Benefits Barometer 2015

WORKING TOGETHER, FINDING SOLUTIONS, IMPROVING LIVES

FINANCIAL WELL-BEING A MODEL FOR ENGAGEMENT

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BENEFITS BAROMETER 2015

Foreword by Alexander Forbes Group Chief Executive Edward Kieswetter 4 Executive summary 8

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Part 1: With a new language comes a new solution

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Chapter 1: The new language

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Chapter 2: Understanding decision-making Section 1: Thinking automatically or thinking deliberatively Section 2: Thinking socially Section 3: Thinking with mental models Section 4: Money mindsets

27 30 38 48 56

Chapter 3: What counts?

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Part 2: Whose job is this and how do we get it done?

Chapter 1: Dealing with debt

74 77

Chapter 2: Taking workplace solutions to the next level 89 Section 1: Financial wellness – why isn’t it working?

91 Section 2: Workplace solutions for financial well-being 104 Chapter 3: Navigating individual financial well-being

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Section 1: Insuring what matters Section 2: A matter of health Section 3: The goals that matter Section 4: What matters in the end?

119 122 132 142 152

TABLE OF CONTENTS

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Part 3: Looking at the numbers

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Chapter 1: Insights from the IRAS data

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Chapter 2: Sector case studies Sector 1: Construction sector Sector 2: Energy sector Sector 3: Fishing, forestry and agriculture sector Sector 4: Manufacturing sector Sector 5: Mining sector Sector 6: Personal services sector • Health industry • Education industry • Media and marketing industry • Security industry Sector 7: Professional and business services sector Sector 8: Public sector Sector 9: Retail, wholesale and hospitality sector • Retail and wholesale industry • Hospitality industry Sector 10: Transport and telecommunications sector • Transport industry • Telecommunications industry

197 202 210 218 226 234 242 244 250 256 262 268 276 284 286 292 298 300 306

Appendix: 312 The Issues 314 References 321 Data 326 Thank you 328

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FOREWORD “Individuals will only truly transform their behaviour when we shift the conversation from building financial capability to enhancing their understanding and empowering financial well-being.�

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FOREWORD

One of the key objectives of the South African government’s National Development Plan is to reduce inequality and eradicate poverty by creating better employment opportunities off a stronger and more appropriate educational base. But bolstering employment on its own is not enough to drive transformation.

We must ensure that South Africans are adequately equipped to maintain what financial stability and viability they are able to secure, so that they don’t become casualties on the road to prosperity.

The Institute of Race Relations recently reported that 20 years of BEE initiatives have yielded disappointing results: only 15% of the relevant South African population directly benefited1. One of the key lessons is that redistribution by itself is not the answer for long-term transformation. Beyond increasing employment, what’s needed for transformation for all South Africans may well be helping individuals to learn how to effectively harness and deploy their financial resources to meet their own needs now and in the future.

Rethinking the traditional employee benefits model Employee benefits should have represented the primary focus of South Africans’ savings and

1 Jeffery (2014)

protection strategies. But in the necessary shift from the defined benefits (DB) model to the defined contribution (DC) model, the delivery of these critical social protections became fragmented, due to the risk transferring from the employer to the individual.

The financial planning burden of a lifetime and the ultimate achievement of financial well-being now rests squarely on the shoulders of individuals. Yet in many ways, the individual has never been less engaged – and for good reason. Even if benefits are only delivering a fraction of an individual’s retirement needs, this is of little consequence if individuals and their families are not even able to address their day–to-day financial needs.

In last year’s edition we concluded that people would continue to remain disengaged unless, as an industry, we addressed each individual’s full financial journey over their lifetime, and not simply their retirement.

For many stakeholders, this suggested a greater focus on enhancing financial capability, in other words, an individual’s ability to make good financial decisions. But financial capability simply isn’t engaging enough.

To secure financial transformation for all individuals, we needed to shift the conversation beyond building financial capability towards enhancing financial well-being.

The concept of financial well-being is something distinctively different from simply expanding a person’s financial awareness, capability or wellness. It strives to capture the individual’s willingness to engage, because it allows individuals to create a direct link between financial capability and achieving their own prioritised ends for themselves and their families – to secure what matters most to them, which is to provide for who matters most to them – their loved ones.

As Gale, Goetz and Britt point out in the Journal of Financial Therapy: “An individual’s and a family’s financial health can vary from the perspective of different family members (both within and across generations), across regions of the country, continent or world, across religions, across ethnic and cultural backgrounds, and across generational cohorts. Can a family be financially sound, but individually and interpersonally unhappy? Can an individual or family be financially at risk, but emotionally and relationally very happy? What role does family history, personal characteristics,

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BENEFITS BAROMETER 2015

religious and spiritual beliefs, and physical health have in one’s definition of financial health? How does the difference that one has between defining their wants and needs determine financial well-being? What roles do compassion, charitable giving, consumerism, social justice and concern for the environment have on financial well-being?2” Financial well-being is a radical departure from what the financial services industry has been built on. It requires a far more collaborative interaction between the individual and their service provider on every financial touchpoint, whether it’s about their health, their long-term savings and short-term emergency cushions, their income and asset protections, or their funding requirements to service dreams for themselves and their families.

And this is where our thought-leading concepts make the boldest suggestions.

Critical focus areas for transforming the financial services industry Where do we see the most important areas for rethinking the current model?

The ambit of our industry The financial services industry mainly operates within one particular area of the market: people with money to spend. This isn’t specifically a wealth issue. Shop floor workers and miners have money in the form of retirement savings, which also requires professional attention. But people in financial crisis also need some sort of professional assistance. The challenge is that the financial services industry and debt industry are separately governed. They need to be integrated to offer a holistic view for individuals.

The nature of our consulting practices and how they are delivered Regulatory change is rapidly changing our notions of commission-driven advice. The financial services industry is being asked to rethink its business model on many different levels. But the more important question is what kind of ‘advice’ or ‘financial assistance’ do people really need.

“Treating Customers Fairly” (TCF) requires that we move away from a hard product sell and offer more of an advice solutions approach.

The nature of the products we offer For the last three decades financial services companies have been offering increasingly complex financial products to provide more ‘choice’ to individuals. However, research shows that whether it is in the area of healthcare, income insurance cover, insurance against the cost of death, asset insurance cover or even investments, many of these complex offerings have actually led to poorer financial decision-making and outcomes for individuals.

Benefits Barometer 2015 argues for a return to simplicity. Not necessarily in the mechanics of how these products are constructed, after all they do need to solve complex problems, but in the way we communicate options and the way we offer choice.

The nature of people’s engagement on their personal financial journey The workplace represents a compelling point of engagement with the individual. Here we can offer advice and services to individual employees based on their personal needs and where they are in their personal financial journey. Not only that, we can also improve employee engagement for companies by reducing employees’ financial stress and enhancing productivity.

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2 Gale, Goetz & Britt (2012)

FOREWORD

Who is ultimately responsible for an individual’s well-being?

Repositioning the financial services industry

On some level, we will all be held to account.

Realistically though, let’s ask who might actually be able to get the work done? It is evident that getting this right demands significant investments into technology, research and resourcing. This in turn demands increasing involvement from the private sector.

There’s a brand new job profile required of the financial services industry if we are going to instigate real change. As such, we now sit at a critical crossroads in our evolution, both as a company and as an industry. It’s patently clear that a dramatic shift in thinking is required to achieve an agenda of financial well-being.

In Africa, the resourcing obstacles facing developing economies have necessitated even greater dependencies on the private sector. This has certainly been the case for the delivery of such social protections as retirement savings and medical aid.

We must collectively think more creatively about how innovative new services can be funded and whose interest they best serve: the individual; the employer; the government? Everyone stands to benefit or, if ignored, to lose.

Alexander Forbes’s thought leadership is contained in, among others, its 2015 Benefits Barometer publication. We therefore present in this Benefits Barometer a potential roadmap, and invite robust debate and engagement to the provocative challenge we have put to the industry in order to transform the lives of individuals and our society.

We invite robust debate and engagement to the provocative challenge we have put to the industry.

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BENEFITS BAROMETER 2015

EXECUTIVE SUMMARY Unless the industry starts focusing on members’ welfare throughout their financial journey and not just at retirement, there is no way we are going to get individuals to engage with their savings.

Providing the background story The important message from Benefits Barometer 2013 was that the employee benefits model was failing to deliver on its full potential to provide for a member’s physical, mental and financial well-being.

The dialogue between the various stakeholders1 had simply become too fragmented, leaving gaping holes in delivery.

Pursuing this line of discussion in Benefits Barometer 2014 made it increasingly clear that two key stakeholders were disengaging. The first to disengage was the employer. The defined contribution model had relieved the employer of the burden of risk in assuring adequate outcomes for members. There was little perceived incentive for them to step back into the fray.

Far more troubling, though, was the fact that the members themselves appeared to be disengaging from the process. A combination of more immediate economic demands and increasingly complex decision-making requirements were gradually taking their toll: where possible, members were opting out rather than opting in.

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1 Policymakers, employers, unions, boards of trustees of retirement funds, and the members of these funds themselves.

Perhaps the most important insight of Benefits Barometer 2014 was that unless the industry started focusing on members’ welfare throughout their financial journey and not just at retirement, there was no way it was going to get individuals to engage with their savings.

Benefits Barometer 2014 argued that if we could transform the employee benefits industry from one where members were accommodated with en masse solutions that were relatively undifferentiated from one sector to the next, to one where we could start designing solutions that met the explicit needs of a given individual or family, we stood a far better chance of getting individuals to engage with what was on offer. But this left us with an important part of the puzzle unresolved: how to get the employee to re-engage? That demanded that we get more fully involved in the individual’s own financial journey. To do this, we needed to shift the focus away from improving financial literacy and financial capability to a concept of financial well-being.

In Benefits Barometer 2015, this is exactly what we set out to do.

EXECUTIVE SUMMARY

PART

1

WITH A NEW LANGUAGE COMES A NEW SOLUTION

Financial well-being is about leveraging financial insights and know-how to deliver on what matters most to the individual.

This term is quite distinct from many other terms we currently use in the sector. As an industry, and often as employers, trustee boards, and Government, what we are typically talking about is an individual’s ability to navigate and make correct use of an often bewildering array of financial products. The correct term for this is financial capability.

Financial well-being, however, is not a term which originates within the financial services conversation. It is more correctly located within what is now known as the ‘subjective well-being’ framework. It looks at what people are trying to achieve in life, what matters to them and what gives their lives meaning. It also takes into account people’s full lives, not simply how they would assess their lives at one point in time, but how their full journey is supported by good financial decisions.

When we shift the focus from financial capability to financial well-being we introduce an important new dimension. Research repeatedly shows us that all individuals tend to be bad decision-makers when it comes to financial matters. This is primarily a function

of the four critical filtering modes that influence financial decision-making.

By borrowing liberally from development specialists such as the World Bank, we identified these four factors as being: ■■ The two distinctly different ways our brains process information.

Much of financial advice and financial education presumes we use the slow, deliberative process of debating financial choices to make our decisions. In fact, 90% of decision-making is driven by our fast, automatic system of processing information.

■■ Our social context We often presume individuals act autonomously when it comes to financial decisions. In fact, social context plays a far more influential role. The social context provides an invaluable key to unlocking the decision-making puzzle.

■■ Our mental models These may or may not be framed by social context, but provide individuals with a shortcut for managing complex information.

■■ Our money mindsets Here, psychological dispositions, both to money in general and to the human interactions required to address money issues, take centre stage.

Addressing financial well-being involves a delicate balance between respecting individual and group values and recognising that people are looking for guidance. This guidance needs to address both what people can expect their money to do for them and how to get the most out of what they have.

Measuring financial well-being, then, becomes a dynamic and evolutionary process. We start with financial capability and, as the individual moves step by step to achieving financial goals that resonate with their priorities, we expand the engagement to ensure that they have at least been able to establish an adequate floor of financial stability, both for today and in the distant future. Then we gradually leverage that individual’s evolving skills set to extend their range of life options.

How do we know if we are winning? It’s all about building trust and keeping the individual engaged because we’ve addressed their needs. If the individual is still with us throughout that journey then, on some level, we’ve probably won.

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BENEFITS BAROMETER 2015

PART

2

WHOSE JOB IS THIS AND HOW DO WE GET IT DONE?

There are three significant parties who have the potential to play a key role in this transformation agenda. The first is the market conduct regulator. For the past few years the regulator played a powerful role in terms of professionalising the industry, addressing the inefficiencies in retirement funding, and challenging the industry practices around pricing and distribution. One further area deserves greater scrutiny if we are going to get to the heart of financial stability in South Africa, and that is the world that intersects lending, debt management and transition to financial viability.

As things currently stand, the industry separates the treatment of debt management from the treatment of credit management and wealth creation. And yet they are two sides of the same, ever-spinning coin. As such, there is no effective continuum from getting someone out of debt and ensuring they move on to financial stability and financial well-being. This is where we need the regulator’s support in creating a more effective resolution model.

Another key player in the continuum is the employer. One way or another employees associate financial support with their employer. That said, when employees are

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financially stressed, productivity plummets.

So there is a vested interest from both parties in getting financial well-being right. But employers have tried numerous variations on financial wellness programmes – often to little avail. The language is often either oriented around getting an employee out of crisis or around removing enough financial stress so that employees can offer more value to the employer. As such this approach can lead employers to neglect the well-being aspect which would allow them to keep employees engaged over the long term.

In truth, we have a limited ability to assess what’s really working and why. Every stakeholder has a different reason for promoting these programmes, which can obscure our ability to tell whether or not a programme has been successful. Both defining and measuring success in these programmes need to become a focus.

But there are signs of hope. By shifting the focus from financial wellness, which seeks to address issues of concern to the employer, to financial well-being, which addresses employee concerns, it is possible to improve these programmes. The ‘journey’ is less about accumulating a body of knowledge and more about learning how to let go of

potentially dysfunctional behaviours. It’s about building up a more effective way to get money and finances to address your specific hopes, fears and dreams. This involves much more innovative ways to engage the employee, building more interdisciplinary teams that can handle the full service continuum, and continuing to monitor success to identify what is working and what isn’t.

Finally the financial services industry itself, typically as represented by the financial planner or adviser, has its part to play. But its new role will only be effective if we can change the way they interact with their clients. Advisory conversations – whether about insurance, healthcare, savings and investments, or knowing that we all need to be prepared for the eventuality of death – need to be framed in the language of well-being. This involves acknowledging that spending money isn’t always the answer, that what people want to achieve is embedded in their overall well-being, and that they have alternative strategies to solve problems beyond money. By helping people to have these conversations, advisers can help individuals to optimally employ their resources to support their overall well-being.

EXECUTIVE SUMMARY

PART

3

LOOKING AT THE NUMBERS

The last section of Benefits Barometer focuses on the insights we can currently derive from a variety of data sources, both internal and external. The question we are asking is how effective are employers at delivering on employee well-being issues. This is a work in progress. But by combining information we can get from reports companies make publicly available, with data derived from our Member Watch™ database, a picture is slowly beginning to emerge.

To lead in this section, Michael Rea from Integrated Reporting & Assurance Services (IRAS) provides a discussion for employers as to what publicly available data can say about the level of focus a company exhibits on employee wellness. The data is particularly telling, more for its absence than for its accuracy. The data paints the picture of a corporate scene that is only beginning

to appreciate why this data provides important insights, not just to potential investors, but potential employees, current employees, unions and the employers themselves; and about how engaged the employer is on managing this aspect of their employees’ lives.

Data from our Member Watch™ database provides an additional perspective for employers by providing industry comparisons of benefit structure, contribution rate, replacement ratios and more.

Ultimately the story for each sector is pulled together by our sector-specific benefits barometer readings. This helps readers identify the critical issues that may be impacting on each specific sector’s ability to translate employee benefit programmes into employee well-being.

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PART 1 Introduction

WITH A NEW LANGUAGE COMES A NEW SOLUTION

GETTING THE TERMINOLOGY RIGHT

– THE DISTINCTIONS MATTER

The world of finance is littered with any number of concepts about one’s interaction with finances: financial education, financial literacy, financial capability, financial wellness, and financial empowerment, to name a few. Some of these concepts deal with our levels of financial knowledge (financial education, financial literacy).

Others relate to our ability to apply financial knowledge to financial actions (financial capability, financial wellness, financial empowerment). But the concept of financial well-being stands apart.

Because the roots of ‘financial well-being’ owe more to ‘well-being’ literature than ‘wellness’ literature there is a crucial distinction. ‘Wellness’ refers to an objective state of being for an individual – as an external observer, I can determine whether an individual had achieved financial wellness.

‘Well-being’ refers to a subjective state – ultimately only the individual can determine whether they have achieved this.

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To an employer for example: improving an individual’s financial wellness seems a reasonable objective because it implies you are trying to maximise an employee’s productivity by minimising their financial stress. An employer could actually measure this. But to the employee, what makes financial well-being a far more engaging concept is that it speaks directly to their ultimate objectives, what they value most in life. As such, financial well-being is the one concept that captures that critical intersection between knowing what matters to us, and knowing how we can effectively deploy financial resources and financial decision-making to achieve what matters in our lives.

Why do we embrace the term? Perhaps the most powerful insight that came out of Benefits Barometer 2014 was that financial education was failing spectacularly, not just in South Africa, but globally. Unless we could identify a way to link financial knowledge

to facilitating goals and choices that had meaning to individuals over the full course of their financial journey, individuals would remain disengaged. Financial well-being takes us that extra step.

What makes financial well-being such a powerful concept is that it addresses one of the seemingly irreconcilable challenges of financial education. More knowledge simply doesn’t translate into better financial decision-making. And knowing what you value is equally uncorrelated to better decision-making. But what financial well-being provides is a process that first examines what filters are influencing an individual’s specific financial decision-making process, then it provides strategies to counter any of the dysfunctional behaviours that might emerge out of these filters.

PART 1

WITH A NEW LANGUAGE COMES A NEW SOLUTION

Introduction

FINANCIAL WELL-BEING PROCESS SUBJECTIVE STATE

SATISFACTION

FEELINGS

MEANING

INDIVIDUAL EXTRA STEP WHAT MATTERS MOST

CHOICES

MEETS OBLIGATION

SECURE FUTURE

FINANCIAL CAPABILITY 13

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Part 1 With a new language comes a new solution

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Chapter 1: The new language

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Chapter 2: Understanding decision-making Section 1: Thinking automatically or thinking deliberatively Section 2: Thinking socially Section 3: Thinking with mental models Section 4: Money mindsets

27 30 38 48 56

Chapter 3: What counts?

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THE NEW LANGUAGE

PART 1 Chapter 1

THE NEW LANGUAGE

SUMMARY

Understanding financial well-being requires understanding how it relates to philosophical concepts like well-being as well as financial concepts like financial literacy and financial capability. Well-being is what people ultimately pursue in life, whether in the form of happiness or meaning. Financial well-being is less about a quantum of money and more about setting floors and providing access to options.

Financial well-being is not a new concept, but it may well be a new term for some. It emerges from two streams of literature. The first is the philosophical and economic conversation about utility, happiness and subjective well-being. The second is the financial literature which frequently locates financial well-being as the ultimate goal of financial education and financial literacy interventions1. But when used in the financial literature, the term does not have an explicit or consistent definition, nor is there a standard way to measure it. To be able to get a better grasp of the concept, we need to turn to the philosophical literature.

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1 Consumer Financial Protection Bureau (2015)

PART 1

THE NEW LANGUAGE

Chapter 1

WHAT IS WELL-BEING? Consider the pictures of these two families:

Which of these families would you judge to be more representative of ‘well-being’?

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PART 1 Chapter 1

THE NEW LANGUAGE

When people around the world were shown pictures like these, they gave very different responses as to which group they perceived were ‘better off’. In wealthier, more Western parts of the world, answers favoured the thinner, more compact group. In poorer, less Westernised parts of the world, fatter, more expansive groups signalled greater wealth, and as such this would be deemed as the family which is ‘better off’2.

We throw around the word ‘well-being’, but do we actually know what it means? If we can agree that well-being might be a real concept and we might be able to agree on what that is, would we agree that it is important?

And, if it is, what would be our reasoning? Is employee well-being better because it makes workers more productive for their employers?

Is financial well-being valuable because it gives financial services companies better customers? Surely the concept means more than that.

Grappling with the concept of well-being has a long history in human thought. It is a history that goes all the way back to the Greeks

– back to questions of what constitutes happiness and what constitutes a good life. It traces its way through the thought of all the major philosophers and encompasses that nebulous term ’utility’ economists so often use.

Well-being as a concept is not easy to define, and it is not easy to compare, either between people or through time. Aristotle thought happiness was the reason we did everything else. It was that thing which we couldn’t reduce any further. We pursue happiness or well-being for itself and it’s why we pursue everything else.

Happiness isn’t an ephemeral feeling or a passing impression. It is something that marks a full life, well lived.

And whether we look at the concept of happiness, or utility, or well-being, those observations have remained rather enduring.

Well-being isn’t something we pursue for another reason – to make money for our employer or a bank. It’s the ultimate objective of everything we do.

We throw around the word ‘well-being’, but do we actually know what it means?

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2 Cogan, Ballah, Sefa-Dedeh & Rothblum (1996)

PART 1

THE NEW LANGUAGE

What the philosophers say

Feelings

Satisfaction

Chapter 1

Meaning

Three basic perspectives have emerged out of the long and varied philosophical debates that inform our views about what well-being3 is: 1. There is the hedonic approach where we simply look at our current ‘happiness’ or feelings of pleasure and pain.

2. There is the evaluative approach which looks at how we see our lives as a whole, often referred to as ‘life satisfaction’.

3. There is the eudemonic approach which looks at the ‘meaning’ we ascribe to our lives.

The most commonly used of these approaches is the ‘life satisfaction’ approach.

An important aspect of ‘life satisfaction’ is that it encompasses the full life. It isn’t merely about a point in time; it’s about the full journey. Ideas around maximising utility over a person’s life embody this type of concept.

In addition to questions around what is well-being, there are also important questions about what makes us well. Increasingly, studies are also trying to understand what factors drive well-being. When I ask you whether you are happy or satisfied with your life, what aspects of your life matter in terms of your answer?

Surprisingly, despite all the variation between individuals and even for the same individual through time, there are many consistencies emerging in the literature. Some of the strongest consensus exists around aspects of life such as family, health and security, as well as living a life consistent with your values and having options or choices4.

3 Benjamin, Heffetz, Kimball & Szembrot (2012). Also see Helliwell, Huang & Wang (2015).

4 Benjamin, Heffetz, Kimball & Szembrot (2012)

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PART 1 Chapter 1

THE NEW LANGUAGE

What role does money play in well-being?

Terms like ‘financial well-being’ or ‘employee well-being’ have to be placed within the broader concept of ‘well-being’. And so, to understand what ‘financial well-being’ is, we have to understand what role money plays in an individual’s overall ‘well-being’.

In studies examining well-being, which typically use the term ‘subjective well-being’, some find that happiness increases with income, while others find it doesn’t. The reason for this seems to be that, for most people, money itself doesn’t make them feel more ‘well’, but what it can do for them does.

In other words, for most people, money is valuable as a means to well-being, not an end in itself.

For instance, Richard Wilkinson and Kate Pickett’s book The Spirit Level: Why Equality is Better for Everyone argues that an increasing income only improves well-being

up to a certain level and then inequality in incomes becomes more important. This is because at low levels of income, increases in income can buy significant improvements in the parts of life we value. More money can buy more nutritional food, or access to better schools, or a nicer family home, all of which contribute to well-being.

What this literature illustrates is that money affects our well-being through how it impacts on the aspects of our lives that we value – like our family, our homes, our security, our options and so on. For instance, if money problems make us feel out of control of our lives, this can have a big impact on our well-being.

At higher levels of income, Pickett and Wilkinson argue that these effects start to fade away. Money has helped people to achieve a happy and healthy family, but additional amounts make a very small difference. This fits in fairly neatly with the findings on what affects national well-being.

GDP per capita plays a role because it will drive the access to basic goods and services – such as sanitation and nutritional food.

But the other key factors for nations are measures of social capital, such as social support, trust and generosity5.

Also, your money needs to serve you throughout your life, and your financial well-being then needs to be assessed over your life as a whole. Similarly, our financial well-being is about the ‘full journey’ and also the pitfalls we manage to avoid.

And now – back to financial well-being Now that we’ve established that money does play a role in happiness – albeit an indirect one – it raises the question of what financial well-being would be. In the context of ‘subjective well-being’, we would have to look at whether or not a person or household’s finances were contributing positively or negatively to their overall well-being.

The subjective assessment of financial well-being moves beyond an assessment of how money makes us feel to a place where we are carrying out a subjective

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5 Helliwell, Huang & Wang (2015) 6 Adapted from Consumer Financial Protection Bureau (2015)

assessment of our circumstances in entirety.

The Consumer Financial Protection Bureau (CFPB) describes financial well-being as a continuum – ranging from severe financial stress to being highly satisfied with one’s financial situation – that is not strictly related to income level. For example, a low-income earner, though unable to access many assets and investments, may still feel a high level of financial well-being. Financial well-being therefore also encompasses an ability on the part of the individual to achieve a state of financial well-being within the constraints

of the resources that they currently have available to them.

We can then say that financial well-being can be defined as ‘a state of being wherein a person can fully meet current and on-going obligations within their constraints, through an effective level of financial capability; where they can feel secure in their financial future and where they have choices available that improve their quality of life6.’

PART 1

THE NEW LANGUAGE

Chapter 1

What is financial well-being?

A state of being in which an individual: FULLY MEETS CURRENT AND ON-GOING OBLIGATIONS HAS AN EFFECTIVE LEVEL OF FINANCIAL CAPABILITY IS SECURE IN THEIR FINANCIAL FUTURE HAS CHOICES AVAILABLE THAT IMPROVE QUALITY OF LIFE

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PART 1 Chapter 1

THE NEW LANGUAGE

What role does the financial expert play here?

As well-being is an inherently subjective concept, this makes it messy, biased and inconsistent. But it is important because it speaks to what individuals value. Where an expert can play a vital role is in two key areas:

1. Setting the floor The first is around setting a floor for a household’s income. In Benefits Barometer 2014, we talked about how the State sets the social floor for the nation as a whole, while financial products provide individuals with the ability to raise this floor in relation to their own income.

Below certain threshold levels of income, income is a very important determinant of well-being. So, it is important to not fall below these levels. And although people can recover from large falls in relative income, they do experience short-term discomfort. In addition, the possibility of a fall – especially in an unequal society – can have negative effects. Placing a floor that strikes the right balance between short-term and long-term outcomes can support well-being.

The concept of floors plays an interesting role in the writings of the American moral and political philosopher John Rawls. Rawls looked extensively at issues of social justice and how

it can be achieved in a society where different things matter to different people. He argued that everyone in a society should get an equal share of basic rights – these are typically political rights such as freedom of speech, freedom of association and so on. Thereafter, economic and social ‘goods’ should be distributed to ensure the best possible outcome for the least well-off in the society.

This does not rule out inequality, but it does moderate it. Imagine a village where everyone has the same income. Everyone in that village will be better off if they give up some of their income to make sure that the doctor in the village has a car and can get to them quickly when they are sick – so long as that loss in income doesn’t put their day-to-day survival at risk.

relieve the consequences of risk in a society for the overall well-being – and economic improvement – of that society. These types of protection are often achieved through various types of long-term savings and insurance products.

On the other hand, people are adaptable.

So, full protection against all forms of disaster is not necessarily the best way to do things either. In theory, experts should be able to provide individuals with guidance as to which protections best suit an individual’s unique circumstances. In practice, when financial service provision becomes conflicted, this trade-off discussion may not be forthcoming.

So, there is an argument that there are certain types of protection that are useful for all of us. And as we highlighted in Benefits Barometer 2014, it’s important to

Placing a floor for a household’s income that strikes the right balance between short-term and long-term outcomes can support well-being.

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PART 1

THE NEW LANGUAGE

Chapter 1

Poverty is a lack of choices.

2. Creating more options The second area where expert assessments can play a role in improving subjective well-being is around increasing the options available to an individual. One of the aspects of well-being with with considerable consensus as to its value is keeping options open.

A great supporter of the value of options is Nobel prizewinner Amartya Sen. In his book Development as Freedom, he introduced the concepts of ‘entitlements’ and ‘capabilities’.

Entitlements are the resources we have access to and capabilities are the things we are able to do. For instance, I may have enough money to send my daughter to a private school but if there isn’t a decent road between my village and the school, I don’t actually have the capability to do it.

Money is part of improving our capabilities, but it isn’t everything. Sen argues that the purpose of economic development is to expand the capabilities of all individuals in a society. Irrespective of what people value (whether it is nice cars or happy families) we place importance on ensuring that every individual is able to pursue what they value.

Essentially, in Sen’s thought, poverty is a lack of choices.

The expert’s challenge To put together a comprehensive and helpful picture of financial well-being, we need an approach that integrates both subjective and objective aspects. On the subjective side of the table, an individual is able to communicate what goals they value and wish to pursue as well as how they prioritise those goals.

On the objective side of the table, an expert can help people identify the methods most likely to allow them to achieve their goals.

They can also help an individual to identify the common pitfalls they might fall into so they can put appropriate preventative measures in place.

What might this look like? An expert may identify a gap in terms of life insurance, but an individual needs to subjectively assess how important that is to them. Perhaps it is important, but so is sending their child to a better school or to university. Then, once again, an expert can help assess how someone can achieve both goals, and also help ensure that they don’t sacrifice the more important goal for the sake of the less important goal.

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PART 1 Chapter 1

THE NEW LANGUAGE

How do we connect the dots to financial well-being?

There is an array of literature around other financial concepts that have started to identify financial well-being as the ultimate output of all interventions in this field. These concepts include financial empowerment, financial literacy, financial wellness and so on. In connecting these concepts, it is important to understand which of them can be affected by outside stakeholders and which cannot.

link to improving financial decision-making.

For this reason, the term ‘financial capability’ has emerged. Financial capability shifts the focus from the input (literacy) to the output (decision-making). It looks at whether or not individuals are making good decisions.

Again, financial capability can be influenced by external stakeholders, using a range of techniques from nudges to edutainment.

Financial literacy can be influenced through financial education provided by outside stakeholders – such as the employer and financial services industry. The growing frustration with financial education has been that improving literacy does not show a clear

Another term that refers to what can be influenced by external stakeholders is ‘financial wellness’. The financial wellness literature tends to focus on the aspects of finances which create stress and are most likely to impact on the variables of influence to employers.

What individuals control Financial empowerment: A person’s ability to use their knowledge and skills to effectively navigate any financial decision they may face. It requires a high level of financial literacy as well as the ability to use that literacy in a financially capable way. Attaining financial empowerment necessitates a high degree of engagement from individuals.

Financial well-being: When a person deploys whatever finances financial knowledge available to them in the way which most effectively supports their life choices and overall goals.

What cannot be so easily influenced is ‘financial empowerment’ and ‘financial well-being’.

Empowerment requires engagement from the individual to get back into the driving seat. Well-being is inherently subjective and intermediated by individuals’ values and personal idiosyncrasies. So the crux of a wellbeing initiative is that it must be a collaborative exercise between the individual who understands what they need, and the expert who helps the individual create that minimum floor of stability and expand their options.

What financial services, policymakers and employers can influence Financial literacy A person’s knowledge and understanding of financial concepts, like compound interest and diversification, as well as their ability to apply these concepts to decisions. For instance, understanding how compound interest impacts on their borrowing.

Financial capability The capacity to effectively manage financial resources over the life cycle and engage constructively with financial products and services. It uses as a benchmark the set of financial decisions judged to be superior in a specific context7.

Financial wellness A set of financial criteria judged by employers to minimise financial stress for employees.

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7 Holzmann, Mulaj & Perotti (2013)

PART 1

THE NEW LANGUAGE

VALUES

MASTERY

Financial well-being

Financial Empowerment

Chapter 1

WHAT POLICYMAKERS, FINANCIAL SERVICES COMPANIES AND EMPLOYERS CAN INFLUENCE Financial literacy

Financial Capabilities

Financial Wellness

WHAT THE INDIVIDUAL CONTROLS

25

PART 1 Chapter 1

THE NEW LANGUAGE

For philosophers, well-being is part of the broader conversations on happiness and utility.

For practitioners it is the purpose of all our attempts to improve people’s interactions with finances.

26

Concluding thoughts Two main groups have been working towards the concept of financial well-being – the philosophers and the practitioners. For philosophers, it is part of the broader conversation on happiness, utility and subjective well-being and looks at how finances serve our overall goals for life. For practitioners, it is the ultimate purpose of all our attempts to improve people’s interactions with finances, but often has a fairly indistinct definition. By combining these two conversations, we can begin to see that financial well-being allows us to unlock what people really want from their money.

But the real value in the financial well-being model will become clearer in our next chapter. We have already indicated that somewhere in an individual’s quest for financial viability and stability there will need to be a guiding hand of a professional. What Chapter 2 reveals, though, is that ‘professional support’ in this context will, by necessity, demand a very different look and feel.

2

UNDERSTANDING DECISION-MAKING 27

PART 1 Chapter 2

UNDERSTANDING DECISION-MAKING

SUMMARY

By understanding how the financial decisions of an individual are filtered by their automatic thinking, the social context, their mental models and their psychological predisposition towards money, professionals can significantly enhance that individual’s ability to convert values into financially viable outcomes.

Can understanding how we make financial decisions lead to better outcomes?

Perhaps the most powerful aspect of the financial well-being model is that it helps us cope with some of the most problematic contradictions in the literature around financial decision-making. On the one hand, the research cautions us that unless we can make a distinct link to what matters to individuals (their values), we are unlikely to successfully translate financial knowledge into an effective engagement with the financial decision. On the other hand, there are any number of studies that highlight just

28

how bad we human beings are at making financial decisions.

The financial well-being model recognises the validity of both those points and provides us with a means for navigating our way through the potential minefield. At the heart of the process, we must recognise that there are distinct filters by which an individual processes financial decisions: automatic thinking, social context, mental models and mindsets about money are cases in

point. The job of the financial consultant, financial coach or financial therapist is to understand how these filters may be creating a blockage to an individual’s ability to secure what matters to them.This next section provides an in-depth description of some of these blockages. An important insight is that concepts such as automatic thinking, social context, mental models and mindsets about money are not simply blockages. They also hold the key to how to positively link decisions to values.

PART 1

UNDERSTANDING DECISION-MAKING

Automatic thinking vs deliberative thinking

The role of social context

Mental models

Chapter 2

Relationships with and mindsets on money

Changing how we think about the problem How could we go about improving the financial decision-making and financial capability of an individual? There are any number of how-to books that profess various formulas for success. But as David Brooks, the New York Times’s pre-eminent pundit on social and political issues, explains in his book The Social Animal, these formulas are typically derived from “the surface level of life”: what knowledge needs to be acquired and what physical steps need to be taken. Getting to the heart of financial decision-making demands we go one step deeper. As Brooks points out: “We are living in the middle of a revolution in consciousness. Over the past few years, geneticists, neuroscientists, psychologists, sociologists, economists, anthropologists, and others have made great strides in understanding the building blocks of human flourishing.1”

1 Brooks (2012)

The critical insight: our conscious, deliberative thinking capacity plays a relatively minor role in the outcome.

Earlier this year, the World Bank published their annual World Development Report with a review of why development projects tend to fail in emerging economies. We saw the paper as providing a superb template for getting to the heart of any change management issues. The study argues along the same lines as David Brooks: to understand what informs financial decisionmaking, we need an approach that goes significantly beyond financial or economic analysis to meaningfully integrate elements of behavioural finance, anthropology, development economics, psychology and even historical context. Specifically we need to understand: ■■ When it is that our brains are using automatic thinking to make decisions

and when they are using deliberative, knowledge-based thinking in making decisions ■■ The role that social context plays in decision-making ■■ The critical role of mental models in both dysfunctional and constructive outcomes.

While the intent of their study is to use these insights to better inform how policymakers, development specialists and service providers could create more effective outcomes for communities and societies, we will take each in turn to illustrate how these insights are equally valuable in the world of financial advice and financial empowerment. In addition, we will look at how people’s mindsets about money affect their interaction with it. This examines how our psychological disposition towards money influences decision-making.

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1

THINKING AUTOMATICALLY OR THINKING DELIBERATIVELY? Daniel Kahneman’s seminal piece Thinking Fast, Thinking Slow, provides the foundation for much of our current understanding of behavioural finance. It introduces the idea that the human brain processes information in two ways: automatically (thinking fast) and deliberatively (thinking slow)1.

These automatic thinking processes can be hugely valuable. After adequate training they can lead us to quick and skilled responses or intuitions. When combined with associative memory, we can rapidly produce a coherent pattern of activated ideas that can allow us to significantly shorten problem-solving tasks.

The problem with automatic thinking, however, is that it can just as rapidly infer and invent causes and intentions. Rapid processing can cause us to focus on existing evidence, while ignoring absent evidence. It occasionally reads

30

1 Kahneman (2011) 2 World Bank (2015)

more into information it is presented with than is warranted. It overweights low probabilities.

It is more sensitive to changes than to states.

It frames decision problems narrowly, when a broader picture would lead to a different conclusion2.

To some extent this is a function of the way we are hardwired: we simply couldn’t apply deliberative thinking to the tsunami of information and decisions that we are flooded with each day. But we should not underestimate its importance. The impressions and feelings generated by our automatic systems inform the explicit beliefs and reflective choices of the deliberative system – not the other way around. Still, we simply cannot ignore the potential for our automatic thinking system to produce sub-optimal financial decisions.

PART 1

UNDERSTANDING DECISION-MAKING

Chapter 2

PEOPLE HAVE

2 THINKING

SYSTEMS OF

The automatic system influences nearly all our judgements and decisions.

AUTOMATIC SYSTEM

DELIBERATIVE SYSTEM

Considers what automatically comes to mind (narrow frame)

Considers a broad set of relevant factors (wide frame)

Effortless Associative Intuitive

Sources: World Bank (2015). World Development Report: Mind, Society & Behavior

Effortful Based on reasoning Reflective

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UNDERSTANDING DECISION-MAKING

AUTOMATIC THINKING: OUR ‘QUICK-SORTING’ TECHNIQUES suscit atum ad remura? Go hos, nulego vitemuro ina, que cati parium. Simus hicatustrum cumus bonloct abeffre dintem dienatilii tam iam, Palicaet ariditusque renatuid us a b c 32

3 Kahneman (2011)

The Law of Small Numbers The Law of Small Numbers dominates the marketing machinery of our financial services industry. It’s our ultimate automatic thinking quick-sort tool. No matter how many times we are reminded (and remind others in turn) about how hugely destructive our adherence to it can be, our industry continually reverts to it when trying to ‘sell a point’.

So, what is this Law of Small Numbers and why is it so problematic? Kahneman uses an example from statisticians Howard Weiner and Harris Zweiling of a Gates Foundation project to illustrate the problem.

The foundation was interested in funding schools that they believed had the highest potential for success. Researchers applying for funding produced data suggesting that successful schools needed to be small. In their study, of the 1 662 schools in Pennsylvania that they analysed, they classified 6 of the top 50 schools as small.

On the surface that seemed to be fairly compelling evidence. It meant that small schools out-represented large schools in the success pool by a factor of 4. As Kahneman noted: “It was easy to construct a causal story that explained how small schools are able to provide superior education and thus produce

high-achieving scholars by giving them more personal attention and encouragement than they could get with larger schools3.”

Unfortunately, in this case, the facts were wrong – although that fact wasn’t fully appreciated until after the Gates Foundation made a considerable investment in the project. Had the researchers asked the question as to the characteristics of schools with the worst success rates, the answer would have been that small schools also had the worst success rates. How could that be?

The issue is not about the size of the school at all, but what happens when we work with data that represents small sample sizes.

Small sample size data is prone to producing outcomes that are significantly more variable, and potentially more extreme. The net effect is that outcomes in a larger sample size would probably be randomly distributed, which can easily become inadvertently skewed with the smaller data sample. Simply put, we are far more likely to see examples of extraordinary and extreme outcomes when we have a small data set than we are when there is a large one.

PART 1

UNDERSTANDING DECISION-MAKING

In financial services, the application of The Law of Small Numbers is most prevalent when we provide performance numbers to investors. How often do we walk past airport billboards that shout the praises of a top performing fund or investment manager?

And yet a ten-year performance record of excellence is statistically meaningless as an indicator of skill in the broader scheme of things. We are using very limited and very noisy data sets to make sweeping claims about what is happening and why those outcomes have been achieved. Still, research from BNP Paribas on fund flows in the South African unit trust industry provides evidence that money flows towards strong historical performance records4.

Even when we believe that our sample set is easily large enough to justify our conclusions, our misunderstanding about probability distributions can lead us to jump to conclusions that defy substantiation. As Nassim Taleb famously pointed out in relation to Warren Buffett’s extraordinary 30-year performance history, if one considers that in this case the sample size represents the several hundred million other investors in the world (and that’s probably a low estimate), the odds are extremely high that someone

4 Gopi (2015) 5 Taleb (2010)

could have achieved Warren Buffett’s performance results by sheer chance – and not by skill at all5. In other words, a random distribution of the performances from several hundred million investors would have yielded at least one data point, if not dozens of data points with outcomes of that order. So…is Buffett skilful? Here is where the statistics defeat us again. We simply do not have a large enough data sample representing Buffett’s range of investment decisions to say with statistical certainty that Buffett is skilful.

Chapter 2

BULL

When it comes to our financial decision-making, it’s the reflexive, fast-thinking part of our processing, the automatic mode, that plays the greatest role in our everyday processing. Cynically put, marketing departments count on the fact that consumers aren’t thinking very deliberatively when they do deliberate.

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UNDERSTANDING DECISION-MAKING

Consider these examples: When cash-strapped consumers consider such ‘grudge’ purchases as short-term or medical coverage, cost will often be a deciding factor. Marketing to these customers will often be deliberately framed to highlight this point. In reality, a tantalisingly low premium may mask the fact that there are high embedded excesses or copayments involved. As such, the promised protections afforded by the policy may well turn out to be significantly more expensive than initially understood. As such, a sub-optimal fast-thinking financial decision will invariably nudge out a better ‘value-for-money’ decision if the consumer is provided with no basis on which to deliberate.

What about this perennial problem? Payday comes and it’s clear an employee is not going to be able to make that required down-payment for the living-room set he has promised his family. But how convenient is the offering of a quick R300 payday loan to address this ‘consumption emergency’? For only R15 per R100 for every two weeks that the loan is outstanding, the individual’s problem is solved. What’s missing, of course, is that critical deliberation insight that helps consumers appreciate that after a mere two months, the charges on that R300 loan are now R180.

