How medical inflation has corroded pension capital
Pensioners have five big enemies – drops in investment markets, inflation, wrong pension choices and medical inflation which outstrips CPI inflation.
One of the biggest underminers of pensions is the spiralling cost of health cover. Not only do the contributions exceed normal inflation but benefits are often reduced, leaving people uncovered even where they thought they were covered.
And Covid-19, if the lockdown does not work, will see an overburdened health system and costs rising even further.
One of the contributory factors is that many people do not make the right choices because medical aid schemes use language and codes which are simply not understandable by ordinary members, particularly pensioners.
It is rather like the life industry used to be. The life industry (and now the medical aid industry) used everything to confuse its policyholders rather than assist them to make the correct decisions.
The combination for the pensioners means that many cannot afford to be on schemes or that they must reduce their cover to a cheaper option. This, at the very time when they need full medical aid cover.
As you age, your claims start climbing at a rapid rate. It has been suggested, tongue-in-cheek, that the way to estimate ages is to count how many medical tablets one has to take daily.
There is no freeze or partial freeze on contributions or claims. Pensioners pay what non-retired members pay and receive the same benefits. The only advantage they get is a better tax refund on medical expenses.
There is an interesting booklet published recently by Alexander Forbes on the Sustainability of Pension Fund Investment in achieving long-term acceptable investment returns. One of the chapters is on the sustainability of medical aids. In doing so the survey spells out a lot of details about medical claims and costs.
At a recent conference on the booklet, Zaid Saeed, a senior specialist at Alexander Forbes who specialises in health issues, detailed some of these issues.
For example, he says, medical claims are closely linked to age and rise by an average of 2% a year. But again, this is an average. When the data is broken down, it shows a gradual climb until about the age of 45 and then it starts taking off.
The pensioner ratio of medical schemes is steadily climbing with 10% of open schemes members and 8,5% of restricted schemes being pensioners.
The research shows that the elderly membership changes between different schemes, such as Keyhealth and Profmed and Premium Health showing an upward trend towards the aged in 2018. The biggest open scheme, Discovery, has an average age profile that is slightly older than the industry average and also has experienced an upward trend in age over the last three years.
Keyhealth had one of the highest average claims and average contributions in 2018, driven by the fact that they also have one of the highest pensioner ratios in the industry. The higher contributions were necessary to ensure a financially feasible claims ratio.
What the research does not show is how many members above the age of 60 are opting out of medical schemes or downgrading to cheaper options.
Saeed says the age profile of all schemes, both open and restricted, shows a rising average age, which dropped slightly in 2018.