The retrenchment reality

Gareth Stokes, FAnews Online Editor

Recently Old Mutual circulated a press release in which it cautioned retrenched workers to retain their death cover. It’s a tough ask when one considers the 300 000 odd South African workers the group estimates will be retrenched through 2009. Government has been rather ambiguous on the employment issue. Minister in the Presidency, Trevor Manuel recently said that government would meet its joint objective of halving poverty and unemployment by 2014, while President Jacob Zuma promised the economy would deliver half a million jobs by the end of his first term in office.

Their upbeat assessment of employment prospects contrast starkly with the latest Statistics South Africa Labour Force Survey, published 28 July 2009. The report, which provides a snapshot of the labour environment for the second quarter of this year, has serious recessionary undertones. Not only has South Africa’s official jobless rate increased, but the number of disillusioned work-seekers is on the rise.

Almost one in four are unemployed

What does the survey reveal? According to the Mail & Guardian Online the country “is wallowing in its first recession in 17 years after depressed local and global demand hit key manufacturing and mining sectors.” Since mid-2008 the media has carried countless stories from large corporations looking to trim their workforce. And the labour survey is the first real indication of how much of this threatened retrenchment activity has taken place. In the three months to June 2009, 267 000 people have lost their jobs. Statistics SA says the country now has 13.369m employed people, 4.125m unemployed and a further 1.517m “discouraged work-seekers.”

Although these numbers sound rather low for a country with more than 48m citizens, Statistics SA works on the assumption of 31.080m citizens between the ages of 15 and 65, giving the country a labour force of 17.496m. Statisticians have a way of extracting the best from the data they collect. But it’s near impossible to be positive in the face of such disappointing numbers. Statistics SA countered their observation of a “relatively stable” unemployment rate (which moved from 23.5% in Q1:2009 to 23.6% in Q2) by pointing out that “the stability masks a continued deterioration in the South African labour market resulting from the decline in employment for the second consecutive quarter in Q2:2009.” If we lump the so-called “discouraged work-seekers” with the official unemployed, 32.5% of the labour force is out of work!

What is Statistics SA’s message to the President? Kefiloe Masiteng, deputy director general for population and social statistics at the organisation puts it quite succinctly: “The economy is not creating jobs – people are losing jobs in big numbers!”

Preservation and other retrenchment conundrums

The first prize in this situation would be for retrenched people to survive on their retrenchment benefits before dipping into their savings. But South Africa’s recently retrenched face two stumbling blocks that render this plan unworkable. First, savings levels are generally low, meaning they enter their period of unemployment with precious little cash to tide them over. And second, many of the job losses occur in the low and middle income bands. So resources are quickly depleted, and in the absence of assistance from family, friends or the community, the temptation is to dip into retirement fund payouts. Of course the regular FAnews Online reader knows that the preservation of retirement funds is non-negotiable for a comfortable retirement!

Under these circumstances Old Mutual’s call for retrenched policyholders to retain their death benefits AND preserve could prove a touch unrealistic. But there is a reason for the call. According to Seelan Gobalsamy, managing director at Old Mutual Corporate, with an average life expectancy for South Africans of 50.8 years of age, life cover is easily as important as saving for retirement. “Although we all focus on investment projections, compound interest, and the benefits of starting to save early (which are all important of course), some members unfortunately won’t make it to retirement,” says Gobalsamy. This thinking also emerged during the recent Sanlam Employee Benefit survey too. The insurers hold that too little attention is given to death benefits in a falling mortality environment.

The call from Old Mutual really goes to taking steps to keep life cover in place – if you can – after retrenchment. And it’s a call that makes sense. As Gobalsamy points out, “a significant number of members joining a retirement fund at age 25 will die before reaching 65 – so life cover is not merely nice to have – but core to a person’s financial plan…”

Editor’s thoughts: The recently retrenched have to make a number of financial planning decisions. Top of the list will be to determine which monthly expenses fall into the critical category, and which can be forgone. Once this exercise is complete the tricky task of finding funds to cover the likely period of retrenchment begins. Do you think we should be having a death benefit versus retirement debate? Add your comments below, or send them to gareth@fanews.co.za