Is financial education really the answer?

Much of financial education and advice presumes that financial decision-making falls into the deliberative thinking camp for individuals. Consumers may have been properly coached in the powers of compounding, or the wisdom of long-term investing and diversification, for example, but even this knowledge foundation can be undermined when framing or anchoring end up short-circuiting a considered outcome.

34

6 Fernandes, Lynch & Netemeyer (2014)

While the academic world now appears to fully grasp that ‘economic man’ (a rational decision-maker) is probably a fiction, our policies and financial advice frameworks simply don’t go far enough in terms of acknowledging this reality. Financial education starts first with trying to teach individuals basic principles. Implicitly this means that we believe we can get results by simply appealing to the deliberative side of human decision-

making. To date, the outcome of such thinking suggests this is not a useful assumption. As we pointed out in Benefits Barometer 2014, a 2014 study on Financial Literacy, Financial Education, and Downstream Financial Behaviours6 concluded interventions to improve financial literacy have a mere 0.1% effect on financial behaviour.

PART 1 Chapter 2

UNDERSTANDING DECISION-MAKING

Where do we need to reshape behaviours if we are going to encourage better decision-making?

Counterintuitive as this may sound, an individual’s goalsetting and prioritisation is far more likely to reside in the automatic than the deliberative thinking space. Just think how many bad choices we human beings make around the deployment of our financial resources. For that reason we need a major rethink of how we could use our insights about automatic thinking to create outcomes that speak directly to greater financial capability.

We know, for example, that automatic thinking is shaped by the accessibility of different features of the situation. Seemingly unimportant features in decision-making, such as how many choices a person has to make, can completely unhinge effective decision-making. When people think automatically, the way choices are presented and the context under which decisions are made is critical.

This means that if we are going to push back the tsunami of influence from automatic thinking that can produce a horrific undertow of sub-optimal decision-making, we need to pay more attention to:

How default options are structured?

How we set out and label the options?

How many options we include?

What sequencing is applied to the

?

presentation of those options?

What prior information might have a bearing on those decisions?

What gap might there be between

when a decision is made and when funds to execute the decision materialise?

How salient is social identity?

What rules of thumb are being applied?

Source: Barry Schwartz (2013). How we decide.

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UNDERSTANDING DECISION-MAKING

This is our starting point. We can also provide little educational ’nudges’ to get people to think through problems more deliberatively.

Or, we may need to completely rethink how we provide advice.

In the World Bank’s 2015 World Development Report entitled Mind, Society, and Behavior, they introduced the following example to show exactly how to quietly introduce financial education at a critical point in an individual’s financial decision-making. In this specific field experiment, individuals received

payslip envelopes that provided illustrations on the back of how the cost of borrowing from a payday lender (short-term loan or loan shark) compares to borrowing the same amount from a credit card. Providing a constant reinforced message with every pay cheque created an important level of anchoring around concepts of ‘good’ debt and ‘bad’ debt.

Now let’s tackle the bigger mind-shift. How could we completely rethink the way we provide financial advice to individuals?

How much it will cost in fees or interest if you borrow $300 PAYDAY LENDER

CREDIT CARD

(assuming two-weeks is $15 per $100 loan)

(assuming 20%p.a.)

If you repay in:

If you repay in:

2 weeks

$45

2 weeks

$2.50

1 month

$90

1 month

$5

2 months

$180

2 months

$10

3 months

$270

3 months

$15

Sources: World Bank (2015). World Development Report: Mind, Society & Behavior

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Consider this challenge: consumers are flooded with information about what the financial services industry believes they need. Financial products are often sold on the basis of why they would be critical to the individual. Given that we are trying to stimulate financial empowerment and financial well-being, would the framing not be far more effective if we told individuals what they don’t need? We take exactly this approach in Part 2: Chapter 3 when we discuss decision-making around short-term insurance and medical aid.

In a field experiment, randomly chosen borrowers received envelopes that showed the dollar fees they would accumulate when a payday loan is outstanding for three months, compared to the fees to borrow the same amount with a credit card.

Borrowers who received the envelope with the costs of the loans expressed in dollar amounts were 11 percent less likely to borrow in the next four months compared to the group that received the standard envelope. Payday borrowing decreased when consumers could think more broadly about the true costs of the loan.

PART 1

UNDERSTANDING DECISION-MAKING

What’s required in all these examples is a sharper focus on decision-making by both individuals and their advisers, such that choice architecture dramatically simplifies the trade-offs being made with each decision and helps individuals quantify the outcomes of these decisions.

In Benefits Barometer 2014 we provided one example of such a tool when we described a payroll application that could help members derive a better understanding of how their employment contracts and benefit structures provide such present, future and future perfect solutions. We also showed how better choice architecture in an investment framework could improve outcomes for umbrella fund members.

In Benefits Barometer 2015 we provide a framework for decision-making around medical and short-term insurance coverage decisions that starts with the question: what if I did nothing?

Chapter 2

Concluding thoughts When it comes to our financial decision-making, it’s the reflexive fast-thinking part of our processing, the automatic mode, that plays the greatest role in our everyday processing.

We would get better results if we focused on how to protect individuals from the reality of their automatic thought processes. Alternatively we could consider ways to use the natural process of automatic thinking to get individuals to make more of the ‘right’ decisions to address their wellbeing objectives.

Here is the conflict, we cannot increase deliberative thinking by increasing the information we give to individuals. The more information we flood individuals with, the less likely we are to see the right decision – much less any decision. We need to change that dynamic.

Our starting point is to determine whether the financial decision in question is more likely to be addressed by the individual with an automatic or a deliberative process. Only when we know the answer to that question will our interventions be effective. This is what should dictate how we formulate our advice process and our collateral marketing documents. (The forests of our planet will thank us for taking that little extra step.)

The financial well-being challenge is in finding the most effective way to walk that thin line between presuming or dictating what would be in the best interests of an individual’s well-being, and recognising that most individuals simply do not have the wherewithal to know that answer – at least not if it involves projecting out hugely complex and variable decision trade-offs into the future.

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2

THINKING SOCIALLY

“Human sociality is like a river running through society; it is a current that is constantly, if often imperceptibly, shaping individuals, just as flowing water shapes individual stones in a riverbed. Policymakers can either work with these social currents when designing interventions or ignore them and find themselves swimming upstream1.�

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1 World Bank (2015)

PART 1

UNDERSTANDING DECISION-MAKING

The problem with economic theory is that it often paints individuals as autonomous decision-makers. In some schools of thought our financial actions are seen as purely self-serving, with wealth maximisation being the overriding driver. It’s assumed that ‘economic man’ does what he does for the money. A focus on material incentives, material rewards and material outcomes is thought of as inevitable.

As the World Bank study highlights, there are ‘other-regarding’ preferences2 at work in all societies. These are concepts such as the innate human desire for social status; our need to identify with one group while potentially rejecting another group; our willingness to cooperate with others who are seen as cooperating; our tendencies in some instances to behave altruistically; and our willingness to engage either in instrumental reciprocity, responding to kindness with kindness for some long-term gain or intrinsic reciprocity, where an individual will be prepared to either reward or punish the behaviour of others even if it is at a cost to oneself or the community.

Understanding where these counter-intuitive drivers of decision-making come from demands that we understand how our broader group behaves and cooperates, and identifies which decisions are in the best interest of

2 World Bank (2015)

the group. Financial decision-making by an individual is more heavily influenced by the requirements of the broader group than it is by self-interest.

On the one hand, this influence from the group helps explain phenomena such as the ‘third force’ of human drive, alluded to by Daniel Pink in his book Drive. Pink describes how human beings can also be driven, to greater or lesser degrees, by the intrinsic rewards that come from believing you are enhancing the world around you. This contrasts dramatically with the kind of explicit rewards provided by simply meeting basic needs or achieving certain performance goals.

Conversely, understanding the role of social influence by way of social context and social history also helps explain how entire societies can get stuck in dysfunctional behaviours such as corruption, over-indebtedness and xenophobia.

Through social context we derive social norms, those powerful sets of shared beliefs that dictate how community members should behave to maintain group dynamics, or how and with whom individuals should interact in their social networks. The net outcome has the potential to be profoundly destructive to a population.

Chapter 2

Failure to understand the importance of social influences on financial decisionmaking has been the undoing of many financial wellness and financial literacy programmes. As the World Bank study cautions us, policymakers often underestimate how critical this social component is in influencing changes in our financial capability.

But if we can get down to the heart of those social norms, come to grips with the context in which they were formed, and identify how a group’s social network influences both the formation of those norms and individual decision-making, we can begin to identify what types of interactions have the greatest potential for creating the kind of new behaviours required to better serve the long term interests of the group.

Understanding who (what type of person) carries influence and why, means we can determine what kind of group role model could change the ‘mental models’ the group employs while making specific decisions. We can target specific individuals to lead and amplify change.

Let’s try to explore this dynamic more fully.

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PART 1 Chapter 2

UNDERSTANDING DECISION-MAKING

The power of the people The tendency of the financial services industry is to ‘tell’ people what would be the preferred behaviours they should follow if they want to improve their financial decisionmaking. Our advisory process is often one where our clients share with us their financial concerns and we, in turn, tell them what they must do.

Consider why this might be problematic. If this advisory framework exists outside of the social context, once the individual returns to that context, it’s just a matter of time until the pre-existing social norms prevail. ‘Tell’ an individual that if they want to sort out their retirement shortfall they shouldn’t buy that new car on credit and they will likely revert back to their original plan or, more drastically,

People will do the right thing to enhance their financial well-being, but only if they perceive other people as doing the right thing.

40

3 World Bank (2015)

change financial advisers. The issue isn’t lack of fortitude or financial savvy. The issue is that there are greater influences at play than you, the adviser.

As an industry, we owe it to our clients to better understand the social context that they operate within – irrespective of what socio-economic grouping they may fall into. The research is alerting us to the fact that unless we develop ways to help clients grapple with potentially dysfunctional pockets of influence, financial advice will fail to make any impact on an individual’s financial capability.

There is a good news/bad news story here.

We are beginning to understand better that people will do the right thing to enhance their financial well-being, but only if they perceive other people as doing the right thing. That means that people often behave as ‘conditional cooperators’. It also means that under the right conditions, social pressure can provide a powerful impetus for change3. The implication is that we should be spending considerably more time as an industry and as policymakers in determining how we can leverage the power of group coercion and group support to change dysfunctional financial behaviours.

Our current model depends almost entirely on convincing the individual directly. But encouraging the right financial behaviour has been shown to be far more effective if it is reinforced by social norms that correlate with the behaviours being promoted.

PART 1

UNDERSTANDING DECISION-MAKING

Chapter 2

“Save more”, “Save for retirement”, “Make a budget”, “Protect your families and loved ones” – this is the general litany of the advice world. Why does this fall on deaf ears?

South Africa: a case study Why does it seem as though no one is listening? The fact is it is at odds with what most of the population sees as the South African success story, post apartheid.

In many highly visible success stories, it sometimes appears as though the real way to success and wealth is through the patronage, nepotism and corruption either afforded by some of our transformation strategies or the prevailing tender processes employed by businesses. The term ‘tenderpreneur’ is probably far more applicable in accounting for the rapid rise of South Africa’s own unique ‘1%’ than indeed the term ‘entrepreneur’ (and this is hardly the exclusive domain of the Black Diamonds4).

In spite of the disheartening results from the Institute of Race Relations’ that 85% of the black South African population has not benefited from the BEE initiatives that have been in place for almost two decades now5, the ‘mental model’ persists that this is a critical element for transformation. “Saving more” is not the primary factor in explaining

4 UCT Unilever Institute (2005) 5 Jeffery (2014)

the extraordinary pockets of wealth creation that we have seen post apartheid. Nor is “spending less”.

A greater factor in the creation of an aspirational black middle class over the years since apartheid has been the role of the government. It facilitated the introduction of two critical ingredients for transformation: the economic legitimacy of employment (albeit for the public sector) for previously disenfranchised South Africans; and unfettered access to unsecured credit to a population that had been previously excluded from any financial levers (such as credit) for building wealth and assets.

As Deborah James points out in her book Money from Nothing, “A newly liberalised capitalism combined with pronounced state patronage was superimposed on what existed before... Whereas the official system of earlier (apartheid era) classification used race as a means to categorise the population, this has been replaced by a market system emphasising lifestyle,

consumption, and consumer choice: the living standards measures, or LSMs”.

“Across all these strata, people have found themselves, to different degrees, exposed to new pressures to consume and have been readily offered the wherewithal to do so. Credit and debt are what make it possible for people to buy more than they can afford. Countering the apparent homogeneity – ‘everyone is now middle class’ – one of the things that varies widely is whether individuals borrow, from whom, how much, what for, and what do they do about repayment.” These are the new class differentiators, the factors shaping the various status groups and how distinctively different they may be from one another in solving financial problems.

James’s short summary of her thinking in her book fleshes out some of the conflicts South Africans face in the context of wealth creation or even financial security that have led to some dysfunctional behaviour around money and wealth creation.

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PART 1 Chapter 2

UNDERSTANDING DECISION-MAKING

DEBORAH JAMES SHARES HER INSIGHT FROM

MONEY FROM NOTHING: ASPIRATION AND INDEBTEDNESS IN SOUTH AFRICA Socially necessary expenses6 People – both middle class and aspiring to be so – got heavily into debt during the 1990s. This had to do with the swiftness of political transition in 1994, and the desire for economic well-being that accompanied it. It would be hard to imagine how the burgeoning aspirations for a better life could have been met in the post-apartheid era were it not for the ability to borrow. Had there been no debt – or access to credit, to use the version that sounds more palatable – very little transformation would have occurred in South Africa. There would not be nearly as many black people driving decent cars instead of skedonks and living in decent homes rather than shacks and sending their children to good schools and universities.

Many in the ‘new’ middle class might have barely finished high school themselves, yet

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6 The following extract was provided by Deborah James and provides a summary of points from her book, Money from Nothing 7 Slang for purchasing something on a tab.

were expected to educate several children to tertiary level (though this could be a matter for disagreement within households). Often the only way to do so, even by those who hated the idea of borrowing, was ‘on tick’7 – and it was often the schools and universities that found themselves becoming de facto creditors. A Sowetan family has two parents working for a parastatal transport company.

The mother, a frugal person, decries all forms of borrowing, especially buying food at Woolworths by ‘swiping the card’. However, she is in disagreement with her husband about whether their daughter ought to have gone out to work or attended university. The result is that the university – here reluctantly turned lender – must wait until the mother gets her 13th cheque before the fees are paid.

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In sum, if there is dissatisfaction with the rate of transformation, the levels of grievance, had there been no credit, would have been much greater, but the results have often been far from straightforward. In this case the daughter got a good job, but that does not always follow.

The situation is neatly summarised by Jonny Steinberg in his 2008 book Thin Blue: The Unwritten Rules of Policing South Africa, when he describes the dilemmas faced by one such member of the new middle class.

“To ensure that your children attend a good school, you must buy a house in the suburbs. You have no reserves of cash, no investments, and so your entire house is bought with borrowed cash; the Reserve Bank governor’s quarterly decisions on interest rates, which once meant so little that you were barely aware of them, can now destroy your precarious monthly budget overnight8.”

People, then, borrow to fulfil their own and their dependants’ expectations, but the net result, taken overall, has been levels of debt that many decry as unsustainable. To speak of such borrowing as ‘irrational’, as financial advisers and economists often do, is to miss an important aspect of the social underpinnings of debt. The reasons for debt have less to do with meeting immediate material aspirations than striving for longterm goals like education, housing, or investing in socially valuable and prestigious connections such as marriage. Exacerbating the levels of dependency on credit, shrinking levels of employment for the majority have been accompanied by entry into – or the

8 Steinberg (2008) 9 Ndumo (2011)

consolidation of – secure employment for the few: especially in civil service jobs or those involving government tenders. People with jobs are expected to support their relatives who are unemployed, and may borrow to meet these expectations. Here, the fulfilling of socially valued norms – like paying for the upkeep and education of members of the extended family – can have negative effects.

Debt advisers have recognised, and many of their clients already know, that only by strategically withdrawing from such obligations can a more individually-viable middle-class existence become possible.

There are “kind and well-meaning people”, says Phumelelo Ndumo, author of a book on the subject, who have been “taken advantage of by those they love”. Rather than being a ‘cash cow’, she advises people to partner up in a nuclear family and focus on the future achievements and needs of their own children9. Yet such advice can be difficult to follow since it goes against the grain of valued social norms. Those who were well served by the new dispensation, finding that they’re required to provide security and education for those who benefited less, have thus found themselves faced with a seemingly insoluble dilemma: to act ‘rationally’ is to undercut the even more forceful value entailed in social expectation and obligation.

Some members of the new middle class, in the grip of the status anxiety and competition that are well known in cases of class mobility, spend money on expensive items. “Neighbours compete and feel under pressure to show that they are living in the correct way,” one young lecturer told me.

Chapter 2

“If you take three neighbouring houses in Orange Farm …all the consumer items like DVD players and washing machines are exactly the same as each other.” So, competing for status does not necessarily mean striving for difference: it can be more like keeping up with the Khumalos than trying to surpass them. Others will spend money on ceremonies considered socially mandatory like expensive weddings. But many, keen to act more frugally, have become hesitant to marry. Not only lavish ceremonies and receptions, but bridewealth or lobola, are costly and can necessitate debt. The cost in the case of the same young lecturer, given her education, would be estimated at R50 000, and the wedding itself would cost around R250 000. While she understands that her parents would want to demand this payment from any prospective son-in-law, Bongile also feels that the huge debt with which he would be saddled to carry forward into the future would make the arrangement unsustainable. She won’t be getting married any time soon, she told me.

To speak of such borrowing as ‘irrational’, as financial advisers and economists often do, is to miss an important aspect of the social underpinnings of debt.

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The formal and the informal: uneven combinations Policymakers and financial analysts often make incorrect assumptions. For example, they see people as gradually moving from more ‘traditional’ ways of conducting their financial affairs (like investing in savings clubs or stokvels) to more ‘modern’ ones, like saving money in banks. To facilitate more modern (read ‘rational’) behaviour, they advocate the banking of the unbanked. In fact, though, many people have developed strategies that have been called ‘portfolios’, which include savings and credit from all of these, in uneven combinations. A group of salaried teachers made a conscious decision to avoid the formal sector and use a savings club, because they felt they had been treated

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with discourtesy and even criminal neglect by those in that sector: specifically the notorious retailers that sell appliances on hire purchase, one of whom had wrongly issued a garnishee order on the club’s founder member founder for an alleged missed payment, and proved unresponsive to all communications. So the founders still use the bank to store their money but use the savings club to generate interest.

Likewise, many policymakers view the indebted as victims of nefarious loan sharks (mashonisas) and consider that they would be better served by the formal banks. This may have a measure of truth,

but there is another side to the story. Those not in receipt of a regular salary are unable to borrow from the banks: for them, the mashonisa represents a preferable (often the only) option for getting hold of money in a hurry, even if they do charge 50% per month. Besides, to see the mashonisa as a demonic figure can be a misrepresentation.

Many lenders are also borrowers – and vice versa. Savings clubs or stokvels like the one mentioned above, for example, not only encourage members to save money, they also make it compulsory for them to lend that money out at interest (typically, 30% per month), to make it ‘grow’. Informal moneylending, to give another example, is a

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tactic used not just by baseball bat-wielding loan sharks: it is also resorted to by grannies, pensioners, neighbours, and people who want to supplement their income. In some cases this is because they lack other, more steady, jobs. But it also owes itself to the fact that even those with salaries need more than they earn. The ubiquitous emphasis on ‘becoming an entrepreneur’ can lead to grief.

People struggling to run small businesses often fail to get credit at reasonable rates, because they ‘lack connections’. All too often, as in the case of one Sowetan I know, they turn to money lending as an alternative. If more sustainable and productive forms of employment were more readily available, there might be less recourse to ‘making money from nothing’ by lending it out at extortionate rates of interest.

Ways forward So do we advocate the survival of the fittest, sink or swim? Or is the answer the complete avoidance of debt?

Although it is true, as stated above, that there are blurred areas where lenders and borrowers are difficult to distinguish from each other, it is still necessary to decide whether the weaker and more vulnerable in society need more protection than the rich and powerful. If they do, how can such protection be put in place without undermining the stability of the financial system? The tendency in societies which advocate the free market has increasingly been – often by giving financial advice and attempting to teach ‘self-discipline’ – to make borrowers carry the can. And this

Chapter 2

may be necessary, but it can work only if it’s combined with other measures. It needs to be accompanied by an attempt to tackle South Africa’s infamous ‘advantage to creditor’ culture, by offering debt defaulters a way to start on a new page, and by challenging the general attitude among many lenders (and the magistrates’ clerks that enable them to issue garnishee orders with impunity) that ‘anything goes’ because none of them will ever be called to account.

At the same time, borrowers will need to recognise the social entanglements in which they are caught, and start to take the kinds of advice offered by advisers who understand these contexts, even if doing so might put certain social relationships and dependencies at risk.

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Solutions that help us shape the social context As the World Bank study highlights, “social norms are rarely chosen by the people who are subject to them. They come from either historical circumstances or accumulated precedence.” Breaking a social norm can create shame and stigma, which is why such issues as openly discussing your debt situation can be hugely problematic. The challenge is to determine how we can design policies or programmes that can bypass the influence of negative social norms on financial wellness.

To start with, creating the perception that there are more ‘acceptable’ norms may be a particularly effective way of stimulating more desirable behaviours.

Take for example the recent South African Revenue Service (SARS) TV ad series that provided an array of amusing skits on tax evasion. The key to the success of these skits was that tax payers were portrayed as attractive young black couples and tax evaders were portrayed as despicable ‘lowlifes’, often Caucasian. The ad campaign was effective in getting people to perceive tax evasion as something much more than just breaking the law – attractive, socially acceptable people simply wouldn’t dream of it in these scenes. The point is that, when people understand how others think about a given behaviour, this can be a catalyst for changing social norms.

Traditional advertising techniques also will use ‘norm entrepreneurs’ (high status game changers) as another way of reducing the

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10 Wilkinson & Pickett (2011)

perceived cost of violating an existing norm and increasing the perceived benefits of the new behaviour. If Trevor Noah turned around and told The Daily Show producers: “I believe my acute sense of wit and comedic timing owes much to growing up in the cultural hotpot that is South Africa, and as such, half my pay should go back to the South African people in some way”, that would send a powerful message out about success, status, and our obligations to a broader social context.

As Wilkinson and Pickett highlighted in their study on the impact of inequality on societies, two factors are key to creating a dysfunctional outcome: ■■ The perception that success was just a function of being in the right place at the right time (inadvertent access to a BEE deal) and not the product of superhuman contributions of intellect or labour.

■■ An escalating inequality of wealth, perpetuated by the fact that only a small minority had access to these opportunities and they went on to become significantly wealthier than everyone else.

The net effect is that money plays a particularly dysfunctional role under these conditions10.

With these conditions in place, our decision-making around money becomes toxic. Not only does the society in question show a sharp increase in crime, teenage pregnancies, mental and physical illness and

so on, but money is considered essential for improving your perceived status through buying aspirational goods.

Social cooperators and influencers could provide a catalyst for changing the quality of financial decision-making in South Africa, but only if we find a way to change the script that’s used by those influencers. We know that there are better scripts out there that appear to be making a difference.

To some extent, then, we need to get individuals and communities to write a new script themselves that would be based on an emerging consciousness of how their actions impinge on their financial well-being. This is not a script that the current financial services industry can write for them with any degree of credibility.

Additionally, we know that social networks can be a distinctive form of economic coordination in themselves with their own inherent logic. As such, they can both aid and undermine goal-seeking. We need to be clear on how this social fabric is constructed to ensure that concepts we promote don’t end up undermining something critical in an individual’s life.

For example, as a financial services company, we might see commitment devices as a way to get people to save more reflexively or to resist the temptation to divest themselves of essential insurance protections. On the positive side, this

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provides an individual some protection from social demands for financial assistance from family members. But commitment devices could also have the opposite effect by weakening broader sharing conventions like helping out extended families or groups or friends during hard times.

What this all suggests is that, as an industry, we need to reflect more on the potential for broader, unintended consequences behind our financial planning recommendations. We need to, as the World Bank study urges us, keep digging deeper to understand the root cause of any issue relating to an individual’s financial well-being and take great care to understand those decisions and their implications within the broader social context.

Chapter 2

Concluding thoughts Not all social norms are beneficial to a society – as such, norm change may well be a necessary component of long term social change (reluctance to save, eliminating corruption).

Without first addressing the need to change those prevailing social norms that are problematic to the broader society, our efforts to try to elicit change by simply encouraging the individual to change their own personal behaviours will invariably fail.

But, and this is a big but, while it is highly unlikely that the financial services industry will provide the catalyst for such mental model changes, a concerted campaign that is driven by both the public and private sector might just succeed.

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3

THINKING WITH MENTAL MODELS Mental models differ from social norms.

People use mental models to make sense of the world around them. They ‘capture broad ideas about how the world works and one’s place in it1’. While social norms focus on what behaviours need to be reinforced for members to fit into a social group, mental models provide the way people categorise, stereotype, identify, consider causal relationships and explain to themselves the way the world works. They may have been originally informed by social context, but they can exist independently of social interactions.

Some mental models may be innate (why we see events that happen more than three times successively as the emergence of a pattern) and others are idiosyncratic (evolved out of an individual’s or population’s historic experience). Mental models can exist at broad societal levels or at very specific, even individualised levels.

Heuristics, for example, is an important subset of mental models that we use throughout financial planning. These rules of thumb invariably spark heated debate around which are old-school mental models and which are viable into the future.

Other mental models can be problematic because they may have served a purpose at one point in time that is no longer relevant.

Think of gender or ethnic biases. Think of the legacies of apartheid on our mental models.

In some cases, mental models may outlive their usefulness – or they may persist in spite of never being useful in the first place – but the harsh reality is that they are extremely persistent.

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1 World Bank (2015)

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Chapter 2

Four factors are important to note in the context of this persistence:

1 2 3 4

Mental models influence how we perceive or recall things.

Some beliefs cannot be tested. An effective test would be one that would lead large numbers of people to question old beliefs (the belief that smoking isn’t harmful, for example). But if we cannot definitely prove or disprove a given mental model (think active or passive investment philosophies) then sometimes the best mental model to nudge people towards is one that provides a rational means of accepting both.

Confirmation bias leads people to ignore, suppress or forget information that might lead them to more rational conclusions. We may say over and over again that performance histories simply are not dependable gauges of the future – and then Manager X wins the Raging Bull Award and we are off to the performance races again.

Some beliefs that people hold on to in one area may transcend to others. If people believe that alternative investments are risky, they may be reluctant to invest in impact investing, even though it has obvious direct benefits to that individual’s community.

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USING MENTAL MODELS

TO ENHANCE FINANCIAL PLANNING INITIATIVES Creating an effective financial empowerment programme requires understanding which mental models we need to help individuals abandon and which mental models we need individuals to embrace, particularly if they help individuals navigate the complex world of money. We can actively change a person’s mental model, but to do so means that we have to be clear about the potential for impact such a change might have on other decisions an individual might make.

The World Bank study argues that we can test the influence of a mental model on a behaviour by experimentally manipulating the salience (its prominence or importance as an influence) of a mental model. What exactly do we mean? An example of how we can manipulate outcomes to student test scores is instructive. When students were asked to reveal whether they went to public or private primary schools before they took a test, there would be decided variations in test scores.

When the same population revealed nothing about their backgrounds before the test, the variation in results was indistinguishable.

Let’s use another concrete example of how an understanding of mental models (and who in a given population possesses what kind of

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2 Ashraf, Karlan & Wesley (2006)

mental model) allowed a group of economic development specialists to formulate a savings programme that boosted savings an average of 82% once the appropriate candidate had been identified2.

The exercise that was conducted in the Philippines targeted commitment programmes – programmes that encourage people to commit to locking away their savings until they reach a predefined target to service a predetermined need (for example the education of a child). In spite of research that suggests that these programmes can be effective in getting people to save above and beyond what they would typically accumulate in a standard savings account (where they would be free to take their money when they wish), many financial institutions weren’t offering these devices for the simple reason that they couldn’t identify the appropriate market.

What the research team was able to establish was that a targeted series of questions could be used to help establish what kind of financial consumers would find these products attractive. The mental model that the team zeroed in on was what behavioural economists identify as ‘hyperbolic

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discounting’. This is just a complex way of saying that there appears to be a general tendency for people to be more focused on their immediate needs than on longer-term distant needs. But some individuals can be aware of this hazard and recognise that the value of a commitment programme is that it keeps you from falling into that trap.

In the Philippines, it turned out that one segment of the population scored particularly well on this account. These were, typically, married women – or, more specifically, married women who were held responsible for managing household accounts.

In all likelihood, there was as much a sociological reason as a psychological reason for why commitment devices were particularly attractive to this segment. Locking away funds until they reached a pre-specified target also meant that troublesome spouses couldn’t prematurely bully the women out of their hard-earned accumulated savings.

Either way, a targeted consumer translated into a successful savings campaign.

Chapter 2

From savings to investments How could we apply a similar strategy to manipulating salience around investment strategies?

Goals-based investing is definitely one mental model we would like to see more investors adopt. There is an inherent logic in getting people to set out their personal financial goals and then helping them identify the investment strategies that have the highest probability of meeting that goal.

Investment management as a professional enabler is far more capable of delivering on that promise to clients than it is capable of consistently winning the performance sweepstakes. But before this is likely to succeed, we need to address the current mental model that outperformance of the peer group or some benchmark is the most important criteria for success in investing.

To affect a mental model shift we would have to increase the ‘salience’ of goals-based solutions by:

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■■ demonstrating how effective these strategies can be in terms of potentially reducing the amount people need to save to meet their requirements or address their utility ■■ proving that high returns alone are not a suitable strategy for matching the variability of your targeted liability. Example: an individual seeking to replace their income in retirement ■■ getting rid of performance surveys as they are currently formulated and replacing them with surveys that help investors evaluate which asset managers do the best job of delivering on a specific goal ■■ or, if all else fails, we could muster a roster of influential individuals in the global investment community, such as a Nobel laureate in finance, to lobby hard for acceptance in an influential forum.

After all is said and done, are we likely to attract all investors to a goals-based framework? The answer is most decidedly not everyone. But for a certain segment of investors, fiduciaries and advisers for example, goals-based investing represents a distinct improvement on the traditional returns-based strategies. That means we need to take a lesson from our Philippines commitment scheme example. By identifying which type of client would be most disposed to this particular mental model and by doing as much as possible to remove blockages for those kinds of clients, we stand a much better chance of success.

By identifying which type of client would be most disposed to this particular mental model and by doing as much as possible to remove blockages for those kinds of clients we stand a much better chance of success.

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Chapter 2

SO WHAT ARE SOME VIABLE APPROACHES

TO CHANGING MENTAL MODELS?

Self-help groups can have a significant impact on getting individuals to change their mental models, particularly their perceptions of themselves and their place in the world.

Media and role-modelling provide a powerful way of changing mental models.

Education and early childhood interventions can have long-term effects.

Cost/benefit projections and present value projections can change mental models around certain financial trade-offs.

Decreasing economic dependence can be an important way of changing an individual’s mental model.

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Global evidence of successful strategies Strength of the evidence

Retail sector

Reminders

73 papers, appearing in 6 domains

Regular text-message reminders to save money increased savings balance by 6 percent (Karlan and others 2010).

Social influence

69 papers, appearing in all 8 domains

Homeowners received mailers that compared their electricity consumption with that of neighbours and rated their household as great, good or below average. This led to reduction in power consumption equivalent to what would have happened if energy prices had been raised 11-20 percent (Allcott 2011).

Feedback

60 papers, appearing in 5 domains

A field experiment provided individualised feedback about participation in a curbside recycling programme.

Households that were receiving feedback increased their participation by 7 percentage points, while participation among the control group members did not increase at all (Schultz 1999).

Channel and hassle factors

43 papers, appearing in 8 domains

Providing personalised assistance in completing the free Application for Federal Student Aid (FAFSA) led to a 29 percent increase in two consecutive years of college enrolment among high school seniors in the programme group of a randomised controlled trial, relative to the control group (Bettinger and others 2012).

Micro-incentives

41 papers, appearing in 5 domains

Small incentives to read books can have a stronger effect on grades than incentives to get high grades (Fryer Jr. 2010).

Identity cues and identity printing

31 papers, appearing in 5 domains

When a picture of a woman appeared on a math test, female students were reminded to recall their gender and performed worse on the test (Shih, Pittinsky and Ambady 1999).

Social proof

26 papers, appearing in 5 domains

Phone calls to voters with a ‘high turnout’ message-emphasising how many people were voting and that the number was likely to increase were more effective at increasing voter turnout than a ‘low turnout’ message, which emphasised that election turnout was last time and likely to be lower this time (Gerber and Rogers 2009)

Physical environment cues

25 papers, appearing in 5 domains

Individuals poured and consumed more juice when using short, wide glasses than using tall, slender glasses. Cafeterias can increase fruit consumption by increasing visibility of the fruit with more prominent displays by making fruit easier to reach than unhealthy alternatives (Wansink and van lttersum 2003).

Anchoring

24 papers, appearing in 7 domains

In New York City, credit card systems in taxis automatically suggested a 30, 25 or 20 percent tip. This caused passengers to view 20 percent as the low tip, even though it was double the previous average. Since the installation of the credit card systems, average tips have risen to 22 percent (Grynbaum 2009).

Default rules and automation

18 papers, appearing in 7 domains

Automatically enrolling people in saving plans dramatically increased participation and retention (Thaler and Benartzi 2004).

Loss aversion

12 papers, appearing in 7 domains

In a randomised controlled experiment, half the sample received a free mug and half did not. The groups were then given the option of selling the mug or buying a mug, respectively, if a determined price was acceptable to them. Those who had received a free mug were willing to sell only at a price that was twice the amount the potential buyers were willing to pay (Kahneman, Knetsch and Thaler 1990).

Public or private commitments

11 papers, appearing in 4 domains

When people promised to perform a task, they often completed it. People imagine themselves to be consistent and will go to lengths to keep up this appearance in public and private (Bryan, Karlan and Nelson 2010).

Type

Source: Richburg – Hayes and others (2014). Behavioural Economics and Social Policy: Designing Innovative Soultions to Programs supported by the Administration for Children and Families.

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Any time one wants to introduce a change or utilise an insight to improve outcomes, one has to dig down any number of layers of consideration to appreciate the potential knock-on effect – both intentional and potentially unintentional.

3 World Bank (2015)

Chapter 2

Concluding thoughts “Because of the interplay of these different dimensions the net effect is not an arithmetic or even geometric addition of complexity. Rather we need to think of it as logarithmic3.”

The complexity comes from the fact that each factor has variable interactions with each additional factor. If there is one lesson that the World Bank is trying to impart to their readers it is that any time one wants to introduce a change or utilise an insight to improve outcomes, one has to dig down any number of layers of consideration to appreciate the potential knock-on effect – both intentional and potentially unintentional. If there is one fault that development policies are often guilty of it is this failure to dig deep enough to understand both the true roots of a problem and to anticipate the potential knockon effects of the outcome.

But there is one further phenomenon that plays an important role in financial decision-making that the World Bank study doesn’t explicitly touch on. This is an individual’s mindset towards money. At some level, money mindset and mental models are interrelated. But the money mindset factor demands that we place a much stronger spotlight on the way an individual engages with money and whether it might be suboptimal or dysfunctional. This we deal with in our next section.

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4

MONEY MINDSETS

Money mindsets – how we engage with money can influence our decision-making Americans love their psychological analysis approach to life. A cursory look at Amazon’s list of top-selling self-help books shows that there are more self-help books per capita targeted at the American audience than any other nationality. There are no less than 38 different twelve-step programmes available somewhere in the US that can address the myriad of addictions that cripple the productive lives of any number of Americans. These range from such well-known programmes as Alcoholics Anonymous and Narcotics Anonymous to the more attention-grabbing Emotions Anonymous, Under-earners Anonymous, Gamers Anonymous, Pagans in Recovery and Clutterers Anonymous. In fact, there appear to be seven distinctly different twelve-step programmes that target various forms of sexual addictions. One could be

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somewhat justified in thinking that the launch of a new academic journal called The Journal of Financial Therapy is another example of the predisposition of Americans to psychoanalyse just about everything in their lives.

But think again. Let’s revisit our starting proposition for this section, Part 1: Chapter 2: “We are only just beginning to understand the complex dynamics that inform our financial decision-making.” Our psychological predisposition provides our fourth area of focus for this chapter.

Recently, while in London, a chance to visit a friend who was just returning from a session at Debtors Anonymous1 proved to be eye-opening. In truth, this woman was quite affluent, without debt problems. But

1 We wrote at length about Debtors Anonymous in Benefits Barometer 2014 pp. 187-189

her reason for seeking the support of Debtors Anonymous came from a different quarter.

This was a programme that was expressly about helping people with their dysfunctional relationships with their finances – and not just with financial crises. Her problem? As an independent consultant, she found she was incapable of asking clients to pay her what she believed her services were worth.

In many instances, poor financial decisionmaking may have little to do with financial literacy, access to money or income, or social pressures. It may be as simple (or rather, as complex) as an irrational response to a seemingly rational economic problem.

What triggers such suboptimal economic behaviour? The reasons are often complex.

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Chapter 2

“MONEY MATTERS ARE TREATED BY CIVILISED PEOPLE IN THE SAME WAY AS SEXUAL MATTERS: WITH INCONSISTENCY, PRUDISHNESS AND HYPOCRISY.” – SIGMUND FREUD

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“If I made you poor tomorrow, you’d probably start behaving in many of the same ways we associate with poor people.” You too would end up in a scarcity trap.

In Benefits Barometer 2014 we described in great detail how scarcity could massively affect an individual’s ability to make effective decisions2. The conclusions drawn by behavioural economists Eldar Shafir and Sendil Mullainathan were that “when the mind becomes pre-occupied with one thing such as scarcity of funds, other abilities and skills – attention, self-control, and long-term planning – often suffer3”.

It’s worth repeating this message in this year’s Benefits Barometer because, as they illustrate, “qualities often considered part of someone’s basic character – impulsive behaviour, poor performance in school, poor financial decisions – may in fact be products of a pervasive feeling of scarcity4.” “To put it bluntly”, says Mullainathan, “if I made you poor tomorrow, you’d probably start behaving in many of the same ways we associate with poor people5.”

You too would end up in a scarcity trap.

But there are other factors that also have a direct impact on how we engage with money and these are often rooted in our historical, family and social circumstances.

Many of these factors relate directly to a person’s sense of self-worth or security or underdeveloped interpersonal skills. This is what we want to explore further.

Two important points are clear: 1. Failing to deal with these decision-making blockages is a major flaw in financial planning.

2. Identifying, understanding and coping with these irrational behaviours is generally beyond the training of most financial advisers.

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2 Benefits Barometer 2014 p. 51 3 Feinberg (2015) 4 Feinberg (2015) 5 Feinberg (2015) 6 Cheeks (2013)

What we do know is that one of the greatest challenges for any exercise in financial planning, financial coaching or even debt counselling is the lack of follow-through from the individual when presented with solutions or action plans. How could we change that outcome?

While the literature is brimming with insights into what causes an individual to seek financial help, it has, until now, been relatively mute on the issue of why follow-through is often lacking. But the field of financial therapy is beginning to uncover some interesting linkages between financial anxiety, the physiological manifestation of stress in the presence of financial decision-making, and the inclination of the counselling candidate for either ‘flight or fight’.

The reality is that most clients enter their advisers’ doors with financial baggage.

And while no one is perfectly rational when it comes to money, Amanda Clayman, a New York-based financial therapist points out: “Highly anxious people often have a hard time building calm, deliberate moneymanagement habits. To act reasonably, you must first neutralise the effects of the stress – you can’t work through money challenges in the throes of anxiety because you aren’t thinking rationally6.”

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Chapter 2

What exactly is a financial therapist?

This is where the role of a financial therapist comes in. Importantly, financial therapists engage in almost none of the typical discussions of a financial planner. It’s not about asking clients what their goals are, what matters to them or what it is they require from their finances. There’s very little reference to financial facts at all in these exchanges. Their challenge is to understand why sub-optimal decision-making exists in the first place.

Their task is to identify ways that the individual can use those insights to manage first the dysfunctionality. Only when that is under control can the individual move on to more cognitive, information-based solutions in financial planning.

More therapist, perhaps, than financial consultant, the financial therapist’s role is “to understand the stories we tell ourselves, true or not, about money.7” Or, in the language of the field, our ‘money scripts8’. What Klontz, Britt, Mentzer and Klontz uncovered in developing the Klontz Money Script Inventory (MSI) was that there are four distinct money belief patterns:

MONEY VIGILANCE

MONEY AVOIDANCE

MONEY STATUS

MONEY WORSHIP

By creating these identifiable money belief patterns, financial therapists have a more useful starting point for addressing the dysfunctional behaviour.

7 McCoy, Ross & Goetz (2013) 8 Klontz, Britt, Mentzer & Klontz (2011)

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MONEY AVOIDANCE

MONEY WORSHIP

MONEY SCRIPT

MONEY SCRIPT

Money is bad Money isn’t deserved “It’s not nice to talk about money” “Money is a man’s job” CHARACTERISTIC

BEHAVIOUR istance themselves from all D financial decisions Self-sabotage their financial well-being by underspending May unconsciously spend or give money away to have as little to control as possible Excessive risk aversion Worry about abusing

end to have lower T income or net worth Often young and single (score tends to fall with age) Tend to not know their net worth

More money will make things better (that said, financial windfalls only momentarily solve problems) Money will make you happier Money gives life meaning BEHAVIOUR

CHARACTERISTIC

Compulsive hoarding Unreasonable risk-taking Pathological gambling Workaholism Overspending Compulsive buying disorder Spending money = love and caring Relationships neglected

end to be young T Culture or ethnicity can impact to carry revolving debtot know their net worth

credit cards

MONEY STATUS

MONEY VIGILANCE

MONEY SCRIPT

MONEY SCRIPT

Net worth = self worth BEHAVIOUR eed to acquire more N money or semblance of money than those around you Puts individuals raised in lower socio-economic environments at risk for overspending and excessive risk-taking to accumulate wealth rapidly

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Money as a deep source of shame and secrecy Excessive wariness or anxiety about potential dangers or trouble

CHARACTERISTIC ssociated with societies with A high levels of inequality Lower ratings of well-being Higher levels of anxiety, physical symptoms, unhappiness and lower levels of self-actualisation, vitality and happiness Tend to be lower levels of income and education

BEHAVIOUR Individuals lie about expenditures or income Denial of where money was funded from Money hidden under the mattress so typically getting lower returns

CHARACTERISTIC Tend not to be white Lower income Non-credit revolvers Less likely to seek credit

PART 1

UNDERSTANDING DECISION-MAKING

Chapter 2

The Financial Therapy Process The Klontz MSI is simply a starting point. What the analysis doesn’t tell you is whether money beliefs precede education and income attainment or whether the reverse is true and culture, education and income inform money beliefs. But knowing how an individual engages with money provides a powerful framework for developing the right financial planning and the right financial coaching methodologies. It helps point to what behaviours need modification9.

