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Cushioning the impact of employee retirement on corporate costs

11 May 2005 Medscheme

In recent years it has been common to see year-on-year increases in medical aid contributions of 15% - 20%, as exchange rates played havoc with holiday plans and medical aid contributions alike.

The weakening rand in the early parts of this decade was mostly blamed for sky rocketing of contributions to medical aid, but even with the rand strengthening of late, medical aid inflation continues to outstrip CPI. 

Andre Dreyer, Executive Director of MS Corporate Solutions says medical aid increases across the industry averaged between 5% and 7% for 2005 renewals, at a time when the rand was at its strongest in years against the greenback and other major currencies, while CPI averaged 1.4% in 2004.  The more commonly quoted CPIX, inflation excluding the effects of interest on mortgages averaged 4.3% over the same period.

Dreyer says that although companies to date have been feeling the pain in their income statements through the funding of annual premiums, the effect is much more severe on their balance sheets.  “Companies used to be able to get away with not having to recognize the liability posed by the promise of post-retirement company support of medical aid contributions.  International and local legislation has changed this, most notably South African accounting standard AC116.  As a result balance sheets have suddenly started to take significant strain,” says Dreyer.

Upon an employee’s retirement, or early retirement on account of ill-health, employers are faced with a potential liability of anything up to R1 million per employee.  “This represents the value that the employer needs to hold in order to fund its portion of future contributions to be paid on behalf of the retired employee.  This amount is determined by a number of factors, most notably the current and expected future levels of medical aid contribution as well as the extent to which the total contribution is split between employer and retiree.  Clearly, a rampant medical inflation figure that continues to outstrip inflation and possibly investment returns to meet these future payments, pose serious threats to employers and employees alike in funding for these liabilities, both now, and into the future.”

According to reports from a major employee benefits insurer in South Africa, “casualties in the war against AC116 liabilities are current employees”.  “Whereas post-retirement contributions by the employer were once used to attract key staff, few companies still maintain this policy for new employees and even attempt to reverse such benefits for existing employees.  The latter has been successful in certain instances, but less so in others like the well-publicized dilemma that the SABC recently had when pensioners took on the employer upon the withdrawal of their benefits,” notes Dreyer.

Whether the employer contributes to this liability or not, the end result is a major financial strain faced by employees as they approach retirement.  Dreyer says this will remain until such time as medical aid contributions can be reduced and year-on-year increases brought under control by government.   However, the general consensus is that regulation alone will not succeed.  “Effective managed care, efficient medical aid administration and behavioural changes from both medical aid members and medical providers will be critical in the long-term sustainability of the South African health care financing model,” concludes Dreyer.

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