Intermediaries to the rescue

South Africa’s strict labour regulations have forced companies to rethink their employee benefit strategies. Rising operating and compliance costs mean that small businesses are reluctant to offer any retirement solutions to their employees. Financial intermediaries will be part of the solution.

The 2013 National Budget confirms that only half of the country’s formally employed workers belong to an employer-sponsored retirement fund. Of greater concern is that 86% of the formally employed earn less than the current income tax threshold, which means they receive no tax benefit for participating in retirement saving vehicles.

A staggering 73% of formally employed workers who are not members of an employer-sponsored fund work at businesses with 50 or fewer employees, with 40% employed in sectors such as construction, agriculture and domestic service.

These statistics suggest that the take-up of employee benefits is impacted by wage levels, the blurring of lines between the formal and informal job market and the level of state interference. It is clear that small business, government and workers will have to make sacrifices to improve the poor savings culture that currently exists.

A good starting point is to consider the employee benefits solution that small businesses should offer their entry-level employees. The FIA Employee Benefits Committee believes that a basic retirement savings solution with a low level of contribution is a must, regardless of business size or sector.

As the employees’ salaries increase, so should their contribution. Carefully selected basic risk benefits such as "one times annual salary to beneficiaries upon the members’ death” can be added over time.

There are a range of umbrella products that allow employers to implement such solutions. Small business owners should approach a registered financial intermediary for assistance in choosing a product provider and structuring a sensible benefit package for their employees.

Why are small businesses not joining umbrella structures in their droves? One possibility is that financial intermediaries are not adequately servicing the small employer market. Another is that small employers genuinely cannot afford to belong to an umbrella arrangement. Intermediaries should see the former as a challenge to up their game in the retirement provisioning space.

National Treasury acknowledges that improved retirement coverage will depend on reaching low-income workers, those outside the formal labour force and those employed by small employers. But current plans focus on general issues instead.

Retirement reform proposals discussed in the latest budget indicate far-reaching changes that could take place as early as April 2015. These include preservation, tax-free savings vehicles and the mandatory purchase of annuities upon retirement.

Government also proposes the consolidation and modernisation of existing social security funds as part of the phasing in of a comprehensive social security system. Reforms include standard death and disability benefits and a basic retirement pension, which will be financed through an earnings-related statutory contribution. A key element of this reform would be the provision of subsidised contributions for low-income workers. Implementation of these reforms is still in the distant future.

The FIA feels that the introduction of sector-linked compulsory retirement provisions in phases prior to the implementation of the overall reforms would go a long way in extending coverage to the low-end market.

It is however important that the size of the contribution towards the retirement provision must be taken into account when determining the minimum negotiated sector wages. If this is not done then affordability will be held up – by both employer and employee – as a reason for not participating in retirement schemes.

We would also like to see a government incentive such as a co-contribution or subsidised contribution for employees who do not benefit from tax incentives. This would go a long way to embed membership of retirement schemes in the low-end market.