Ask the average individual what their financial goals and their financial priorities are and the chances are very good that either:

1.

2.

they haven’t thought the question through to its logical conclusion; a ny number of ‘blockages’ stand in way of properly engaging with that question.

The role of the financial therapist is to ‘free up’ an individual’s ability to move forward in their thinking so that they can formulate future goals and priorities that link to a likely real world scenario.

“If you don’t plan your consumption patterns in relation to your income patterns, you will run out of money.” “There will come a time in your life when you won’t be able to earn a salary. How will you manage that?” “You will eventually die, as will your family members. How are you prepared for that eventuality?”

These are questions that many of us would prefer not to engage with and no amount of financial knowledge or financial adviser coercion is likely to change our behaviour. Nor should we as an industry sit back and say: “This is the individual’s choice. It’s how they’ve defined their priorities”, if we know the issue in question has not been given proper consideration.

Financial therapy provides the all-important first nudge that allows an individual to move on (and be responsive) to a more effective financial planning and financial coaching process.

9 Klontz, Britt, Mentzer & Klontz (2011)

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Who is qualified to be a financial therapist?

While financial therapy appears to offer an important missing link in our understanding of what drives financial decisions, it poses a real challenge to the current professional financial consulting model. Psychological insights are powerful catalysts for change, but psychological insights formed without proper therapeutic training can be profoundly destructive. Currently financial therapy lacks accreditation, although many therapists in the US have psychological training and are PhDs. As Edward Horwitz, an American financial therapist with a doctorate in personal financial planning puts it, “the risk is that someone starts delving around into someone’s psychological feelings around money by simply offering lessons from their own lives.

The results could be far more damaging than underfunding a retirement plan10.” That means that a whole new professional segment will have to emerge if we are going to close this gap. And it’s a profession that will have to be born out of the social sciences not the financial sciences.

That said, the other extreme, our current model for instilling better financial decision-making through more financial education is equally flawed. As Amanda Clayman remarked in her interview in Forbes Magazine, “Financial literacy is certainly helpful, but a thorough understanding of compound interest will be of little help in treating a compulsive shopping addiction – or in aiding someone who sabotages her financial security because she was raised to believe wealth is evil. Financial behaviours tend to be more emotional than rational. So we need to be more emotionally literate in addition to being more financially literate”.11

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10 Sullivan (2015) 11 Cheeks (2013)

Concluding thoughts The field of financial therapy is scrambling as fast as it can in countries like the US and the UK to establish itself and cement its credibility as an important player in the financial well-being initiative. But here are the important considerations. The more we understand about what affects financial decision-making, the clearer it becomes that we need a multidisciplinary approach and a multi-tiered model to ensure that we can derive better results for individuals. But the more interdisciplinary this becomes, the more it raises important ethical and regulatory concerns.

In many ways we are talking about shared theories, shared curricula and shared models. But who will ensure that all these disparate ideas can combine to provide the best outcomes for individuals? By necessity, we are learning that as an industry we must move to a whole new model for advice and consulting. We have a sense of what this model should look like. But it is most decidedly outside the current scope of thinking for our regulators. No doubt, these concepts should give the policymakers pause for thought. But let’s hope it’s not too long a pause.

3

WHAT COUNTS?

PART 1 Chapter 3

WHAT COUNTS?

SUMMARY

Ensuring that financial well-being programmes are successful requires measuring their effectiveness, accessibility and outcomes. We discuss an assessment framework that can be used not just to measure the financial capability of individuals, but also to provide a roadmap for an individual’s financial well-being.

We have taken great pains to explain why, if we want to transform the lives of individuals, we need to change our focus from financial wellness or financial capability to financial well-being. Similarly, we have argued that if we can navigate the decision-making minefields thrown up by our filters of automatic thinking, social context, mental models and mindsets about money, then striving for financial well-being becomes a meaningful pursuit. But unless we can demonstrate that this approach indeed makes a difference, financial well-being becomes one more piece of marketing puffery.

In this third chapter we tackle this issue of measurement from a variety of angles.

Each year, millions are spent around the

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world on employee assistance programmes and wellness programmes in the workplace.

And this is no different in South Africa.

Employers the world over recognise the importance of providing these additional benefits to their workers because of the direct impact that they can have on their bottom line, through reduced turnover and increased productivity. If we are not assessing whether we are getting measurable improvements, then there should be serious questions around whether there is merit in investing in these exercises.

PART 1

WHAT COUNTS?

Automatic thinking

Chapter 3

Social context Money Mindset Mental models

In Benefits Barometer 2014 we reported that interventions to improve financial literacy had a mere 0.1% impact on changing financial behaviour.

Here were some of the identified stumbling blocks:

■ Recognising that for most companies, programmes will have to address a range of literacy levels and needs – one size can simply not fit all and expect to be effective.

■ Addressing the fact that individuals may be at different stages of receptiveness to change and that effectively reaching these different levels requires very different types of interventions.

■ Knowing whether the programmes and services provided are actually translating into better decisions or less stress for employees.

Our last point represents the crux of the matter. If we are not assessing whether we are getting measurable improvements, then there should be serious questions around whether there is merit in investing in these exercises.

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WHAT COUNTS?

Setting a base line From the government’s perspective, their primary interest in measuring financial literacy and skills was to understand how South Africans compared to their cohorts in other countries.

If they could establish some sort of baseline skill levels for South Africans today, they could assess whether interventions from either the public or private sector were actually impacting that baseline (either positively or negatively). As such, the concept of financial capability held the greatest relevance for this type of assessment.

In Benefits Barometer 2014, we reported on the work of the Financial Services Board (FSB) as part of an initiative with the OECD task team on financial education. Their findings formed the foundation of the financial competency framework that aims to improve the quality of financial education intervention in South Africa. Within this framework, the FSB sets out four domains described below.

These are indices against which you can measure knowledge. They point out actions of a consumer that indicate financial competence and include examples of the types of programmes and presentations that may be effective in developing high financial literacy among consumers.

The diagram gives a brief summary of the four domains:

1

2

3

4

Financial control

Financial planning

Financial product choice

Financial knowledge and understanding

The objective is to manage current expenditure

The objective is to manage future income and expenditure

A financially capable person exercises a high level of control over their finances and is able to save rather than spend, budget and make ends meet, and is involved in the daily decision-making for the household.

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Here a person must set financial goals and commit to meet them, display a preference for long term saving, and have emergency funds in place.

The objective is to choose the right financial products A consumer must understand financial products. They must be aware of different types of banking and insurance products, hold at least one of a range of financial products, must have a clear understanding of their product needs, undertake detailed research before choosing a product, and must have no regrets about the products they’ve purchased in the last year.

The person must attain and increase mastery over personal finances This is a consumer with high financial knowledge and an understanding of some of the familiar financial concepts, including basic mathematical division, effects of inflation, interest paid on loans, interest on deposits, compound interest, risks involved in high-return investments, risk and diversification.

PART 1

WHAT COUNTS?

Despite the fact that the FSB describes their objective as developing the financial literacy of South Africans, what it describes in this framework goes beyond financial literacy to developing financially capable consumers.

Financial capability is a construct that extends our understanding of financial concepts as to how we manage our finances and make financial decisions. Policymakers and academics have used the term to refer to a person’s ability to manage the demands of personal finance1. Financial capability is the ability to sustain these abilities once they have been achieved. It creates the platform of good decisions which allow financial well-being to be reached.

Many individuals exhibit the right behaviours without necessarily having financial literacy.

1 Remund (2010) 2 Holzmann, Mulaj & Perotti (2013) 3 World Bank (2015) 4 Holzmann, Mulaj & Perotti (2013) 5 Consumer Financial Protection Bureau (2015)

Chapter 3

The challenges of measurement Given the financial competency framework set out by the FSB, measuring financial capability would seem to be relatively easy.

A series of surveys can test knowledge of financial terms, an inventory of a person’s product holding can tell you whether they have the right products and a quick look at their budget will tell you whether they are both using current income wisely and planning for future expenditure. You can use all this to calculate a score for the four domains described earlier.

But there are two problems with this approach: 1. Combining the scores to form a single number for how financially capable someone is may be tricky. The four domains bear little relationship to each other, since doing well in one category doesn’t affect how well someone does in another category2. This is evidenced by the fact that although conventional measures of financial capability are predicated on the belief that financial literacy translates into the right behaviours, the World Bank has pointed out that many individuals exhibit the right behaviours without necessarily having financial literacy3. An individual may have an excellent level of financial literacy and knowledge but the types of blockages described in the previous chapters prevent them from translating this into the right behaviours4.

2. No two people will have identical financial profiles. They may have the same family structure, income and fixed monthly expenses. But one of them may have a

family history of illness that puts them at greater risk of financial loss than the other person. We cannot measure the two using the same benchmark.

Like the FSB, the CFPB in America conducted an extensive study on financial well-being in order to determine how to define and measure the success of different financial literacy strategies so that they have a basis for measuring the effectiveness of different strategies’ effectiveness.

Some of the problems they identified in how practitioners have been measuring the success of their interventions includes5: ■■ Although there is a lot of work on how financial knowledge correlates with certain factors, little has been published on the causal relationship between financial knowledge and financial behaviour.

■■ Concepts that are being measured, whether financial knowledge, financial well-being or some other objective, are loosely defined.

■■ The studies fail to combine large samples, long time-spans and control populations that would contribute to meaningful conclusions on the subject.

■■ Well-being is sometimes conflated with behaviours that are considered to be positive because they are presumed to lead one in the direction of financial well-being.

Attempting to measure financial well-being unearths a new set of challenges, mainly that financial well-being has never been explicitly

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PART 1 Chapter 3

WHAT COUNTS?

and consistently defined, nor is there a standard way to measure it 6 . Although we offer a definition of financial well-being in this publication, it relies on every individual’s subjective assessment of the complex interaction between whether: ■■ they have sufficient resources, both financial and knowledge-based ■■ they feel secure both now and in the future ■■ they can achieve their financial and nonfinancial goals ■■ they have options available to them.

Additionally, what we’ve described relies quite heavily on time. It requires us to follow an individual through time and at each

point ask them whether they have achieved financial well-being. It may require us to only ask this question at the close of a person’s life. No industry practitioner would be excited about only measuring the success of their project 20 or 30 years after the intervention was applied.

So the best the adviser can do is help an individual make an accurate assessment of where they are, given that the world is evolving so fast. For instance, while automobile insurance may play an important protective role today it will be irrelevant in a future where sharing systems, like Über dominate.

If financial well-being is so difficult to measure why should we even bother? We bother because we need to understand better. Although we propose a number of concepts that practitioners may find intuitively appealing, we have no way of knowing whether anything we’ve put forth is actually addressing our end-game. Constructively contributing to the ongoing debate demands measurement and monitoring.

We start the measurement process by looking first at financial capability.

Individualising financial capability Let’s start with our first two criteria: does the individual have sufficient resources, both financial and knowledge-based, and is the individual and their family secure both now and in the future?

To address these first two concerns we need a high level structure, an interactive tool, that addresses four areas of assessment: 1. Determine the areas of a person’s life that could give rise to financial loss.

2. Establish a set of benchmark criteria that is specific to the person we are interested in assessing.

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6 Consumer Financial Protection Bureau (2015)

3. Assess how much cover the person needs.

4. Compare this to how much cover the person has, if any, in that area.

Determining the areas of a person’s life that can give rise to financial loss means we need to consider both their life and asset-related risks. Life risks include their probability of death, while asset risks could be the loss of a car. Such risks do depend on the state of health of the individual and their personal store of assets.

What’s important is that the assessment should not only take place at an individual level but at a household level. The tool needs to take account of where financial loss can come from, including healthcare needs of children, for example.

The diagram describes some of the areas that we may be interested in considering:

PART 1

WHAT COUNTS?

Emergency funds for emergencies not covered by insurance

Chapter 3

Building assets for retirement

Protecting physical assests against theft damage and loss

Adequate and effective healthcare for the entire family

Sufficient life cover for loved ones

Income in case of disability

The household’s areas of financial concern

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WHAT COUNTS?

A single male with two children will find that life cover ranks very highly.

We would have to establish a set of benchmark criteria specific to the person we are interested in assessing. This might mean looking at certain demographic characteristics like sex, age, education and possibly even values, attitudes or habits7. The aim here would be to establish, based on research, which areas of financial concern would need to be covered and with what level of priority. For the example given before, the person who is paying off their car will have to prioritise short-term insurance that covers that vehicle because the loss of the car could have terrible consequences.

The level of priority given to each area will change depending on demographics. A single male with no dependants will not need to prioritise life cover, but a single male with two children will find life cover ranks very highly.

For a low-income earner, their priorities, in order, should be ensuring that they can make ends meet (setting up a budget), having an emergency fund and then ensuring adequate protection against the risks that are not covered by the state (funeral insurance, short-term insurance, life cover and retirement savings).

Other concerns, like medical coverage and education, are provided for by the state, so low-income earners don’t have to pay too

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7 Zakaria & Sabri (2013)

much attention to this. Although retirement income is also provided by the state, it is at such a low level that it would be wise to supplement this with savings.

Next we need to assess how much cover a person needs. This involves an assessment of how much insurance or liquid assets they would have to hold to make sure that they are covered for any financial loss. We might want to know the person’s income, liabilities and assets to correctly assess how much protection they need in each area.

Finally, we compare this to how much cover, if any, the person has in that area.

To find the ‘funding level’ in each area, we need to take the ratio of what the person has to what they need to be fully protected.

The final score that we calculate is then a weighted average, weighted by the level of priority of each area, of the individual funding levels.

What the tool does is ensure that the individual has enough financial protection in each area so that any mishap, expected or unexpected, does not set them back financially. It does so by pointing out possible areas where insufficient protection has been set against the risk that the person faces.

PART 1

WHAT COUNTS?

Chapter 3

Individuals should have the freedom to adjust their priorities to suit their own needs. If our tool can evolve with the individual in an interactive way then we will have come as close as possible to achieving our well-being agenda.

Should we be using the same benchmarks for everyone?

How could an employer benefit from this framework?

Using a set of priorities based on demographic and family factors may work for some. What it does is provide a useful starting point for individuals who may not even know what steps to take to achieve financial capability. But not everyone sees the same value in formal protection mechanisms like insurance products, specifically lowerincome earners who are dealing with much more complex issues than middle- and higher-income earners. So they should have the freedom to adjust their priorities to suit their own needs.

In previous Benefits Barometers we made the case for why employers need to care about financial health. We’ve also discussed examples of ways to measure the return on investment of financial education and financial wellness programmes in the workplace. The tool described above can take the measurement to a whole new level.

As such, if our tool can evolve with the individual’s priorities in an interactive way, then we will have come as close as possible to achieving our well-being agenda.

What we’ve done here is addressed the issues of ‘feeling secure’ and setting a floor for quality of life, while at the same time recognising that our finances need to help us expand our range of choices.

By looking at the scores individuals achieve on an aggregated basis, an employer can get a feel for the areas that people are struggling with and that could be a potential concern in future. For example, if there are several employees spending more than they earn every month, the employer could be facing a debt crisis among employees. Measurement at the employer level can highlight issues before they turn into problems.

profile of employees with the benefits that would serve them best, the employer can offer a package of benefits that plugs some of the holes that people may have in their financial protection, potentially without incurring additional costs, if they replace existing benefits that are of little value to their employees.

Slicing and dicing the data may allow the employer to target assistance to those employees who have the greatest need.

What this tool can assist with is the optimal structure of employee benefits packages within the constraint of affordability. By matching the demographic and family

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WHAT COUNTS?

Measuring financial well-being Measuring financial well-being involves pulling in the final two points from our definition given earlier, namely: ■■ whether they can achieve their financial and non-financial goals ■■ whether they have options available to them.

We have described how we can measure an individual’s financial capability, but to measure financial well-being we need to think more about what matters to each individual.

The goals that an individual may set for themselves may be nebulous, like trying to achieve financial security. But in one way or another every person’s goals and aspirations

are related to their financial ability to meet those goals. To assess whether a person has achieved a high level of financial well-being we need to structure protections and financial decision-making around the end-goal that we have in mind. This means that we select our protections so that a life-changing event does not get in the way of our ability to meet our goal.

To make the goal more tangible and easy to assess, we might also specify an amount of money that we need to meet the goal and a time frame within which to achieve the goal.

We are attempting to measure how effective our financial capability is at getting us to our personal goals. And if we are able to

GOAL

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both score highly on financial capability and achieve the goal that we have set for ourselves, then we should be financially ‘well’.

It may be difficult for an individual to specify their goal clearly or even to specify the right goals, one that genuinely improves their financial well-being rather than one that is unrealistic and creates financial stress. This is where various stakeholders, like financial coaches, can play a role in helping people to articulate their goals.

The assessment framework and goal-setting mechanisms form a roadmap that individuals can use to navigate their financial well-being.

GOAL

PART 1

WHAT COUNTS?

Essentially we are attempting to measure how effective our financial capability is at getting us to our personal goals.

GOAL

Chapter 3

Concluding thoughts Financial well-being is a concept that is not easy to define or measure.

But industry practitioners can offer individuals a way to assess their well-being that both relies on the individuals’ level of financial capability and their ability to meet certain milestones in their life, like buying their first home.

But we need some way of knowing whether our interventions are successful. Providing an assessment framework that understands that person’s priorities and the options they have available to them is the first step to understanding whether they are achieving financial well-being.

GOAL

GOAL

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PART 2 Introduction

WHOSE JOB IS THIS AND DO WE GET IT DONE?

WHOSE JOB IS THIS

AND HOW DO WE GET IT DONE? Part 2 shifts the discussion from laying out the concepts as to ‘what needs to be done and why’, to one where we define ‘who needs to get involved and how’. We have frequently discussed the need for specific stakeholders to ‘come to the table’, if we are going to get an effective follow-through on an agenda as ambitious as this one of transformation.

In Part 2 we put the spotlight on the different roles we need to see three of these stakeholders playing.

The first stakeholder that we need at the table is the regulator. By ‘regulator’ in this context, we mean the market conduct regulator. Our first chapter in this section examines the paralysing role played by debt and financial stress in South Africa. Before we can even embark on how to construct a meaningful financial well-being programme we need to address the gap that already exists between how we deal with the financial affairs of those who have money (even if it’s only retirement

savings) and how we deal with those in debt (no matter what their socio-economic background). But rather than provide a litany of grievances experienced by individuals where debt management may have left them in a more paralysed state than previously, we use the chapter to describe exactly what needs to come right to ensure that debt consulting and regaining financial stability are both managed as one continuous integrated strategy. This provides us with at least a base on which to construct a more stable, targeted trajectory towards financial well-being.

In Chapter 2, the employer is our next area of focus. There have been any number of attempts both globally and in South Africa to address the issues of financial literacy, financial capability, financial wellness and so forth. We use the next chapter to identify what’s worked and what hasn’t and how these insights could inform the way forward for workplace solutions.

Our final point of focus, in Chapter 3 addresses advisers. Top of our list is a need to change the conversation between the adviser and the individual. It’s too easy to slip into a conversation about the minutiae of product features and miss the wood for the trees. Advisory conversations – whether it’s about insurance, healthcare, savings and investments or knowing that we need to all be prepared for the eventuality of death – need to be framed in the language of well-being. This involves acknowledging that spending money isn’t always the answer. What people want to achieve is often embedded in their overall well-being. This means they have alternative strategies to solve problems beyond money. By helping people to have these conversations, advisers can help individuals to optimally employ their resources to support their overall well-being.

We now shift the discussion from ‘what needs to be done and why’ to ‘who needs to get involved and how’.

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PART 2

WHOSE JOB IS THIS AND DO WE GET IT DONE?

Introduction

FINANCIAL SERVICES

FINANCIAL WELL-BEING POLICY MAKERS

FINANCIAL CAPABILITY

BOARD OF TRUSTEES

FINANCIAL LITERACY

EMPLOYER

FINANCIAL WELLNESS

EMPLOYEE

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2

Part 2: Whose job is this and how do we get it done?

Chapter 1: Dealing with debt Chapter 2: Taking workplace solutions to the next level Section 1: Financial wellness – why isn’t it working?

Section 2: Workplace solutions for financial well-being

89 91 104

Chapter 3: Navigating individual financial well-being

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Section 1: Insuring what matters Section 2: A matter of health Section 3: The goals that matter Section 4: What matters in the end?

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122 132 142 152

1

DEALING WITH DEBT

PART 2 Chapter 1

DEALING WITH DEBT

SUMMARY

Until we can address the divide that currently exists between the world of debt counselling and the world of financial advice, securing financial stability for individuals will remain challenged. Our guardians for market conduct will need to play a decisive role. More importantly, the financial services industry needs to close the gaps.

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PART 2

DEALING WITH DEBT

Chapter 1

Dealing with debt – the value destroyer for employee benefits and employee productivity Mind, Society and Behaviour 1 reminds us that many interventions to change an individual or society’s behaviour fail because we haven’t identified the root of the problem.

Think of a medic at a crash site. A preliminary scan of the victim reveals that he is suffering from a broken leg and cuts to the face. Stop the investigation there and the medic could well miss the fact that the victim has internal bleeding. The consequences of such an oversight would be dire.

When it comes to the issue of savings and retirement benefits, we are often guilty of just such an oversight. As boards of trustees,

1. World Bank (2015)

we spend hours assessing whether the asset managers of these savings vehicles are outperforming their benchmarks or their competitors. And yet, how many boards of trustees and management committees are thinking about the underlying reasons for inadequate replacement outcomes?

So, what did account for those abysmal outcomes for members? The greatest contributors to value destruction are savings periods that are too short (mainly as a result of poor preservation when changing jobs). It’s not for nothing that National Treasury prioritised finding a way to enforce

preservation without tipping families into economic hardship. Needless to say, their initial proposals drew heated debate. The prevailing view was that preservation couldn’t become mandatory unless the government paid better attention to ensuring there were safety nets in place for individuals confronted with financial crisis.

Perhaps the question we need a better answer to is this: what’s driving lack of preservation in the first place?

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DEALING WITH DEBT

Why would an individual cash in their retirement fund?

1 2 3 4

They were not told there were other options.

They are provided with no reason why not to when they change jobs.

The hassle factor of filling in complex forms to transfer to a preservation fund.

Financial pressures are so great that resigning from a job and cashing in their benefits provides some respite, albeit temporary.

It’s not totally clear which of these factors dominates the decision-making.

What we do know is that we can go some ways to addressing the first two factors by:

■■ making preservation the default option for anyone leaving an employer ■■ making it difficult for people to get access to that cash (they must present a reason why they must have the money) ■■ equipping the HR departments of both the old employer and the new employer with the tools to help people understand exactly what they are giving up when they don’t preserve ■■ eliminating the hassle factor of transferring funds to a new employer or a preservation fund.

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PART 2

DEALING WITH DEBT

The problem is that for many South Africans, financial stress may be the driver in the decision to cash in their fund. The research results are far from conclusive, but anecdotal evidence suggests a distinct relationship between the number of garnishee orders a company has on its books and that company’s level of turnover. This not only affects preservation numbers but impacts absenteeism and presenteeism2.

The problem of debt has much broader implications than impacting on retirement benefits. It hits at the core of employee productivity and employee engagement. On one front, financial stress plays a disruptive part in keeping employees focused on work keeping employees employed and keeping employees engaged. On another front, financial stress issues undermine the best intentions (and considerable cost) of well thought out employee benefit offerings.

Under financial duress, employees would rather take the cash.

Chapter 1

The preservation iceberg Cashing in retirement fund

Financial stress

Family obligations

Perhaps the story around preservation is the same as the story of our trauma doctor: the patient may end up dying from our treatment if we don’t take the trouble to understand the problem of preservation in depth.

When an employee quits a job to access their savings, we need to be prepared to delve deeper. We need to understand how it is that so many South Africans are living in such a financially precarious situation that access to their long-term savings holds far greater sway in their lives than being able to retire comfortably in 30 years’ time.

2 Rea (2014)

Debt

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PART 2 Chapter 1

DEALING WITH DEBT

22.84 million credit active people

10.26 million in arrears

Just how bad is it?

South Africa most decidedly has a debt problem. The numbers speak for themselves; 22.84 million credit-active consumers, 10.26 million with impaired credit records, which indicates how many people are at least three months behind in their payments. By that criteria, 55% of all active members are over-indebted3. But not all debt is from credit.

These numbers don’t include non-payment of rates and taxes, utilities or school fees.

They also don’t reflect the fact that one out of every two indebted people ‘borrow’ from informal money-lenders (mashonisas) at exorbitant rates, and often for the purposes of paying off formal debt obligations4.

The National Credit Regulator identified the following factors as catalysts for debt6: Bad planning Peer pressure “ Wanting to live in the first-class lounge” Interest rate hikes

As Deborah James points out, untangling the debt web in South Africa is hugely complex5.

Retrenchments

Particularly telling was the response from the National Credit Regulator (NCR).

Ignorance Divorce.

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3 National Credit Regulator (2014) 4 Haupt (2015) 5 James (2014) 6 City press 1 March 2015 7 See James (2014)

There is one important factor that the regulator failed to mention. Spending more than you earn may well be a problem, but having the means to spend more than you earn is also a problem. Nowhere on this list is the credit provider identified as a problem.

Yet reckless lending and the spiralling interest rates that go with it must be held equally culpable. As James articulated in one of the interviews on her book, “I see many of these problems as structural and I view it as hypocritical that borrowers are asked to reform their behaviour when lenders are allowed to go free.”

We can’t tackle reckless lending in this publication – or why it seems to be a particularly South African problem7. That debate should exist in a different forum. But we do need to address why getting out of debt is unnecessarily difficult.

PART 2

DEALING WITH DEBT

Chapter 1

The problem is not so much how South Africans get into debt, but how difficult it is to get out of debt.

While the National Credit Act may be an admirable starting point for providing reasonable and fair protection of consumer interests, the industry tasked with helping people pay off their debt and repair their credit standing is problematic. Rife with conflicts of interests, ineffective oversight or monitoring, inadequate levels of professionalism or value-enhancing administration, it is an industry in serious need of a regulatory overhaul.

The debt counselling industry is one of the newest entries in the vast variety of services that have emerged to address problems that affect an individual’s financial wellbeing. Yet, from a regulatory perspective, standards, training requirements and market oversight for the industry have historically rested outside of the FSB. The National Credit Regulator reserves this power and reports into the Department of Trade and Industry. As such, regulation of the debt counselling industry is more closely aligned to banking than it is to the provision of a financial service.

At some level, this seems a rational division of labour. But the problem is that it creates a schism in the advisory industry. Financial advisers deal with people who have money that they need advice on, and debt counsellors deal with people who had money (at least in the form of credit) but one way or another ended up mismanaging their decisions around that access to money.

Surely though, these are two sides of the same coin. Credit (debt) represents a critical financial lever for attaining such necessary lifetime assets as housing or transportation and other items that would require financing over time. Every financial advisory template should provide some insight into how to

manage these commitments. And yet dealing with the consequences of debt mismanagement falls out of the ambit of financial advisers. Once an individual goes ‘under water’ on their credit commitments, they are handed over to debt counsellors, debt consolidators and debt managers whose sole focus is to deal with the legal threats of debt, not the long difficult business of restoring an individual to financial well-being.

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THE DEBT INDUSTRY Dealing with debt has now become big business. Debt counsellors have become the largest collection agents for the banking industry8. But if we understand more about where the embedded conflicts and contradictions are in this highly profitable industry, then we can begin to appreciate why this is one industry that is due for a significant transformation, and what that transformation should look like.

We need to look at three core issues: ■■ Entrenched conflicts of interest ■■ Inadequate qualifications and professional processes ■■ The legal and regulatory quagmire of debt.

Entrenched conflicts of interest Let’s try to understand the business model of debt counselling. Regulations cap how much a service provider can earn in providing formal debt counselling services as stipulated

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in terms of section 86 of the National Credit Act 34 of 2005 (NCA). This means that, as a business, there is a strong incentive to: ■■ Find other related sources of revenue such as: • owning the payment distribution agency that takes fees on every transaction between the debtor and the creditor • providing a debt consolidation service that repackages debt and rolls it forward • providing insurance coverage for people applying for repackaged loans while service providers earn commission without being FAIS approved.

■■ Build a high-volume business by: • establishing tie-ups with entities such as credit providers to ensure that there is a steady stream of business • creating a high-volume servicing platform (call centres) that sacrifices personalised service.

From a business perspective, these would all seem like rational economic choices.

But then ask this key question about each business choice the debt counsellor might make: how does that choice incentivise the counsellor to get the individual out of debt and keep them out of debt?

Each individual’s debt crisis is personal. For each one there would be different reasons and circumstances that got them to that point of indebtedness. For that reason, getting them out of debt must also be understood from this highly individual-specific perspective.

Logically we should see a close synergy between the debt counselling and the financial planning and advisory industries, but as it currently stands, there is a huge gap between these two entities.

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Chapter 1

Qualifications and professional processes Consider what a debt counsellor needs to be able to do to get a person out of debt:

1. Understand how and when someone can apply 6.

Restructure debt according to each consumer’s for debt review and determine whether that person is over-indebted.

2. Read and interpret credit bureau reports

and information about the person’s debt.

Understand their spending and payment habits.

personal needs.

7. Negotiate an agreement or arrangement in an authentic work situation, ensure legal work is completed and monitor consumer payments.

8.

Counsel the consumer back into financial

health and assist them to understand current laws and issues within the process and industry, and encourage them to change spending behaviours.

3. Investigate reckless credit and acquire all

relevant documentation from both consumer and credit provider.

4. Investigate Section 103(5) Statutory In Duplum 9. – this determines at the date of default, the maximum amount that a consumer can be charged. Interest charges, admin fee charges, insurance charges and all legal and collection costs are included in this determination.

5. Understand why the consumer is in their

omplete annual assessments throughout their C debt review cycle, and inform credit providers of changes of circumstances and of new repayment plans.

10. Issue a clearance certificate and communicate verbally with clients in a financial environment.

situation and put an action plan in place that mitigates the risks.

How long do you think it takes to qualify as a debt counsellor?

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Debt counsellors need only complete a 10-day training programme before sitting an exam

With these skills in mind, appreciate that a prospective debt counsellor only has to complete a 10- day training programme before they sit the required exam. There are no stipulations for how they would ‘learn their trade’ after that, and no requirements for supervision or submission of their outcomes to any regulatory scrutiny. Their only guidelines are to have: ■■ a matric certificate ■■ no criminal record ■■ a clear credit history ■■ no history of mental illness.

The open book exam that debt counsellors write deals only with the theory of how things should work and provides no practical training.

Newly minted debt counsellors are thrown into the proverbial deep end. Yet, the job of a debt counsellor is that of a counsellor in every respect and with little to no external support.

Failure and stress levels are understandably exceptionally high.

Nowhere in the definition of responsibilities for a debt counsellor is there any discussion about how to keep an individual who is emerging from debt out of debt once they

have become solvent again. Therein lies a flaw in the model. If, as the spokesperson for the NCR has suggested, bad planning and ignorance are two important factors, then surely a rehabilitation programme needs to go further. But how do we ensure continuity of counselling?

Four factors stand in the way of debt counsellors fulfilling this role: ■■ Their training requirements appear to preclude any financial planning or coaching skills.

■■ They aren’t paid enough to integrate this service into their debt counselling process as it currently stands.

■■ Financial coaching veers very close to financial planning or financial advice.

■■ They have little administrative support in an administratively intense field so they have no time to go beyond the basic requirements of their job.

The NCA provides no direction on what should happen to individuals once they have been released or cleared from the formal debt counselling process. Unfortunately many consumers are also eager to get back into the credit cycle because in their

Nowhere in the definition of responsibilities for a debt counsellor is there any discussion about how to keep an individual who is emerging from debt out of debt once they have become solvent again.

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minds you only pay off your debt so that you can get more credit. This is where the intersection of three sectors needs the greatest focus, namely the financial sector, the debt counselling sector and the credit provider sector.

Regulators should insist that anyone who has come out of debt counselling and is applying for credit again should be mentored through a ‘half-way house’ programme. As in any abusive situation, there has to be a go-between to create stability and trust. This would also ensure that credit providers acted ethically and performed adequate credit affordability tests. It takes consumers coming into debt review about two years to settle into working only with cash and coping with the changes in their life; the same should apply when reintroducing them into the credit cycle9.

The legal and regulatory quagmire The spirit of the NCA is to ensure transparency and to assist those in need of financial assistance with debt mechanisms that could be used in various aspects and applications of the act.

9 Commentary by DCI, the Debt Counselling Industry

The fact that credit providers have not fully embraced this act has had a massive knock-on effect for not only the debt counsellor, but especially for the consumers it was meant to protect. Too many people have paid the price when good faith is not adhered to or legislation is not enforced on those who breach it. The most difficult part of legislation is not in the writing of the act or in its promulgation, but rather in enforcing it.

More than seven years later, credit providers are still finding loopholes and pushing the envelope in every aspect that they possibly can to avoid consumers paying off debts while being afforded the protections of various debt mechanisms under the act.

Chapter 1

The fact that credit providers have not fully embraced this act has had a massive knock-on effect for not only the debt counsellor, but especially for the consumers it was meant to protect.

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What needs to be done?

Although there has been considerable drama in the press about debt counselling we need to keep in mind that debt counselling has had a positive impact on the lives of thousands, if not hundreds of thousands, of South Africans. When it works, it has the potential to transform the lives of individuals and their families. The good news is that the more people understand the system in its current form, the better we’ll become at addressing the problem areas. We have to give credit here to the financial media for assessing and reporting on what is clearly a complex system with any number of arcane problems.

Concluding thoughts There is a sharp divide in the financial servicing continuum. Our large insurance and asset management-driven businesses target one fundamental area of the market: people with money, whether that be disposable income or retirement savings assets. The issue of debt or financial crisis is relegated to a completely separate industry: the world of debt counselling. Unless we can integrate this segment of the ‘complete financial well-being picture’ into our mainstream model and uplift its promise to bust the vicious debt cycle, any ambitions the financial services industry has in transforming the savings culture of South Africans will be perpetually undermined.

The debt industry requires an unconflicted ‘Big Brother’. That means mainstream financial services players whose business model is not contingent on lending, and who can get the right people in the right places to consider the right answers – or at least better answers. The debt counselling industry desperately needs more muscle to lobby for the necessary legislative changes to help the lending business come right.

Getting this right will provide an important foundation for effective workplace solutions around financial well-being.

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Holistic Assistance

EAP Re-active Provides assistance to indivduals in crisis

SUMMARY

Well-being A Journey Develops Financial capabilities to meet individuals’ needs

Wellness

EWP Pro-active Provides educational services to minimise likelihood of future problems

Many interventions introduced by employers centre around either financial assistance or financial wellness as opposed to financial well-being. We consider case studies in the space and look at their successes and failures.

One thing is certain, if we are to achieve meaningful change in an employee’s life, workplace solutions need to evolve from their current format to a programme that aims to foster financial capability, while addressing any filters used for decision-making. At the same time these programmes must deliver some benefit to employers and be financially and operationally sustainable.

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1

FINANCIAL WELLNESS – WHY ISN’T IT WORKING?

Financial wellness in the workplace – why isn’t it working?

In November 2008, a German development aid agency, the German Technical Cooperation (GTZ)1, published a study titled Employee Financial Wellness: A corporate social responsibility. The study was an ambitious collection of eight feature articles, which covered a full spectrum of issues and challenges that needed to be addressed if workplace financial wellness programmes were going to work.

In addition, the study included four case studies that provided detail on how four separate corporate employers: BMW SA, Ernst & Young, Liberty and SA Breweries had gone about structuring their own financial wellness initiatives over the years 2006 to 2008.

Perhaps the most meaningful outcome of the project was the formal launch of the Financial Wellness Forum, an initiative that

1 Deutsche Gesellschaft fur Technische Zusammenarbeit 2 Prudential (2014)

allowed member corporates to share their insights and successes in that space. Surely a collaborative initiative such as this would prove to be a powerful catalyst for ensuring the success of these programmes.

If anything, the demand for financial wellness programmes appears to be higher now than ever. In the US, a broad range of studies proclaim that “financial wellness is the next frontier in wellness programmes2”.

Three years later, when the funding for the GTZ-BMW SA programme ceased, the Financial Wellness Forum went quiet. Go to the site www.financialwellness.org.za and you’ll see a banner stating: “Soon to be the new home of... www.financialwellness.org.za”.

The problem is most of these enthusiastic studies are funded by the insurance industry, with indicative benchmarks being derived from the types and quantities of insurance coverage they need to sell to declare an individual financially well. But let’s assume that the case for financial wellness programmes remains viable. The harsh reality is that the renewed wave of enthusiasm is at risk unless we get better insight into whether these programmes add value and if not, why not?

Presumably the website was handed over to the National Credit Regulator when the German agency decamped – but it appears as though little else has happened since then.

So, where does that leave us? Has the problem of financial wellness quietly gone away? Are employers not interested anymore?

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1

Problem 1 Lack of sustainable programmes leaves little basis for testing success The GTZ report captures this first problem precisely. The reality is many programmes put in place as far back as 2006 have changed substantially. Contributing factors are retiring heads of human resources, retiring programme champions, shifting corporate priorities, and changing funding resources. The irony is that the more financially stretched a company gets, the more likely it is that the financial wellness programme gets cut back.

At some level, this lack of sustainability and continuity speaks to the funding model of these programmes. In the BMW project, funding and support were derived from a public–private partnership. What we had was collaboration between a willing employer (BMW) and a willing and experienced developement aid agency, the German Technical Cooperation (GTZ). When that three-year project ceased and the funding with it, so too did the momentum behind a collaborative initiative involving a number of similarly concerned corporates.

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Going forward we need to determine how we can create a more sustainable programme design. In many developed economies, the issue of financial well-being has been addressed by the government or non-profit initiatives. In countries like the UK and Australia, keeping these programmes in the public domain is seen as an important curb on conflicts of interests that might be introduced by financial services companies.

A developing economy like South Africa faces a more demanding challenge – it’s a challenge that will reverberate across Africa.

Governments will be unable to fund such initiatives out of the current fiscus. More importantly, research suggests that unless there is a commitment from the employer of some kind, these programmes won’t get the ‘air time’ they need to keep employees engaged and produce sustainable outcomes.

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2

Chapter 2

Problem 2 Lack of consensus around what constitutes a financial wellness programme A 2011 study on Management of employee wellness in South Africa: Employer, service provider, and union perspectives3 provided the following main findings. After assessing employee wellness programmes at 16 participating employers, they determined that: “The results showed that organisations, service providers and labour unions define employee wellness differently and that these role players give different reasons for introducing employee wellness programmes (EWPs) or employee assistance programmes (EAPs).�

To start with, there is confusion around the nomenclature. EAPs and EWPs may sound very similar but there are important differences of emphasis. An EAP can be thought of as a reactive type of programme.

It provides an emergency backstop for employees in crisis. Legal services, debt counselling, marriage counselling, alcohol and addiction interventions would be cases in point.

But, as the 2011 study added, this confusion in programme distinctions has meant that half of the participating employers in the study had no baseline measurement with which to compare their various programmes. Until there is agreement as to what these terms mean and how they should be measured, we can’t begin to understand whether any of these programmes matter or are even working.

The same criticism can be made about programmes employers introduce to address financial issues. Is the ambit of the service about the management of financial crises, or does it extend to include such concepts as budgeting or financial planning, or is it striving for something even greater. More importantly, are these services outsourced by either the EAP or EWP provider and therefore tangential to the overall focus of the service provider.

These considerations become important if we are trying to promote a more expansive conversation around financial well-being.

EWPs provide a more proactive service.

By promoting programmes that provide preventative care, more employee crises might be averted. Examples would be smoke-enders, physical fitness programs, nutritional counselling, budgeting and financial planning assistance.

3 Sieberhagen, Pienaar & Els (2011)

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POLICY MAKERS

FINANCIAL SERVICES

BOARD OF TRUSTEES

EMPLOYEE

EMPLOYER

From the employer’s perspective Introduce the concept of financial wellness to employers and it becomes apparent that employers’ top concern is helping employees cope with financial crisis. Addressing financial crisis was the primary target for all four case studies reported in the GTZ study of financial wellness programmes in the South African workplace. Two specific areas of focus were the burden of garnishee orders on payroll systems and the impact employees in financial crisis had on absenteeism and productivity in the workplace.

There’s a definite logic here: if corporates are going to spend precious resources on their employees, it stands to reason that those in the greatest need should be targeted first. That’s why the EAP model is the default choice. But therein lies an important limitation.

If corporates are going to spend precious resources on their employees, it stands to reason that those in the greatest need should be targeted first.

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Many corporates believe their EAPs adequately cover any financial concerns of the employees. Service providers who specialise in EAPs will make the following facilities available: ■■ access to debt counsellor or financial adviser solutions or both, typically provided as a one-on-one service at the individual’s cost ■■ access to a garnishee order administrator ■■ options for a range of workshops on such topics as budgeting basics, making good credit decisions, making your bank work for you, property financing and home buying, estate planning and wills.

What EAP providers do is monitor and categorise the types of queries that come to them from a specific set of employees.

Based on those inputs, the company then determines which services they might need to expand on and to what extent.

In theory this seems a sensible approach.

In practice a range of employers expressed concern that the model fell far short of expectations. As BMW learned quickly, financial well-being is as much a socio-psychological issue as it is about developing a level of financial literacy or

financial capability. Follow-up research on ‘programme graduates’ highlighted that, while debt counselling and debt restructuring might address short-term crises for individuals, keeping people out of debt, or, more importantly, keeping them from falling into debt in the first place seemed an important missing piece in creating a viable programme.

A major frustration with outsourced assistance programmes was that ‘in the spirit of maintaining employee confidentiality’, employers would be informed that ‘x’

number of employees were requesting ‘y’ services, but there was little information to indicate what had happened to those employees. Had their problems been resolved? Were they financially solid again?

