• Michael Prinsloo

New approach to savings help combat financial emergencies

To mark World Savings Day on October 31, Alexander Forbes has identified a novel approach to emergency savings where employers help their employees with short- and long-term financial needs.

Michael Prinsloo, Managing Executive: Research & Product Development at Alexander Forbes said the idea behind the emergency savings approach, touted in 2018 Benefits Barometer, an Alexander Forbes research publication focusing on the financial services industry, was to help corporates leverage the power of compulsory long-term savings to help employees who find themselves in financial emergencies.

“This offers employees a sense of immediate value, as they can experience the benefits of their savings throughout their lives,” Prinsloo said. “The solution could be employer driven, member driven, a stokvel-type model or a combination of these. Employers have a key role to play in the overall well-being of their employees, which bring benefits to the employees and employers. Employers can demonstrate this via an employer-driven solution.”

Prinsloo gave the example of Company A, which decided to use retirement savings to provide an emergency savings plan for its employees. “The aim is to build up some short-term savings (to deal with emergencies) without sacrificing retirement income objectives. The way it achieves this is by reducing retirement savings for younger members of the retirement fund.”

A portion of their contribution to the fund is redirected to an emergency savings plan. Over time, the accumulated savings in the emergency savings plan will grow. “To make up for the lower contributions members make to the retirement fund when they are young, their retirement savings contributions automatically increase as they get older.” Prinsloo said this could be done at salary increase time to limit the immediate financial impact on take-home pay. “This practice helps to put the member in a neutral or better financial position at retirement, while having access to savings during their working lives when the need arises.”

Prinsloo explained that the benefit of an employer-driven model was that it could be provided as a default solution, with the choice to opt out. “The employer determines the savings level and makes payments through the payroll system. This approach alleviates employee apathy, ensuring more employees needs are met over the course of their lives. Employees will have amassed short-term and long-term savings and will have developed a savings habit.”

“This is the sort of solution employers need to be implementing to assist employees through the savings journey and it recognises the need for access to emergency savings,” concluded Prinsloo.


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