cut in subsidies, pensioners also face the prospect of living longer and having to pay more for health care and the general high rate of medical inflation.
What you should do
Arnold says it is imperative that while you are working, you take action to save more to cover your medical costs in retirement.
But, he warns, even if you want to save more for funding your healthcare needs in retirement, your options are limited, apart from saving money that has already been taxed.
In most cases, he says, you have probably contributed to a retirement fund the maximum amount that you can in order to enjoy a tax deduction. This maximum is 7.5 percent of your pensionable salary.
Special employer-sponsored funds are also problematic for the following reasons:
- Employers fear this could create a legal obligation for them to continue subsidising your medical scheme contributions;
- The South African Revenue Service has clamped down on salary-sacrifice structures where an employer claims contributions against tax but where you receive the ultimate benefit;
- The prohibition on the use of dedicated retirement funds to fund anything other than a pension; and
- People tend to change jobs often, creating a problem as to how any such employer-sponsored funds would be transferred.
Take action
Arnold warns that you must take action now and put together your own savings plan for health care in retirement. He says that often people in their fifties argue that it is now a case of "too little, too late".
He says a little is better than nothing at all.
If you wanted to provide for a monthly medical scheme contribution of R7 000 in 23 years time - R7 000 is the equivalent of R1 000 a month in today's values - Arnold says you would need to save a capital amount of approximately R830 000.
To achieve the capital amount, assuming a conservative, average annual medical inflation rate of seven percent after you retire, and average returns of 10 percent a year, you would have to start saving at age 40.
Your problem, however, would not be fully solved. A man aged 63 at retirement can be expected to live for another 17 years and his spouse could live for another 22 years. The R830 000 would be exhausted after 12 years.
Take responsibility
Whether you are an employee, self-employed or a pensioner, Arnold says the most important thing for you to do is "assume primary responsibility for being informed about your retirement needs".
"You must plan for your financial security, taking the appropriate action to save before retirement and to effectively manage your retirement assets in retirement."
He says if you are an employee, as a part of your planning, you need to understand existing contractual arrangements with your employer and the impact of any change in benefit structures if your employer renegotiates its policy on medical scheme contribution subsidies.
He says that you must identify now, what your circumstances will be at retirement. The factors that need to be taken into account include whether you will continue to receive a subsidy, a reduced subsidy, no subsidy or be offered a once-off lump sum in lieu of a subsidy or pension at retirement.
Arnold warns that uncertainty will prevail in the short-term, particularly until there is more clarity on legislation, such as compulsory membership of medical schemes and tax deductibility of medical costs.
He says employers should play a role in assisting and educating employees on self-funding.
You should treat the accumulation of medical scheme capital as a separate component of your financial and retirement strategy. "Do not delay, start making provision now, consult a reputable financial planner and remember that healthy pensioners live longer and need more capital."