Had they developed an enhanced level of financial capability? None of this information was available. Measurement appeared to be restricted to how many times a particular counselling service was requested and by what department.

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From the policymaker’s perspective In Part 1: Chapter 3 we described the primary objective for the policymaker as enhancing the financial capabilities for South Africans. The concern is making sure the individual becomes a better financial consumer. “A more financially educated population is likely to save and invest more, to be better equipped to run successful businesses, and to be more likely to purchase and use financial products which are appropriate to their circumstances.

These factors should stimulate economic growth and help to reduce levels of poverty and deprivation, placing less of a burden of government social safety nets4.” This goes beyond keeping the individual out of debt – an individual with a high level of financial capability would not get into a debt hole in the first place.

The question is how prepared is Government to help employers with funding these programmes in the workplace?

Is this enough – particularly when most of these funding obligations have already been earmarked for work-related skills development? Many employers argue it’s not. But at this point in time, this appears to be as far as government is prepared to take the discussion.

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4 Genesis Analytics (2015) 5 Genesis Analytics (2015)

From the financial services company’s perspective

As it stands now, a properly constituted financial well-being programme that facilitates consumer education stands to tick three important funding boxes:

3

important funding boxes The skills development tax benefit The BBBEE skills transfer levy The Financial Sector Codes requirements around funding broad – based financial education programmes.

A handful of financial services companies have begun to enter into the market promoting services such as on-site financial advice and financial wellness days in the workplace. This is likely to stimulate uptake of financial products, especially by establishing financial institutions’ ‘social licence’ among people who view formal financial institutions with distrust. Financial education can also reduce risks and costs associated with people using products that are unsuitable for them5.

From the employees’ perspective, wellness programmes appear to be free but the cost of it is often embedded in the monthly service fee.

From the employer’s perspective this solution seems unobtrusive. They can make available space in the lunchroom and employees can visit during breaks.

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From the perspective of the boards of trustees of retirement funds An employee’s compensation package is as much about the benefits and social protections attached to that package as it is about the income the member takes home.

Effective financial education around the value of these benefits keeps the member invested and ensures they get the best return from these packages6.

Most retirement fund boards recognise that they have a duty to provide effective member communication that introduces these concepts from the start to the member.

But, because communication costs are typically attributed to the fund, (and therefore deducted from a member’s specific fund credit), there is some reluctance from fiduciaries to be too generous with this facility. This understandably puts funds into a quandary in terms of determining how much to allocate to communication and education.

From the employee’s perspective The relationship between the employer and employee is complex. That said, the dynamic around providing financial programmes in the workplace is also complex. At one level, research shows us that employees will tend to trust the advice of their employer (or at least their validation of a service) before they trust the recommendations of a financial services provider.

The flip side of this coin is that the deeper the humiliation or shame associated with an individual’s financial distress, the less people want their employer, or anyone, to know.

But what employees want most is a credible, unconflicted, knowledgeable resource that is on tap 24/7 where they can turn to for: ■■ sudden financial funding issues ■■ resolution of debt crises ■■ guidance on consumer education issues (housing and vehicle loans, cell phone and other service contracts, credit enhancement and so on

Chapter 2

■■ help on legal issues pertaining to consumer rights or employment rights ■■ financial guidance on not just what they need, but what they really don’t need ■■ financial guidance on the implications of making one financial choice (buying a car) over another (putting a roof over your head).

What’s missing from this list is financial education, although you could argue that it’s implicitly there. We know that many attempts in this area fail because: ■■ the employee is not ready to engage ■■ the employee is in denial or a state of inertia ■■ the employee simply doesn’t see the benefit of taking or creating the time to make the exercise meaningful.

What the employee wants is likely to be at odds with what other stakeholders want to see out of such a programme. What the employee is not interested in is hours of dreary lecturing about concepts he or she neither understands nor has an immediate interest in.

The key to success around financial well-being will be to find ways to integrate the objectives of all the stakeholders.

6 Benefits Barometer 2014, Part 2: Chapter 8 Failure to Launch

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3

Problem 3 With no consensus about how to define it, how exactly do we measure it?

With these potentially competing agendas for achieving financial wellness, determining what constitutes success is fraught with problems.

For employers For those employers who focus on workplace financial crisis management, there are some straightforward metrics we can employ, as long as the employer and their HR departments are involved in the process.

Assessments can be made on whether: ■■ garnishee orders reduced ■■ the quantum of company loans reduced ■■ replacement ratios for retirement fund members improved ■■ absenteeism reduced.

For companies like BMW these achievements were monitored and documented. Translation into a quantifiable returns on investment (ROI) to the company was a tangible possibility. Without doubt, these sort of metrics are essential for maintaining employer buy-in to the process.

But for employers who outsourced their

financial assistance programmes to EAP service providers, often the only gauges they had to work with was whether the number of employee queries for help increased or decreased in specific areas. The obvious drawback here is that an employer has no clear idea whether the fall-off in requests was due to failure of the programme to engage individuals or the success of the programme in resolving their problems. And given that most financial difficulties take years to resolve, you have no idea whether there’s any progress.

The GTZ report recorded a number of telling comments by HR professionals involved in the reported projects:

“Success was measured according to the number of employees who make use of the various other programmes and workshops on offer7.”

“What we didn’t have a feel for was whether our employees’ needs were actually being adequately serviced.”

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Chapter 2

“The data provided merely indicated utilisation rates, with a further breakdown of the percentage and type of employees presenting with financial and money management issues8.”

For financial services companies

For the policymakers

A handful of financial services companies have taken on the task of providing on-line programmes that help individuals determine their level of ‘financial wellness’. Often these indicators reflect the extent to which the individual has bought the right financial products given their particular circumstances. While at some level, meeting these objectives constitutes some level of financial capability if they indeed chose the right products, there is little insight into how absolutely necessary those products might have been to establishing a viable level of financial wellness. This is an area of development well worth watching though.

Policymakers have already gone through an extensive exercise with the OECD model of setting a baseline and a benchmark for financial capability in South Africa.

More importantly, they are developing an assessment framework against which service providers can measure whether their own programmes will make an impact. The challenge they face is how to get the array of service providers on board the same bandwagon and tackling the same objectives.

For the individual The most tangible measure of success for the individual is whether they found enough reward in whatever programme they were exposed to, to simply stick with it. What is patently obvious is that over the course of time an individual’s financial well-being is something that waxes and wanes. This is hardly a linear process. That means that the longer an individual sees value in sticking with what’s on offer, the greater the probability that the programme is adding real value in their lives.

To date, we have almost nothing to go by here. Our days of measuring success are really in their infancy. Little by little, though, we are starting to form a consensus around what needs to be measured and how we could go about doing it.

8 GTZ (2008)

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CASE STUDY:

THE BMW MODEL – ALMOST THERE Arguably, the most ambitious programme that South Africa has seen to date has been the BMW programme. They did a particularly thorough job of thinking through the issues.

BMW recognised early on that while their initial financial education campaign might have been effective in tackling issues of indebtedness what they needed was an ongoing, sustainable programme that would focus on behavioural changes, not quick-fix solutions. As their programme director, Dr Natalie Mayet, pointed out, they needed a programme that focused less on financial education and more on life skills development and behavioural changes.

In keeping with this insight, BMW determined that it was more important to get people who could impact behavioural change first – and

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then equip these individuals with financial information, than it was to start with people who were financial specialists. The skill-set most needed was that of a life coach.

The BMW programme followed something called the Cologne Model. The concept was a programme that focused not just on improving their financial specifics but included an individual’s psycho-social situation. The idea was to make a significant impact on people’s self-confidence and to deal head-on with the reason they had gotten into debt in the first place.

What made the BMW programme so compelling was that it included the following key components: ■ The right people around the table to support the project. This included people

with psychological and social counselling skills, people with a strong legal background in the specifics around debt counselling and collection, people with financial wellness skills, the unions, and the employer.

■ The recognition that a multiple-media approach was required: with questionnaires, industrial theatre, the provision of free credit reports, and on-site counsellors.

■ The ability to collect baseline data and develop monitoring and evaluation tools.

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Chapter 2

ROI RESULTS BEHAVIOUR

LEARNING

REACTION Criteria: Satisfaction Tool: Not necessarily needed

Criteria: Know-how about money, credit...

Tool: Multiple-choice test of 15–20 items Time: Beginning of the programme and once a year

Criteria: Communication and negotiation skills, reliability, openness Tool: Interview, role play, questionnaire, observation Time: Beginning of the programme and once a year

Criteria: Amount of credit, number of creditors, quality of life Tool: Questionnaires Time: Beginning of the programme and once a year

Criteria: Comparison of cost or saving Time: Once a year all clients

BMW’S GENERAL EVALUATION MODEL

Source: Kuhlemann & Walbrühl (2006)

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How successful was the programme?9 Sucess was measured for two crisis groups and across the organisation. The first crisis group entered the programme in 2006 and had 63 participants. The second crisis group entered the programme in 2007 and had 93 participants.

Improvements in crisis groups

Reduction in number of creditors

Group 1 Group 2

% of employees with loans from the company

50% 47%

7.9% 2007 6.04% 2008

% of employees with garnishee orders

Reduction in judgements

Group 1 Group 2

Improvements in company-wide indicators

32% 42%

0.35% 2007 0.15% 2008

% of exiting employees who preserved their retirement fund Reduction in debt

Group 1 Group 2

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9 GTZ (2008)

57% 53%

0% 2007 23% 2008

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At the end of the GTZ involvement in 2009, there were important insights to be gained.

Three points that were specifically mentioned were as follows: ■ “The biggest on-going challenge for financial wellness programmes is reducing the time it takes to achieve sustained behavioural changes.” Changing human behaviours is a process – a long, drawn-out process. In a manufacturing environment, time is money, and after the GTZ grant ran out, the programme was deemed too expensive to maintain because of the ‘cost’ of removing employees from the factory floor.

■ The other important recognition was that “the programme needed to extend beyond remediation and basic financial education, to include a wealth creation aspect10.” To accommodate this, several companies provided space in the lunchrooms to allow representatives of financial services companies to come in and provide a financial advice resource to members.

This was viewed as little more than a tick-box exercise: “Yes, we’ve made financial advisers available to our employees”. What those financial advisers did or said, was not part of any holistic approach to improving financial capability.

10 GTZ (2008)

Chapter 2

The challenge is to find a model that does not just deliver what each stakeholder requires, but also proves to be financially sustainable.

BMW themselves recognised that they were only touching on the first part of the problem: how to get their employees out of financial stress. Elevating the project to a full-blown well-being exercise demands that they help their members address both short-term and long-term financial needs. They needed to help employees understand the balancing act that comes with managing the trade-offs between these short- and long-term goals.

The journey continues.

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Everyone thinks financial capability is important Each has their own role to play given the benefit that each achieves.

FINANCIAL INSTITUTIONS People who are financially educated are more likely to have the knowledge, skills and confidence to choose and purchase financial products. This is likely to stimulate uptake of financial products, especially by establishing financial institutions ‘social licence’ among people who view formal financial institutions with distrust. Financial education can also reduce risks and costs associated with people using products that are unsuitable for them.

BOARD OF TRUSTEES An employee’s compensation package is as much about the benefits and social protections that are attached to that package as it is about the income they take home. Effective financial education around the value of these benefits keeps the member invested and ensures they get the best return from these packages.

EMPLOYERS Employees who are financially educated are less likely to experience distressing financial difficulties, which can prove distracting. These distractions can enter the workplace making employees less productive and even impacting on employer’s profitability and workplace management.

GOVERNMENT A more financially educated population is likely to save and invest more, to be better equipped to run successful businesses, and to be more likely to purchase and use financial products which are approriate to their circumstances. These factors should stimulate economic growth and help to reduce levels of poverty and deprivation, placing less of a burden on government social safety nets.

Source: Adapted from Genesis Analytics (2015)

But ...

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Chapter 2

Are we getting closer to the answer?

The verdict is in and it appears to be unanimous: everyone thinks that financial literacy and financial capability are important. But as we highlighted, everyone has their own vested interest in what needs to be achieved and what needs to be the focus.

fund their child’s education; employers have gone to great lengths to introduce debt counselling or programmes that help employees cope with financial crisis; and the government and NGO sector has focused on providing access to budgeting and planning tools.

It’s becoming increasingly apparent that unless we identify a way to move everyone along a continuum that meets the individual’s needs and speaks to what brings meaning to their lives, our financial education initiatives are doomed – like so many that have come before1.

Financial well-being is a concept that takes us one step further. It’s what the BMW programme was striving for when it developed its programme. It demonstrated that we needed is to move beyond a snapshot approach to financial education to something more akin to a movable feast, a journey, a change management continuum. “We need a framework that allows individuals to toggle back and forth between shortterm goals or immediate needs and longer-term needs2.” Or, in the words of one financial planning group, individuals need help striking a balance between living responsibly today and planning wisely for tomorrow. “In this sense, financial well-being programmes are as much about learning to do it right as learning the right thing to do3”.

To date the majority of financial education programmes in South Africa focus on a single aspect of financial planning.

Boards of trustees oversee member education programmes that help people interpret their benefit statements, financial institutions go to great lengths to help people determine what kind of annuity would best suit their needs in retirement or what sort of tax-free savings investment would be most effective in helping them

1 Fernandes, Lynch Jr & Netemeyer (2014) 2 Interview with Stefan Roodt, BMW 3 Webber & Recol (2014)

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SHIFTING FROM FINANCIAL WELLNESS TO FINANCIAL WELL-BEING Now we need to take the goal one step further. It may seem more like a conceptual shift, but it’s a critical shift nonetheless.

The challenge that these programmes have been up against is how to keep individuals engaged on the journey. When we embark on a change management programme – and we’ve identified that that is what is required here – we know we are in for a long journey.

But it’s one that individuals are more likely to stick with if we can find ways to address the blockages that exist in each individual’s unique circumstance.

What the ‘journey’ is all about is less about accumulating a body of knowledge and more about learning how to let go of potentially dysfunctional behaviours. It’s about building up a more effective way to get money and finances to address your specific hopes, fears and dreams.

Who should be involved?

To hijack another change-management initiative’s byline, achieving this goal “will take a village”. We will need to tackle this at multiple levels and those levels need to

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incorporate as broad a social context as possible.

many individuals, financial crisis and debt can be a cause for embarrassment and shame.

Policymakers will have to do their bit to clear up the problematic lending industry. Both public and private institutions will have to change the ‘messaging’ about money in various socio-economic settings. Financial services institutions need to control their inclination to capitalise on our tendencies to depend on behavioural short-cuts around financial decision-making. And somewhere, somehow, we need to cultivate the right type of professionals to help us provide that service continuum that takes an individual out of financial crisis, into financial stability and then on to financial well-being.

But let’s pose the problem differently. How would you respond to this statement?

“I see my employer as a natural source of assistance with respect to: ■■ my physical well-being ■■ my mental and social well-being ■■ my financial well-being.”

Be honest now. Which answer most naturally resonated with you?

But after considerable debate and reflection, it’s becoming clear that the real engine room for change must, by necessity, be the workplace.

The reality is that for most individuals, their employment represents the heart of their engagement with money. Under normal circumstances, your salary is your first port of call for financing life’s requirements. Like it or not, an employer will always play some role in how their employees engage with money.

At some level this might seem counterintuitive. We are told by HR departments that employees consider their financial circumstances a deeply private matter. For

As Sally Hass, the former Director for Human Resources for the American paper company, Weyerhaeuser, argued in a Consumer Financial Protection Bureau paper

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“I see my employer as a natural source of assistance with respect to:

my physical well-being

my mental and social well-being my financial well-being.” on Financial Wellness at Work: “Employers are already in the financial education business. They provide benefits and educate employees about complicated financial and investment products… but they rarely give much thought to the question of how they can be more effective with what they are already spending to educate employees4.”

Employers are typically the first outreach point when employees get into financial difficulty. What could be a more natural request than asking for an advance on your pay cheque?

Additionally, members believe their employee benefits fiduciaries act in their best interest.

If these representatives take a view on the appropriate default investment strategy that best serves member requirements, members

believe they are more likely to be right than anyone else.

But it’s more than just an endorsement by employers that should drive our thinking.

Improving an employee’s financial capability works in the self-interests of both the employer and the employee. A study by Hira and Loibl concluded that financial wellness is correlated with employee satisfaction with the employer and with company pride5 – more so, perhaps, than other wellness initiatives set by the employer. From that perspective the potential for return on investment for the employer is more easily justified. Employers will accept that they need to invest in employee wellness programmes that focus on mental and physical wellness – while only tacitly acknowledging how interlinked these two states are with financial well-being.

It’s about building up a more effective way to get money and finances to address your specific hopes, fears and dreams.

4 Consumer Financial Protection Bureau (2014) 5 Hira & Loibl (2005)

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A WAKE-UP CALL The challenge is not to motivate employers to roll out a whole slew of financial wellbeing programmes for their employees.

The challenge is to remove the stigma of talking about your financial well-being in an open forum. The most telling aspect of the BMW programme is that they used the same counsellors that they used in their AIDS awareness programmes to engage with employees around their financial crises. The sensitivity of the subject matter demanded that level of professional engagement.

We are beginning to understand what works and what doesn’t work in promoting behavioural change around financial decision-making. Removing the stigma from open engagements allows us to leverage those opportunities. Consider the following insights that came out of a range of successful programmes in the US.

FROM THE CEO OF THE PACIFIC MARKET RESEARCH COMPANY The programme they developed included individual counselling, coaching and classroom instruction on budget basics and other financial skills such as managing debt.

“The most effective part of the programme was real-time help.

For example, a counsellor with the programme might meet with an employee and walk them through a credit report and then offer to call about a bill while the employee listens in and learns to negotiate a reasonable payment.”

“Some of the most important and lasting outcomes came from positive peer pressure at work. Employees formed teams of two or three or four people encouraging each other and trying to hold each other to solid financial principles... by creating a ‘safe’ environment where participants feel they can share their questions and experiences without being judged.”

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FROM THE HEAD OF HUMAN RESOURCES FOR THE GLOBAL OFFICE SUPPLY COMPANY, STAPLES Here the challenge was substantively different. With 1 800 stores in 25 countries the HR ‘trick’ was to identify a cost-effective way to reach a far-flung population where a ‘one-size-fits-all’ approach would never be effective.

The interesting feature of this initiative was that it was prompted by the fact that there were disappointing participation rates in the company’s 401K plans (retirement savings plans). The company thought it had a communication problem.

But more discussions with employees revealed that 401K plans were the last thing employees had in mind when their day-to-day financial challenges were around how to make ends meet.

Traditional classroom training programmes on financial skills would be money wasted. Employees didn’t engage. The answer would prove to be intriguingly counter-intuitive. What changed the engagement dynamics was an off-the-wall online game that was designed by a non-profit gamification group. The financial challenge posed in the on-line game? Manage a nightclub for vampires – profitably.

In addition to embedding any number of money management challenges in the game (such that even seasoned financial directors could derive some helpful insights from the game, the game encouraged collaboration, an important embedded value in Staples’ corporate culture).

Who would have imagined this could work? But, in two different districts Staples noted that roughly 80% of targeted employees engaged with the company’s game portal.

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FROM THE NON-PROFIT GROUP, THE UNITED WAY, WHO COMMITTED THEMSELVES TO CREATING FINANCIAL WELLNESS PROGRAMMES FOR SMALL EMPLOYERS. When the United Way in Omaha, Nebraska wanted to launch a financial well-being initiative in conjunction with the Federal Reserve Bank of Kansas, it became immediately apparent that “if you ignore emotion in this process, you are going to miss the point6.”

The Omaha programme focused on re-assurance – financial mistakes were human, and often a bad financial debt spiral is a function of fear of debt. “If employees are to successfully work their way out of debt, emotionally you have to break that feast and famine cycle.”

Employers who adapted the programme remarked on how effective the programme was in getting co-workers together to support each other. The key to their success was “skilled trainers, sophisticated materials, rigorous research and a committed employer. The training was reinforced in the workplace by bringing co-workers together to support each other7.”

To ensure that buy-in and commitment remained high, the programme recommended a model where employees were encouraged to pay a portion of the programme’s costs.

“ If employees are to successfully work their way out of debt, emotionally you have to break that feast and famine cycle.”

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6 Hira & Loibl (2005) 7 Hira & Loibl (2005)

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FROM THE HR REPRESENTATIVES OF THE GOODWILL INDUSTRIES, A NON-PROFIT GROUP COMMITTED TO PROVIDING SUPPORT TO THE INDIGENT AND TO GRADUATES OF THE STATE’S VARIOUS CORRECTIONAL SERVICES

Goodwill Industries believed their most valuable insight was in recognising that the ‘sweet spot’ for introducing a financial wellness programme was at the on-boarding of a new employee. Because their employees typically came out of the ranks of the unemployed and even rehabilitated criminals, the on-boarding moment provided an ideal opportunity to signal that major changes would be coming into these individuals’ lives. This would become their ‘new normal’.

Importantly though, whatever had been communicated during the on-boarding process had to be reinforced every 60 days for the message to continue resonating.

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THE SOUTH AFRICAN EXPERIENCE Armed with these insights we can consider the South African experience. Clearly many of these points have been articulated in one form or another in both the GTZ study of financial wellness in the workplace in South Africa and in our 2014 Benefits Barometer research. But there are other challenges that are less addressed in the literature.

If our end-game is to move the goal-posts higher – to create a programme that is enduring, not just for the employer, but for the employee, whether they remain with that specific employer or not, then there are some thorny questions that need to be addressed that can ensure this continuity:

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How should these programmes be funded?

We have learned that for employee well-being programmes to be successful, they need both the inclusion and the financial commitment from the employer, the unions (if significant) and the individuals themselves. But we’ve also seen first-hand that co-funding solutions with external parties can be problematic if one party backs out.

We believe that there is huge potential in getting everyone’s funding buy-in if the programmes can play an important role in the company’s overall skills development commitments. That means that these programmes need to be as clear and transparent in their motives and compensations as possible, otherwise the integrity of the funding will be challenged.

What’s clear is that the scale of such a transformative project is so significant that the private sector will have to drive this. It will be beyond the means or reach of the non-profit or governmental agencies. The challenge will be that to keep these private service providers credible, they will have to recognise that what they are providing or selling is a service – not a fishing expedition for cross-selling.

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What delivery mechanisms?

Keeping individuals engaged and interested in their own financial well-being will demand technological and financial resources that are beyond any non-profit funding model. The challenge for delivery in South Africa is finding the right balance between the broader reach of technology-driven solutions and the need for one-on-one, unconflicted assistance. That means we will have to lean heavily on technology that will enable us to personalise the user experience more. It will demand that we learn how to more cleverly manage big data to draw far better insights into what’s required. And it means that we have to be prepared to deliver on multiple media levels to individuals who are at very different points of engagement, who have different and conflicting needs, and different resources at their disposal to achieve those hopes and dreams.

From this perspective, one of the most powerful insights we formulated from our research in Benefits Barometer 2014 as to how to get people to engage more readily and continuously was captured in the table on the opposite page.

This means that to deliver on these multiple requirements we’ll need to focus not just on more entertaining technology, but, as we explained in Benefits Barometer 2014, we need to equip the relevant stakeholders with the toolkits that simplify these complex modelling problems. We need to identify simpler, more cost-effective products and decision-making frameworks. We need to introduce appropriate guardrails and peer comparison points so that individuals can gradually reshape their mental models to produce better outcomes.

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Effective strategies for engaging individuals

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Teachable moments Just-in-time education Understanding bandwidth Rules of thumb Defaults Smart defaults Translate future into present Understanding trade-offs The right incentives

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What servicing requirements?

Servicing requirements relate to whether we have the right professional skills. There is an increasing need to bring a multi-disciplinary skill-set into the picture.

This means that if financial services companies want to be part of this party, they’re going to have to integrate completely different types of professionals into their ranks. What we are describing is a service continuum.

Here is a list of skills or participants they need most: ■■ Educators ■■ Financial therapists – both psychological and sociological ■■ Debt counsellors ■■ Financial coaches ■■ Anthropologists or development economists ■■ Legal counsellors (on behalf of the client) ■■ Financial planners ■■ Financial consultants ■■ Programme coordinators Most financial services typically only employ the last few categories. Hiring, training and compensation models will all need to change if we want to put the interests of individuals first.

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Service Debt counsellor

Financial therapist

Financial planner Financial coach

Role Financial crisis or debt management.

Ensures that when we begin our engagement with an individual, financial stress doesn’t limit their ability to engage with the problem.

Helps individuals understand their default modes for engaging with money.

By addressing attitudes that may lead to dysfunctional behaviours, the financial therapist ensures that the individual can consider goals and priorities that are realistic for that individual’s world.

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Professional qualifications Qualified debt counsellor

Qualified therapist with some financial insights (not qualified financial adviser interested in investor behaviour)

These roles may be either combined or set out separately.

Financial adviser, Certified Financial Planner (CFP), educator, change specialist.

Individuals require a starting point for their financial journey that includes such basics as budget setting, a financial plan and a roadmap of how to get there.

Robo-adviser (computer-driven programme) that helps individuals set goals and then monitor progress to goals

Once this is established, this may well require an ongoing coach to ensure the individual stays engaged and on track. Where does the individual go to next once they reach each goal? How do they continually refresh goals?

Financial adviser

At some point individuals may need technical advice on what they need to do to reach their declared goals and, if required, what products serve those ends best. This is where the financial adviser plays a key role.

Certified Financial Planner (CFP) Qualified financial adviser

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In this world of advice there is no room for the commission-driven model. Consider how we engage with other professional worlds: we employ a good lawyer if we think there is a danger we may be sued for wrongful dismissal or malpractice. We would hardly expect that same professional to turn around and sell us professional indemnity insurance.

We go to doctors to have them cure a specific illness such as heart disease or inflammatory bowel syndrome. We would be mortified if that same doctor peddled us their personally branded diet plan and food supplements.

What both of these examples highlight is that people need to think of their professional support systems, whether that’s in the accounting, assurance assessments, engineering professions and so on, as unconflicted or filtered by an ancillary business agenda. The same has to be said of the type of financial support that has been described if it is going to bridge a level of trust that will be fundamental to its success.

We would never expect these services to be offered for free. The weight of research argues that people tend to undervalue (and hence under-commit to) services that are offered for free. With the right financial wellbeing model in place, employers, individuals, policymakers and financial service providers all stand to benefit. As such any arguments about effective compensation should be moot. On some level, all parties will need to shoulder some part of the funding burden, although the correct answer may well vary from one employer to the next.

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How to monitor Irrespective of which role we are playing: employer, trustee or service provider having a common framework to assess whether our interventions are moving that dial on the national financial capability benchmarking exercise provides insight for all parties. While evidence appears to be mounting about what doesn’t work, we need to start sharing insights and data around what could. We believe there would be substantial benefit from revitalising the financial wellness forum initially conceived during the GTZ project.

How can we best accommodate the feedback requirements of all parties?

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To start with, we all need to apply the same level of qualitative assessment on our various programmes as groups such as the FSB, ASISA and the Finmark Trust have applied on their programmes. The table on the next page takes us through the insights we need to gather from focus groups and face-to-face interviews.

RELEVANCE

Relevance assesses the extent to which the programme is suited to the needs of its beneficiaries and whether the programme’s activities are relevant to achieving its objectives

EFFECTIVENESS

The effectiveness criterion measures the extent to which the programme is meeting its objectives and identifies constraints to the factors driving these achievements

EFFICIENCY

Efficiency contrasts the achievements of the programme against the various inputs and activities of the programme

IMPACT

Impact measures the extent to which the programme has directly or indirectly altered social, economic and other development indicators

SUSTAINABILITY

The sustainability criterion assesses the extent that the benefits accrued to the target audience will likely be sustained post intervention

Source: The Organisation for Economic Cooperation and Development’s (OECD) Development Assistance Committee (DAC)

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But the game changer will be if we can develop a truly integrated approach.

In an ideal world, the employer should be able to see an aggregate picture that brings together the financial capability baseline comparison tests (using the FSB’s model), the HR metrics that help employers assess their return on investment, the trustees’ assessments around changes in replacement ratios and preservation, the medical schemes data on coverage sufficiency and the service usage feedback from the company’s EAP or EWP programmes.

Ultimately, it’s whether the employee believes they are less financially stressed and making better financial decisions. What counts most is whether they are still on the journey and still engaged.

The picture we are capturing takes us to a new level of monitoring employee well-being. If we can achieve this, we’ll know we are winning.

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Concluding thoughts Can such an ambitious plan work? We believe the financial services industry can’t afford to ignore what is being asked.

Imagine how effective the industry could become if it focused not just on delivering what clients need, but what they desperately want.

A picture is beginning to form as to what will be required to make workplace initiatives work. A bigger problem may well be that to structure the optimal solution requires a complete retooling of the financial services industry. But let’s see where our thinking thus far has taken us. While we may be some distance off from definitive answers, we have begun to gain clarity about the critical elements of a promising effort.

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SUMMARY

If we place financial well-being at the heart of what we are trying to achieve, this should change how we help individuals navigate through financial decisions. These decisions should be placed within the broader context of what they are trying to achieve with their lives as well as acknowledging that money isn’t the only way to solve problems.

Navigating individual financial well-being Financial decision-making is challenging.

Simple decisions like spending rather than saving can be difficult to make. And this is quite apart from the challenges posed by product complexity.

In a recent study by Bhargava, Loewenstein & Sydnor (2015), they examined health insurance choices that had been made as simple as possible. They looked at these choices in the context of a single employer with 50 000 employees where all health insurance choices were offered by a single provider and had the same healthcare features. The only variation was in the financial

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dimensions of the decisions. These financial dimensions covered what individuals would pay monthly as a premium, what they would pay for out-of-pocket, co-payments and so on.

What they found is that most individuals chose options that were inferior in every way to other options that were available, primarily due to leaning on maladaptive rules of thumb. For most of the options chosen, there was another option that was better on every dimension. These are called dominated options. This is like choosing a slow, uncomfortable, expensive car rather than a fast, comfortable, cheap one.

This demonstrates that even when much of the complexity is removed – like differences between providers and many of the features of the product – individuals still struggle to navigate decisions.

Many financial decisions involve a far more complex decision-making process. We’ve argued that to keep people engaged, we need to address their own criteria for well-being.

These criteria may be more subjective than economically rational. The issue is not that their priorities are flawed, the issue is more that they may not understand the long-term financial consequences of those decisions.

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Individuals need ways to map their overall objective to their financial decisions so that they have a context in which to place them.

In many cases, a financial product is not the only way to solve a specific problem.

Alternatives exist that may be social, for instance. The implication is that by balancing financial and alternative strategies, there may well be opportunities for individuals to stretch their money further.

As product complexity increases, it becomes harder for individuals to navigate such decisions. Where possible, this complexity should be avoided and where unavoidable, it needs to have tangible benefits for well-being.

In the sections that follow, we look at several types of financial decisions – about choices relating to insurance, medical aid, savings and investments and even how to manage the inevitability of death. We place them in the context of the overall problems that people are trying to solve with financial products and then look at the alternative strategies available.

Then we look at what types of considerations an individual could look at to navigate what strategy makes the most sense for them.

While these sections target the individual decision-making process, they are not aimed specifically at the individual. The purpose is to illustrate how an understanding of

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Understanding the trade-offs

well-being informs the kinds of guidance and models that can be used. Too often the instinctive reaction for financial services is to point people towards more products and this is not always the answer that will best serve an individual’s financial well-being.

Instead, by placing decisions in a broader context, it becomes easier to discern whether a problem is best solved by a formal insurance product, by saving, by a social strategy or an adaptation strategy, or some mix of these.

Acknowledging the full range of strategies allows individuals to better deploy their finances in a way which reflects what matters most to them. More importantly, it helps them manage the inevitable trade-offs that come from knowing that the resources available to any individual or family are limited.

We can no longer continue advising individuals on the basis that financial decisions are treated as stand-alone problems. Financial decisions fit into a broader context – of both objectives and strategies – and incorporating these aspects can only enrich our ability to advise individuals appropriately.

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INSURING WHAT MATTERS

Insurance products are tough to wrap your head around. In most cases you get nothing out unless the worst happens. There’s little likelihood of instant gratification. In fact, in the context of personal well-being, not ever needing to use these products would be the best outcome of all.

But unlike health insurance products (which we’ll discuss in the next section) the risk events covered by both long- and shortterm insurance products happen so rarely and unpredictably that we often fail to see the value in holding the insurance product at all. In each year, the vast majority of policyholders pay premiums but receive absolutely no monetary benefit in return. If insurance was viewed like an investment, policyholders would rationally feel like they had invested in a dud. The result is that where people have a choice about buying insurance, they often don’t.

Fundamentally, buying insurance is more about managing fear than making a financial decision, which is why it is so critical for an adviser to have a conversation with the individual that goes beyond product details.

If you add to this the fact that insurance premiums can run into several thousands of rands a month, you’ve got a conundrum on your hands: why should anyone buy an

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insurance product that cost a fortune, and provides only the promise of a benefit on the off-chance that the insured event happens at some point in the future?

Since the State offers limited protection against the asset risks that formal insurance products cover and often not at the level required by many employed people, it’s largely up to the individual to decide on the best way to manage these risks. The options available to the individual that the adviser needs to help navigate them through include: ■■ Buy a formal insurance product ■■ Use informal insurance mechanisms, such as stokvels, which pay out on certain events ■■ Self-insure by using savings or income as an offset ■■ Rely on your family or community for support ■■ If all else fails, readjust your lifestyle should the event occur.

Too often an adviser will jump to the first option of formal insurance products, without helping an individual to think through other options. In this chapter we examine a framework the adviser can use to help an individual trade off the various points against each other to see which option delivers the greatest value.

While different people have different risk tolerances, levels of adaptability and cognitive biases, there are good guidelines we can follow when helping them determine whether to buy an insurance policy. We need to answer two main questions to establish these guidelines: ■■ Is there a significant enough probability of the event happening?

■■ Can the individual deal with the impact if the event does in fact happen?

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What is the probability of the event occuring?

Life is full of uncertainty and risks. There are various methods individuals use for dealing with the risks they face in life. The two most extreme modes for dealing with uncertainty:

THE FEAR MODE Individuals who respond to the fear model tend to exaggerate the probability of occurrence and underestimate their ability to deal with the consequences if these events do happen. This leads to irrational purchasing behaviour and sometimes being over-insured.

Anxiety tends to be the driving force.

THE FAITH (DENIAL) MODE On the other extreme, someone employing the faith model puts no protection mechanisms in place. Either they believe the probabilities of the event occuring are low or they don’t engage with the possibility at all.

The fear model may lead to people being overly cautious while the faith (denial) model can put them in serious danger of removing all safety nets.

By identifying what mode an individual leans on most heavily, the adviser can help the individual to find a more moderate balance between them.

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FAST THINKING TO ESTIMATE PROBABILITY AND LOSS1

Most insured events are more likely to not happen each year than they are to happen. People tend to understand this. But do they really understand the probabilities? We have to turn to behavioural finance to understand how people determine the chances that an event will occur and therefore whether they need the protection.

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1 All descriptions of mental biases are adapted from the study material for actuarial examinations for subject F105, developed by the Actuarial Education Company.

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Anchoring

Availability bias

This term explains how people produce estimates. They start with an already established view on the occurrence of an event and will anchor to that view. This can lead to incorrect assessments of the chances of an event occurring.

The ease with which something can be brought to mind influences our judgement of how likely that event is to happen. For example, there may be more deaths from cancer than car accidents in this country, but car accidents are much more widely publicised, so we tend to believe that car accidents are more likely.

Prospect theory This is the theory of how people make decisions when faced with risk and uncertainty. This moves away from traditional views of utility to a concept of value defined in terms of gains and losses relative to a reference point.

If we apply prospect theory to disability insurance for a 40-year old male, we would be comparing the following alternatives: 1. A 100% loss equal to the sum of the premiums paid for the insurance protection (say R10 000 per month).

2. A 1% chance of becoming disabled and incurring a loss of say R1 million.

Although the two alternatives lead to the same expected outcome, people would choose alternative 2 because it has a smaller probability of occurrence, even though the potential loss is far greater than that under alternative 1.

2 Schade, Kunreuther Koellinger (2011)

Myopic loss aversion Myopic loss aversion refers to an excessive focus on short-term losses when a longerterm time frame, that acknowledges shortterm losses, is more appropriate. This results in some people buying excessive amounts of insurance in the belief that the event may happen in the next year when it may only occur once every five years.

How can an adviser respond Research shows that it is not the magnitude of the potential loss that leads people to buy insurance, it is the frequency with which the loss is likely to occur2. You can only respond appropriately if you perceive the risk correctly. How can we help individuals with that decision-making process?

Here are some points an adviser can include in their discussion with an individual:

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1. Don’t consider probabilities over too short a period into the future.

2. Understand how your chances of experiencing the event may differ from someone else’s. For example, if you have a history of heart disease in your family, this puts you at greater risk of a heart condition than the average person.

3. Do not think that because it hasn’t happened recently that it will not happen in the future.

4. Avoid overconfidence in your ability to estimate probabilities. If you choose not to buy insurance, each day that you don’t experience the loss event affirms your decision not to buy the insurance. But every insurance product is developed from a need that existed in the market and is driven by the fact that the probability of occurrence was great enough that it warranted an insurance contract.

5. Consider the risk probability together with the potential loss. This means going against your mental biases as captured by anchoring and prospect theory. To assess whether you need the insurance it is fine to consider how likely the event is to happen, but you also need to ask yourself: “If the event happened, could I cope with the loss?”

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CAN YOU DEAL WITH THE IMPACT OF THE

EVENT IF IT DOES IN FACT HAPPEN?

An adviser can be critical in helping you assess whether you can cope with loss on the basis of the following questions. If our default position is no insurance coverage then the answers to these questions will help an individual to determine whether their savings, income or additional support systems would be adequate to provide the needed protection.

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Is the maximum potential loss uncapped?

For certain types of loss events it’s simple to estimate how much cover is needed. Vehicle insurance should cover the value of your car, and life insurance should be enough to cover the daily living costs of your family after your death for a reasonable time period. In these cases an adviser can help an individual calculate whether they have enough savings or income to cover the expected loss.

There are also instances where the loss might be unlimited. For example, you may experience a rare disease and your medical costs could run into the millions. Your savings would be inadequate.

Third party insurance is a specific type of cover that provides indemnification against losses incurred by someone else as a result of your actions. If you drive a car and you don’t decide to buy third party insurance, you could crash into a Ferrari and you may be liable for millions of rands in compensation. The upward bound of this type of liability is not known. Savings alone would be inadequate. Insurance should be treated as a priority.

Do you have enough emergency funds to absorb the loss?

If we return to the example of life cover above, we could calculate how much you need to cover your family’s daily living costs in your absence. You might consider factors like the

outstanding bond amount on the house so that your family has somewhere to live; the cost of education for your children up to a university degree; estimated medical costs; and the cost of food, to name a few. We can then look at your existing asset holding to see if you have enough to act as a substitute for insurance. You might count the value of your retirement fund savings, emergency savings, existing cover from your employer, and so on.

The decision to buy insurance for losses that do have an upper limit depends on the assets you have at your disposal to absorb such a liability. Accumulating and managing these assets will often require the adviser to discuss an individual’s saving and investing decisions.

It isn’t always easy to assess all the costs that you could face if you experienced the loss event. When it comes to disability insurance, for example, there are many costs you may have to pay for, like physiotherapy, that you don’t think of when assessing whether you have enough money to offset the risk. This is where an adviser can help an individual to consider all angles.

Do you have social structures to support you should you incur the loss?

Some communities have strong social ties and sharing of medical costs and income support are common. If you’re comfortable relying

Chapter 3

on this support system to protect your family when you’re gone, you may be less inclined to buy life insurance. However, the costs you may incur are difficult to estimate with accuracy and can be unlimited. Consider how comfortable you are relying on such a support system. This is a very personal decision.

Will you be able to live your life as you wish if the insurable event occurs or could you adapt your lifestyle?

Humans are much more adaptable to losses than we think. If your cellphone is stolen, you could adapt and buy a cheaper one.

However, if you don’t insure your car and it is stolen, would you be able to adapt to taking the bus? If you became disabled, would you be able to survive or adjust to a life with no income? You have to think about whether you could adjust your lifestyle without compromising your well-being.

When it comes to short-term cover for a home or a vehicle, specifically, if you are still paying off either of these assets, you should probably hold insurance equal in value to the asset themselves, or at the least, the value of the outstanding debt. If you were involved in a car accident and the vehicle is so badly damaged that it could not be repaired, you would be stuck having to pay off the outstanding amount on the car but wouldn’t have any car to drive.

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Q2 Do you have sufficient emergency funds to absorb the loss?

Proceed to Question 3

Here’s a diagram that represents a decision tree for the purchase of insurance:

YES

NO

NO

Proceed to Question 2

Q3 YES

Start

Q1

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Do you rather avoid the uncertainty / negative impact of loss?

Is the maximum potential loss uncapped?

Get insurance

NO

Self-insured

YES

Get insurance

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Q4 Do you have social structures to support you should you incur the loss?

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Q6 Will you be able to live your life as you wish if the insurable event occurs?

Q7

YES

NO

YES

Proceed to Question 6

Self-insured

Is the probability of the event significant?

NO YES

Get insurance

NO

Q5 Do you feel comfortable relying on this?

YES NO

Proceed to Question 8

Q8 Do you need the peace of mind that you are protected from this risk?

Self-insured

NO

Proceed to Question 6

YES

Self-insured

Finish

Get insurance

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When you do buy insurance cover ...

If you conclude that formal insurance is the preferred option, here are the considerations that will provide peace of mind: ■■ Excess payments: This is the first amount of any loss that you must pay, with the insurer covering the remainder of the loss, up to a specific maximum.

The greater the excess the cheaper the cover will be. You need to determine whether you have enough in savings or disposable income to cover the excess or whether you may need to borrow to cover the excess, ultimately affecting your well-being in a negative way.

■■ Exclusions: Most policies contain standard exclusions. For motor vehicle insurance this includes that the insurer will not pay any claims for an accident caused by the insured while under the influence of alcohol or drugs. This seems sensible. But these exclusions can mean that you are not protected against the very thing that you sought insurance for. An example of this is where you have a history of cancer in your family, and choose to take out dread disease cover, but the insurer stipulates that cancer is not one of the conditions that they will pay out a benefit for because of your family history. Exclusions need to be carefully checked.

