NOMPU SIZIBA: Insurance company Sanlam has released its 2020 benchmark survey, which is a comprehensive view of what’s taking place in the retirement industry. Naturally, with Covid-19 having had a massive impact on the economy, their survey has focused a lot on its impact on the retirement fund members and other players, and how this is going to affect the shape and direction of the industry going forward.
Well, to take us through some of the research, I’m joined on the line by Viresh Maharaj, the managing executive at Sanlam Corporate Distribution. Thanks very much Viresh, for joining us. This survey that you do – just give us a sense of whom you survey, how many people, and so on.
VIRESH MAHARAJ: Thank you, Nompu. Sanlam Benchmarks has actually been running since 1981 with a view to exploring the experiences of retirement-fund stakeholders and to share that data, hopefully to the public, so that all stakeholders have an opportunity to use the data to help improve outcomes for our ultimate stakeholders, the members themselves.
With the impact of the lockdown and the pandemic running its course, in our country and economy, we saw fit to repurpose the survey to explore and understand the experiences of employee benefits consultants, retirement funds and employers through the lockdown, as well as to explore the expectations of the future post the lockdown itself, with a focus on employee financial resilience and the role of retirement funds in this space.
To that end, we received about 140 responses from professional employee-benefit consultants from across the industry, as well as around 230 respondents who are either retirement-fund stakeholders or employers.
NOMPU SIZIBA: The economic impacts of the lockdown have been very harsh indeed, and that’s come through in members’ engagements with their retirement funds. I see, for example, that there have been many enquiries around people being able to tap into their retirement funds.
VIRESH MAHARAJ: Yes. Approximately a quarter of the respondents indicated that they have members, either in their client base, if they’re consultants, or in their actual workforces as employees in retirement funds, who requested access to their retirement funds as a result of the financial distress caused by the lockdown.
One of our findings, though, when we looked at Sanlam’s own retirement-fund administration data, is that the lockdown has actually exposed the fault lines in the retirement-funding system, largely because roughly 50% of the members have less than R50 000 saved. Put differently, what that means is that, while that would make a material difference across many South Africans in their lives right now, it’s potentially not enough to make enough of a financial impact – even if retirement-fund members were to access those savings, which, due to regulation, they can’t at this stage.
NOMPU SIZIBA: I see that there’s also been quite a demand for premium holidays. Has that been quite a thing with retirement funds from both employees and employers, and what sort of payment breaks have been given, if any at all?
VIRESH MAHARAJ: We could probably break that down into two sub-categories – and let’s change the labels so that we’re able to clarify what we mean.
In the employee-benefit space, you don’t have premium holidays, as you would in typical insurance. What we find is that many employers in fact, from the survey – as well as about a quarter of the employers that we polled – indicated that they had requested temporary suspensions of retirement-fund contributions. So this is where either the employer handles the employee contribution to their retirement fund on a monthly basis, and those contributions accumulate over time and build up into their final fund value. But we find that many employers have requested that those contributions be suspended for a temporary period, so that cashflow can be netted off and provide financial relief to employees in distress right now.
The other aspect would be to take a premium holiday, or a premium suspension on one’s group-risk premiums. That’s where you effectively stop paying premiums for your group insurance. But it seems that unanimously, across the industry, that is then met with a cancellation of coverage. Fortunately, we find that very, very few employers have gone down that quite extreme route of effectively cancelling their group risk coverage.
NOMPU SIZIBA: Right – they’ve continued to pay whatever they need to pay over.
VIRESH MAHARAJ: Yes. Specifically because group insurance is probably the only meaningful insurance that many employees actually have, and it is a key enabler of financial inclusion. And, taking away coverage, especially when you’re in the midst of a pandemic, which affects lives and livelihoods, that is probably not the best decision.
NOMPU SIZIBA: Insurance companies put their members’ premiums largely in the equities markets for growth over time. But, of course, the markets have been extremely volatile, and there was a massive plunge in portfolio values in March. In the short term, this must be quite a worry for retirement funds, especially because there is still so much uncertainty about the future, and hence continued volatility on the markets.
VIRESH MAHARAJ: Absolutely. Retirement funds invest across a diversified range of portfolios governed by what’s known as Regulation 28, which can include a significant portion of equity in that. But what we find is that when a crash has happened, when shock happens, when fear happens, those diverse asset categories – even, though, under normal circumstances – provide risk mitigation due to the diversification. But in conditions of market shock, those asset categories start to move together in the same direction and, unfortunately, they all tend downwards. And that’s what we saw during the market crash.
But it’s not just a recent phenomenon. If you look back the last 10 to 12 years, we’ve had the tail end of the great financial crisis, Brexit, the European debt crisis, various “gates” – Nenegates and Steinhoff – among other issues. And, even if you look ahead into the future, you’ve got an alphabet soup off economic recovery, [both] home and abroad.
VIRESH MAHARAJ: You’ve got the US elections in November, actual Brexit, and potential further pandemics down the line. So, effectively, the story of the last 12 years has been volatility, and the story of the foreseeable future is volatility. Because of that, we find that about 10% of retirement funds are actually reconsidering their investment defaults; also about 10% of funds are considering implementing what are known as “smoothed bonus investment portfolios”, where investment returns are smoothed over time to take away the volatility, or provide investment guarantees to ensure that one can never lose money when you’re invested in such portfolios.
NOMPU SIZIBA: Right. Insurance companies will certainly be working overtime, given the Covid-19 crisis, with more claims arising. Presumably in the next year or so the industry will be hiking insurance premiums all over again. What’s your expectation?
VIRESH MAHARAJ: Well, let’s clarify that. A group-risk insurer – this is when you belong to an occupational fund and you receive cover by virtue of being an employee at a certain company, or a member of a retirement fund – in that space what we’ve found over the last number of years is that, due to the deterioration in South Africa’s economic profile, and the slowdown in GDP, we find that there is a correlation and a link between GDP and consumer confidence, as well as claims that arise in the group-risk space, specifically with respect to disability and income benefits where you become temporarily or permanently disabled and receive a monthly disability income from the insurer as a result.
Now, because of this link, over the last few years, with the deterioration and the experience we’ve seen there have been year-on-year rate increases leading up to now. The impact of the pandemic is twofold. You’ve got the healthcare impact, which directly influences health, and then you’ve got the economic impact, which indirectly influences the claims experience.
Because of that, we are quite confident that in the group-risk space we will see a deterioration in the disability income experience across the industry, specifically because of these two intermingled effects. And, over time, that will result in sustained increases in pricing cycles. Now, those sustained increases are not sustainable, because members of retirement funds and employees and employers simply cannot continue to pay more and more and more towards insurance, while then contributing less and less and less to their retirement fund as a result. And so we explored the views of consultants and employees and funds as to how they would control for these costs should such increases come about.
What we found was that the most popular option selected was to move from what is currently the most popular structure, which is a flat benefit, typically 75% of one’s pre-disablement income, to what’s known as tax-scale structures, where one’s post-disability income is actually aligned to the Sars income-tax scales, rather than being a flat 75% on salary pre-tax.
NOMPU SIZIBA: Our thanks to Viresh Maharaj, the managing executive at Sanlam Corporate Distribution.