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SUB CATEGORIES General  |  HIV |  Medical Schemes | 

Hidden costs of improved healthcare

06 March 2012 Nick Hibbit: Head of Business Development, Liberty Corporate Intelligent Insurance

The recent Budget Speech and State of the Nation address were clear indicators that Government is continuing to increase its focus on healthcare with a R12, 3 billion allocations to healthcare spending over the next three years. However, while this should

In his State of the Nation address President Jacob Zuma laid out plans to invest in the infrastructure of hospitals as part of the move towards a universal healthcare system and a continued commitment to HIV and AIDS programmes. While this is good news for all of us there could well be a hidden and not insignificant impact on corporate and government entities in South Africa.

A large number of these entities have significant post retirement obligations; be it in the form of defined Benefit Pension funds or Post Retirement Medical Aid Liabilities. The main risks that impact the liabilities of DB obligations are interest rate risk, inflation risk and longevity risk.

Entities with DB obligations are increasingly using a Liability Driven Investment (LDI) strategy as this allows the effective hedging of interest rate risk and inflation risk. Consequently, the biggest unhedged risk facing DB liabilities is longevity risk.

By our estimations there is more than R120bn in defined benefit obligations in South Africa, potentially 30-40% of this relating to Government based entities. The relevance to improved healthcare is that a significant portion of these liabilities relate to how long a pensioner will live after retirement. For example should mortality (life expectancy) improve by 0.5% more than expected the DB liabilities of R120bn could increase by between 3.5bn and 5bn.

It is not unreasonable to consider an even greater improvement rate approaching 1%; this could result in liabilities increasing by more than 7%. It is important to note that the mortality improvements are over and above the improvements already allowed for in the determination of the liability. These liabilities will continue to increase, in the short term, on the back of improved mortality and consideration needs to be given to potentially hedging the longevity risk and on how best to fund these ever increasing liabilities.

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