■■ Indemnity or fixed compensation: The principle of indemnification states that the individual will be returned to the position they were in before they suffered the loss. This is good as it means that your well-being should be left unaffected. But some types of contracts only offer a fixed benefit, leaving you uncovered for any amount over and above the sum insured. Again, it’s a question of whether you have enough net assets to absorb that loss.

■■ The comprehensiveness of cover: Be careful to not simply choose the cheapest option available to you because it may mean that you are only covered for certain things and not others. For example, the cheapest form of vehicle insurance available is third party insurance. That means that if you are involved in a car accident, the insurer will not compensate you for the cost of repairs.

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A helpful framework for advisers is to start with the presumption of no coverage and the interrogate whether the individual has adequate alternatives.

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Concluding thoughts ■■ Insurance products don’t provide instant gratification and often only provide a pay-out when the worst happens.

■■ Many people handle risk by gravitating towards a faith or fear model.

■■ When considering whether to take out insurance, people tend to focus on their perception of their probability of the event, rather than the potential magnitude of the impact.

■■ A helpful framework for advisers is to start with the presumption of no coverage and to interrogate whether the individual has adequate alternatives.

■■ Only after determining that a formal insurance product is the appropriate way to offset a risk should the conversation about product details take place.

■■ Make sure to understand the fine print around excess payments, exclusions, fixed compensation and comprehensiveness of coverage.

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A MATTER OF HEALTH

People agree life satisfaction and health are the most important aspects of well-being.

Your health is one of the most important parts of your well-being. In study after study around the world people agree life satisfaction and health are the most important aspects of wellbeing1. It isn’t hard to see why: without your health, every other part of your life becomes harder to appreciate.

Looking after your health has a few inter-linked components. One aspect is prevention, and another is cure. When you’re looking for a cure, you have to have two things. You have to have access to the right medical services – like a doctor, medicine or a hospital. Then you have to be able to pay for those services.

Being able to pay for these services is where financial well-being finds its overlap with health. In South Africa, there are three ways to pay for medical care: 1. The State 2. Insurance 3. Savings

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1 Helliwell, Huang & Wang (2015) 2 Bhargava, Loewenstein & Syndor (2015)

Because the State only provides access to public facilities for medical care, many employed South Africans use a combination of health insurance and savings to pay for private care.

Within the context of South African health insurance there are two separate vehicles, the first is a medical scheme, the second is medical insurance. These are two very different types of protection and the distinctions are important to understand.

Making decisions about paying for healthcare is tricky. Even when decisions are simplified down to only a few variables, individuals struggle to make good decisions2. There is no silver bullet for managing the complexity of this space, but our discussion in this section looks at broad issues to consider when helping people navigate this space.

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Being able to pay for these services is where financial well-being finds its overlap with health. In South Africa, there are three ways to pay for medical care:

THE STATE

INSURANCE

MEDICAL AIDS

SAVINGS

HEALTH INSURANCE

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A comparison of medical aid and regular insurance South African medical aids are actually quite special as a form of health insurance.

Firstly, your medical aid can’t earn a profit.

Service providers to your medical aid, like its administrator, can earn a profit, but your medical aid can’t. Secondly, your medical aid can’t take into account personal factors about your health when it prices your cover. This reflects the principle of social solidarity. Within the medical space, the term commonly used is ‘community rating’ and it means that every member of a medical aid who has chosen the same level of cover has to be charged the same price.

Compare this to other forms of insurance. If you’ve ever tried to take out life or disability insurance in your individual capacity (rather than through your company), they probably ran you through a battery of questionnaires and blood tests. Then, based on your results, they often alter the type of cover you have or they charge you a higher price. In a way, this means they’re ‘personalising’ your cover, precisely to minimise the risk they face by insuring you.

Medical aids can’t do this. This makes the cost of health insurance far more predictable – and reliable – than it is in other parts of the world. The community rating structure makes health insurance more expensive for young, healthy people than elsewhere, but it also makes it far more reliable and accessible for all parts of the population.

insurance you may never use. You may use short-term insurance occasionally but with little regularity. All of these forms of insurance are unpredictable.

annual check-ups. Babies have to go for immunisations. So, there is an element of your medical costs that are fairly predictable.

However, medical aids are not the only form of health insurance available in South Africa.

Medical aids as insurance Because medical aids are a form of insurance, many of the questions we asked in the section on insurance are relevant to this discussion. As with other forms of insurance, an adviser needs to help an individual balance their use of insurance against their use of savings and work out which is most useful.

But medical aids are different from other forms of insurance. The reality is that most individuals use their medical aids regularly.

Life insurance you only use once. Disability

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Your health is not as unpredictable. Most people visit the doctor a couple of times a year. The bigger your family, the more likely you are to see the doctor. If you have a chronic condition or poor health, you use medical care more frequently. Everyone is supposed to see the dentist once a year.

Some specialist visits are necessary for

There is also an unpredictable element to your need for medical care. Car accidents, heart attacks and cancer can all be almost impossible to predict. Maybe you have a family history, but even if you do, the timing is unknown. This is where medical aids become more like other forms of insurance.

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Returning to our decision-making framework 1

Is the liability associated with the insured event limited?

2

In the case of medical aids, the insured event is using medical care. In some cases, this cost is limited. For instance, if you go to the doctor and they prescribe medication, you have a fairly clear idea of how much this will cost, and the cost is limited. However, if you are in a car accident, you don’t have a clear idea of what those total costs could be and they could be very high. Similarly, with diseases like cancer, the cost of medical care can increase very rapidly.

Self-insurance for day-to-day cover seems viable. It requires two things. First, an adviser will need to help an individual build a fairly good estimate of what they are likely to spend on doctors, specialists, medicine and so on each year.

Second, an adviser would need to ensure that the individual has saved enough money to cover this.

Mixing your health saving with your emergency fund would not be prudent. Emergency funds are to cover all an individual’s ’what-ifs’. What if you crash your car? What if you’re unemployed for a few months? What if…

These two types of events divide into day-to-day cover and major medical cover. Day-to-day cover includes things like seeing doctors and buying medicine. It has a level of predictability and is unlikely to accelerate rapidly.

Self-insurance could apply.

Most years you don’t crash your car or lose your job, but you do go to the doctor. Because you’re likely to spend this money, you need to save for it specifically and not lump it in with all your ’what-ifs’.

Major medical cover includes emergencies, in-hospital treatment and diseases like cancers. Costs could be unlimited. Self-insurance could be unrealistic.

3

Do you have social structures to support you should you incur the loss?

Social structures can be less relevant once you’ve incurred medical costs. Once they’ve been incurred, they have to be paid.

D o you have enough emergency funds to absorb the loss of the insured event?

4

Will you be able to live your life as you wish if the insurable event occurs or could you adapt your new lifestyle?

Adaptability is a less feasible strategy for health insurance.

While there are ways to control medical costs once they are incurred, a mechanism needs to be found to pay for it.

At this stage, you would need to have a social structure that allows you to ask people for money directly, rather than inkind help like childcare which may be relevant as alternatives to life or disability cover. In the case of day-to-day cover, this could work. In the case of major medical expenses, your social support would have to be extensive to bear the costs.

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What about chronic cover?

Chronic diseases include asthma and diabetes. They are common in the population, require regular treatment and are unlikely to be fatal, if treated correctly. The costs of chronic care cover both the regular treatment – consultation with the relevant doctors and medication – and the cost when a chronic disease puts you in hospital.

In South Africa, chronic care is covered by ‘prescribed minimum benefits’ (PMBs).

What this means is that every option on every medical aid has to pay for the chronic care of these conditions – even if the option is only a hospital plan.

Prescribed minimum benefits are often blamed for the high costs of medical aid in South Africa. In a sense this is correct.

But this is also part of the ‘social solidarity’ aspect of cover in South Africa and it means that even the chronically ill can get cover.

Important note: Medical aids are allowed to have certain rules for how a chronic condition is treated. If an individual does have a condition, the adviser could help them check what those rules are and evaluate whether they can live within these.

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Thinking through your medical cover

Day-to-day medical cover Includes visits to doctors, optometry, dentistry and prescribed medicine for general illness like flu.

Fairly predictable from year to year.

Influenced by: ■■ Family size ■■ Dependants’ ages (kids under 2 get sick a lot) ■■ General health of family Savings are an option, either in the form of: ■■ The built-in savings pocket within many medical schemes.

■■ Self-insurance where you set the money aside for medical costs.

Major medical cover Includes emergencies where you are admitted to hospital, in-hospital treatment and major diseases like cancer.

Very unpredictable, though this may be partially influenced by your family history and individual health status.

Savings are not an option.

INSURANCE is necessary. Medical schemes are normally the only option as other forms of health insurance (including hospital cash plans) cannot cater for the unlimited nature of the liability. Can be combined with gap cover.

Chronic cover Includes treatment for common conditions and any associated emergencies.

Covered by any medical scheme option

Check: ■■ Whether your condition is on the list of 27 PMBs defined by the Government.

■■ Medical aid’s rules for treatment.

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Managing the costs What you pay for your medical cover is not based on your personal profile. So, what is it based on?

It is based on the profile of the people who choose the same option on the same medical scheme as you. This is referred to as your risk pool. Each option has a set of rules about what it does and doesn’t pay for. How generous these rules are has some effect on the price of the option, but so does the claims history of people on that option. If people claim often and there are a lot of costs for the scheme to pay, the risk of that pool goes up and the price of that option on that scheme goes up. If people don’t claim often, the risk goes down and so does the price.

One of the ways in which medical aids have been trying to bring down the price of cover is by introducing rules that allow them to control costs. In Benefits Barometer 2014, we discussed a number of these cost control measures. The implication of this is that the more rules you’re willing to follow, the lower your cost of cover.

Most medical aids offer a network option where they have rules about which doctors you may see, what medicines you can use and what hospitals you can visit. Other options on a medical aid may only restrict one of these aspects – say which hospital you can use. Increasingly, medical aids are developing rules for which types of procedures should be done in a day clinic, rather than a full-service hospital. Day clinics are normally less expensive.

Savings are an interesting aspect. A number of medical aids are offering options which build savings into the medical aid itself. This means that the cost of your day-to-day cover comes out of a savings pool, rather than your risk pool. That way, what other people claim does not affect the cost of this aspect.

Another way to lower costs can be to accept higher co-payments or deductibles. These are like excess payments in regular insurance. It means that you have to pay the first portion of a claim yourself. This takes us back to the need for savings. If you choose an option with higher copayments, it may reduce the monthly cost of your medical aid, but it will increase your need to put savings aside, in case.

If medical aid is placing a strain on an individual’s budget, an adviser may want to help them identify more cost-effective options.

As with other forms of insurance, an adviser needs to help an individual balance their use of insurance against their use of savings and work out which is most useful.

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The ins and outs of savings plans Medical aids pay for day-to-day cover in one of two ways. In a traditional plan, your day-to-day cover comes out of the same risk pool as your major medical cover. Everyone on the plan puts money in, everyone takes money out. The alternative to this is the savings plan where your day-to-day cover and major medical are handled separately. Major medical is part of the risk pool and your day-to-day cover is your own savings.

A benefit of saving within your medical aid is that they normally make the full pool of your savings available at the beginning of the year. Say you pay R1 000 in savings each month. If you saved this yourself, on the first of January you wouldn’t have any savings available. In a savings option within a medical scheme, the full R12 000 that you will save over the year is available on 1 January.

Even simple savings plans have many rules about what you can spend on and how much you can spend on different types of healthcare needs.

There are also more complicated versions of savings plans. In these versions, in addition to your savings, there is an additional portion of day-to-day cover that you can claim from the risk pool. This could come in many forms. It could come in a fixed amount once you’ve spent your savings plus an additional amount from your own pocket. It could be unlimited. It could be for specific types of use – for instance, blood tests and X-rays, or for ultrasounds if a woman is pregnant.

What makes this so complex is these options switch between three forms of funding: your savings in the medical scheme, your out-of-pocket expenses and the risk pool. And they can do so in quite complicated ways. For instance, you may be able to access your savings in the medical scheme to pay R100 for your medicine, but the scheme only counts R50 to your threshold.

The rules around savings in a medical scheme and their relationship to day-to-day cover can be complex. This can have benefits – as it often means you have access to the risk pool for some of your day-to-day cover if these costs rise suddenly. But it also has additional costs and complexities compared to saving separately from the medical aid.

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Alternatives and complements to medical aids Medical aids may be the most common form of health insurance in South Africa, but they are not the only way to fund medical care. Beyond using savings if an individual self-insures, the diagram shows some alternatives that an individual could consider. It is not exhaustive.

Primary healthcare is available through the State at clinics. However, this is generally only free if your income is low and you are not a member of a medical scheme.

Day-to-day cover

Some employers offer occupational health schemes for their employees. This only covers employees and not their families or dependants.

Emergency care and in-hospital care are available at State hospitals, but are only free if your income is low and you are not a member of a medical scheme.

If you have been in a road accident, some cover should be available in both State and private facilities to be paid for by the Road Accident Fund (RAF).

Major medical – in-hospital cover

Major illnesses

Hospital cash plans pay a fixed cash amount per day that you are in hospital. There is no relationship between the hospital’s charges and this fixed amount.

Gap cover is available for medical aid members to supplement major medical for in-hospital costs only. This often focuses on specialists who may charge more than the medical aid will pay. Some of these products will cover co-payments and other gaps that arise when you go for options with more rules and limits on hospital use.

Dread disease cover pays out a fixed amount when you’re diagnosed with a specific disease of a specific severity (for example cancer). Like hospital plans, the fixed amount is not related to the cost of medical care. This type of cover is subject to the same kind of tests, questionnaires and exclusions as individual life cover.

Disability cover pays out either as a lump sum or a monthly amount when someone can no longer earn their normal income. It is meant to cover the loss of income, not the costs of medical care. It is subject to tests, questionnaires and exclusions if taken out on an individual basis (rather than on a group basis through your employer).

Life-altering injuries & illness

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Subject to conditions, you may be eligible for the State disability grant or the unemployment insurance fund (UIF) or both.

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Getting back into the detail Choosing how to manage the costs of your healthcare can be tricky. Even once you have a sense of what strategies you would like to use, the specific rules of specific options on specific medical aids can be intricate. This intricacy makes it tricky to compare options both within and between medical schemes.

?

Chapter 3

?

The claims history of the people on that option has a large influence on the pricing of that option. This means that establishing the cost-effectiveness of various options is not a straightforward exercise.

Once an individual has had their conversation with their adviser about how they want to tackle funding their medical care, there is still a lot that will need to be covered on the detail of picking a medical aid option.

Ideally, this kind of advice would consider an individual’s history with medical aids, their family structure, their preferences in terms of strategies and in terms of the types of rules they can comply with, and affordability.

Concluding thoughts ■■ Health is a critical component of well-being.

■■ The primary form of health insurance available to employed people is medical aid.

■■ Medical aids have to price based on a community rating, not on your individual risk profile.

■■ Social and adaptive strategies are not meaningful alternatives to financial strategies for covering healthcare costs.

■■ Lowering the cost of medical aid normally involves following more rules and saving more on the side.

■■ There are alternatives to medical aid, but in most cases they can’t guarantee that all your costs will be covered.

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THE GOALS THAT MATTER

Savings and investments represent the engine room of our financial well-being. Lack of savings can limit the set of decisions for an individual around what can be achieved to further their well-being interests, just as lack of a focused, goals-based investment strategy can well mean there’s a complete mismatch between what a consultant or adviser recommends as a required outcome to meet the individual’s needs, and what gets delivered.

Savings serve two core functions in supporting overall well-being. Savings can protect an individual’s current lifestyle or it can give them options to improve their

Savings and investments represent the engine room of our financial well-being.

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lifestyle in the future. This improvement is not about having ‘more’ for ’more’s sake’ – it’s about having money available for other things that the individual values.

The new paradigm of goals-based investing is particularly appropriate for linking savings and investments to an individual’s overall well-being. Goals-based saving ties the money you accumulate to a specific purpose. Goals-based investing looks at what strategies you should use to best reach your households’ priorities. The measure of success is how close you come to meeting your objectives and not whether you achieve the highest possible return. This shift in focus has significant consequences for how we build investment products.

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SAVINGS

SELF-INSURE

HOUSE & CARS

RETIREMENT

HOLIDAYS

EMERGENCIES

PHILANTHROPIC

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Protection strategies Emergencies

Self-insurance

Retirement

When an adviser is helping an individual protect their current lifestyle, there are a few areas which they need to look at. Some of these areas are best addressed with a formal insurance product, for others savings make more sense and there is an overlapping category where an individual could use either.

SAVINGS SAVINGS

Emergency savings are a good starting point.

These savings cater for those unexpected things life may throw at you. These could include things like losing your job – or leaving your job. But they also need to take into account any deliberate gaps that may have been left in an individual’s health or insurance coverage. It may make sense for an individual to self-insure some risks, or to choose higher excesses or copayments.

For all these, some form of savings will need to exist, and it is likely to be in the form of emergency savings as this money could be needed unexpectedly.

Life cover or savings available on death

INSURANCE

Major medical in health insurance like hospitalisation

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Saving to protect your future

Third party liability in auto insurance

Retirement savings are another important point for conversation. But a correct picture of whether retirement savings are adequately requires we maintain a holistic picture of an individual’s savings: pension fund, retirement annuities, preservation funds, post-retirement medical aid, insurance policies and housing, should be included.

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The right goal for retirement savings Nobel laureate Robert Merton is emphatic about one point when it comes to retirement investing: “Sustainable income flow, not the stock of wealth, is the objective that counts for retirement planning.�

Saving to improve your future Saving can protect a current lifestyle, but it can also open up possibilities for a future lifestyle. These future-oriented savings strategies can be divided as follows: Those that are linked to a particular time-frame such as funding an education programme or going on holiday; those that are independent

of a time-frame such as saving for the next generation or funding some wished-for luxury like a new house.

Sometimes future-oriented goals are harder to define. Sometimes one might want to achieve the luxury of options. Savings can preserve

a sense of freedom without being directly tied to a specific goal. Savings may help households to feel that a breadwinner could choose to leave their job or take a sabbatical, for instance, without ever intending to do so.

This may be linked to a less tangible goal, but it still ties back to well-being.

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Structuring investments around your goals Setting goals for savings is an intuitive and sensible process. However, knowing how to translate this into an investment strategy is trickier and more technical to get correct.

Most financial services companies will approach goals-based investing as goals-based saving with each goal mapping to a traditional investing product.

This is often how many of the calculators available online will approach it. You specify how much you need, how long until you need it, your risk appetite and the calculator tells you how much you should contribute every month and to which traditional investment product.

But this doesn’t explicitly take prioritisation of your goals into account. It expects you to try out various goals, find out what is possible and what is not in the traditional framework and decide which goals to sacrifice. In the traditional framework, most portfolios are built based on a risk-return frontier which assumes that your savings and investing decisions are separable. In a goals-based framework this approach is sub-optimal.

In a proper goals-based investing framework, you would be able to specify your priorities across your full set of goals. Based on this, it would generate an investment strategy – in the form of a asset strategy allocation – which would maximise your probability of reaching as many goals as possible in your order of prioritisation.

So, instead of trying to work out the best way to do things by playing with different combinations, your prioritisation would be embedded in the process to identify the correct investment strategy.

This way of dealing with goals-based investing requires more sophisticated mathematical approaches. For several decades, computing did not allow for a ‘strong goals-based’ approach to be taken. However, our computational ability has now caught up with the problem. In the table, we show some high-level differences between a ‘strong goals-based’ approach to investing and a traditional approach which may only be using the goals-based language.

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Traditional investing

Strong goals-based investing

■■ Each goal is addressed separately, with prioritisation done at the savings level

■■ Goals are addressed jointly, factoring prioritisation into the investment choice

■■ Doesn’t incorporate constraints in generating investment options

■■ Directly incorporates constraints in generating an investment strategy.

For example, specifying an income level below which you cannot survive

■■ Trade-offs are dealt with at the savings level

■■ Trade-offs are dealt with at the investing level

■■ Risk is about how bumpy the ride is

■■ Risk is about missing your target

■■ Monitoring focuses on the trajectory of returns

■■ Monitoring focuses on whether the strategy continues to maximise the probability of success

■■ Success is generating the highest returns and focuses on the final outcome

■■ Success is about maximising the chances of meeting as many goals as possible

Understanding the difference in the risk parameter is important. In the traditional model, when we look at risk, it refers to volatility. What this means is that it looks at how you respond to your investment falling 10% in one month, for example, in a 10year strategy. It focuses on how you feel about the ups and downs along the way, and is mathematically often summarised as a volatility measure.

Risk in goals-based investing is about falling short of your target at the end. If you need a R100 000 deposit for a R1 million house, you could tolerate if the final outcome is R80 000 and you can only buy a R800 000 house. Any lower and it will be harder for you

to adapt. A goals-based investing strategy should minimise the probability of any result below R80 000 and maximise the probability of achieving R100 000. The risk isn’t about a bumpy ride; it’s about how far you can afford to fall short at the end.

more sense to use formal insurance for R500 per month than self-insure when you can’t meet your self-insurance goal without compromising higher priority goals.

Ideally, what a goals-based investing framework would also be able to do is navigate the choice between investments and insurance, in cases where both options are available. For instance, you might want to self-insure your car, but doing so means you have to save R1 000 a month, which is a lower priority than saving for your retirement and your children’s education. In this case, achieving all your goals means it makes

Risk in goals-based investing isn’t about a bumpy ride, it’s about falling short of your target.

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WHY?

How do savings link to your overall well-being

WHERE? Do savings take advantage of any tax benefits?

WHAT?

Does the investment strategy maximise the probability of meeting as many goals as possible, based on your priorities

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Unlocking the real sources of value1 Investing is often regarded as a race for returns with an undue emphasis on selecting the right manager. A goals-based savings and investing framework allows us to integrate a number of value-enhancing strategies that are not dependent on the returns race. These would be: ■■ deriving value from effective allocation to the most tax efficient vehicles over time ■■ finding the right balance for an individual between their need to take risk, their capacity to take risk, and their appetite for risk ■■ knowing which annuity best suits the individual and when to buy it ■■ determining how to effeciently withdraw income when required ■■ incorporating an individual’s personal liabilities when determining an optimal strategy.

Pulling it all together – from goals to action When you decide to save, it helps to link those savings to specific parts of your overall well-being. For some people, accumulation may have its own value, but research suggests this is not widespread. Saving may also provide a more intangible benefit such as a feeling of safety or security, or of providing options for the future. In many cases, saving is likely to be linked to a specific objective like buying a car or providing for retirement.

At this stage, it is important to consider your adaptability and your alternative strategies.

Your adaptability helps you to identify the

1 Adapted from Blanchett and Kaplan (2013)

bottom of your target range. How much of a miss can you tolerate?

In terms of alternative strategies, this means identifying when either social capital or formal insurance could offer a cheaper alternative. If self-insurance itself is a high priority goal, then it may involve sacrificing other goals. If it’s a medium priority, then other strategies may come into play. In some families and communities, there is a high social obligation to care for parents or the elderly. This social capital may mean that savings alone do not have to provide the full solution for retirement.

You can improve the chances for an individual of achieving financial well-being by thinking these trade-offs and decisions through. We want our money to serve our overall well-being. To do that requires making active choices about what matters and what doesn’t, and translating those choices and priorities into a strategy that makes sense.

Hope is not an optimal strategy.

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“How much is enough?” is not the right question: Implications for financial services Offering a robust approach to goals-based savings and investments is not simple for financial services companies to do in the current environment. There is a considerable gap between how we should do this and how things are currently being done.

In many financial services companies, savings and investments are handled separately. There may be one division that looks at financial advice and what this needs to look like to improve savings, and so they might adapt a goals-based language. There may be another division that looks at investment products and they may or may not build them according to a robust goals-based framework.

Regardless, even if both divisions are talking the same goals-based language, the problem comes if they do not integrate the advice and investments seamlessly.

Historically, this division has not necessarily been the wrong one. Previous versions of investment theory – such as Markowitz’s risk-return efficient frontier– suggested that these problems did not have to be solved simultaneously. Under Markowitz, there is only one ‘ideal’ risky portfolio and once this is identified, you only have to combine it with a risk-less aspect to generate a whole range of portfolios appropriate for different risk appetites. The questions were separable.

But the mathematics of financial theory has begun moving much more swiftly.

By returning to a utility-based framework, we are able to start using methods that solve for the savings and investment decisions simultaneously. Unlike what was thought under Markowitz, this appears to generate much more efficient portfolios in terms of how much you need to save to maximise utility – or well-being – over your lifetime.

A recent paper2 compared how much you have to save using these traditional methodologies – against a newer and more robust framework. What it shows is that using a framework that employs more advanced mathematics means you can achieve the same outcomes with considerably less capital.

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2 Dempster, Kloppers, Osmolovskiy, Medova, & Ustinov (2015)

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Getting the right answer demands we know the right optimisation framework is to solve the specific problem. This determination is getting more and more complex.

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Concluding thoughts ■■ Saving links to well-being by either protecting your current lifestyle or providing you more options for your future lifestyle.

■■ When protecting your current lifestyle, insurance and savings are often complementary.

■■ Savings can provide options for your future, whether it is for a specific purpose or to preserve a sense of freedom or control.

■■ Goals-based saving and investing provides a useful framework for linking saving to well-being but is often done poorly, or is badly integrated in a financial services company; “how much is enough?” is sometimes not the right question.

■■ Traditional investment frameworks often separate the savings and investing decisions.

■■ As technology advances, our ability to improve outcomes by making savings and investing decisions jointly is increasing.

■■ Successful investment advice in the future will be more about selecting the right optimisation framework than selecting the right asset manager.

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WHAT MATTERS IN THE END?

“A MAN’S DYING IS MORE

THE SURVIVORS’ AFFAIR THAN

HIS OWN.”

– THOMAS MANN

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There is no debate. We will die, no matter what our race, religion or political persuasion.

Yet nowhere in the complex social fabric of South Africa do we see greater examples of cultural divides than around the issue of death.

Whether we plan for death and how we plan for death presents such a complex and emotional minefield, with so many varying cultural nuances from one segment of our population to the next, that most financial advisers and their clients would prefer to sidestep the question altogether. But avoiding the discussion means we sidestep an issue which, in almost every quarter in South Africa, can be the root of financial hardship.

When asked to identify the financial product most widely owned by South Africans, Finmark Trust put funeral coverage on the top of the list for mid- to lower-income employees. To meet the high cost of funeral coverage (as much as R100 000 according to the FSB3) people often blend both formal structures, like funeral policies, and informal structures, like stokvels and burial societies, to meet the costs of a funeral. Finmark Trust approximates that 38% of South Africans hold a formal funeral policy, while 35% hold an informal funeral product. They further estimate that 35% of those who have funeral cover also belong to a burial society4.

News pundits are particularly fond of the quote “Death is literally killing our people financially”1. In South Africa, that can happen in one of two ways. On the one hand, as Deborah Solomon, a Cape Town-based debt counsellor, highlighted in a recent interview: “Around 85% of people’s debt problems start with a death in the family…. It is not only the cost of the funeral but the expatriation of the body and the challenge of looking after the dependants when the breadwinner dies that is creating the financial burden2.”

If we could identify one mental mindset or social norm in the broader South African culture that has taken root it’s that, without adequate funeral coverage, the family (survivors) will be unable to discharge their responsibilities or reaffirm their place within the community. Funerals play a vital part in the continual reweaving of a community’s social fabric.

Several developments have converged to make these traditions almost untenable.

Where once these lavish events seemed

1 Maya on Money (2015) 2 Maya on Money (2015) 3 Van Wyk, C. (2012) 4 Finmark trust (2014). FinScope South Africa 2014 – Consumer Survey

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fitting tributes to individuals who have made lifetime commitments to providing leadership and the ‘social glue’ to a community, the AIDS crisis has changed all that. Even with the introduction of ARVs, many more deaths are happening at much younger ages, but the scale of funerals has not necessarily been adjusted to recognise that the primary function of the funeral may well have quietly shifted. Funeral costs have not adapted to these shifts.

The problem is that funerals and their associated costs have become linked with status, irrespective of a person’s seniority in the community. Money buys the credibility that an individual may not have had the benefit of a full life to achieve. This recognition has led many South Africans to buy multiple funeral policies or burial society memberships to pay for the financial burden of a lavish funeral. Adjusting to this upward spiral has come at an untenable cost though: the financial viability of the survivor.

The loss of the family breadwinner in middle age opens up many new financial issues.

Looking after orphaned children or elders without incomes now falls to the survivors.

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“Why don’t we take that money and use it as a memorial by starting a bursary/scholarship fund for such students?” argued the FSB5.

Financial imperatives such as funding the children’s education, managing the debt payments on the family home or car, or funding for retirement, must take a backseat until the funeral has been paid for. The consequences cannot be ignored.

Is the answer really more funeral insurance?

This is one area where families and individuals need our help as an industry in understanding the trade-offs. It’s one thing for sellers of insurance policies to brow-beat individuals into allocating almost all their savings to burial societies or funeral policies by citing the rising cost of funerals. But the more important question would be “what are the trade-offs a family must consider in terms of the future for the survivors or, more importantly, the next generation?”

Financial advisers could play a key role here.

But perhaps the starting point has to be with the communities themselves.

In 2012, the FSB turned to the South African Council of Churches (SACC) for help in this regard. What was needed was a two-pronged attack. On the one hand, an appeal went out

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5 The Africa Report (2012)

to get church leaders to gently nudge their flocks towards a bit more circumspection.

Did it make sense that South Africans were saving more to cover their death than they did to cover their life?

“Why do we continue to put costly caskets underground when we have kids dropping out of school because they can’t afford to study?” SACC general secretary, Reverend Mautji Pataki, said.

“Why don’t we take that money and use it as a memorial by starting a bursary/scholarship fund for such students?” argued the FSB5.

But the other area that needed addressing was the unscrupulous overpricing by funeral parlours and hard-selling insurance companies. Legislation needed to play a more aggressive role – at a national level not just at a provincial level. Again, the churches and the FSB need to use their powers of moral persuasion and consumer education to place pressure where it is needed.

What should be our real focus?

Where the focus of protection needs to shift is to what happens to ‘the survivors’.

This is when the South African cultural divide converges. No matter what our socio-economic backgrounds may be, a critical source of value destruction in families and communities comes from the fact of ‘not planning’. Not providing our ‘survivors’ with the means to navigate a financial world in our absence.

Death is out of our control – the when, where and how. But one thing we can control, but often overlook, is the condition we leave our family in when we die. Not many of us even dare to think about that event before we really need to, which is when we are faced with a terminal disease, life-changing accident or some other event.

In the previous chapters we spent some time talking through the issues that an individual has to consider when deciding to take out insurance, in particular in this case, life cover.

But do we understand what the implications are of failing to plan appropriately for your death?

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Death is out of our control – the when, where and how. But one thing we can control, but often overlook, is the condition we leave our family in when we die.

What if I just don’t bother with a will – what happens?

How often are we told “You need to make a will!” And how often do we superstitiously tell ourselves that somehow the act of doing so might well become the catalyst for the event.

Perhaps a better way to ask the question is “What happens if I just don’t bother?”

Dying without a will means that you die ‘intestate’. The Master of the High Court will become the key decision-maker, ‘the executor’ of your estate and will distribute your belongings according to the law, the Administration of Estates Act, which may not align to your wishes. This process can take an extremely long time to complete.

The primary criterion the law uses is that assets follow the bloodlines – favouring wife and children first. One of the unintended consequences of this is that the family may not have access to the deceased’s money to survive while this process is underway.

If the estate at death is less than R125 000 a representative from the Master of the High Court will automatically administer the estate.

A will does more than say how your belongings should be distributed. An effective will can unlock any number of obstacles that a family faces when their breadwinner dies. At its most basic, wills can indicate who should get what. But the important function of a will is to ensure that there is a comprehensive tally of every asset an individual may possess and where it can be found. Wills should capture details of assets and debt obligations, pension fund assets, life cover policies and how the individual wishes their estate to be distributed after paying off debt. The act of creating a will with a financial planner provides an important opportunity to consider how an individual could structure their estate in the most taxefficient manner possible.

Who needs a will?

Having a will is not just for people who are considered wealthy in the traditional sense. In the appendix to the will you can specify anything from artworks, jewellery and even livestock – pretty much anything of reasonable value. It’s often the case that the most contentious assets in a will are not the most valuable, but the ones that have the greatest sentiment or emotion attached to them. Putting these items in the appendix can help to avoid any discord among beneficiaries after the person’s death.

One of the most important functions of a will is that it allows a person to state who will be guardians for their minor children.

But having a will may not be good enough.

You have to update your will at least once a year and after any major change in assets, liabilities or family structure.

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?

WHAT ELSE HAVEN’T WE THOUGHT ABOUT THAT CAN PROVIDE SOME PROTECTION AT DEATH?

Employer benefits For most employed people, there will be policies that an individual may not previously have considered. This could include death benefits (typically in a lump-sum form), disability benefits (either as a lump-sum or an income stream), and funeral cover.

Accumulated retirement benefits may also be available to the dependants.

These benefits could be offered on an approved or an unapproved basis. If on an approved basis, then the benefits will be taxed on pay-out.

This may rely on the individual having nominated beneficiaries for their policies.

If these benefits are through the retirement fund, any payout will go through the trustees.

Even if there is a nomination form on file, distribution of benefits is at the discretion of trustees, based on determinations of

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financial and legal dependencies. They could ignore the content of the nomination form and qualify why they have done so in the resolution to effect payment.

Unconventional benefits Sometimes we have benefits available from unconventional places. One example of this is where the individual has a credit card that offers a small funeral benefit or death benefit. The amount is normally capped but is intended to be used towards repaying the balance on the account. Although a benefit of R5 000 may not make a difference for a higher-income earner, it can have a huge impact on the family of a low-income earner who can use this money for many purposes.

State-provided benefits If the individual cannot afford any benefits, does not have any employer-provided benefits or simply chooses not to take

out cover then it doesn’t mean that they are left without cover. Depending on the circumstances in which they die, the following State-provided benefits may come to their rescue: ■■ Workman’s compensation If the client passes away in a work related activity the dependants can claim certain benefits. The size and structure of the benefit that the family is entitled to depend on the composition of the family (spouse and child benefits). The person who incurs funeral expenses will also be entitled to claim within certain limits.

■■ UIF death benefit If the person was a contributing member to the Unemployment Insurance Fund (UIF), their dependants may claim death benefits from the fund. The size of the benefit will be affected by the length of time they have been contributing to the fund. Their spouse and any minor children must apply for

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Taking care of the admin around your death these benefits within six months after their death. The death benefit they receive will be the amount that they could have claimed if the deceased had become unemployed.

■■ Road Accident Fund (RAF) If the breadwinner of the family is killed in a motor vehicle accident, their dependants may claim from the RAF for the loss of support. The RAF’s liability to compensate the loss is limited to a prescribed cap. The RAF will also assist in the compensation for your funeral expenses if you are killed in a motor vehicle accident. The RAF’s liability to compensate the funeral costs is limited to the necessary actual costs to cremate or bury you.

The State has proposed the introduction of a social security scheme, and if successful, such a scheme will offer a death benefit (in addition to retirement benefits) to citizens that contribute to the scheme6.

6 National Treasury (2013).

Some of the softer issues that the family of the deceased need to consider are: what life cover policies exist so that they can submit claims; details of any medical aid policies in place; debit orders that they may have to switch; details of bank accounts; and so on. If families are not prepared, frozen bank accounts can make life very difficult for them.

In addition, are there any outstanding claims on insurance policies? If a claim on a dread disease, disability policy or some other policy has not been paid out before the individual’s death, their family needs to be informed.

Accessing such key pieces of information as passwords for computers or special accounts, the location

of keys or strongboxes, important communications for loved ones, and who to contact for what, like the cancellation of services that may no longer be needed, is vital.

For many people, the benefit paid out on the death of a family member will be the most money they have ever had access to at a single point. For this money to be used responsibly, they have to have proper planning in place for the use of the funds. An adviser or financial planner may have to sit with the family and discuss both their current income needs and their future aspirations. The money can then be invested in such a way that it meets their requirements.

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The final checklist The final step in protecting your financial well-being is to make sure you have all your important financial documents together, and that your family knows where they are:

Marriage certificate, divorce or maintenance contracts – If married with an antenuptial contract, a copy of this as well Certified copies of IDs, birth certificates, passports, driver’s licences (also try to keep the actual documents where your family can find them) Updated copies of insurance policies and schedules Car registration documents Latest copy of your will Details of bank accounts and banker Latest copies of policies for investment products and details of contact person Details of all consumer accounts (retail store accounts, TV subscriptions) Details of business entities Title deeds for properties Rates and taxes accounts or details of the body corporate or managing agents Details of your retirement fund Name, membership number and address of your medical aid Income tax reference number and office of registration

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i

Other useful information: ■■ Post box details ■■ Providers of household services (alarm system, electric fencing) ■■ Details of domestic help and gardeners

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ACCESS DENIED Banks cut off your access the moment they know you are dead. Keep your PINs, account log-in details and online passwords somewhere safe and secure where your family can find them if they ever need to.

Remember: Your family will need to renew insurance and medical aid policies that were under your name when you’re gone.

Concluding thoughts The fact of the matter is that we fail spectacularly at having these hard conversations about death and preparing for it – in spite of the fact that this is something we will all face, without exception. The key to getting this right will be in the quality of the consulting framework. These are not discussions that should be held in the heat of a sales pitch, nor should they rightly be linked to any form of compensation by commission. If anything, these conversations more rightly belong to the realm of financial planner, financial coach or financial therapist – all professionals who should be adept at helping individuals understand the trade-off issues, how incredibly sensitive these discussions can become and, most importantly, help individuals zero in on what matters most to them – given their broader financial reality.

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PART 3 Introduction

LOOKING AT THE NUMBERS

WHY THE DATA IS IMPORTANT

AND WHAT IT SAYS ABOUT SOUTH AFRICAN COMPANIES This section of Benefits Barometer focuses on the insights that we can derive from a variety of data sources, both internal and external, to answer the question of how effectively employers are delivering on employee well-being issues. By combining information obtained from reports companies make publicly available, and data derived from our Member WatchTM database, a picture is slowly beginning to emerge.

To lead in this section, Michael Rea from Integrated Reporting and Assurance Services (IRAS) provides a discussion to employers

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on what publicly available data can say about the level of focus a company exhibits on employee well-being. The data is telling, more for its absence than for its accuracy.

The data paints a picture of a corporate body that is only just beginning to appreciate why this data provides important insights, not just to potential investors, but potential employees, current employees, unions and the employers themselves, about how engaged the employer, is on managing this aspect of their employees lives.

Data from our Member WatchTM database provides an additional perspective for employers by producing sector comparisons of benefit structures, contribution rates, replacement ratios and more.

Ultimately the story for each sector is pulled together by our sector-specific benefits barometer readings. This helps readers identify what the critical issues are that may be impacting on each specific sector’s ability to translate employee benefits programmes into employee well-being.

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Introduction

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Chapter 1: Insights from the IRAS data

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Chapter 2: Sector case studies Sector 1: Construction sector Sector 2: Energy sector Sector 3: Fishing, forestry and agriculture sector Sector 4: Manufacturing sector Sector 5: Mining sector Sector 6: Personal services sector • Health industry • Education industry • Media and marketing industry • Security industry Sector 7: Professional and business services sector Sector 8: Public sector Sector 9: Retail, wholesale and hospitality sector • Retail and wholesale industry • Hospitality industry Sector 10: Transport and telecommunications sector • Transport industry • Telecommunications industry

197 202 210 218 226 234 242 244 250 256 262 268 276 284 286 292 298 300 306

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INSIGHTS FROM THE IRAS DATA ON HUMAN CAPITAL MANAGEMENT IN SOUTH AFRICAN COMPANIES1 Amid rising community discontent, worker solidarity, record levels of work stoppages due to strike action and an ever-increasing polarity between those who have skills and those without, companies can no longer claim to be ‘responsible’ based on traditional public relations spin. Making claims of ‘high levels of worker satisfaction’, based on surveys constructed around a central bias, fails to meet reasonable standards for research integrity. Stakeholders want, expect and ought to expect companies to be held accountable for decisions that affect society. Understanding how employers regard and manage their employees is an important component of that societal impact.

Stakeholders would be correct in demanding access to a transparent record of those factors that provide insights into how companies effectively manage their human capital.

For the past seven years IRAS has produced an annual review of the sustainability reporting of all of the companies listed on the Johannesburg Stock Exchange (JSE). Using elements of the King Code of Corporate Governance and the Global Reporting Initiative (GRI) Guidelines for

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Sustainability Reporting as the basis for assessing accountability, IRAS tests levels of transparency by data mining the public record for evidence of critical disclosures.

At base, IRAS investigates whether or not JSE-listed companies provide comparable quantitative data for a series of 84 Environmental, Social and Governance indicators. IRAS then compares the data, within and across industries, to assess the quality of the data presented. IRAS constructs a comparative analysis of the available data to draw conclusions about how well companies perform relative to their industry peers.

The puzzle pieces Indicators such as ‘number of employees’, ‘total revenue generated’ and ‘total income paid to employees’ are useful in understanding the size of the business, but in isolation they don’t help to determine whether one company is ‘better’ than the next. However, these (and other) indicators form the skeletal framework against which we can make a useful comparative analysis. For example, how do we determine ‘fair wages’? We can begin by comparing the ‘average compensation

1 The following report was produced by the research team from Integrated Reporting & Assurance Services (IRAS) and as such does not reflect the views of Alexander Forbes. Note that all data in this report was derived from information supplied by the companies themselves. Both the data and the IRAS report are all in the public domain.

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per employee’ between companies that all operate in the same industry – or go further and calculate the ‘average compensation per executive director’, and then the ‘income disparity ratio’ (the ratio of ‘average compensation per executive director’ to ‘average compensation per employee’) to determine if one company appears to be more, or less, ‘fair’ than its peers.

We should not underestimate the power of this data to tell a story to stakeholders. The presence of reliable comparable quantitative data within companies affects our collective understanding of four critical elements:

■■ Risk management ■■ Status as an employer of first choice and reducing employee turnover ■■ Cost reduction, and therefore greater shareholder returns ■■ Demonstrating an ability to remain ‘sustainable’ (or ‘a going concern’).

Whether or not companies have robust systematic procedures in place to identify, classify (or rank), and mitigate key risks, including those that result from the everchanging socio-political environment in which they operate, provides an important element to risk management. Demonstrating

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management commitment to developing employees is key to attracting critical skills in an increasingly competitive labour market.

