The impact of HIV/AIDS on the financial health of retirement funds can be quite severe. Trustees and members of retirement schemes need to monitor this closely, advises Richard Treagus, Group Assurance Executive at Old Mutual Corporate.
Treagus says that based on models developed by the Actuarial Society of South Africa (ASSA), appropriate interventions such as anti-retroviral treatment can significantly limit the effect of AIDS. For an average company, the mortality rate could increase by more than 40% by 2015 with no interventions in place but by only 10% where a successful intervention strategy had been implemented.
The success of AIDS management initiatives in an organisation is the key factor affecting future mortality experiences. Sadly, South Africa has been very unsuccessful in limiting the spread of the disease through education about lifestyle change. This means that the main challenge has now shifted to the provision of effective anti-retroviral treatment programs, he says.
According to Treagus the difference in mortality rates at retirement schemes in South Africa is extreme. White collar retirement schemes in the Western Cape may, for example, only experience a mortality rate of 3 deaths per 1000 lives compared to a rate of 25 for a low income scheme in the mining sector.
But the simple fact is that AIDS will negatively effect every scheme in the country to some degree and it is therefore important for trustees to obtain some insight into the impact on their scheme.
Treagus says the big impact of AIDS is of course on the group life assurance costs, which will then also affect the contribution levels available for retirement funding. To ascertain the impact and risk, trustees should, as a first step, try to determine the prevalence of HIV. More and more companies are encouraging voluntary and anonymous testing as part of Know Your Status campaigns. Unfortunately the stigma around the disease means that it is still difficult to get full participation and reliable estimates of overall prevalence.
But what are the options for trustees trying to deal with increasing costs of providing group life cover? Treagus examines eight of these:
1. Ask for a raise
Most employers would want to see their employees adequately provided for and it is therefore not unreasonable to ask employers to fund increasing costs. But employers want to limit their financial obligations by capping their contributions and transferring retirement funding risk to employees. So for most funds, this is usually not an option.
2. Shop around
Trustees may well find that by opening their risk benefits to tender, another insurer is found who will accept the risk for a lower premium. At best, however, this response is a short-term reprieve that will not deal with an underlying trend of increasing cost.
3. Raid the piggy bank
Some funds have set aside reserves to cover increasing costs of risk benefits, but in most cases, surplus legislation will prevent reserves being used to subsidise future increases. The exception is where the fund rules have allocated a certain contribution towards risk benefits and actual costs have been less than this allowing a dedicated risk reserve to be built up.
4. Re-evaluate priorities
The need to deal with significantly increasing risk benefit costs, forces trustees to consider the question of the fundamental purpose of retirement funds. Where tough trade-offs need to be made, most trustees would weight the balance towards preserving adequate retirement provision at the expense of maintaining life and disability cover. Hence it is critical for trustees to formulate a policy on the relative priorities of retirement and risk benefits, including the approaches to be followed in dealing with increasing risk benefits.
5. Tighten the belts
For funds with defined life and disability cover benefits, the most common action is to reduce the level of cover to make it more affordable. This requires clear communication to members and, preferably, an option to replace lost cover on an optional basis.
6. Share it out fairly and carefully
Some funds have opted for a Defined Contribution Risk benefit solution, where benefits are purchased according to their affordability within age bands. The rationale for this structure is that each member obtains the level of cover that his or her individual contribution affords.
7. Target the heavy users
There are two ways of protecting the funds mortality experience against high-risk members:
Offer a minimum core benefit with medical testing required for members to be eligible for further cover, or
Apply vesting scales, whereby benefits only become available after a period of membership.
Both options have equity implications.
8. Fend for yourself
In a non-paternalistic age, the trend is for companies to reward employees on a cost-to-company basis, with the onus on the employee to make retirement and life cover provision according to his/her individual needs. As yet, there has been very little evidence of this trend.