What looming M&As, restructures and retrenchments mean for employee insurance cover and retirement savings

10 September 2020 Momentum Corporate

Momentum Corporate CEO discusses closing the R15.4 trillion life insurance gap and improving bleak retirement outcomes as GDP plunges to record lows.

• South Africa’s Gross Domestic Product (GDP) declined by 51% in the second quarter of 2020, according to Statistics South Africa, with almost all sectors of the economy having taken a knock.
• Business restructures and liquidations are set to soar as businesses grapple with COVID-19 related cost and other balance sheet related pressures;
• There are clear legislative processes that need to be followed with regards to employee benefits in a merger or acquisition;
• Widespread retrenchment exercises have serious implications for the many South Africans whose only life insurance cover is the group life cover they have through their employer;
• Dire impact of widespread pauses on employer contributions for employee retirement outcomes. Additional voluntary contributions can help retirement savers to catch up.
• The importance of catching up, protecting and growing retirement savings cannot be overstated in a country where a dismal savings culture means retirement savings are the nation’s savings backbone and the average South African’s largest investment.

Businesses and their employees have felt the impact of COVID-19 in many areas. Employee benefits is no exception. Dumo Mbethe, CEO for Momentum Corporate, says corporate activity emerging from the current environment raises a number of important issues in the employee benefits space, and calls on all stakeholders to work together in addressing these challenges.

COVID-19 and the lockdown have had a significant bearing on businesses in South Africa and, as restrictions ease, a number of companies may find it necessary to consider a merger or open themselves up to being acquired in order to survive. In recent weeks, we have seen a number of such transactions taking place in respect of JSE-listed businesses. The Competition Commission has already indicated that they expect increased merger and acquisition activity involving firms in financial distress due to the pandemic*.

There are clear legislative processes that need to be followed with regards to employee benefits during a merger or acquisition. Section 197 of the Labour Relations Act, No 66 of 1995, not only facilitates the business transfer but protects employees’ employment, which includes their employer-provided retirement and insurance benefits.

Acquiring employers may allow transferred employees to keep contributing to their existing pension or provident fund, or they may decide that employees have to transfer to a new fund. Section 14 of the Pension Funds Act applies if employees have to transfer to a new fund and ensures that the transfer of pension benefits is reasonable and fair.

Mbethe says, “Clear, comprehensive and empowering member communication around the transfer is essential. The careful transfer of assets into the new fund is also a key issue requiring professional management and close collaboration between all stakeholders, particularly in volatile financial markets.”

We are also, sadly, likely to see a rise in liquidations. According to Statistics SA, the total number of liquidations decreased by 7.1% in the three months up to July 2020 compared with the three months up to July 2019**. However, a year-on-year increase of 5,5% was recorded in July 2020, with voluntary liquidations increasing by 16 cases. Mbethe says that given these figures come from the courts, whose activity was seriously impacted by the pandemic and lockdown, it’s likely we’ll see them increase significantly in the near future.

Members can have peace of mind that their retirement fund investment is protected if their employer is liquidated. While a company collects contributions, once paid to the retirement fund, they become the employee’s assets and company creditors have no claim on this money.

A number of companies have already announced widespread retrenchment exercises, and more are expected to follow. This has serious implications for the many South Africans whose only life insurance cover is the group life cover they have through their employer. Losing their jobs also means they lose their life cover in the middle of a pandemic.

The total life insurance gap is already estimated to be a shocking R15.4 trillion in the ***2019 ASISA Life and Disability Gap study. Large-scale loss of employment will increase this shortfall and more South African households will struggle to maintain their standard of living if their breadwinner passes away.

Mbethe points out that many group insurance policies include a conversion option. This gives employees the option of converting to an individual insurance policy without medical underwriting when they leave their employer. Employers should actively encourage retrenched employees to consider this option if their policy offers it.

“Momentum Corporate is offering retrenched members covered by their group insurance schemes the option to convert their group life cover to an individual policy, even if their employer did not choose this option as part of their initial benefit structure. Paying the premium may be a big ask for employees without a job lined up but budgeting to pay it from their retrenchment package could be a wise choice in the current environment. Affected employees should also review their household budgets holistically to find ways to afford their insurance cover as no-one should be without cover,” says Mbethe.

As companies streamline operations and reduce costs, they may consider the option of early retirement for some employees. A big concern for soon-to-be retirees, whether it’s normal retirement or early retirement, is the impact that COVID-19-related market volatility is having on the value of their retirement savings and the level of income they will be able to afford in retirement.

“It’s vital that employees facing retrenchment, early or normal retirement, or simply struggling to catch up financially due to missed or reduced salaries during lockdown, have access to financial advice, financial coaching and benefit counselling during this difficult time.

Benefit counselling and personalised financial advice are two complementary building blocks for empowering retirement fund members to make better decisions. The Momentum Corporate benefit counsellors are working long hours to help group scheme members in these situations to understand their options within the fund and the long-term outcomes of certain choices. Members also have access to professional, holistic financial advice through either Momentum financial advisers and intermediaries, their group scheme’s financial adviser or their personal financial adviser.

It’s particularly important for retrenched employees to understand the adverse impact that taking their retirement savings as cash will have on their long-term retirement outcomes. Failure to preserve is behind the bleak retirement outcomes most South Africans currently face. However, many retrenched employees may need to take their retirement savings in cash to overcome their immediate financial needs.

Retrenched employees should speak to a qualified financial adviser for personalised advice to help them balance their immediate short term expenses with their longer term retirement goals. Often households perceive luxury expenses as non-negotiable needs. Cutting back on “wants rather than needs” will free up money to cover their immediate financial needs, and this could help them to preserve all, or at least part of, their retirement savings.

To stay on course, retirement fund members should look at “catching up”, where their employer put contributions to their retirement fund on hold during the hard lockdown. Many retirement funds allow members to make additional voluntary contributions. Mbethe says that when they can afford it, members affected by contributions that were suspended for a period should make additional voluntary contributions so the missed contributions do not impact negatively on their retirement outcomes.

Another big decision for those nearing retirement, whether early or planned, is their choice of an annuity. This decision has a profound impact on one’s financial destiny. Many members may be influenced by their retirement fund’s annuity strategy when making this choice. Mbethe says trustees should ask how current market conditions have impacted on the purchasing price of their preferred annuity strategy and may wish to consider a with-profit annuity, given current conditions. This is because the cost of the with profit annuity changes as interest rates and equity markets move up and down. The level of the guaranteed income available from a with-profit annuity under current market conditions may offer worried or soon to-be retirees better news than they were expecting within the current uncertain investment market environment.

Mbethe concludes with an observation on the trend from standalone to umbrella retirement funds. He believes a growing need for greater cost efficiencies across employee benefit arrangements will give this trend more impetus. These professionally managed, multi-employer funds offer the most cost-effective retirement and insured benefit solutions. Their economies of scale and operational efficiencies reduce costs and make it possible to channel more money to members’ retirement savings.

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