Managing costs cuts across the full spectrum of considerations. Whether the issue is about managing electricity demand in an energy– constrained environment, or about reducing worker unrest resulting from perceptions of inadequate compensation, effective reporting is all about demonstrating that a company is not only ‘a going concern’, but of providing comfort to shareholders and insurers that the company has the structures in place to weather all but the most cataclysmic of events. Effectively, are they sustainable?

We should not underestimate the power of this data to tell a story to stakeholders. The presence of reliable comparable quantitative data within companies affects our collective understanding of a company’s ability to remain sustainable.

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Using data from two sectors to illustrate gaps in employee well-being We have used the case of two sectors: Metals & Mining and Retail to illustrate how we can use this publicly available information to develop preliminary peer group comparisons around the issues of how responsive companies and industries are to decisions that relate to human capital management. The indicators assessed are as follows: ■■ Absenteeism ■■ Employee turnover ■■ Income disparity ratio ■■ Lost-time injury frequency rate ■■ Number of employees trained ■■ Rand spend on employee training ■■ Percentage of employees who are permanent employees ■■ Lost days due to strike action The challenge is that companies are only now coming to grips with how to accurately report much of this information. This can throw into question the quality of some of the data discussed, in spite of the fact that it has all been collected out of public reports that have presumably been signed off by qualified assurance experts. As such, it’s not always clear whether the counterintuitive findings that may occasionally surface are a function of misreporting, misunderstanding the basis for reporting, or genuinely important conclusions that may have eluded our analysis in the past.

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Risk management

Cost reduction and greater shareholder returns

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Status as an employer of first choice and reducing employee turnover

Demonstrating an ability to remain ‘sustainable’

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THE EIGHT ISSUES IN MORE DETAIL Absenteeism

Absenteeism has long been viewed as an indicator of an organisation in – or out of – control. Both job type and industry can have an impact on absenteeism, so industry comparisons become important.

What constitutes ‘absenteeism’ can often be misunderstood. In many cases, companies will report sick leave, not understanding that people who are ‘absent without official leave’ and late arrivals are significant contributors to total lost production time. Systems are therefore structured around ‘official leave’, consisting sick leave, maternity leave, parental responsibility leave and study leave, but this results in a gross under-reporting of actual absenteeism.

In one case, a company reporting only sick leave learned that the true extent of absenteeism was greater than 6%, not the 2% they’d been reporting. Given that their total turnover was roughly R40 million per year, their total cost of uncalculated absenteeism was roughly R1.6 million, across an employee population of just over 200 people. With the average employee earning R600 per week, absenteeism was resulting in an additional payroll cost of 25.6% of total cost to company.

To address this, the company considered a quarterly bonus for employees.

If they could reduce total absenteeism to below 2%, every employee would receive R300, or 50% of a week’s wages (a total bonus pool of R240 000 per year). Did it make sense to pay employees extra to do what they should have already been doing? In this case the economics were irrefutable. The 4% regained production time translated into R1.6 million of revenue ‘purchased’ at a cost of R240 000.

The problem is fewer than 12% of all JSE-listed companies provide absenteeism data in their public reports. Either that means companies aren’t paying enough attention to this key statistic, or the data is not something companies want to advertise.

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Absenteesim

Comparing Metals & Mining with Retail

The Metals & Mining sector had the highest reported absenteeism rate at 7.2%. The Retail sector reported a much lower absenteeism rate of less than 1%. However, only seven (13.3%) of the 45 companies in the Metals & Mining sector provided comparable absenteeism data, while only 8.7% of Retail companies disclosed their rate, yet both sectors stand to lose significantly from lost productivity. Worse still is that within the supplied data, significant issues arise.

Some significant players in the mining industry reported absenteeism rates of as high as 17.1%. Either these rates have been miscalculated (a possibility as companies scurry to improve their reporting standards) or they signal potential productivity issues for the company – particularly if the absent employees possess critical skills, as they often do in mining.

In the Retail sector, only one company appears to have adequate controls in place to both manage absenteeism and report reasonable data. While 19 companies provide no absenteeism data, other companies submit data that is highly improbable. No company, regardless of how well they might manage absenteeism, can record only 1 685 lost days due to absenteeism across an employee population of 13 375 (roughly 3 million available person days).

There is a need for South African companies to be much more transparent about the cost of absenteeism within their workforces, noting the manner in which researchers can assign negative ‘proactive employer ratings’ for the absence of data, or the presence of data that calls into question the company’s ability to encourage employees to show up for work and be duly (and correctly) counted.

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Industry

Average reported absenteeism rates in various sectors

Rate of absenteeism

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What constitutes ‘absenteeism’, though, can often be misunderstood. In many cases, companies will report sick leave, not understanding that people who are ‘absent without official leave’ (or AWOL) and late arrivals are significant contributors to total lost production time.

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Employee turnover

Do companies pay enough attention to their employee turnover (ET) rates2?

Do they adequately interrogate causes of excessive ET, or make efforts to differentiate between ‘controllable’ and ‘uncontrollable’ causes, or, most importantly, attempt to find solutions to rectify those causes?

Employee turnover constitutes a key area of business risk, particularly with those companies requiring skills, or where continuity of service to customers is paramount to business success. More importantly though, ET can point to other deeper concerns that might be emerging for employees.

In 2008, a small garment manufacturing company in Cape Town identified a significant increase in ET and determined that one of the leading causes was garnishee orders, or emoluments attachment orders (EAOs). Employees had been given access to credit as a direct function of the National Credit Act (NCA), but were not financially literate enough to understand the significant risks and challenges of accepting retailers’ offers of ‘buy now, pay later’. Worse still, many had borrowed money from less than scrupulous lenders who were charging exorbitant interest rates.

Many workers simply applied their own solution to the problem by resigning from their place of employment as soon as the net sum of wages minus all garnishee orders decreased to below a level that was deemed a reasonable living wage. At a certain point, it no longer paid to go to work.

In some cases, companies opt to simply ignore garnishee orders, even when the EAOs were handed down as judgements in court proceedings. In other cases, such as the clothing manufacturer, the management team made an effort to provide debt awareness training to all employees, and debt counselling to those identified as ‘at risk’, ultimately observing a significant decrease in their ET rate. This decreased the direct and indirect costs of ET through recruitment, training, and lower productivity rates during the transition from old to new employees. Thus, the benefit of being a proactive employer with respect to ET is equally accrued to both employer and employee (for those willing to take the advice of the supplied debt counsellors).

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2 Employee turnover (ET) is defined as the number of employees who left the company during the year relative to the number at the end of the year.

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Employee turnover

Comparing Metals & Mining with Retail

In terms of the employee turnover data, the Retail sector (with 23 companies in the sector) scores relatively well with a reporting rate of 47.82%, while Metals & Mining (with 45 companies in the sector) scores rather poorly, with a rate of only 35.56%.

Given the higher proportion of unskilled labour working in the Retail sector, coupled with the sheer volume of employees (one company with more than 110 000 employees had a FY2013 ET rate of 17.3%), the challenge isn’t so much around cost of training as it is about the cost of constantly recruiting new employees to replace those who have left. For some well-known brands within the sector, ET rates are reported to be as high as 30.80% and 28.91%. Managing this metric provides some important insights into a company’s willingness to engage. The broad range of outcomes suggests that peer to peer, there appears to be considerable variability in attention being directed towards this metric.

By contrast, in the Metals & Mining sector, the highest ET number hovers around 17%, with an industry average of only 8.09%, well below the median of the Retail sector. This could be a function of the significant cost of recruitment and training in the sector, such that employees can be considered ‘less expendable’.

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Average reported turnover rate in disparity ratio

Employee turnover rate

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Employee turnover constitutes a key area of business risk, particularly with those companies requiring skills, or where continuity of service to customers is paramount to business success. More importantly though, ET can point to other deeper concerns that might be emerging for employees.

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Income disparity ratio In this age of continuous access to information, where anyone can access almost anything at any time, there are few societal concerns greater than income disparity. Economists like Thomas Picketty and Joseph Stiglitz have illuminated the growing discord resulting from too few people possessing more than the too many. In the United States of America, the Occupy Wall Street campaign was precipitated by a need to question how ‘the 99%’ can possess less collective wealth than those who make up the 1% of the population who own the rest.

For the past few years, annual general meetings (AGMs) around the world have been inundated by disgruntled stakeholders who argue that those at the top should not earn a disproportionate amount of the total wages paid by the company. In Switzerland, the government even attempted, but failed, to stop the practice of over-compensation by setting limits to what executives can earn. Yet with all of the public discontent, there are still too many company directors who can comfortably turn a blind eye to the anger welling up within their workforce.

Perhaps this is a case of ‘in the land of the blind, the one-eyed man is king’, where only the bravest of MDs are willing to squint when forced to observe how income disparity is affecting the overall sustainability of their companies.

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Chapter 1

Income disparity ratio

Comparing Metals & Mining with Retail

In 2014, the Metals & Mining (six companies) and Retail (five companies) sectors dominated the list of least equitable companies when comparing average executive director compensation (excluding gains on share options) to average employee compensation. In some of the least equitable companies, executive directors earned 188.34 times what their employees earned. This means that those at the top need only report to work for two days to earn what it would take the average worker to earn in an entire year of working.

As you might expect, the vast majority of JSE-listed companies provide data about how much everyone – executive directors and employees alike – earn. However, there remain several companies who manage to skirt around Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), and avoid disclosing compensation data. Roughly 9.5% of the 311 IRAS-reviewed companies did not disclose executive director compensation, while 5.95% failed to report employee compensation data. This further calls into question what those companies felt the need to hide.

In fairness though, high income disparity should not necessarily force one to conclude that a company isn’t equitable or fair. One of South Africa’s largest retailers, who have over 111 000 employees, has an income disparity ratio of 188.34, while a smaller retailer with only 4 000 employees has an income disparity ratio of only 15.64, roughly 12 times less than that of the larger retailer. A medium-sized retailer with an employee population of 23 538 reports an income disparity ratio of 75.86. This suggests that of the three retailers, the largest one is perhaps doing the best job of giving more people access to employment, a fundamental component of what constitutes being a responsible employer. It’s simple math, the more people you hire at the lowest possible wage level – replete with those deemed ‘unskilled’ – the greater the possibility that those at the top of the income pyramid will be earning an inordinate amount of money in comparison.

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Top 20 companies by income disparity ratio Company Name

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Sector

Total Workforce

Average Employee Compensation

Average Executive Compensation

Income Disparity Ratio (IDR)

IDR Inclusive of Gains

Shoprite

Retail

111 338

68 968

12 989 333

188.34

188.34

Aquarius Platinum

Metals & Mining

9 964

95 958

17 854 815

186.07

233.92

Liberty

Insurance

10 098

133 096

23 336 143

17533

346.96

Mr Price

Retail

18 104

93 791

10 506 333

112.02

254.91

Woolworths

Retail

26 955

171 990

17 037 000

99.06

134.96

African Rainbow Minerals

Metals & Mining

24 716

118 223

10 704 250

90.54

130.37

Anglo Gold Ashanti

Metals & Mining

66 434

230 749

20 891 172

90.54

158.17

Crookes Brothers

Food & Beverages

4 000

35 112

3 063 500

87.25

87.25

Lonmin

Metals & Mining

38 421

242 369

20 590 088

84.95

N/A

Adcorp

Services & Other

94 580

68 445

5 703 184

83.33

209.04

Anglo American plc

Metals & Mining

158 892

319 152

25 806 416

80.86

87.97

Bidvest

General Industry

106 371

156 562

12 481 600

79.72

131.04

Mondi

Energy & Natural Resources

37 400

372 821

28 066 142

75.28

156.34

York Timbers

Energy & Natural Resources

4 500

58 361

4 310 500

73.86

N/A

AfroCentric Investment

Health

3 500

278 078

20 253 818

72.84

72.84

Truworths

Retail

10 184

145 531

10 330 560

70.99

305.16

Assore

Metal & Mining

5 700

282 569

19 333 241

68.42

68.42

lllovo

Food & Beverages

31 937

74 303

5 035 750

67.77

78.39

Mvelaserve

Services & Other

30 778

85 959

5 498 333

63.96

75.41

Foschini

Retail

1 7898

114 443

7 274 867

63.56

113.57

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In the United States of America, the Occupy Wall Street campaign was precipitated by a need to question how ‘the 99%’ can possess less collective wealth than those who make up ‘the 1%’ of the population who own the rest.

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4

Lost-time Injury Frequency Rate (LTIFR) Nothing says, ‘We appreciate our employees’ more than an active commitment to keeping them alive.

Investing in safe machinery, adequate personal protective equipment, training, and adequate oversight and control procedures to ensure that every worker makes it home at the end of the day is tantamount to the ultimate demonstration of appreciation.

We can’t assume that any industry, whether it’s mining or construction, is inherently dangerous, and that employees must be willing to put their lives on the line in exchange for a pay cheque. Rather, the health and safety of each and every employee ought to be the first consideration whenever any company chooses where to operate, how to operate, and under what sociopolitical constraints. However, the data provided by some companies over the past few years tends to suggest that safety is far too frequently overlooked as a material concern.

Here is a particularly interesting example. In 2013, when IRAS launched its sustainability data analysis, many readers were shocked to learn that three of the country’s largest banking and financial services companies, FirstRand, Absa and Standard Bank, were more dangerous than some of the country’s largest mining companies. Even Sasol, which most people assume is a dangerous company based on highly publicised tragic events that occur less frequently than anyone estimates, reported a LTIFR roughly half that of the banks. Perhaps more astonishing was the fact that Nedbank even reported a fatality, or that Vodacom reported the tenth highest fatality injury frequency rate (FIFR), or the number of fatalities per 200 000 person hours worked (PHW).

The great challenge with LTIFR data is trying to determine whether the numbers reflect a genuine misunderstanding of how to calculate the data or whether something is genuinely amiss. Ironically, the data might also suggest that those industries that objectively appear to be more dangerous give far more attention to this aspect of employee protection than industries where risk of injury on the job should theoretically have a lower probability of occurring.

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Chapter 1

Lost-time Injury Frequency Rate (LTIFR)

Comparing Metals & Mining with Retail

In the mining industry, safety continues to create cause for concern, but not necessarily because mining companies are the most dangerous to work for. Only two mining companies report an LTIFR that places them within the top 10 most dangerous companies in South Africa. Three of the top 10 are actually from the Food & Beverages sector. That said, of the 45 JSE-listed Metals & Mining companies reviewed in 2014, only 31 companies reported an LTIFR. The problem? Mining actually is dangerous, regardless of what controls are in place, and therefore all mining companies should publicly disclose what they are doing to manage safety as a critical risk. The absence of such information must therefore call into question one of the two possibilities: ■■ The company does not have the policies, procedures, systems and/or controls in place to effectively manage safety risks ■■ The data is so bad that the company is unwilling to publicly disclose the information.

In either case, the problem is immensely troublesome, and investors – if not Government, unions and other key stakeholders – should be deeply concerned and should call the companies to account.

In the Retail sector, the problem is even more worrisome, as only three companies disclosed an LTIFR. All three reported an LTIFR of 0.00, which is highly improbable (if not impossible). With more than 300 000 people reportedly working for the 23 JSE-listed retailers – including people transporting goods from one location to another on South Africa’s notoriously dangerous roads, use soapy mops to clean already slick floors, or work on lighting and ventilation often perched at significant heights – we might conclude that the lack of injury data could mean that retailers aren’t committed to workplace safety.

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Top 20 companies by Lost-Time Injury Frequency Rate (LTIFR) Company Name

182

Industry

LTIFR

Distell

Food & Beverages

3.01

Central R& Gold

Metals & Mining

2.52

Sun International

Travel, Hotels & Leisure

2.05

Wesizwe Platinum

Metals & Mining

2.01

Grindrod

Transportation

1.98

Winhold

Services & Other

1.92

AFGRI

Food & Beverages

1.70

RCL Foods

Food & Beverages

1.67

Mvelaserve

Services & Other

1.61

Sekunjalo Investments

Financial Services

1.55

Northam Platinum

Metals & Mining

1.50

Hudaco Industries

Engineering & Support Services

1.47

Telkom

Information, Communications & Telecoms

1.42

Afrimat

Construction, Materials & Equipment

1.41

Reunert

Electronics & Electrical Equipment

1.40

Nampak

General Industry

1.23

Sibanye Gold

Metals & Mining

1.22

Astral Foods

Food & Beverages

1.22

Metair

General Industry

1.12

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We can’t assume that any sector, whether it’s mining or construction, is inherently dangerous, and that employees must be willing to put their lives on the line in exchange for a pay cheque. Rather, the health and safety of each and every employee ought to be the first consideration whenever any company chooses where to operate, how to operate, and under what socio-political constraints.

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5

Number of employees trained In almost every ranking of ‘Best Companies to Work For’ or ‘Most Responsible Companies’, investment in employees is deemed a fundamental ‘must have’.

More than wanting to believe in the company, or align to its mission, vision and values, employees want to know that their employer values their capabilities and will give them an opportunity to grow. New recruits, particularly those starting out on their first post-schooling ‘real job’, tend to assign more inherent value in training and development than in the size of their pay packet. They want to know that their future potential within the company will be identified and nurtured through company-sponsored training, and companies tend to understand that recruiting talent is relatively easy compared to retaining the most desirable of employees. As such, global leaders in employer surveys are quick to market their views on the importance of training.

In South Africa, where skills are scarce – and as a result valued at a premium – the ability to retain competence and promote from within is all the more critical to the ongoing sustainability of any company. As a result, it’s fair to assume that companies would ensure that they publicly disclose comparable data regarding the extent to which employees are trained. However, this doesn’t appear to be the case.

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Chapter 1

Number of employees trained

Comparing Metals & Mining with Retail

Of the 45 Metals & Mining companies, only 19 provide data on employees trained. Six reported obviously incorrect data, as their data suggests that they train more people than they employ.

In the Retail sector, the data is equally disappointing, with only 12 of the 22 companies providing training data. Of those, the data for three is obviously incorrect (or suggesting even greater problems like extremely unsustainable rates of employee turnover). Several large retailers reported training that exceeded the number of people they actually employ, with one company reporting training figures that represented eight times their reported employment numbers.

The problem here, based on IRAS’s experience as an assurance provider – or auditor of non-financial data – is that far too many companies over-report training data based on the application of an overly simplistic definition of ‘training’.

When we refer to ‘training’, or ‘training and development’, the issue is not whether or not every employee is inducted into the company with training on the company’s HR policies and procedures, but whether or not employees are given access to new skills. The count should not include the number of people participating in mandatory safety inductions, but rather those persons who have participated in specific training initiatives. This would include the number of people participating in anything that would create new ‘portable skills’.

In some cases, the opposite is true. Some companies are overly harsh in their definition of what training is, or is not, reporting that fewer than 5% of all employees have been afforded access to skills development. However, it is often the case that this data is a much fairer reflection of the extent to which the companies invest in comprehensive talent pooling and personalised skills development programming to develop and retain critical skills.

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Industry

Percentage of workforce that is given training in each sector

Percentage of workforce trained

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New recruits, particularly those starting out on their first post-schooling ‘real job’, tend to assign more inherent value in training and development than in the size of their pay packet. They want to know that their future potential within the company will be identified and nurtured through company-sponsored training.

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Rand spend on employee training Several years ago, a large JSE-listed mining company battled with consistently poor safety performance. Not only were employees regularly getting injured, but lives were lost at such an alarming rate that the company had to do something.

They had to place the blame on an appropriate set of shoulders. Unfortunately for the Group Health & Safety Manager, those shoulders were his, which should have meant that his access card would soon be recalled. Somehow though, his career was miraculously saved by a request to attend a company-sponsored PhD programme in the United States. Rather than pay him severance, the company chose to pay relocation costs for him and his family, to pay his salary for no fewer than four years, and to pay the substantial tuition fees demanded by an American university.

What was the benefit to the company? They were able to report all associated costs as ‘skills development spend’.

This is surely not what the government intended as skills development for South Africa as set out in the Mining Charter, the Skills Development Act and the Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice set out by the Department of Trade and Industry (dti). Rather, this is an abuse of otherwise extremely useful legislation. The above example is relatively rare, but it nevertheless represents one such case of abuse.

Nonetheless, the rand value of training spend can be an extremely useful benchmark for determining which companies are ‘more responsible’ than others, as well as which ones have sufficiently adequate financial controls in place to publicly report how much money they spend on training.

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Chapter 1

Rand spend on employee training

Comparing Metals & Mining with Retail

Of the 45 Metals & Mining companies, 30 companies provide training spend data.

Unfortunately though, the data reported for many of the 30 companies is either incomplete or incorrect, such that the data for only 17 companies can be used to calculate a ‘rands per person trained’ value. The suggested value for 7 of the 17 exceeds R60 000 per person trained. Only 10 companies reported within a reasonable range of R1 700 to R15 000 per person trained.

Once again, the data for the Retail sector is less than impressive. Of the 23 companies in the sector, only 12 provide training spend data. Of this, only 8 provided enough data to calculate a ‘rands per person trained’ value, with two companies reporting obviously incorrect information.

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Percentage of employees who are permanently employed In recent years, much has been made of the fight for and against the use of labour brokers. On the one hand, companies argue that local legislation makes the hiring of permanent employees an unbearable risk, with employees controlling a disproportionate advantage in the balance of power needed to hire and fire people who ought, or ought not, to be given access to employment.

At the same time, our workforce is regarded as one of the least efficient in the world, severely hindering our rankings in the World Economic Forum’s Global Competitiveness Index, where South Africa’s labour market efficiency is ranked 113th out of 144 countries in the latest report3.

On the other hand, unions and other stakeholders argue that the corporate sector is shirking its responsibility to society by opting to recruit people on a temporary, rather than permanent, basis. Restricting the length of contract, or in many cases, limiting the number of hours someone can work in a week (which classifies them as ‘part-time’ rather than ‘full-time’ employees), permits companies to limit employee access to much-needed benefits. Labour brokers – or companies that act as an intermediary to recruit temporary workers on behalf of a company fearing the risks associated with hiring people on a permanent, full-time basis – have therefore become a blessing for larger corporates, and the bane of everyone else’s existence, including the government.

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3 World Economic Forum (2014)

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7

Chapter 1

Percentage of employees who are permanently employed

Comparing Metals & Mining with Retail

As per the data reviewed for IRAS’s 2014 research report, 29 of the 45 Metals & Mining companies (64.4%), and 17 of the 23 Retail companies (73.9%), recognised the significance of disclosing data about the percentage of employees who are deemed ‘permanent’, while six Metals & Mining companies and one Retail company didn’t even report how many people they employed (let alone ‘% permanent’).

Once again, the data suggests that while most companies understand the importance of providing data, the quality of what they place in the public domain remains questionable.

For example, it’s highly improbable that one mining company is able to operate with only 8.87% permanent staff, unless contract employees are somehow considered ‘employees’ rather than reported separately. At the same time, it’s highly improbable that four retailers can report a labour force based exclusively on 100% permanent staff.

The issue is one of managing the ‘social licence to operate’: particularly when unions have made it clear to all concerned that they will not tolerate any practice that even suggests a two-tiered employment system. Whether it’s the string of endless strikes delaying Eskom’s Medupi and Kusile power station projects, or the five-month-long platinum strike that devastated platinum belt communities in 2014, unions have put on record an unwillingness to allow companies to underestimate the need for workers’ rights (be those rights real or perceived). Companies need to be much clearer about what constitutes a ‘permanent employee’, and be clear when presenting labour statistics to the public. If there’s a genuine need for temporary labour, inclusive of labour-broking services, then they must be clear in their description of where benefits accrued to permanent employees do not substantially differ from those of temporary workers.

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Percentage of workforce that are permanent Metals and Mining sector

192

Retail sector

DRD Gold

99,12%

Gold Fields

63,33%

Truworths

100,00%

BSi Steel

96,24%

Atlatsa Resources

60,31%

African & Overseas Enterprises

100,00%

Anglo American Platinum

94,00%

ArcelorMittal South Africa

60,09%

Lewis

100,00%

Sibanye Gold

93,00%

Afican Rainbow Minerals

55,56%

Curro Holdings

100,00%

Evraz Highveld Steel & Vanadium

88,93%

Kumba Iron Ore

46,57%

Italtile

99,86%

Harmony Gold

83,88%

Merafe Resources

40,69%

Rex Trueform

99,24%

Pan African Resources plc

75,54%

Royal Bafokeng Platinum

36,98%

Cashbuild

94,19%

Impala Platinum

74,31%

Coal of Africa

29,93%

Clicks Group

93,83%

Lonmin

73,86%

Rockwell Diamonds

29,32%

Woolworths

87,32%

Aquarius Platinum

72,87%

Sephaku

27,98%

Shoprite

86,26%

AngloGold Ashanti

72,00%

Keaton Energy

26,86%

JD Group

85,78%

Trans Hex

67,64%

Wesizwe Platinum

8,87%

The Foschini Group

74,73%

Infrasors

66,07%

Mr. Price Group

73,06%

Petmin

65,00%

Holdsport

67,45%

Northam Platinum

63,87%

ADvTECH

66,00%

Anglo American plc

63,61%

MassMart Holdings

62,42%

Assore

63,48%

Verimark Holdings

24,72%

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By restricting the length of contract, or in many cases, limiting the number of hours someone can work in a week (which classifies them as ‘part-time’ rather than ‘full-time’ employees), permits companies to limit employee access to much-needed benefits.

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Lost days due to strike action Perhaps the most startling of all observations made in 2014 was the fact that only 17 of 311 companies, across all sectors, provided data pertaining to the number of days lost due to strike action. This in a country declared in an August 2014 article published by Engineering Weekly as ‘one of the world’s most violent, strike-prone countries4.’

Citing research by John Brand of Bowman Gilfillan law firm, the article declared that South Africa lost more than 17 million person hours due to strike action – of which more than 16 million were in the mining sector – as a result of 99 strikes, 45 of which were unprotected. Between 2007 and 2011, there was an average of 65 strikes per year.

Using the international standard of measuring the number of working days lost due to industrial action per 1 000 employees (or two million person hours worked), Brand reported that Denmark, France and Belgium registered the highest work stoppage rates, with a respective 159.4, 132 and 78.9 yearly average days lost between 2005 and 2009. The global yearly average for the same period was 30.6 average days. However, for every 1 000 working South Africans, from the period 2006 to 2011, about 507 working days were lost a year due to strikes. This is 16.5 times more than the global average, and three times the rate of France.

Perhaps the cynical will assert that the reason for such a deplorable rate of reporting the number of days lost due to strike action is that nobody wants shareholders to back away for fear of investing in a lost cause. However, companies less affected by strike action ought to be much bolder in their reporting in this area. For example, Royal Bafokeng Platinum (RBPlats) reported in their most recent annual report (to be reviewed as part of IRAS’s 2015 research report) that while their largest platinum mining peers all suffered enormous losses during the 2014 platinum strike, RBPlats didn’t lose a single day, suggesting that genuine empowerment reflects a critical component of the company’s ongoing sustainability strategy.

Ultimately, all JSE-listed companies ought to recognise that the attraction of foreign investment is predicated on their ability to demonstrate publicly that adequate controls are in place to manage critical risks, one of which is being painted with a common reputational brush. Where South Africa is viewed as non-competitive from a labour market perspective, the only way to combat ‘guilt by association’ is to ensure that companies make available accurate and reliable data.

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Chapter 1

Top 20 companies highest strike days lost rate Number of employees

Days lost to strikes

Company

Sector

Petmin

Metals & Mining

633

13 821

9.6%

Northam Platinum

Metals & Mining

7 077

130 525

8.1%

Merafe Resources

Metals & Mining

1 295

13 986

4.7%

Metair

General Industry

6 457

65 272

4.4%

Anglo American Platinum

Metals & Mining

47 032

269 160

2.5%

Group Five

Construction, Materials & Equipment

4 367

18 348

1.8%

Sibanye Gold

Metals & Mining

33 773

108 822

1.4%

Denel

Government & Parastatals

3 437

10 000

1.3%

WBHO

Construction, Material & Equipment

11 916

32 888

1.2%

Clover Industries

Food & Beverages

6 533

11 118

0.6%

Tongaat Hulett

Food & Beverages

24 324

26 066

0.5%

Winhold

Services & Other

786

112

0.1%

Barloword

General Industry

19 692

1 393

0.003%

Sekunjalo Investments

Financial Services

610

2

0.00%

Pioneer Foods

Food & Beverages

12 268

40

0.00%

Telkom

Information, Communications & Telecoms

21 209

56

0.00%

Sasol

Energy & Natural Resources

35 424

35

0.00%

Strike rate

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Concluding thoughts In the matter of ‘wellness’, the above discourse is but a sample of how we can use comparable quantitative data to assert whether companies are – or are not – acting in a manner that can be deemed ‘responsible’ or ‘proactive’ from no less than a human capital perspective.

Without touching on country-specific indicators like whether or not companies give special consideration to historically disadvantaged South Africans (or HDSA candidates or suppliers), or on environmental or societal issues such as corporate social investment, the above demonstrates how researchers who evaluate ‘responsibility’ ought to look for information that they can use to compare companies with one another. In the same manner, companies ought to view their annual reports (and supporting online content) as an opportunity to demonstrate that they are not only ‘a going concern’ as from the last day of the previous reporting period, but that they have given due consideration to what it takes for companies to be regarded as both ‘responsible’ and ‘sustainable’.

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SECTOR CASE STUDIES 197

PART 3 Chapter 2

SECTOR CASE STUDIES

SUMMARY

We investigate ten sectors. In each sector we summarise the employee benefits offered and how well they meet the needs of the people in each sector. We also include the benefits barometer for each sector, drawing on findings from our Member Watch™ data set, to highlight major areas of concern.

The Member Watch™ data As a research team, we are often asked to provide statistics on the common benefit structures in each sector. For Benefits Barometer 2015 we decided to include many more summary statistics to aid analysis in each sector and comparison across sectors. This year we include a demographic profile of each sector (number of employees, gender split, average pensionable salary, average age, etc) to contextualise the main discussion in each chapter: a discussion of the current risk and retirement benefit structures and how well they meet the needs of employees in these sectors.

The economic commentary provided for each sector was written up with the assistance of the Bureau of Economic Research. This enabled us to comment on the confidence levels of sector participants and also to provide an outlook for productivity, employment and other things, in some sectors.

Our analysis often considers a member well before they reach retirement since we still have a chance to intervene and correct any shortfalls. This year, however, we include

198

statistics on the average replacement ratio achieved by retirees in each sector to highlight how dire the situation is.

Next we introduce the Alexander Forbes benefits barometer for each sector.

In Benefits Barometer 2013, we provided a comprehensive overview of the current employee benefits environment in South Africa. We presented 11 issues that we believed captured the essence of the challenges faced by South African employers and we investigated the impact of these issues on employee benefits and ultimately the individual.

Some of these issues relate to structural factors that trustees and employers need to be aware of because they often explain why outcomes might be considerably lower than expected. Issues relating to pensionable pay and variability in salary inflation would be cases in point. Other issues relate to employees in terms of decisions or preferences that they exhibit that can impact

on outcomes: choices, unhealthy finances, absenteeism and presenteeism, incapacity, young workers and longevity are all good examples. Some issues deal with who should be in these funds and whether the benefit to them is adequate or appropriate: temporary workers, informal workers, low-income earners and incentives, and bricks and books and beyond. Finally, there were two issues that needed addressing that dealt with factors that were potentially exogenous to the fund member: mass exits and strikes.

In Benefits Barometer 2014 we split absenteeism and incapacity, added the concept of presenteeism to the absenteeism discussion, split temporary and informal workers, changed our coverage of high salary inflation to variability in salary inflation, and added high employee turnover as an issue we had previously not included in 2013.

We also absorbed the incentives issue into low-income earners and incentives, as both issues looked at concerns for this group: what benefits were appropriate, and what incentives would motivate them.

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In the appendix to this book we include a table that provides a high level description of each issue but we urge you to look at the full discussion in previous editions of the book.

We also considered the data of the Integrated Reporting and Assurance Services (IRAS) when putting together our Barometers in each chapter. The data set provided a comprehensive look at all of the factors affecting the financials of a company.

We consider the work of IRAS more fully in part 3: chapter 1.

Our final addition to each chapter is a graph summarising how prevalent each risk benefit is in the sector. Common benefits include lump-sum death benefits, income disability policies and funeral cover. An employer that is interested in at least matching the offering of their competitors should find this graph useful. An employer who is looking to become an employer of choice should consider what they can offer beyond the commonly offered benefits mentioned.

A broader discussion on this topic was included in Benefits Barometer 20141.

Chapter 2

We are asked by consultants how we have structured our sectors for this analysis and where a client of theirs would fall. We provide a summary of how the classification has been done.

Note that we do not include charitable or religious organisations, holding companies or diversified conglomerates in our analysis.

How to interpret the Alexander Forbes Benefits Barometer

HIGH PRIORITY These issues are significant because they will have a large impact if they happen, are very likely to happen or both.

1 Benefits Barometer 2014, Part I Chapter 1

BE

NEF

ITS B A R O MET

ER

MEDIUM PRIORITY These issues are important but are less likely to happen, will have a smaller impact than high priority issues or both.

PRIORITY

HIGH

H PRIORITY HIG

H PRIORITY HIG

ER

PRIORITY

ITS B A R O MET

LOW

NEF

PRIORITY LOW

PRIORITY LOW

BE

DIUM PRIORITY ME

DIUM PRIORITY ME

DIUM PRIORITY ME

BE

NEF

ITS B AR O MET

ER

LOW PRIORITY These issues are unlikely to happen or will have a small impact or both.

199

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SECTOR CASE STUDIES

Aggregate Data from Member Watch 2014TM

Male

Female

54.9%

45.1%

Average pensionable salary

R223 156

Average member contribution towards retirement funding

Average employer contribution towards retirement funding

+

4.92% Average projected replacement ratios of active members

Exit rate

Average normal retirement age

200

Average fund credit of active members

-

Average expense allocation rate

0.97%

=

10.46%

42.7% 7.8% 63.4

Average replacement ratio achieved by retirees

Preservation rate (excludes Section 14 transfers)

Average actual retirement age

R293 460 Total average contribution rate towards retirement funding

14.37%

30.8% 16.21% 61.5

PART 3

SECTOR CASE STUDIES

Chapter 2

How do we classify the sectors?

Construction

Personal services

Companies involved in building and construction of residential and commercial buildings as well as infrastructure projects. Examples: Aveng-Grinaker and Stefanutti.

This sector includes four industries: health, education, media and marketing, and security. This is a very labour-intensive sector that involves supplying services to consumers. Producers of equipment and suppliers of services intended solely for use by the industries mentioned have also been included.

Examples: Life Healthcare, Primedia, Chubb and ADvTECH.

Energy Companies involved in the extraction, refinement and supply of oil and gas products throughout the country.

Water services and energy utility companies have also been included. Examples: Engen Petroleum and Eskom Holdings.

Fishing, forestry and agriculture Companies involved in farming of crops, fishing and various stages of production and supply of paper products. Food producers in this sector are farmers involved in the earliest stage of food production.

Other food and beverage producers involved in the intermediate stages of food production and distribution are included in the manufacturing sector. Examples: Mondi, Afgri, Oceana Group and Tongaat Hulett.

Professional and business services This sector includes financial services providers (like banks and insurance companies), legal and accounting firms, engineering and recruitment consultancies and the real estate industry.

Examples: Bowman Gilfillan, Alexander Forbes, Redefine and Adcorp.

Public sector This sector includes various government municipalities, departments and government-funded industries, but not parastatals.

Manufacturing This includes various industries, namely chemical and plastics, electrical and components, technological products, food and beverages, metals, motor vehicles, pharmaceuticals and textiles. Companies are involved in the production of consumer durables and non-durables from raw materials and chemicals.

Examples: Consol, Tiger Brands, SA Breweries and Highveld Steel and Vanadium Corp.

Mining Companies involved in the extraction and supply of basic raw materials throughout the economy, including coal, steel and precious metals. Companies providing maintenance and technological services solely to mines have also been included. Examples: Impala Platinum Holdings and Xstrata.

Retail, wholesale and hospitality Companies include food, drug and clothing retailers and companies in the travel and leisure industries. This group also includes hotels and restaurants. Examples: Clicks Group, Truworths and Tsogo Sun Holdings.

Transport and telecommunications

Telecommunications companies are providers of fixed-line and mobile phone services, while transport companies are involved in both commercial logistics and distribution of consumer goods and passenger transport. Examples: Cell C, Sentech, ACSA and Unitrans Supply Chain Solutions.

201

Demographic profile

20 292

Number of employees in the database

Average pensionable salary

R209 079 Average age 37.5

years

Male 76.9% Female 21.3% Average normal retirement age

63.6 years

Average actual retirement age

61.9 years

Average exit rate Average preservation rate

1

16.1% 5.2%

Projected replacement ratio for a member aged 25

CONSTRUCTION SECTOR

56% Source: Member Watch™ 2014 data set

PART 3

CONSTRUCTION

Introduction

Economic commentary

Since the 2010 Soccer World Cup, the construction sector has experienced a decline in big-ticket infrastructure work and falling margins1. The South African government has made a concerted effort to increase the number of infrastructure projects in the country by establishing the National Infrastructure Plan, under which the State plans to spend around R4.3 trillion on new and upgraded infrastructure across the transport, energy, water, sanitation, health and education industries over the next few years. This should help to bolster the sector in future2.

Over the course of 2014, the construction sector’s contribution towards the growth in real gross domestic product (GDP) was limited, mainly as a result of the tough conditions companies faced over the period. Both residential and non-residential contractors experienced a sharp fall in building activity and overall profitability, leading to a decline in business confidence among market participants3.

The recent slowdown in the sector has led to some firms focusing their attention overseas.

This has implications for the South African unemployment rate, since the construction sector is one of the largest employers of low and unskilled labour in the country.

1 Oxford Business Group (2014) 2 Oxford Business Group (2014) 3 Bureau for Economic Research (2015)

Chapter 2

CONSTRUCTION SECTOR GDP contribution (2014 prices)

R514 472 million

% contribution to GDP

3.8%

Real increase in GDP 2013–2014

2.9%

Source: Statistics South Africa (2015)

The Bureau for Economic Research (BER) building cost index showed a rise in tender prices of 9.6% in 2014, from 7.3% in 2013.

This is well above inflation and suggests that profit margins within the industry are widening. Despite these results, a survey of market participants carried out by the BER showed that market participants remain negative in their outlook for growth in the number of people to be employed, the business conditions, and the number of projects available.

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Benefits Barometer While there’s significant variation, the majority of employees in the construction sector are low-income earners.

might choose not to rehabilitate workers, opting instead for replacement, exacerbating the problems of turnover in this sector.

Employment is seasonal and cyclical, which results in high employee turnover.

Employees continue to place importance on bricks and books, which ensures the livelihood of low-income earners who may not otherwise be able to afford accommodation and the other in-kind benefits they receive.

Incapacity remains a high-priority issue. As a result of time constraints, due to project deadlines and the costs incurred, employers

HIGH PRIORITY ■ Bricks and books and beyond ■ High employee turnover ■ Incapacity ■ Low-income earners and incentives

204

MEDIUM PRIORITY ■ Longevity ■ Absenteeism and presenteeism ■ Mass exits ■ Unhealthy finances ■ Strikes ■ Young workers ■ Temporary workers ■ Informal workers

LOW PRIORITY ■ Choice ■ Variability in salary inflation ■ Pensionable pay

PART 3

CONSTRUCTION

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

13.9%

Member contribution towards retirement savings as a percentage of pensionable pay

3.5%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.4%

Contribution to retirement funding costs as a percentage of pensionable pay

1.1%

Contribution to death benefits as a percentage of pensionable pay

2.0%

Contribution to disability benefits as a percentage of pensionable pay

1.0%

Average replacement ratio achieved by retirees

11.6%

Average fund credit of active members

R179Â 709

Source: Member Watch™ 2014 data set

The average contribution rate towards retirement savings is 13.9%. This has contributed to a projected replacement ratio of 56% for a new fund member aged 25, one of the lowest projected outcomes across all sectors. The construction sector is very cyclical and many workers will change companies and provinces in search of work.

A low level of preservation upon changing jobs also contributes to the low expected replacement ratios.

Given the low salaries in this sector, members are unlikely to retire with large fund credits.

The average fund credit of active members is about R179 000 and few members will reach retirement with fund credits over R1 million, resulting in an actual average replacement ratio at retirement of just 11.6%.

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Breakdown of benefits offered The construction sector is characterised by low-income earners and high-risk work environments that can result in a number of disability and death claims. Around 92.5% of employers in the sector offer a lump-sum death benefit. In Benefits Barometer 2014 we argued that disability income benefits would be most suitable to meet the needs of these workers. The majority of employers in this sector (71.7%) offer disability income benefits, but only 5.7% of employers in our database offer permanent disability benefits.

Funeral cover may be seen as an important source of protection for low-income earners and is offered by 67.9% of employers, with a small number of employers offering other types of protection.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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5×

Chapter 2

5 times fund salary – the death benefit offered by 51% of employers in this sector.

Death benefit analysis On average, 2% of pensionable salary is spent on death benefits and the average death benefit in this sector was 3.6 times. A further 0.9% of pensionable salary goes towards disability benefits. As mentioned in Benefits Barometer 2014, the construction sector has higher insurance costs per rand of cover due to higher claim rates.

Around 92.5% of employers in this sector offer death benefits to their employees.

A total of 51% of employers offer a benefit of five times pensionable salary, while a further 25% offer a benefit of four times pensionable salary. Other employers offer benefits that are higher or lower than this.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. Given the current death benefit structure, only 24.1% of the life cover need for members is met.

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CONSTRUCTION

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

High turnover and low preservation mean that only 11.7% of the membership can expect a replacement ratio in excess of 60%. Around 90% of members aged 55 and older can expect a replacement ratio of 30% or less at retirement.

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Chapter 2

Few members will reach retirement with fund credits over R1 million, resulting in an actual average replacement ratio at retirement of just 11.6%.

209

Demographic profile

11 945

Number of employees in the database

Average pensionable salary

R433 788 Average age 41.5

years

Male 66.8% Female 33.2% Average normal retirement age

63.4 years

Average actual retirement age

61.6 years

8.6% Average preservation rate 16.4% Average exit rate

2

Projected replacement ratio for a member aged 25

ENERGY SECTOR

57% Source: Member Watch™ 2014 data set

PART 3

ENERGY

Introduction

Economic commentary

South Africa is the fifth most energy-intensive economy in the world, accounting for around 30% of total power consumption in Africa1.

