Key trends shaping the employee benefits landscape

As the employee benefits landscape continues to shift and evolve, players in this fast-transforming market are realising that returning to ‘business as usual’ of years gone by, is no longer an option.

In the face of increasing competition, economic uncertainty and changing customer needs, companies will have to adapt and innovate if they wish to remain competitive and seek opportunities for new growth. What are the key trends that will impact our industry over the next year?

On the regulatory front

South Africa’s retirement fund industry has already undergone far-reaching regulatory changes. These reforms have been talked about for years, and it is believed they are sound in the context of retirement planning – they aim to ensure that the plight of South African pensioners is significantly improved.

Despite significant and on-going opposition from the labour movement, T-Day has now been signed into law and will take effect on 1 March 2016. The new legislation will harmonise the tax treatment of pension funds, provident funds and retirement annuity funds and will encourage greater annuitisation upon retirement (whilst protecting vested rights).

Because of the significance of these changes, the impact on systems and the political implications for government (pushing ahead despite Labour opposition), it is anticipated that there will be some reflection and significant consultation before any other major changes are introduced. It will be interesting to hear what the Finance Minister will have to say on this matter in the upcoming Budget Speech.

One piece of legislation which does need urgent revision is Regulation 28 (issued under the Pension Fund Act) which limits the extent to which retirement funds may invest in particular assets or asset classes – 75% in the case of equities and 25% for offshore investments. It is believed such limits hold no place in a Defined Contribution (DC) environment and should be abolished. They also run contrary to the principles underlying life-stage investment portfolios which have gained in popularity among retirement funds in recent years.

Economically speaking

To remain profitable and to grow as a business in the economic environment we are currently experiencing, which is likely to continue for some time, is very difficult. People will have access to even less disposable income which will result in more debt. This will continue to be a challenge for the employee benefits industry in the year(s) ahead. Economic hardship has seen increasing numbers of people cashing in on their retirement savings in order to reduce debt.

The 2015 Sanlam BENCHMARK Survey revealed that 62% of members and 53% of pensioners had used withdrawal benefits to reduce debt. In our experience, employers are not doing enough to educate members about the implications of failing to reinvest retirement savings.

The non-preservation of retirement funds is having a huge impact on people’s retirement outcomes, but people’s short-term financial needs cannot simply be ignored. A holistic approach to the financial needs of each individual retirement fund member is crucial. The tax-free savings accounts introduced last year could go a long way towards creating awareness that there are other ways to address these needs.

Ripples in the market

As is the case in other industries, the employee benefits market will be facing increasing competition from non-traditional start-ups with innovative ideas, ground-breaking digital systems, and new ways of defining the market and engaging with clients. The retail, taxi and hotel industries are already feeling the pinch in this regard, and it won’t be long before players similar to Uber or SnapScan start to create ripples in our own industry.

Financial services firms will need to adopt unconventional, out-of-the-box approaches and become disrupters in their own markets if they wish to compete with market entrants able to offer the technology-enabled lifestyle solutions many traditional industry players currently cannot accommodate.

Who are our customers?

Innovative, game-changing companies such as Uber came into being in response to changing customer needs in the digital era. Today’s up-and-comers interact with brands and products differently from preceding generations. The employee benefits industry will have to adapt to the vastly different outlook of the so-called millennial generation – people born between 1982 and the early 2000s – especially in the new DC environment where the investment risk has shifted from the employer to the employee.

It means providing clear and complete information to clients, offering them highly relevant products, and interacting with them in ways they have become used to in other industries, such as social media and mobile apps. It also means greater product customisation. With the days of remaining in the employ of a single company for life long gone – millennials tend to job-hop in two-year intervals – individualisation of a member’s fund experience and simplicity has become crucial.

Consolidation and crucial conversations

The South African retirement fund landscape has seen massive growth of the umbrella fund market over the past few years, with the number of stand-alone funds rapidly decreasing as employers continue to transfer to umbrella funds. The Financial Services Board (FSB) fund list contained almost 14 000 stand- alone funds at some stage and I believe this number is now closer to 1500 funds.

Stand-alone funds are moving to umbrella funds for the following reasons: cost savings, better administration, better governance and better investment expertise. It is believed the majority of the remaining stand-alone funds will move to umbrella funds over the next few years. However, to sustain their current growth trajectory, umbrella funds will have to continue to improve on aspects such as more effective governance models, simpler ways to charge fees, and improving the retirement outcomes of all employees – including members for whom cost efficiency is vital, as well as more affluent members prepared to pay for greater flexibility and customisation.

In the year ahead, the offerings in the commercial umbrella fund space will increasingly evolve as the crucial conversations and competitive pressures continue. New-generation umbrella funds that offer the best of both the institutional and the retail worlds are the likely result.

The last word

No-one can predict what will happen next, but it is safe to assume that the current trends in the employee benefits industry will continue to force the players in this market to adapt to ensure future success.

In every challenge there lies opportunity however, we believe the funds that will enjoy the most success going forward will be those who can assist their members first and foremost – by offering simplified products and cost structures, incentives to save and preserve funds, and the relevant advice and education to increase their members’ overall financial well-being.