But the country’s reliance on coal-fired energy plants has meant that the energy grid has been under severe pressure since 2008, with rolling blackouts predicted to continue for at least another two to three years.

Although the energy sector only contributes 2.5% towards South Africa’s GDP, it forms a key part of the country’s economic growth and development. Over 2014, the energy sector’s contribution towards GDP declined.

South Africa has the continent’s most developed energy sector in terms of capacity and load management, but if it is to stoke headline growth, major investment will be needed throughout the value chain, as will improved cost-recovery tariffs and clear regulatory goals4.

Blackouts in the country will propel the development of alternative energy sources2, and most likely the privatisation of energy supply in the country. Environmental issues and concerns play a major role and have also domestically delayed exploration initiatives. However, the Energy Information Administration predicts that natural gas and renewables will drive half of the growth in Africa’s electricity generation up to 20403.

1 Oxford Business Group (2014) 2 See the discussion on this topic in Benefits Barometer 2014 3 Energy Information Administration (2015) 4 Oxford Business Group (2014)

Chapter 2

ENERGY SECTOR GDP contribution (2014 prices)

R337 306.8 million

% contribution to GDP

2.5%

Real increase in GDP 2013–2014

-0.9%

Source: Statistics South Africa (2015)

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Benefits Barometer Absenteeism remains a high priority issue within the energy sector, although this is more pertinent among the blue collar workforce. The sector, which requires scarce and specialised skills, tends to remunerate its employees well and as a result has the highest average salary across all the sectors5.

High salary inflation is therefore a concern for members in this sector because they can accelerate an individual’s pre-retirement

HIGH PRIORITY ■ Absenteeism and presenteeism ■ Choice ■ Variability in salary inflation ■ Incapacity

212

MEDIUM PRIORITY ■ Bricks and books and beyond ■ Mass exits ■ Strikes ■ Unhealthy finances

5 Based on the funds included in the Member Watch™ 2014 data set

lifestyle at a rate that growth in retirement savings cannot keep pace with.

The delicate balance between offering employees the flexibility to make their own decisions, but steering clear of unsuitable options, has been a matter of priority for many of the large defined contribution funds operating in the energy sector.

LOW PRIORITY ■ High employee turnover ■ Longevity ■ Low-income earners and incentives ■ Pensionable pay ■ Temporary workers ■ Young workers ■ Informal workers

PART 3

ENERGY

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.2%

Member contribution towards retirement savings as a percentage of pensionable pay

3.5%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.7%

Contribution to retirement funding costs as a percentage of pensionable pay

0.9%

Contribution to death benefits as a percentage of pensionable pay

1.2%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

27.2%

Average fund credit of active members

R664 134

Source: Member Watch™ 2014 data set

On average, the contribution towards retirement savings is 14.2%, up from the average contribution rate of 12.8% reported in Benefits Barometer 2014. The average normal retirement age for employees in this sector was 63.4 and, as a result of the higher contribution rate, the projected replacement ratio for a new fund member aged 25 is 57% (51.3% in Benefits Barometer 2014).

Employees in this sector have the highest average salaries out of all the sectors covered in the Member Watch™ database. This leads to relatively high average fund credits for active members but this fails to translate into good outcomes at retirement, with retirees achieving an average replacement ratio of 27.2% on retirement.

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ENERGY

Breakdown of benefits offered The standard risk benefit offering for employers in this sector seems to consist of lump-sum death benefit cover, disability income cover and funeral cover, to a lesser extent. Given that the subset of workers considered are mainly medium- to high-income earning office workers, a greater emphasis is placed on income disability benefits as opposed to total or permanent disability benefits, with only a small percentage of employers offer this benefit.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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3Ă—

Chapter 2

3 times fund salary – the death benefit offered by 30.9% of employers in this sector.

Death benefit analysis The majority of employers in this sector offer lump-sum death benefits on an approved basis, with only 5.9% of employers offering death benefits on an unapproved basis. The average insured death benefit as a multiple of pensionable pay is 3.7 times salary, with 30.9% of employers offering a benefit of three times pensionable pay. The remaining employers offer benefits below this level. Around 1.2% of pensionable pay is dedicated to death benefits.

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ENERGY

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Despite high salaries and high average fund credits many employees have projected replacement ratios below 60%. Only 3% of people above the age of 55 can expect a replacement ratio of 75% or higher at retirement.

216

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ENERGY

Chapter 2

Employees in this sector have the highest average salaries out of all the sectors.This fails to translate into good outcomes at retirement, with retirees achieving an average replacement ratio of 27.2% on retirement.

217

Demographic profile

14 764

Number of employees in the database

Average pensionable salary

R139 541 Average age 40.5

years

Male 70.6% Female 29.4% Average normal retirement age

63.4 years

Average actual retirement age Average exit rate Average preservation rate

3

FISHING, FORESTRY AND AGRICULTURE SECTOR

61 years

14.4% 11.4%

Projected replacement ratio for a member aged 25

65% Source: Member Watch™ 2014 data set

PART 3

FISHING, FORESTRY AND AGRICULTURE

Introduction

Economic commentary

Agriculture accounts for 88% of output in the sector, forestry for 9% and fishing 3%.

Despite the decline in the contribution to GDP of this sector over the past decade or so, the fishing, forestry and agriculture sector continues to be a major employer, a strong driving force behind economic growth, and is key to the achievement of Government’s longterm strategic aims as set out in the National Development Plan (NDP).

Over 2014, this sector contributed 2.6% towards GDP, much lower than the contribution of more than 10% in the 1960s.

According to the DAFF, the decline is primarily the result of the expansion of the rest of the economy over the past few decades as opposed to a decline in the sector itself.

Agricultural production by volume rose by 2.7% in 20131, mainly attributed to a 4% increase in poultry meat and a 2.3% rise in field crop production, which includes sorghum and soya beans. Prices for South African agricultural products rose by 4% on average during 2013, but this was offset by a 9% rise in the price of farming inputs over the year2.

The sector is undergoing key structural changes. The government is driving the land reform process and promoting small-scale farming and job creation alongside the vibrant commercial sector. While lower oil prices have brought some relief, other cost pressures and subdued demand conditions (and commodity prices) are putting profit margins under pressure, which highlights the importance of scale production.

Chapter 2

FISHING, FORESTRY AND AGRICULTURE SECTOR GDP contribution (2014 prices)

R356 688.3 million

% contribution to GDP

2.6%

Real increase in GDP 2013–2014

5.6%

Source: Statistics South Africa (2015)

The fishing industry continues to be challenged by environmental and social sustainability. The Department of Agriculture, Fishing and Forestry (DAFF) has issued quotas and fishing rights allocations to address these issues. However, the restrictions on fishing only make the challenges, which the low-income earners in this industry face, worse.

1 Department of Agriculture, Fishing and Forestry (2014) 2 Oxford Business Group (2014)

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FISHING, FORESTRY AND AGRICULTURE

Benefits Barometer Employees in this sector earn particularly low incomes. Even with assistance, most farm workers struggle to make ends meet. Many permanent employees, particularly on farms, enjoy several additional benefits which are not regarded as pensionable, but make up a significant portion of their yearly earnings. Farm workers have a heavily subsidised standard of living (farm schools, subsidised housing and municipal services) while they are employed, which is not maintained after retirement.

There are generally low levels of pensionable pay in this industry. In addition, when fishing is sparse, dipping into retirement savings is seen as a quick fix for the current lack of income. Individuals often resign to gain access to their pensions.

The use of seasonal workers, at harvest time or when certain large quotas are caught, creates

Those affected by incapacity, due to either injury or ill-health, often live in outlying or remote areas without access to transport.

HIGH PRIORITY

MEDIUM PRIORITY

■ Absenteeism and presenteeism ■ Bricks and books and beyond ■ Incapacity ■ Low-income earners and incentives ■ Pensionable pay ■ Strikes ■ Temporary workers ■ Informal workers 220

a large pool of workers who are excluded from any formal retirement funding arrangement.

They also have no access to risk benefits.

■ High employee turnover ■ Unhealthy finances

When transport is available, the afflicted member is either unable to travel due to the level of incapacity or lack of funds. This is particularly relevant when a benefit is subject to annual review and possible suspension if the member is unable to arrive for an examination or submit the required medical evidence. Further, given the low education levels, there is minimal scope for disability recipients to be retrained, reskilled or redeployed should they be deemed to have recovered in terms of the policy conditions.

LOW PRIORITY ■ Choice ■ Variability in salary inflation ■ Longevity ■ Mass exits ■ Young workers

PART 3

FISHING, FORESTRY AND AGRICULTURE

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

16.1%

Member contribution towards retirement savings as a percentage of pensionable pay

3.9%

Employer contribution towards retirement savings as a percentage of pensionable pay

12.1%

Contribution to retirement funding costs as a percentage of pensionable pay

1.2%

Contribution to death benefits as a percentage of pensionable pay

1.7%

Contribution to disability benefits as a percentage of pensionable pay

1%

Average replacement ratio achieved by retirees

24.5%

Average fund credit of active members

R199Â 826

Source: Member Watch™ 2014 data set

In previous editions of Benefits Barometer we reported that the fishing, forestry and agriculture sector had the highest contribution of all the sectors reported on.

This year only the public sector has a higher contribution rate. The projected replacement ratio for new employees is 65%, which compares favourably with the other sectors.

But in the fishing sector, pensionable pay has been kept artificially low as members are remunerated based on tonnage caught.

Earnings in the sector are low, cyclical and

very dependent on both weather conditions and regulatory intervention. As a result, the average fund credit is only R199 826, which is concerning given that the average age of members is roughly 40 years and many employees are less than 20 years away from retirement.

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Breakdown of benefits offered Most employers in this sector (80%) offer lump-sum death benefits, and 70% offer an income disability benefit. Only about half of the employers in this industry offer funeral benefits, which is surprising given that many workers are low-income earners who may value such a benefit.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

222

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FISHING, FORESTRY AND AGRICULTURE

3×

Chapter 2

3 times fund salary – the death benefit offered by 43.4% of employers in this sector.

Death benefit analysis On average 1.7% of pensionable salary is spent on death benefits and the average death benefit in this sector was 3.1 times. A total of 43.4% of employers offer a benefit of three times pensionable pay. Death benefits are low in this sector, with very few employees eligible to receive a benefit higher than five times pensionable pay.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. Given the current death benefit structure, only 18.3% of the life cover need for members is met.

223

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FISHING, FORESTRY AND AGRICULTURE

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Although the sector has decent contribution rates and good projected outcomes for younger employees, very few employees over the age of 30 can expect a replacement ratio of over 60%. This is a function of low preservation in the sector, caused by low and variable earnings.

224

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Chapter 2

The projected replacement ratio for new employees is 65%, but in the fishing industry, pensionable pay has been kept artificially low as members are remunerated based on tonnage caught.

225

Demographic profile

114 741

Number of employees in the database

Average pensionable salary

R251 315 Average age 40

years

Male 66.0% Female 34.0% Average normal retirement age

63.9 years

Average actual retirement age

61.6 years

Average exit rate Average preservation rate

4

MANUFACTURING SECTOR

12.8% 18.3%

Projected replacement ratio for a member aged 25

61.6% Source: Member Watch™ 2014 data set

PART 3

MANUFACTURING

Introduction

Economic commentary

Since 2008, the manufacturing sector has experienced lower-paced growth due to multiple challenges, ranging from labour unrest and poor productivity to price pressure as well as the influx of cheaper imports.

The manufacturing sector is one of the largest employers in the country and of the estimated one million jobs the country lost over the course of the global recession, nearly a quarter were in manufacturing1.

The manufacturing sector currently accounts for 13.9% of GDP. Manufacturers had a tough year in 2014 since export sales and order volume growth declined2. The general weakening of demand contributed to the renewed slowdown in production volume growth. This resulted in a worsening of the employment picture as manufacturers reported a decline in the number of factory workers and average hours worked.

However, the success of a turnaround in the sector is supported by various policy frameworks aimed at national economic expansion and job creation developed by the Department of Trade and Industry (dti), in particular the Industrial Policy Action Plan.

The outlook for the near future for the manufacturing sector is uncertain. The sustained weak level of the rand exchange rate, the substantially lower oil price and an improving global economy provide opportunities going forward. However, these could be outweighed by a more binding electricity supply constraint and the possibility of renewed labour unrest in the manufacturing or closely-linked mining sector.

Chapter 2

MANUFACTURING SECTOR GDP contribution (2014 prices)

R1 886 944 million

% contribution to GDP

13.9%

Real increase in GDP 2013–2014

0.41%

Source: Statistics South Africa (2015)

1 Oxford Business Group (2014) 2 Bureau For Economic Research

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Benefits Barometer The cyclical nature of this sector can make it a volatile one for employees, with routine reductions in the workforce. What makes this volatility particularly worrying is that many employees in the sector are low-income earners, which means they have less ability to absorb shocks. Phenomena like short time and low pensionable pay averages

place further pressure on employees and make it even less likely that they will have a reasonable income in retirement.

HIGH PRIORITY

MEDIUM PRIORITY

■ Low-income earners and incentives ■ Mass exits ■ Pensionable pay ■ Absenteeism and presenteeism ■ Strikes

228

3 Oxford Business Group (2014)

matched by an increase in productivity. As a result, many companies are pursuing more capital-intensive production despite the high unemployment rate in the country3.

This year, absenteeism and strikes join the list of high priority issues facing this sector.

Industrial action over wage increases means labour is costing more but is not being

■ Temporary workers ■ Informal workers ■ Bricks and books and beyond ■ Choice ■ High employee turnover ■ Incapacity ■ Unhealthy finances ■ Young workers

LOW PRIORITY ■ Variability in salary inflation ■ Longevity

PART 3

MANUFACTURING

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.9%

Member contribution towards retirement savings as a percentage of pensionable pay

4.5%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.4%

Contribution to retirement funding costs as a percentage of pensionable pay

0.9%

Contribution to death benefits as a percentage of pensionable pay

1.5%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Average replacement ratio achieved by retirees

30.3%

Average fund credit of active members

R372Â 892

Source: Member Watch™ 2014 data set

New fund entrants in this sector are on track for a replacement ratio of 61.6%. This is slightly above the projected replacement ratio that was reported last year and is a function of the higher average contribution rate of 14.9% reported this year.

Employees retiring from funds in the manufacturing sector are achieving replacement ratios of just 30.3%.

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MANUFACTURING

Breakdown of benefits offered The majority of employers in this sector offer both lump-sum death benefits and disability income benefits. Offering disability income benefits ensures that members who work in a particularly risky environment have an alternative income if they cannot work for a limited or even a prolonged period of time.

Funeral cover is also granted to 60.1% of employees in this sector, with dread disease benefits and unapproved death benefits offered to a limited extent.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

230

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MANUFACTURING

3×

Chapter 2

3 times fund salary – the death benefit offered by 39.8% of employers in this sector.

Death benefit analysis On average, 1.5% of pensionable salary is spent on death benefits and the average death benefit in this sector was 3.4 times.

Around 89.2% employers in this sector offer death benefits to their employees. A total of 39.8% of employers offer a benefit of three times pensionable salary, while a further 21.9% offer a benefit of four times pensionable salary.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. Given the current death benefit structure, only 23.0% of the life cover need for members is met.

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Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Total amounts contributed towards retirement savings are not enough to get many of the employees in this sector beyond an expected replacement ratio of 60%. Only 10% of those aged 60 and due to retire in the next few years are on track for a replacement ratio of 75% or more.

232

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Chapter 2

Employees retiring from funds in the manufacturing sector are achieving replacement ratios of just 30.3%.

233

Demographic profile

20 751

Number of employees in the database

Average pensionable salary

R270 116 Average age 39.0

years

Male 82.9% Female 17.1% Average normal retirement age

62.7 years

Average actual retirement age

61.2 years

Average exit rate Average preservation rate

5

Projected replacement ratio for a member aged 25

MINING SECTOR

57% Source: Member Watch™ 2014 data set

6.6% 9.7%

PART 3

MINING

Introduction

Economic commentary

Whereas mining’s direct contribution to South Africa’s GDP is relatively small (8.3%), it makes a large contribution to job creation and the country’s foreign exchange earnings, giving the sector a critical role in the economy.

Unfortunately, the sector has in recent years been in the news for all the wrong reasons.

Marikana alerted all to the brewing tensions.

Recurrent labour unrest, culminating in the five-month-long strike in the platinum belt last year, has been very damaging to the sector (and the broader economy).

Considering the outlook, a key driver of the sector’s fortunes is global demand conditions and the level of commodity prices. The world economy has been stuck in what is being described as secular stagnation following the Great Recession of 2009. The major advanced economies (USA, Euro area and Japan) are all attempting to deleverage from high levels of debt1. Growth has slowed from double digit rates during the 2000s to 7% and below, which has had a major adverse impact on hard commodity prices in recent years.

Real value added by the overall mining sector contracted by 1.6% during 2014. Mines are restructuring to absorb rising costs amid depressed commodity prices and lacklustre global demand conditions. As noted in previous editions of Benefits Barometer, the labour unrest has devastating longer-term consequences for the sector as much scope for mechanisation remains.

Analysts suggest 2011 was the peak of the commodity super cycle. Given the long lead times involved with the creation of new mining capacity, some mining subsectors are currently witnessing faster growth in supply (which was commissioned during the commodity boom phase of the cycle) compared to the lacklustre demand, hence the pressure on prices2. This, in turn, leads to the attrition of high-cost commodity producers, which should eventually rebalance supply and demand.

1 Commentary by Bureau for Economic Research 2 Commentary by Bureau for Economic Research

Chapter 2

MINING SECTOR GDP contribution (2014 prices)

R1 1312 04 million

% contribution to GDP

8.3%

Real increase in GDP 2013–2014

-1.6%

Source: Statistics South Africa (2015)

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Benefits Barometer Labour unrest, as a result of wage demands, has contributed to salary increases well over inflation in the mining sector.

Non-traditional benefits form a large part of the total rewards systems. On-mine benefits can include housing, regular meals and mine medical facilities. There’s a strong emphasis on education for miners’ children and many mines have on-site schools.

Mass exits, as a result of retrenchments and termination of employment due to illegal strike action, reduce fund membership numbers, and thus economies of scale.

HIGH PRIORITY ■ Absenteeism and presenteeism ■ Bricks and books and beyond ■ Variability in salary inflation ■ Incapacity ■ Mass exits ■ Strikes ■ Temporary workers ■ Informal workers 236

Unhealthy finances are another area of concern and can often fuel the wage demands seen in the sector, which are less about the actual quantum of money workers get and more about their standard of living.

While safety is a priority for mining companies, incapacity levels remain high.

For employees to work underground, they have to undergo a stringent process to ensure they are equipped to function well in those conditions. Disability insurance premium rates are therefore typically high in

MEDIUM PRIORITY ■ Choice ■ Low-income earners and incentives ■ Young workers ■ Healthy finances

the mining sector. However, the definition of disability often does not match the employer’s criteria in this regard.

A large percentage of workers in this sector are employed on a temporary or informal basis, leaving many without access to much-needed benefits, although recent amendments to the Labour Relations Act aim to correct this.

LOW PRIORITY ■ High employee turnover ■ Longevity ■ Pensionable pay

PART 3

MINING

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.9%

Member contribution towards retirement savings as a percentage of pensionable pay

3.5%

Employer contribution towards retirement savings as a percentage of pensionable pay

11.4%

Contribution to retirement funding costs as a percentage of pensionable pay

1.9%

Contribution to death benefits as a percentage of pensionable pay

1.7%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Average replacement ratio achieved by retirees

26.4%

Average fund credit of active members

R286Â 165

Source: Member Watch™ 2014 data set

With an average normal retirement age of 62.7 and a total contribution towards retirement savings of 14.9%, new fund entrants in this sector can anticipate a projected replacement ratio of 57%, one of the lowest projected outcomes across all the sectors.

The average exit rate in the sector is low, but the average preservation rate is alarming, with just 9.7% of all people exiting the sector over the last year choosing to preserve. This contributes to the low average fund credit of R286 165 for active fund members in this sector and average replacement ratios of retirees amounting to just 26.4%.

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Breakdown of benefits offered Most employers in this sector (90%) offer lump-sum death benefits. Disability income benefits and funeral cover are offered by fewer employers but are still prevalent in the sector.

Dread disease is not offered at all, and this means that many of these low-income earners will have to rely on State-provided care in the event of contracting a life-limiting disease.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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3×

Chapter 2

3 times fund salary – the death benefit offered by 55% of employers in this sector.

Death benefit analysis Death benefits form an important part of the benefit offering in this sector due to the risky nature of the work carried out. A total of 1.7% of pensionable pay is dedicated to death benefits, but this is used to buy benefits of just three or four times pensionable pay, making this a relatively expensive benefit to fund in this sector.

A total of 55% of employers offer benefits of three times pensionable pay, 30.8% offer a benefit of two times pensionable pay and 7% offer a benefit of 1 times. In most instances, such benefits won’t be enough for these low-income earners who may be supporting up to twenty other people with their income.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. Given the current death benefit structure, only 22.5% of the life cover need for members is met.

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Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

0% to 30% 30% to 60% 60% to 75% 75% +

Age band Source: Member Watch™ 2014 data set

The majority of younger employees in this sector are on track for a replacement ratio of between 60% and 75%. However, low preservation rates lead to employees retiring with replacement ratios of just 26.4%.

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The average preservation rate is alarming, with just 9.7% of all people exiting the sector over the last year choosing to preserve.

241

Demographic profile

100 497

Number of employees in the database

Average pensionable salary

R221 683 Average age 41.1

years

Male 35.5% Female 64.5% Average normal retirement age

64.4 years

Average actual retirement age

62.6 years

Average exit rate Average preservation rate

6

PERSONAL SERVICES SECTOR

12.2% 10.1%

Projected replacement ratio for a member aged 25

56.5% Source: Member Watch™ 2014 data set

PART 3

PERSONAL SERVICES

Introduction

Economic commentary

The personal services sector spans a wide range of fields, including medical services, education, media and marketing, and security. Although very different in many respects, these are all industries that require the personal delivery of a service. About 47% of the employees in the sector within our client base work in health-related activities.

Education is the second largest employer, with 30% of the workers in this sector.

The personal services sector, comprising education and health services, media and marketing services, security and other personal services, makes a relatively small GDP contribution (5.9% in 2014). However, its employment contribution is huge at 16.4% of South Africa’s workforce, with 1.65 million formal sector employees and 865 000 informal workers1. Real GDP growth came in at 1.4% during 2013/14, in line with the general economy which expanded at 1.5%.

Chapter 2

PERSONAL SERVICES SECTOR GDP contribution (2014 prices)

R798 458 million

% contribution to GDP

5.9%

Real increase in GDP 2013–2014

1.4%

Source: Statistics South Africa (2015)

Services industries tend to be less cyclical as debt finance does not play such a huge role as in the durable goods purchases of households or as in business fixed investment, for instance.

1 Quantec Research

243

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PERSONAL SERVICES | HEALTH

HEALTH INDUSTRY South African longevity has risen in recent years due primarily to improvements in access to HIV treatment. At least 25% of public healthcare spending has been devoted to HIV2. The health industry continues to be a key focus for Government, with plans for National Health Insurance (NHI) continuing. NHI is likely to have a significant influence on both how healthcare services are provided as well as how they are paid for.

Skills shortages continue to be prevalent in this industry, and private healthcare costs continue to rise. The Competition Commission is currently investigating healthcare costs to understand what is driving this dynamic and whether there are anti-competitive forces at play.

244

2 Oxford Business Group (2014)

PART 3

PERSONAL SERVICES | HEALTH

Chapter 2

Benefits Barometer

HIGH PRIORITY ■ Absenteeism and presenteeism ■ Incapacity ■ Longevity ■ Strikes

Within the health industry, public sector workers are prone to strike action, particularly with nursing staff tending to demand higher than average increases each year. Strikes impact on productivity levels and place an already volatile system under pressure. This is made worse by high absenteeism in the sector.

The average age of people retiring in the industry is in line with the average seen in other industries. At the same time, longevity has been identified as one of the industry’s high priority issues. With employees retiring earlier but living longer, individuals need to ensure that their retirement and other savings are sufficient to last them through a longer-than-average retirement period.

MEDIUM PRIORITY

LOW PRIORITY

■ Bricks and books and beyond ■ Choice ■ High employee turnover ■ Low-income earners and incentives ■ Temporary workers ■ Informal workers ■ Unhealthy finances ■ Young workers

■ Variability in salary inflation ■ Mass exits ■ Pensionable pay

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Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.6%

Member contribution towards retirement savings as a percentage of pensionable pay

4.7%

Employer contribution towards retirement savings as a percentage of pensionable pay

9.9%

Contribution to retirement funding costs as a percentage of pensionable pay

0.4%

Contribution to death benefits as a percentage of pensionable pay

1.3%

Contribution to disability benefits as a percentage of pensionable pay

1.3%

Average replacement ratio achieved by retirees

17.4%

Average fund credit of active members

R195Â 788

Source: Member Watch™ 2014 data set

On average, the contribution towards retirement savings is 14.6%, resulting in a projected replacement ratio of 63% for a new fund member aged 25. This contribution rate continues the upward trend seen in 2012 and 2013. This, in combination with a rising preservation rate, has improved the projected replacement ratio for the sector, from 45% in 2012 and 53.9% in 2013 to 63% in 2014.

246

However, members are retiring with an actual replacement ratio at retirement of just 17.4%.

The improvement in contribution rates should help raise this figure in the future.

A further 1.3% of pensionable salary is spent on death benefits and 1.3% of pensionable salary goes towards disability benefits.

PART 3

PERSONAL SERVICES | HEALTH

Chapter 2

Breakdown of benefits offered Employers in this sector offer a narrow range of benefits, restricted to lump-sum death benefits, funeral cover and disability benefits. Only 62% of employers offer disability benefits, with 86% offering lump-sum death benefits. As we discussed in Benefits Barometer 2014, this is a concern given that employees in this sector have an elevated risk of contracting communicable diseases.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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3×

3 times fund salary – the death benefit offered by 50.8% of employers in this industry.

Death benefit analysis More than 86% of employers offer a death benefit through their retirement funds.

Of those who do offer death benefits, the most common multiples are three times and five times pensionable salary. The full range goes from one times pensionable salary to seven times pensionable salary.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 30.2% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

0% to 30% 30% to 60% 60% to 75% 75% +

Age band Source: Member Watch™ 2014 data set

The majority of workers aged 40 and above is currently projected to retire with less than 30% of their pensionable salary. Even among younger workers, the percentage projected to reach more than 60% of salary of their pension is very low.

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PERSONAL SERVICES | EDUCATION

EDUCATION INDUSTRY The national budget devotes a significant proportion to education and private educational facilities are also prevalent. South Africa is one of the few countries on the African continent which has drawn close to the aim of universal primary enrolment1. Despite the expansion in access, outcomes remain a concern.

Education remains highly inequitable from primary education to tertiary education.

While some tertiary institutions are globally competitive, others are extremely dysfunctional. Even among students who manage to reach tertiary education, the dropout rate at this level is still extremely high. Over half of students who start a tertiary qualification fail to graduate2.

250

1 Oxford Business Group (2014) 2 Oxford Business Group (2014)

PART 3

PERSONAL SERVICES | EDUCATION

Chapter 2

Benefits Barometer The National Development Plan (NDP)’s diagnostic report identified absenteeism as a key issue, with 20% of teachers absent on Mondays and Tuesdays and absenteeism rising to 30% at month-end3.

This is exacerbated when teachers strike, as it reduces the number of teaching days.

The NDP’s diagnostic report estimated that strikes reduce the number of teaching days

HIGH PRIORITY ■ Absenteeism and presenteeism ■ Bricks and books and beyond ■ Longevity ■ Strikes

3 National Planning Commission (2010) 4 National Planning Commission (2010)

by as much as 10 days per year, or 5% of the teaching year4. Some tertiary institutions also face challenges with absenteeism and some strike action.

age at which they have to retire, both of which are below 65. This suggests employees could take more advantage of their ability to extend their working lives and build up additional retirement capital.

Given the cerebral nature of this sector, it should be easy for employees to work longer.

However, the average actual age at which employees retire is lower than the average

MEDIUM PRIORITY ■ Choice ■ Variability in salary inflation ■ Pensionable pay ■ Temporary workers ■ Unhealthy finances ■ Informal workers

LOW PRIORITY ■ High employee turnover ■ Incapacity ■ Low-income earners and incentives ■ Mass exits ■ Young workers

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Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

13.5%

Member contribution towards retirement savings as a percentage of pensionable pay

4.3%

Employer contribution towards retirement savings as a percentage of pensionable pay

9.2%

Contribution to retirement funding costs as a percentage of pensionable pay

1.0%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.7%

Average replacement ratio achieved by retirees

35.5%

Average fund credit of active members

R824Â 334

Source: Member Watch™ 2014 data set

On average, the contribution towards retirement savings is 13.5%, resulting in a projected replacement ratio of 57% for a new fund member aged 25. Average contribution rates have fallen slightly from previous years, which is a concern. In contrast, preservation behaviour has continued on a positive trend, rising from 14.1% in 2013 to 19.1% in 2014.

A further 1.4% of pensionable salary is spent on death benefits and 0.7% of pensionable salary goes towards disability benefits.

252

The average fund credit in this industry is comparatively high at R824 334. Members are retiring with an actual replacement ratio at retirement of 35.5%. Despite this being a low replacement ratio, it is high compared to many other industries and likely reflects the very low exit rate in this sector due to long service periods.

PART 3

PERSONAL SERVICES | EDUCATION

Chapter 2

Breakdown of benefits offered The most common risk benefits offered in this sector are lump-sum death cover, funeral cover and disability income benefits. There are also small numbers of employers offering dread disease cover and permanent disability benefits.

Given the long tenure of teachers’ working lives and their stability of income, we have pointed out in previous Benefits Barometers that disability income should be a valuable benefit in this sector. However, only 62% of employers are offering disability income benefits and a tiny fraction is offering permanent disability.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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4×

4 times fund salary – the death benefit offered by 50.9% of employers in this industry

Death benefit analysis Lump-sum death benefits, like in many other sectors, remain the most prevalent benefit offered to employees. In the education sector, almost three-quarters of employers offer this benefit. Among these employers death benefits range from 2 times to 5 times cover, with the majority of employers offering four times cover.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 23% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Projected replacement ratios for young workers are generally good, but deteriorate as employees age. If the improvement in preservation rates continues, this should filter through to the replacement ratios over time.

255

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PERSONAL SERVICES | MEDIA AND MARKETING

MEDIA AND MARKETING INDUSTRY The range of companies operating in this industry is extremely wide. On the one hand there are large global conglomerates like Naspers and on the other there are tiny agencies which may employ only a handful of people.

While digital media is growing, it remains out of reach of much of the population.

Affordability constrains access to both broadband access and smartphone ownership1. Traditional media remains popular in South Africa, and the industry is generally considered to be globally competitive.

256

1 Oxford Business Group (2014)

PART 3

PERSONAL SERVICES | MEDIA AND MARKETING

Chapter 2

Benefits Barometer This industry is fast-paced, attracting large numbers of young, energetic people, which contributes to the high exit rate. Despite the tilt towards young workers, this is an industry where employees could work to later ages than in other sectors. This is particularly true for those who have specialised knowledge.

HIGH PRIORITY ■ High employee turnover ■ Longevity ■ Young workers

MEDIUM PRIORITY ■ Choice ■ Low-income earners and incentives ■ Pensionable pay ■ Temporary workers ■ Unhealthy finances ■ Mass exits ■ Informal workers

LOW PRIORITY ■ Absenteeism and presenteeism ■ Bricks and books and beyond ■ Variability in salary inflation ■ Incapacity ■ Strikes

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PERSONAL SERVICES | MEDIA AND MARKETING

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

13.7%

Member contribution towards retirement savings as a percentage of pensionable pay

5.3%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.4%

Contribution to retirement funding costs as a percentage of pensionable pay

1.6%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

30.3%

Average fund credit of active members

R317Â 793

Source: Member Watch™ 2014 data set

Retirement outcomes in this industry appear to be deteriorating, in stark contrast to the improvements seen in many other industries.

On average, the contribution towards retirement savings is 13.7%, which has fallen from being over 15% in 2012 and 2013. As a result, the projected replacement ratio for a member aged 25 has fallen from 62.8% in 2013 to 53% in 2014. The high exit rate of 21.9% and low preservation rate of 13.7% appear to be undermining the retirement structures in the industry.

258

A further 1.4% of pensionable salary is spent on death benefits and 0.8% of pensionable salary goes towards disability benefits.

Members have an average fund credit of approximately R317 793. Retirees face an actual replacement ratio at retirement of 30.3%. Compared to other industries, this is not that low, but what remains a concern is whether the projected replacement ratios in this industry suggest that this number will fall in the future.

PART 3

PERSONAL SERVICES | MEDIA AND MARKETING

Chapter 2

Breakdown of benefits offered Lump-sum death cover and disability income benefits are the most common forms of risk cover offered by employers in this industry. Some employers also offer funeral cover and a tiny group offers dread disease cover.

The fact that disability income benefits are as prevalent as lump-sum death cover, and extended by the majority of employers, is encouraging given the youth of many of the employees in this industry.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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PERSONAL SERVICES | MEDIA AND MARKETING

4×

4 times fund salary – the death benefit offered by 62.7% of employers in this industry.

Death benefit analysis The range of death benefits offered by employers in this sector is wide, varying from one times cover to seven times cover. Despite this variance, the majority offer four times cover as their standard benefit.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 21.4% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Even for young workers, the vast majority of members are projected to have a replacement ratio of less than 60%. This starts to deteriorate rapidly after the age of 25, and from age 45 the majority of members are projected to have replacement ratios of less than 30%.

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PERSONAL SERVICES | SECURITY

SECURITY INDUSTRY As with health and education, many wealthier households rely on the private sector for much of their security needs. The business sector also makes extensive use of the private security industry. Security guards vary from the informal car guards commonly found in most parking areas to sophisticated outfits using advanced technology.

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Chapter 2

Benefits Barometer This industry experiences high turnover. This could be because employees work long hours but earn low levels of income. The industry could consider incentives for low-income earners to improve the savings behaviour of this group. Despite registration requirements, workers in this industry may be employed on a temporary or contract basis only, leaving them without access to much-needed employee benefits.

HIGH PRIORITY ■ High employee turnover ■ Low-income earners and incentives ■ Temporary workers ■ Informal workers

MEDIUM PRIORITY ■ Pensionable pay ■ Strikes ■ Unhealthy finances ■ Young workers

LOW PRIORITY ■ Absenteeism and presenteeism ■ Bricks and books and beyond ■ Choice ■ Variability in salary inflation ■ Incapacity ■ Longevity ■ Mass exits

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PERSONAL SERVICES | SECURITY

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

11.7%

Member contribution towards retirement savings as a percentage of pensionable pay

6.2%

Employer contribution towards retirement savings as a percentage of pensionable pay

5.5%

Contribution to retirement funding costs as a percentage of pensionable pay

2.1%

Contribution to death benefits as a percentage of pensionable pay

1.7%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

16.5%

Average fund credit of active members

R86Â 298

Source: Member Watch™ 2014 data set

Retirement outcomes in this industry have been a concern since Benefits Barometer 2013 and they have not improved. If anything, they appear to be getting worse.

The average contribution towards retirement savings is 11.7%, which is low, and a further deterioration from 12.1% in 2013 and 12.7% in 2012. The projected replacement ratio for a member aged 25 is 50%. The industry also suffers from high exit rates (at 19.7%) and extremely low preservation rates (at 1.2%).

A further 1.7% of pensionable salary is spent on death benefits and 0.8% of pensionable salary goes towards disability benefits.

264

Members have an average fund credit of R86 298. Low salaries are part of the reason for this very low number, but so is the poor accumulation of savings through the retirement process. This is shown by the fact that the average replacement ratio is 16.5% for actual retirees. This is very low and should be a matter for concern.

PART 3

PERSONAL SERVICES | SECURITY

Chapter 2

Breakdown of benefits offered All employers in this industry offer lump-sum death cover and disability income benefits, which is encouraging given the dangerous nature of jobs. Almost all employers offer funeral cover as well.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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4×

4 times fund salary – the death benefit offered by 84.9% of employers in this industry.

Death benefit analysis Employers in this industry appear to recognise that death benefits need to be significant, with the vast majority of employers offering at least four times pensionable salary. A small minority offer three times cover.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 30.1% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Projected replacement ratios in the security industry are abysmal across all age groups. From age 40 onwards, the majority are projected to retire with replacement ratios below 30%.

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Demographic profile

152 671

Number of employees in the database

Average pensionable salary

R253 200 Average age 39.0

years

Male 50.9% Female 49.1% Average normal retirement age

63.8 years

Average actual retirement age

61.4 years

Average exit rate Average preservation rate

7

PROFESSIONAL AND BUSINESS SECTOR

13.4% 12.8%

Projected replacement ratio for a member aged 25

46% Source: Member Watch™ 2014 data set

PART 3

PROFESSIONAL AND BUSINESS SECTOR

Introduction

Economic commentary

This sector spans financial services, legal and accounting firms, engineering and other consultancies and the real estate industry.

Companies in the different areas have all experienced varying fortunes. Short-term insurers had a tough time largely due to high claims from weather-related damage1.

The life insurance industry did well across the board and the industry had R2 trillion in assets under management2.

The professional and business services sector is a key sector and employer. It contributed an estimated 21.6% to GDP in 2014. Real GDP growth of the combined financial and business services sector came in at 2.2% in 2013/14. The business services subsector employed 1.9 million people in 2014, 343 000 of whom were employed in the informal sector3.

The economic slowdown affected banks indirectly, as did sovereign ratings agency revisions. The fall-out in the unsecured lending space is starting to settle after the failure of African Bank. New regulatory requirements will affect the industry in the near future. Despite these challenges, banks continued to post strong results.

1 Oxford Business Group (2014) 2 Oxford Business Group (2014) 3 Statistics South Africa (2015)

Within business services, one would expect that real estate services will be closely tied to the property cycle and engineering services to the general business cycle; these industries may therefore display a sharper cyclical pattern.

Chapter 2

PROFESSIONAL AND BUSINESS SECTOR GDP contribution (2014 prices)

R2 941 208 million

% contribution to GDP

21.6%

Real increase in GDP 2013–2014

2.2%

Source: Statistics South Africa (2015)

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Benefits Barometer Employees in this sector are assumed to be knowledgeable on financial issues and so employers give them greater choice, relying on them to know what to do. But retirement outcomes suggest that employees in this sector may not be as informed about benefits as expected.

HIGH PRIORITY ■ Choice ■ Variability in salary inflation ■ Longevity ■ Pensionable pay ■ Young workers

270

MEDIUM PRIORITY ■ Bricks and books and beyond ■ Mass exits ■ Unhealthy finances ■ High employee turnover

Basic salaries tend to increase at a low rate, except for unionised employees in financial services, but with all the other components of pay, including bonuses and commissions, they can be volatile. Many young workers enter this sector due to the lure of high salaries, which can lead to neglect of longterm savings and protection.

LOW PRIORITY ■ Absenteeism and presenteeism ■ Incapacity ■ Low-income earners and incentives ■ Strikes ■ Temporary workers ■ Informal workers

PART 3

PROFESSIONAL AND BUSINESS SECTOR

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

11.3%

Member contribution towards retirement savings as a percentage of pensionable pay

2.4%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.9%

Contribution to retirement funding costs as a percentage of pensionable pay

0.8%

Contribution to death benefits as a percentage of pensionable pay

1.0%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

33.4%

Average fund credit of active members

R325Â 723

Source: Member Watch™ 2014 data set

This sector has remained consistently one of the more worrying sectors in terms of its retirement outcomes despite the higher salaries and educational levels. The average contribution rate is 11.3%. This is lower than the 12.2% from 2013 and 12.8% from 2012, showing a steady decline. As a result, the projected replacement ratio for a member aged 25 is 46%.

Actual retirees have achieved an average replacement ratio of 33.4%. This is reasonably high compared to other sectors, but may hide a high dispersion of outcomes.

A further 1.0% of pensionable salary is spent on death benefits and 0.8% of pensionable salary goes towards disability benefits.

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Breakdown of benefits offered The most common risk benefits offered by funds in this industry are lump-sum death benefits, disability income benefits and funeral cover. A small group of funds also offers dread disease cover and permanent and temporary disability benefits. The higher salaries in this industry may also give employees greater ability to access alternative sources of cover.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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3×

Chapter 2

3 times fund salary – the death benefit offered by 27.7% of employers in this sector

Death benefit analysis More than 90% of funds in this sector offer lump-sum death cover. The multiples of death cover vary widely from one times to six times cover. The most common offering is three times death cover, but there is a similar number of employers offering four times and five times cover.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 12.8% of the life cover need for members in this sector.

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Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

A small but significant group is projected to retire with more than 75% of their pre-retirement income. Meanwhile, even from a young age, more than 25% of employees have projected replacement ratios below 30%.

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Chapter 2

This sector has remained consistently one of the more worrying industries in terms of its retirement outcomes despite the higher salaries and educational levels.

275

Demographic profile

34 126

Number of employees in the database

Average pensionable salary

R206 822 Average age 45.3

years

Male 63.7% Female 36.3% Average normal retirement age

64.3 years

Average actual retirement age

61.8 years

Average exit rate Average preservation rate

8

3.2% 12.8%

Projected replacement ratio for a member aged 25

PUBLIC SECTOR

81% Source: Member Watch™ 2014 data set

PART 3

PUBLIC SECTOR

Introduction

Economic commentary

The Public sector has been one of the fastest growing sectors in the South African economy in the aftermath of the 2009 recession. Including employment in public business enterprises, public sector employment expanded by no less than 20% between the end of 2007 and 2014 to a level of 2.15 million, accounting for 25% of non-agricultural formal employment in South Africa1.

The Public sector’s contribution to GDP increased from 14% in 2007 to 17% in 2014. This contrasts with the decline in the manufacturing sector’s contribution to GDP from 16% to 13% over the corresponding period2.

This makes the Public sector the biggest employer in the country. The general government, consisting of central, provincial and local Government, accounts for 95% of public sector employment.

In the 2015 budget, the marginal personal tax rate was hiked by 1%, the fuel and Road Accident Fund (RAF) levies were increased by a combined 80 cents per litre and noninterest real spending growth was restricted to low single digit levels. These measures are aimed at reducing the budget deficit from an estimated 3.9% in 2014/15 to 2.5% in 2017/18 and stabilise the gross national debt ratio.

Chapter 2

PUBLIC SECTOR GDP contribution (2014 prices)

R2 314 130 million

% contribution to GDP

17%

Real increase in GDP 2013–2014

3.0%

Source: Statistics South Africa (2015)

This has important implications for the future expansion of the public sector. Should Government find the political will to turn the ship, it implies that the sector will not be such a buoyant source of growth over the short to medium term. Employment levels are likely to stabilise and government spending on goods and services will be constrained. The spending category that will continue to grow is public sector infrastructure investment – the nominal projected capital investment programme is valued at R813 billion over the medium-term expenditure framework (MTEF) period, in other words 2015/16 to 2017/183.

1 SA Reserve Bank Quarterly Bulletin, March 2015: S-136 2 Statistics SA (2015) 3 National Treasury (2015)

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Benefits Barometer The public sector is one of the largest employers in the country and offers not only generous cash remuneration for some occupations, but generous benefits packages including risk and retirement benefits, housing subsidies and medical aid subsidies.

The value of additional benefits to employees in this sector, such as housing subsidies, cannot be underestimated.

HIGH PRIORITY ■ Absenteeism and presenteeism ■ Bricks and books and beyond ■ Longevity ■ Strikes

278

MEDIUM PRIORITY ■ Choice ■ Variability in salary inflation ■ Temporary workers ■ Unhealthy finances ■ Informal workers

This sector struggles to attract young workers and has not addressed the longevity problem either. Absenteeism and the abuse of sick leave continue to be a major problem in this sector. Owing to the sector’s history of strikes over wage increases, strikes remain an issue going forward.

LOW PRIORITY ■ High employee turnover ■ Incapacity ■ Low-income earners and incentives ■ Mass exits ■ Pensionable pay ■ Young workers

PART 3

PUBLIC SECTOR

Chapter 2

Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

19.4%

Member contribution towards retirement savings as a percentage of pensionable pay

4.2%

Employer contribution towards retirement savings as a percentage of pensionable pay

15.2%

Contribution to retirement funding costs as a percentage of pensionable pay

1.6%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.6%

Average replacement ratio achieved by retirees

48.1%

Average fund credit of active members

R568Â 173

Source: Member Watch™ 2014 data set

This sector has always been a top performer in retirement outcomes and this has only improved over the last few years. The average contribution rate to retirement has risen from 16% in 2012 to 17.7% in 2013 to 19.4% in 2014. As a result, the average projected replacement ratio for a member aged 25 has risen from 57.5% in 2012 to 81% in 2014.

There remains a large gap, however, between projected and actual outcomes. The average replacement ratio achieved by actual retirees is 48.1%. This is significantly higher than in private sector funds, but is still substantially

below what is projected. We can hope to see this improve in the future, given that the exit rate is extremely low (at 3.2%) and the preservation rate is rising (from 5.1% in 2012 to 12.8% in 2014).

The average fund credit of active members is R568 173, which is almost three times the average annual pensionable salary in the public sector funds. The average contribution towards risk benefits is 1.4% towards death cover and 0.6% towards disability cover.

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Breakdown of benefits offered Like in other sectors, lump-sum death cover is offered by the vast majority of employers. In contrast to other sectors, there is a relatively lower proportion of employers offering disability income benefits and funeral cover through their retirement fund. Small numbers of employers also provide dread disease cover and permanent and total disability.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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4×

Chapter 2

4 times fund salary – the death benefit offered by 34.6% of employers in this sector.

Death benefit analysis Among funds offering lump-sum death cover, the range of multiples varies from one times to five times cover. The most common grouping is four times cover, with the smallest groups being one times and two times cover. Offering three times and five times cover is also quite common.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure meets 38.5% of the life cover need for members in this sector.

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Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

A significant number of the employees in our data set are on track for a replacement ratio in excess of 75%. However, employees at older ages can anticipate much lower expected outcomes due to the impact of non-preservation.

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Chapter 2

This sector has always had the best outcomes and this has only improved over the last few years. The average projected replacement ratio for a member aged 25 has risen from 57.5% in 2012 to 81% in 2014.

283

Demographic profile

125 351

Number of employees in the database

Average pensionable salary

R144 241 Average age 35.4

years

Male 43.6% Female 56.4% Average normal retirement age

62.9 years

Average actual retirement age

60.6 years

Average exit rate Average preservation rate

9

RETAIL, WHOLESALE AND HOSPITALITY SECTOR

15.3% 11.7%

Projected replacement ratio for a member aged 25

57.2% Source: Member Watch™ 2014 data set

PART 3

RETAIL, WHOLESALE AND HOSPITALITY

Introduction

Economic commentary

Retail and wholesale trading involves the sale of goods to individuals or other companies.

In the case of hospitality, the basic offering of accommodation is often just a small part of the value proposition to the customer, with the service component being the dominant factor. Hospitality shares some characteristics with retail and wholesale trading, and others with personal services. To get a better idea of the benefits landscape in this sector, we will consider trading and hospitality separately.

The retail, wholesale and hospitality sector made the third highest contribution towards GDP in 2014.

Although business confidence in the retail and wholesale sector remained low during 2014, sales volumes increased in line with expectations, while increased pricing power in the midst of a recovery in consumer demand resulted in profit levels remaining well supported1. Retailers are optimistic that conditions will continue to improve going forward. However, the sharp increase in the fuel and Road Accident Fund levy, higher personal income taxes for high income consumers, and the slowdown in government expenditure announced in the February 2015 budget should rein in disposable income growth, and hence consumer spending, in the second half of 2015.

Chapter 2

RETAIL AND WHOLESALE, HOSPITALITY SECTOR GDP contribution (2014 prices)

R2 046 197 million

% contribution to GDP

15.1%

Real increase in GDP 2013–2014

1.3%

Source: Statistics South Africa (2015)

The hospitality and tourism sector now matches the mining and minerals sector in terms of its contribution towards GDP and employment2. Tourism’s taking on added importance these days in light of the fact that its expansion has been outperforming the growth witnessed by the economy at large3.

1 Bureau for Economic Research (2015) 2 Oxford Business Group (2014) 3 Oxford Business Group (2014)

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RETAIL AND WHOLESALE INDUSTRY South Africa has one of the most sophisticated consumer markets in Africa. Although the retail industry made a significant contribution to helping South Africa rebound from the economic recession, social grants, increases in public sector employment and rising real wages contributed to higher household disposable incomes and encouraged spending.

An increase in the number of indebted consumers has led to retailers tightening their restrictions for buying on credit, which should lead to a decrease in bad debts over time.

286

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Chapter 2

Benefits Barometer This industry has a high number of both low-income earners and young workers. It also has high employee turnover, particularly among young workers. The seasonal nature of retail sales, combined with the large informal sector, results in significant numbers of temporary and informal workers.

Pensionable pay is particularly low in this industry, creating gaps for both retirement and risk.

HIGH PRIORITY ■ High employee turnover ■ Low-income earners and incentives ■ Pensionable pay ■ Temporary workers ■ Unhealthy finances ■ Young workers ■ Informal workers

MEDIUM PRIORITY ■ Absenteeism and presenteeism ■ Variability in salary inflation ■ Incapacity ■ Strikes

LOW PRIORITY ■ Bricks and books and beyond ■ Choice ■ Longevity ■ Mass exits

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Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.8%

Member contribution towards retirement savings as a percentage of pensionable pay

5.5%

Employer contribution towards retirement savings as a percentage of pensionable pay

9.3%

Contribution to retirement funding costs as a percentage of pensionable pay

1.2%

Contribution to death benefits as a percentage of pensionable pay

1.2%

Contribution to disability benefits as a percentage of pensionable pay

0.9%

Average replacement ratio achieved by retirees

31.5%

Average fund credit of active members

R177Â 314

Source: Member Watch™ 2014 data set

The structure of the retirement funds in this industry has been steadily improving the projected retirement outcomes. The projected replacement ratio of a member aged 25 has risen from 46% in 2012 to 52% in 2013 and now to 59% in 2014. This has been primarily due to two improvements in the structure of funds. The first is that average normal retirement ages have been rising, from 61.9 in 2013 to 62.9 in 2014. The second is that contribution rates have been rising from 14% in 2012 to 14.4% in 2013 and to 14.8% in 2014.

288

The average fund credit is R177 314 and the average replacement ratio being achieved by actual retirees is 31.5%. Although this is 20% lower than the projected replacement ratio, it is high compared to other industries.

A further contribution of 1.2% pays for death benefits and 0.9% pays for disability benefits.

PART 3

RETAIL, WHOLESALE AND HOSPITALITY | RETAIL AND WHOLESALE

Chapter 2

Breakdown of benefits offered Most employers do offer lump-sum death benefits, with many offering disability income benefits and funeral cover. There is also a sprinkling of employers who offer other risk benefits such as dread disease. Given the prevalence of low-income earners, it may be worth more employers offering disability income benefits and funeral cover.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

289

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3×

3 times fund salary – the death benefit offered by 58.3% of employers in this industry.

Death benefit analysis Among funds offering death benefits, the range in multiples is wide, from one times to eight times pensionable salary. The most common multiple is three times pensionable salary, but there are also significant numbers of funds offering two times, four times and eight times cover.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 33% of the life cover need for members in this industry.

290

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

At younger ages, the most common projected replacement ratio band is 60%-75%.

As people age, the 30%-60% band becomes the most prominent and then finally from 50 onwards, the band for 0%-30% replacement ratios becomes the majority.

291

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RETAIL, WHOLESALE AND HOSPITALITY | HOSPITALITY

HOSPITALITY INDUSTRY International arrivals reached 14.8 million in 2013, a 7% increase year on year from 2012.

The government has also set an ambitious target of attracting 15 million visitors by 2017.

The increase in international visitors comes as a relief to the businesses in this industry that have experienced tough times since the end of the 2010 Soccer World Cup. If growth in the industry continues, there will likely be an increase in demand to match the oversupply that was created during the period leading up to the World Cup.

292

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Chapter 2

Benefits Barometer Despite the fact that the cost of labour is a concern for employers, employees in this industry tend to be low-income earners. They may earn a large part of their income in tips, which will raise their standard of living but not improve their employee benefits.

take-home pay to employee benefits. There does seem to be evidence that concerns over take-home pay drive mobility in this industry.

Furthermore, a large proportion of employees in the industry are young workers, which means they may prefer higher

Due to the seasonal cycles in this industry, there are significant numbers of temporary and informal workers. These cycles do not all run concurrently – with holiday destinations following one cycle and business destinations another.

HIGH PRIORITY

MEDIUM PRIORITY

■ Low-income earners and incentives ■ Temporary workers ■ Young workers ■ Absenteeism and presenteeism ■ Informal workers

■ Bricks and books and beyond ■ High employee turnover ■ Mass exits ■ Pensionable pay ■ Unhealthy finances

Absenteeism and presenteeism has been identified as a high priority issue for the industry this year, since it can impact the bottom line of employers in this very labour-intensive industry.

LOW PRIORITY ■ Choice ■ Variability in salary inflation ■ Incapacity ■ Longevity ■ Strikes

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Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

14.4%

Member contribution towards retirement savings as a percentage of pensionable pay

4.4%

Employer contribution towards retirement savings as a percentage of pensionable pay

9.9%

Contribution to retirement funding costs as a percentage of pensionable pay

0.7%

Contribution to death benefits as a percentage of pensionable pay

1.3%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

19.4%

Average fund credit of active members

R181Â 510

Source: Member Watch™ 2014 data set

Retirement outcomes have been steadily improving over the past few years, due primarily to rising contribution rates to retirement savings. In 2012, the projected replacement ratio for a member aged 25 was 43%. By 2014, this had risen to 56%, which puts it in a much more comparable position in relation to other industries. Supporting this, contribution rates have risen from 12.6% in 2012 to 14.4% in 2014.

294

This is significant, given that at present retirees are achieving an average actual replacement ratio of 19.4%. We can hope that improving contribution rates results in better outcomes and are not undermined by poor preservation behaviour. Exit rates in the industry are quite high at 16%, with preservation being moderate at 22.6%.

A further contribution of 1.3% goes towards death benefits and 0.8% towards disability benefits.

PART 3

RETAIL, WHOLESALE AND HOSPITALITY | HOSPITALITY

Chapter 2

Breakdown of benefits offered All employers in this industry offer lump-sum life cover. A high proportion also offers disability income benefits, which is positive given the number of young workers in this sector. The majority offers funeral cover, and a sprinkling offers other types of risk benefits.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

295

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4×

4 times fund salary – the death benefit offered by 47.2% of employers in this industry.

Death benefit analysis Multiples for death cover range from one times to seven times cover with the majority of employers offering between three times and five times cover. The most prevalent multiple is four times fund salary.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 23.9% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Even at young ages, at least 20% of employees are projected to retire with replacement ratios of less than 30%. This situation only becomes more aggravated until at older ages, more than 80% of employees are projected to retire with less than 80% of their pre-retirement income.

297

Demographic profile

49 751

Number of employees in the database

Average pensionable salary

R250 410 Average age 36.9

years

Male 68.2% Female 31.8% Average normal retirement age

63.0 years

Average actual retirement age

61.8 years

Average exit rate Average preservation rate

10

TRANSPORT AND TELECOMMUNICATIONS SECTOR

18.2% 22.6%

Projected replacement ratio for a member aged 25

51.6% Source: Member Watch™ 2014 data set

PART 3

TRANSPORT AND TELECOMMUNICATIONS

Introduction

Economic commentary

The National Development Plan (NDP) rightfully positions transport and telecommunications as engines of growth and catalysts for national economic integration. The combined sector accounts for a substantial number of jobs in South Africa’s economy. It also enables other industries to play their economic and social role more effectively.

The transport and communications sector represents diverse industries. What they have in common is the fact that both sub-sectors are services industries with their fortunes closely linked to that of the broader economy. Having strong forward linkages, with a range of businesses operating in the primary and secondary sectors of the economy, the growth of transport and communications services is derived from the growth of these industries.

Chapter 2

TRANSPORT AND TELECOMMUNICATIONS SECTOR GDP contribution (2014 prices)

R1 257 574 million

% contribution to GDP

9.3%

Real increase in GDP 2013–2014

2.3%

Source: Statistics South Africa (2015)

The transport and communications sector’s combined direct contribution to GDP in 2014 is estimated at around 9%, with transport services accounting for 54% and communications for 46%. According to Statistics SA, the sector employs 952 000 workers, 216 000 of which are in the informal sector1.

It has been one of the faster growing sectors in South Africa since 1994, with the expansion of communications being particularly robust following the introduction of mobile telephony and the incremental deregulation of the communications market2. Growth accelerated notably over the 2004–2008 period. However, in line with other services industries and the broader economy, growth tapered down in the aftermath of the 2009 recession, coming in at 2.3% in 2013/14.

1 Statistics South Africa 2 IDC (2013)

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TRANSPORT AND TELECOMMUNICATIONS | TRANSPORT

TRANSPORT INDUSTRY In general, demand for transport services of various types has increased across the board in recent years. Nearly 7.1% of the cargo moved in 2013 was transported on the country’s roads with the remainder being moved primarily by rail3.

The transport industry also stands to benefit from the government’s National Infrastructure Plan, under which the state plans to spend around R4.3 trillion on new and upgraded infrastructure across the transport, energy, water, sanitation, health and education sector over a 15-year period. Major transport projects include the revitalisation of the country’s rail network, and a plan to update and expand provincial bus lines.

300

3 Oxford Business Group (2014)

PART 3

TRANSPORT AND TELECOMMUNICATIONS | TRANSPORT

Chapter 2

Benefits Barometer Working in transport is not characterised by the typical ‘9 to 5’ working hours. Several studies indicate that transport employees work long days and weeks. Transport workers often suffer from health hazards associated with atypical working hours, including, but not limited to: insomnia, long-term fatigue and digestive problems, which affect the

HIGH PRIORITY ■ Incapacity ■ Absenteeism and presenteeism

MEDIUM PRIORITY ■ Variability in salary inflation ■ High employee turnover ■ Low-income earners and incentives ■ Mass exits ■ Strikes ■ Unhealthy finances ■ Young workers

health and well-being of employees. Healthrelated issues often lead to incapacity and absenteeism, which require that employers implement comprehensive schemes to protect them and their employees against the potential health and safety risks prevalent in the transport industry.

LOW PRIORITY ■ Bricks and books and beyond ■ Choice ■ Longevity ■ Pensionable pay ■ Temporary workers ■ Informal workers

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Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

17.1%

Member contribution towards retirement savings as a percentage of pensionable pay

6.6%

Employer contribution towards retirement savings as a percentage of pensionable pay

10.5%

Contribution to retirement funding costs as a percentage of pensionable pay

1.0%

Contribution to death benefits as a percentage of pensionable pay

1.8%

Contribution to disability benefits as a percentage of pensionable pay

1.1%

Average replacement ratio achieved by retirees

26.9%

Average fund credit of active members

R214Â 535

Source: Member Watch™ 2014 data set

There has been a dramatic improvement in average contributions to retirement savings over the past few years. In 2012, the average contribution rate was 14.5% and by 2014 the average contribution rate had risen to 17.1%. This has resulted in a substantial improvement in the projected replacement ratio for a member aged 25 from 49% in 2012 to 73% in 2014.

Average fund credits remain low compared to average salaries at R214 535. Hopefully, the recent improvement in contributions will soon begin to translate into more robust fund credits. At present, the average replacement ratio retirees are achieving, is 26.9%, which will also hopefully improve if the higher contribution rates persist.

A further 1.8% is being contributed to death benefits and 1.1% to disability benefits.

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Chapter 2

Breakdown of benefits offered The most common risk benefit provided through funds in the transport sector is lump-sum death cover, closely followed by disability income benefits and funeral cover. There are also small groups of employers providing additional types of risk benefits such as dread disease.

Given the hazardous nature of work in this industry, it would be desirable for more employers to ensure that their employees have access to disability income benefits.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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4×

4 times fund salary – the death benefit offered by 38.0% of employers in this industry.

Death benefit analysis The range of multiples used for death cover is wide in this sector, ranging from one times cover to nine times cover. Despite this range, most employers offer in the range from two times to four times cover. The most prevalent category is four times cover. Given the hazardous nature of this industry, it is encouraging to see that some employers are offering higher multiples and hopefully this trend will continue.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 19.9% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Partly as a reflection of high contribution rates, projected replacement ratios for the majority of young members are above 60%. Older members’ history of low contributions mean most members are projected to retire with less than 30% of their pre-retirement income.

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TRANSPORT AND TELECOMMUNICATIONS | TELECOMMUNICATIONS

TELECOMMUNICATIONS INDUSTRY The information and communications technology (ICT) industry has done well in the penetration of foreign markets despite firms being generally small. The development of the ICT industry embodies key positive externalities for the wider regional economy.

An important catalyst for the national industry has been the establishment of broadband metropolitan area networks.

The financial services industry is also an important driver of the growth in the ICT industry and in future the fortunes of the two industries may be tied together more closely.

Despite fairly modest fixed-line activity compared to mobile growth, targeted infrastructure programmes such as fibre-optic and broadband initiatives have helped to spur growth in some areas of fixed-line operators.

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Chapter 2

Benefits Barometer Employees in this industry are accustomed to using technology and prefer self-help portals for doing business online. They want to have choice and are able to access information to better inform their decisions, but this doesn’t necessarily mean that

HIGH PRIORITY ■ Choice ■ Temporary workers ■ Informal workers ■ Young workers ■ Unhealthy finances ■ Pensionable pay

MEDIUM PRIORITY ■ Bricks and books and beyond ■ Longevity ■ Mass exits

outcomes in this industry are particularly good. To complicate matters further, just over a quarter of workers in this sector are classified as informal workers and are unlikely to have access to employee benefits.

LOW PRIORITY ■ Absenteeism and preseentism ■ High salary inflation ■ High employee turnover ■ Incapacity ■ Low-income earners and incentives ■ Strikes

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Benefits overview – A high level summary of benefits Total contribution towards retirement funding as a percentage of pensionable pay

11.0%

Member contribution towards retirement savings as a percentage of pensionable pay

2.8%

Employer contribution towards retirement savings as a percentage of pensionable pay

8.2%

Contribution to retirement funding costs as a percentage of pensionable pay

0.7%

Contribution to death benefits as a percentage of pensionable pay

1.4%

Contribution to disability benefits as a percentage of pensionable pay

0.8%

Average replacement ratio achieved by retirees

22.1%

Average fund credit of active members

R387 823

Source: Member Watch™ 2014 data set

The total contribution towards retirement savings declined slightly from 12.9% in 2013 to 11% in 2014. However, the average retirement age increased. This meant that the projected replacement ratio for a new fund member was largely unchanged from one year to the next.

308

The average fund credit of active members is R387 823, one of the higher numbers across all the sectors we report on. This seems sensible given that many employees in this industry are highly skilled and will likely have higher salaries that lead to this higher rand amount saved. Despite the higher average fund credits of active members, individuals are retiring with a replacement ratio of only 22.1% on average.

PART 3

TRANSPORT AND TELECOMMUNICATIONS | TELECOMMUNICATIONS

Chapter 2

Breakdown of benefits offered Income disability benefits are the most commonly offered risk benefit by funds in the telecommunications industry. This is positive for the many young workers in the sector. Lumpsum death cover is almost as common and funeral cover is relatively common. The proportion of employers offering lump-sum death cover has fallen since 2012 when all employers in this sector offered this form of protection. The rest of the profile appears to have stayed fairly static over the period.

Percentage of employers offering each type of benefit

GLA: Approved lump-sum death cover DD: Dread disease cover FUN: Funeral cover PHI: Disability income benefits PTD: Permanent disability benefits TTD: Total disability benefits UGL: Unapproved lump-sum death benefit

Source: Member Watch™ 2014 data set

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4×

4 times fund salary – the death benefit offered by 36.6% of employers in this industry.

Death benefit analysis Death cover multiples in the telecommunications sector range from one times to nine times. The most common multiple offered to employees is four times cover, followed by three times and six times cover.

We assess the benchmark life cover need as a spouse’s pension of 60% of the deceased employee’s annual salary. The current death benefit structure only meets 21.8% of the life cover need for members in this industry.

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Chapter 2

Retirement benefit analysis

Proportion of members

Percentage split of members’ projected replacement ratio benefits

75% + 60% to 75% 30% to 60% 0% to 30%

Age band Source: Member Watch™ 2014 data set

Projected replacement ratios in the telecommunications industry follow a fairly unusual shape. They start badly at young ages, with less than 20% of employees in the lowest age band projected to have a replacement ratio higher than 60%. This situation initially gets worse, but then starts to improve dramatically after employees reach their 40s.

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Appendix The Issues 314 1. Unhealthy finances 314 2. Low-income earners and incentives 314 3. Absenteeism and presenteeism 315 4. Incapacity 315 5. Temporary workers 316 6. Choice 316 7. Bricks and books and beyond 317 8. Strikes 317 9. Young workers 317 10. Pensionable pay 318 11. Variability in salary inflation 318 12. Mass exits 319 13. Longevity 319 14. Informal workers 320 15. High employee turnover 320 References 321 Data 326 Thank you 328

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APPENDIX The issues

THE ISSUES

1

UNHEALTHY FINANCES

Unhealthy personal finances can lead to unhealthy employer finances. Problems highlighted were: ■■ high turnover of staff ■■ increased levels of absenteeism and presenteeism ■■ low morale among employees ■■ healthcare problems among employees ■■ increased levels of fraud, theft and on-the-job accidents.

Taking positive action to reduce financial distress, such as enrolment in a debt counselling programme, has been shown to improve financial status and this also has a positive knock-on effect on health. However, interventions need to be sustained and it can take up to 18 months for the effects to be felt.

2

LOW-INCOME EARNERS AND INCENTIVES

In examining benefits for low-income earners in the South African system it was found that: ■■ because of the means test for the older person’s grant (OPG), saving for retirement does not make sense for many low-income earners.

■■ low-cost risk benefits through a group arrangement are important for workers who support a large number of dependants.

■■ joining a medical scheme doesn’t make sense for workers earning under R72 000 because they lose access to free hospital treatment at government facilities.

Beyond State-provided benefits, retail financial products available to individuals are not cost-effective for low-income earners and employers may need to include lower-income earners in occupational funds.

In examining the incentive structure for savings, we argued that in an optimal benefit structure for low-income earners, the Government should also match contributions. Not only is this easier for workers to understand, but it also fosters partnership with the Government.

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THE ISSUES

3

The issues

ABSENTEEISM AND PRESENTEEISM

Absenteeism in the workplace is a direct cause of lost productivity for an employer. When absenteeism is not managed correctly, employees tend to view their sick leave as an entitlement, using their full benefit.

Monitoring and managing sick leave effectively is critical to detect disability claims before they occur, since temporary absence may be a sign of a disability claim that could become protracted.

Presenteeism is the practice of employees coming to work despite illness, injury or anxiety over personal issues. Presenteeism can also have a direct impact on productivity since, despite physically being at work, the employee produces sub-standard work, if any work at all.

4

INCAPACITY

The strain experienced in certain industries may warrant early retirement. Key indicators include physical strain, emotional strain and loss of physical strength and flexibility. If companies manage incapacity in the workplace correctly, they will mitigate cross-over into disability benefits and manage benefit premiums.

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APPENDIX The issues

THE ISSUES

5

TEMPORARY WORKERS

Temporary or contract workers include fixed-term contractors, project contractors and casual workers who work no more than 24 hours in a month. Their shared characteristics include: ■■ volatile and non-continuous pay ■■ high turnover ■■ varying employment periods ■■ temporary relationship with a given employer.

These characteristics all make providing access to retirement funds and risk benefits extremely tricky.

6

CHOICE

Individuals face a multitude of choices but don’t have a clear grasp of the interconnectedness and implications of these decisions, particularly when it comes to their finances.

The challenge is to identify which decisions individuals need to make and how many are best managed by defaults which preserve an individual’s sovereignty but guide outcomes more carefully.

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THE ISSUES

7

The issues

BRICKS AND BOOKS AND BEYOND

South Africans place a premium on in-kind benefits from employers in two areas: housing (bricks) and education (books). Both housing and education act as partial substitutes for retirement savings. Given their importance, there may be reasons to allow both pension-backed lending and pension fund withdrawal for these two purposes. Other ways employers could assist employees with these two areas include subsidies and education trusts. However, the tax implications of fringe benefits for the individual need consideration.

Note that when an employee leaves the mine or farm, they will no longer have access to these benefits – they lose their home, have no claim on any assets and have to start from scratch. This too warrants consideration.

8

STRIKES

Strikes are a primary issue because of their unintended consequences for employee benefits coverage. When members can’t pay contributions towards approved and unapproved group risk benefits or medical aid, these safety nets can vanish when workers need them the most. Similarly, when employees are dismissed during the heat of negotiations, members may withdraw their retirement savings to cover their lost income.

9

YOUNG WORKERS

Although millennials are unlikely to be loyal to a single employer, employers can build greater employee buy-in by harnessing their preferences to be connected, involved and evolving.

It is important to develop good habits among this group at the outset, while acknowledging the complexities of the environment millennials are joining – with many unlikely to find permanent employment for the first portion of their career.

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APPENDIX The issues

THE ISSUES

10

PENSIONABLE PAY

Pensionable pay is embedded in many individuals’ contracts, but often goes completely unnoticed, or is misunderstood. The problem with this is that it creates gaps in employee protection – both for retirement and risk. For instance, if an employee’s pensionable pay is 70% and their fund’s replacement ratio target is 75%, the fund will only provide a post-retirement income of 52.5% of the employee’s pre-retirement income.

Given that tax benefits for retirement savings will now be based on remuneration and taxable income, companies and funds will have to find ways to communicate in these terms, even if they keep the term ‘pensionable pay’.

11

VARIABILITY IN SALARY INFLATION

In previous years, real salary increases were above 9% for younger members. Salary increases raise an employee’s standard of living, but often translate into increased borrowing and consumption rather than savings. The result is that retirement savings do not keep pace with lifestyles.

But the real problem of high salary inflation is that it may well exceed the assumed rate used to calculate projections of replacement ratios. Unless members adjust their contribution rates or benefit expectations, there is likely to be a shortfall at retirement.

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THE ISSUES

12

The issues

MASS EXITS

The term mass exits describes the situation when a significant number of employees leave a company – either through retrenchments or corporate activity. But unlike strike action, there is typically enough lead time for more contingency planning.

Being retrenched when the prospect of a new job is poor can lead to individuals using their retirement savings to fund their lifestyles. In the case of transfers, members sometimes have the option of accessing their funds even though they will likely join the new employer’s fund. This would not be a bad thing if members acted responsibly, but low preservation rates indicate the opposite.

13

LONGEVITY

Men and women retiring at 65 can expect to live another 16 and 20 years respectively, of which 7 to 9 years will be spent in relatively good health.

Research on how the human brain ages highlights that the older brain often has a better capacity for strategic and visionary thinking; and a greater capacity for the kind of empathetic insights that great leadership demands. All of this points to extending the retirement age for certain groups of workers.

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APPENDIX The issues

THE ISSUES

14

INFORMAL WORKERS

This group includes informally employed domestic workers and gardeners, some types of construction workers, and hawkers and traders. In providing benefits for informal workers, the fund sponsor would have to deal with three key challenges: ■■ cost, which must be rock bottom ■■ administration, which must address the demands of a transient population of no particular fixed address or employment ■■ intermittent employment of indeterminate length.

15

HIGH EMPLOYEE TURNOVER

This is a structural issue in a sector where large proportions of a staff complement exit regularly. It may be due to cyclical requirements in an industry with boom-bust dynamics, or high levels of competition for skills or even high levels of financial stress.

Long-term investment strategies or dynamic benefit structures that shift members’ benefit exposures in accordance with their life cycle requirements are interrupted when a member transfers to a new fund or strategy. Similarly, high employee turnover undermines such compelling strategies as auto-escalation where employees’ contribution rates are gradually increased when their salaries are adjusted. If an employee is constantly switching between employers, they would always be on the lowest contribution band.

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APPENDIX

APPENDIX References

APPENDIX: REFERENCES

References

REFERENCES Edward’s Foreword Gale, J, Goetz, J & Britt, S (2012) Ten Considerations in the Development of the Financial Therapy Profession. The Journal of Financial Therapy, 3 (2) 2012 Jeffery, A (2014) Bee: Helping or Hurting?. Tafelberg.

Part 1: Chapter 1 - The new language Benjamin, D J, Heffetz, O, Kimball, M S, & Szembrot, N (2012). Beyond happiness and satisfaction: Toward well-being indices based on stated preference (No. w18374). National Bureau of Economic Research.

Cogan, J C, Ballah, S K, Sefa-Dedeh, A, & Rothblum, E D A Comparison Study of United States and African Students on Perceptions of Obesity and Thinness. Journal of Cross-Cultural Psychology, Jan 1996. 27(1), 98-113.

CFPB. Consumer Financial Protection Bureau (2015) Financial well-being: The goal of financial education 2015 Dunn, E W, Gilbert, D T & Wilson, T D (2011) If money doesn't make you happy, then you probably aren't spending it right. Journal of Consumer Psychology, 21(2), 115-125.

Gilbert, D (2009) Stumbling on happiness. Vintage Canada.

Helliwell, J, Huang, H & Wang, S (2015) “The Geography of World Happiness” in Helliwell, J, Layard, R & Sachs, J (ed.) (2015) World Happiness Report 2015.

Holzmann, R, Mulaj, F, & Perotti, V (2013) Financial Capability in Low-and Middle-Income Countries: Measurement and Evaluation. http://www.finlitedu.org/team-downloads/overall-tf/financial-capability-in-low-and-middle-income-countries-measurement-and-evaluation.pdf Menzel, P, Dolan, P, Richardson, J, & Olsen, J A (2002) The role of adaptation to disability and disease in health state valuation: a preliminary normative analysis. Social science & medicine, 55(12), 2149-2158.

OECD (2011) Measuring Financial Literacy: Questionnaire and Guidance Notes for Conducting an Internationally Comparable Survey of Financial Literacy. http://www.oecd.org/finance/financial-education/49319977.pdf Rawls, J (1999) A Theory of Justice Cambridge, MA: Belknap Remund, DL (2010) Financial Literacy Explicated: The case for a clearer definition in an increasingly complex economy. The Journal of Consumer Affairs 44(2).

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APPENDIX

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Sen, A (1999) Development as freedom. Oxford University Press.

Wilkinson, R G, & Pickett, K (2011). The spirit level. Tantor Media, Incorporated.

Part 1: Chapter 2 - Understanding decision-making Ashraf, N Karlan, D & Wesley, Y (2006) Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines. Quarterly Journal 0f Economics Bhargava, S, Loewenstein, G, & Sydnor, J (2015) Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options (No. w21160). National Bureau of Economic Research.

Brooks, D (2012) The social animal: The hidden sources of love, character, and achievement. Random House Incorporated.

Cheeks, D (2013) “What It’s Like to Be…A Financial Therapist” Forbes Magazine, Oct 1, 2013 Feinberg, C (2015) The Science of Scarcity: A Behavior Economist’s Fresh Perspective on Poverty. Harvard Business Review, May – June 2015 Fernandes, D, Lynch Jr, JG, & Netemeyer, RG (2014), Financial Literacy, Financial Education, and Downstream Financial Behaviors.

Management Science Gopi, Y (2015) The Impact of Past Performance on Fund Flows – it’s not a simple as you think! BNP Paribas Research, March 2015 Grable, J, Heo, W & Rabbani, A (2014) Financial Anxiety, Physiological Arousal, and Planning Intention. Journal of Financial Therapy, Volume 5 (2) James, D (2014) Money from nothing: indebtedness and aspiration in South Africa. Stanford University Press.

Jeffery, A (2014) Bee: Helping or Hurting?. Tafelberg.

Kahneman, D (2011). Thinking, fast and slow. Macmillan.

Klontz, B, Britt, S, Mentzer, J & Klontz, T (2011) Money Beliefs and Financial Behaviors: Development of the Klontz Money Script. The Journal of Financial Therapy, 2 (1) McCoy, M, Ross, DR & Goetz, J (2013) Narrative Financial Therapy: Integrating a Financial Planning Approach with Therapeutic Theory. Journal of Financial Therapy, 4 (2) Mischiel, W (2014) The Marshmallow Test: Mastering Self-Control. New York: Little, Brown Ndumo, P (2011) From debt to riches: steps to financial success. Jacana Media.

Pink, D H (2011) Drive: The surprising truth about what motivates us. Penguin.

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References

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APPENDIX References

APPENDIX: REFERENCES

References

Steinberg, J (2008) Thin Blue: the unwritten rules of policing South Africa. Jonathan Ball Pub. Sullivan, P (2015) Stressed by Money? Get on the Couch New York Times, Feb 9, 2015 Taleb, N N (2010) The black swan: The impact of the highly improbable fragility Random House.

UCT Unilever Institute (2005) Black Diamond 2005 Report.

Wilkinson, R G, & Pickett, K (2011) The spirit level. Tantor Media, Incorporated.

World Bank (2015) World Development Report 2015: Mind, Society, and Behavior. Washington, DC: World Bank.

Part 1: Chapter 3 - What counts?

Consumer Financial Protection Bureau (2015) Financial well-being: The goal of financial education http://files.consumerfinance.gov/f/201501_ cfpb_report_financial-well-being.pdf Genesis Analytics (2015) Assessment of ASISA Foundation’s Financial Literacy Programme.

Remund, DL (2010). Financial Literacy Explicated: The case for a clearer definition in an Increasingly Complex Economy. The Journal of Consumer Affairs 44(2) Holzmann, R, Mulaj, F, & Perotti, V (2013) Financial Capability in Low-and Middle-Income Countries: Measurement and Evaluation. http://www.finlitedu.org/team-downloads/overall-tf/financial-capability-in-low-and-middle-income-countries-measurement-and-evaluation.pdf Lusardi, A (2008) Financial Literacy: An essential Tool for Informed Consumer Choice? Working Paper National treasury (2013) Budget Review 2013, Pretoria World Bank (2015) World Development Report 2015: Mind, Society, and Behavior. Washington, DC: World Bank.

Zakaria, NF and Sabri, MF (2013) Review of financial capability studies. International Journal of Humanities and Social Science 3(9)

Part 2: Chapter 1 - Dealing with debt James, D (2014) Money from nothing: indebtedness and aspiration in South Africa. Stanford University Press.

Haupt, F (2015) Presentation on Debt, BATSETA June 2015 Conference Rea, M (2014) Sustainability Data Transparency Index (SDTI): A 2014 Review of Environmental, Social & Governance Reporting in South Africa.

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APPENDIX References

APPENDIX: REFERENCES

National Credit Regulator (2014) “Credit Bureau Monitor”, December 2014 World Bank (2015) World Development Report 2015: Mind, Society, and Behavior. Washington, DC: World Bank.

Part 2: Chapter 2 - Taking workplace solutions to the next level Consumer Financial Protection Bureau (2015) Financial wellness at work: A review of promising practices and policies http://files. consumerfinance.gov/f/201408_cfpb_report_financial-wellness-at-work.pdf Fernandes, D, Lynch Jr, JG, & Netemeyer, RG (2014) Financial Literacy, Financial Education, and Downstream Financial Behaviors.

Management Science Finmark Trust (2013) Financial Education Toolkit. http://www.finmark.org.za/wp-content/uploads/pubs/FEtoolkit_unabridged_DevelopingeffectiveFEstrat_SaveActEvaluation_FNL_June2013.pdf Genesis Analytics (2015) Presentation on How do you determine if you are successful, BATSETA June 2015 Conference GTZ (2008) Employee Financial Wellness: A corporate social responsibility, GTZ South Africa Prudential (2014) Financial Wellness: The Next Frontier in Wellness Programs Sieberhagen, C Pienaar, J, & Els, C (2011) “Management of employee wellness in South Africa: Employer, service provider and union perspectives.” SA Journal of human resource Management/SA Tydskrif vir Menslikehulpbronbestuur, 9(1), Art #305 Tahira H, Cazilia L, (2005) Understanding the Impact of Employer-Provided Financial Education on Workplace Satisfaction, Journal of Consumer Affairs 173, 185.

Waddell & Reed (2014) Financial Wellness. http://www.lincoln.wrfa.com/Financial-wellness.6.htm

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Blanchett, D & Kaplan, P (2012) Alpha, Beta, and now ... Gamma. Morningstar Investment Management division.

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References

APPENDIX

APPENDIX References

APPENDIX: REFERENCES

References

Helliwell, J, Huang, H & Wang, S (2015) “The Geography of World Happiness” in Helliwell, J, Layard, R & Sachs, J (ed.) (2015) World Happiness Report 2015.

Kahneman, D and Tversky, A (1979) Prospect theory: an analysis of decision under risk Econometrica (47).

Schade, C, Kunreuther, H and Koellinger, P (2011) Protecting against low probability disasters: The role of worry. Journal of Behavioural Decision Making

Part 3: Chapter 1 - Insights from the IRAS data Odendaal, N (2014) SA one of the world’s most violent, strike-prone countries. Engineering News. 6 August 2014.

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World Economic Forum (2014) The Global Competiveness Report 2014-15. http://www.weforum.org/reports/global-competitiveness-report-2014-2015

Part 3: Chapter 2 - Sector case studies Bureau for Economic Research (Unpublished) Building & Construction Survey First Quarter of 2015, 30(1).

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South Africa: International energy data and analysis. http://www.eia.gov/beta/international/analysis.cfm?iso=ZAF 2015/05/23

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APPENDIX Data

APPENDIX: DATA

DATA Hot Topics Summit Employer Survey 2012 The Hot Topics Summit Employer Survey 2012 was a study designed to gain insight into the link between an individual’s financial state and the impact this could potentially have in the work setting. There were 42 respondents in this survey.

Member Watch™ 2014 Data Set The Member Watch™ data set is a database containing information of individual members of retirement funds administered by Alexander Forbes Financial Services. The analysis prepared for Benefits Barometer 2015 used data as at 31 December 2014. The number of funds in each sector was large enough to give credible results.

Number of funds per sector

Note that Public sector funds included in our analysis are a small number of municipalities that sit outside of the Government Employees Pension Fund. Comments made about funds in the Public sector are not necessarily applicable to members in the Government Employees Pension Fund.

The fund data corresponded to 644 889 active retirement fund members that can be classified by sector.

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APPENDIX

APPENDIX Data

APPENDIX: DATA

Data

Number of members per sector

The large number of members in each sector suggests the data around member behaviour is likely to be relatively credible.

The retirement fund industry consists of 788 905 members and 1 663 funds. We combined this data with fund data where we could not find an appropriate sector classification or where the client’s operations were diversified in holding companies, for example.

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APPENDIX Thank you

APPENDIX: THANK YOU

THANK YOU Benefits Barometer 2015 is the product of three remarkable individuals on behalf of Alexander Forbes Research, Anne Cabot-Alletzhauser, Kelsy Moodley and Amy Underwood. Through extensive dialogue with industry experts and comprehensive analysis of industry data, the team identifies how the industry needs to change to better meet client needs.

Anne, Kelsy and Amy would like to thank the following people who contributed to making this publication the great work in service to the people of South Africa that it is: Edward Kieswetter Belinda Sullivan Michael Kirkpatrick Aletta Raju

John Anderson Lettah Mpanza Gigi Kightley Alison Counihan

Anthea Towert Vickie Lange Dwayne Kloppers

Michael Prinsloo Dean Furman Jeshma Naidoo

Cecilia Augustine Matthew Ryder Deslin Naidoo

External parties who contributed special articles: Deborah James London School of Economics

Michael Rea Integrated Reporting and Assurance Services

External experts who shared their thoughts and insights: Deborah Solomon The Debt Consulting Industry Lindwell Clarke Financial Services Board Alyna Wyatt Genesis Analytics

Stefan Roodt BMW Andries Bester Financial Services Board

Frans Haupt University of Pretoria Law Clinic Tamrynne Peype Financial Services Board

Charlotte van Sittert University of Pretoria Law Clinic Pieter Laubscher the Bureau for Economic Research

Angela Meusen Designer Sharmaine Chanee Production Lisa Wright Editor

Kim Jonson Designer and DTP Irene Stotko Senior Copy Editor

Alexander Forbes Communications team: Myrsheila Wessels Project Manager Nkgomo Bojosinyane Designer Elmarie van der Riet Editor

Michelle Wilson Art Director Sharon Stephen Digital Designer Ziska Baumgarten Editor

To the clients who allow us to analyse their data on an ongoing basis.

Thank you!

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BENEFITS BAROMETER 2015

BENEFITS

BAROMETER 2015

Visit benefitsbarometer.co.za to view and download all three editions of the Benefits Barometer.

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