Many South Africans face a bleak retirement because they are either not saving enough, cash out their retirement savings when changing jobs or they are following an inappropriate investment strategy. To make matters worse, unfortunate and unexpected life events such as illness and disability or the premature death of a spouse can further hamper the probability of individuals reaching their retirement goals and can ultimately compromise their lifestyle during retirement.
The impact of disability and critical illness
Disability is one of the major influencers which negatively impact retirement outcomes. Momentum Corporate’s claims analysis reveals that disability in South Africa is rising at an alarming rate, with cancer and psychiatric claims leading across all sectors and types of disability cover.
Momentum Corporate’s critical illness claims have increased by 10% each year since 2016, while mental health claims make up 9% of its disability claims on average – and are likely to spike in the near future, particularly due to the impact of Covid-19 on mental health. In addition, musculoskeletal-related claims, which are already one of the top three claim causes, are also likely to rise due to poor ergonomics of home-based offices, as work from home (WFH) continues into the foreseeable future.
Cancer is statistically the fastest-growing critical illness in South Africa according to the South African Medical Journal. Momentum Corporate claims reflect this trend, with an analysis of income disability claims over the last decade showing that overall cancer claims increased by 60% and now represent 16% of all claims.
It seems that a big part of the increase in cancer claims can be attributed to female employees, with the Momentum Corporate analysis showing that these claims increased from 16% of total claims in 2010 to 24% in 2020. The comparative figures for men were 8% in 2010 and 10% in 2020.
Younger employees, the Millennial and Gen Z generations, are also at risk. Again female employees appear to be at higher risk than their male counterparts, with 27.5% of female cancer disability claimants under 40. The comparative figure for male employees is 17.5%.
To make matters worse, the costs associated with treatment for this non-discriminatory disease continue to rise, and it is estimated that the typical medical costs for cancer treatment are usually around R1 million.
Over and above these medical costs, which may normally be covered to some extent by one’s medical scheme, there are also many non-medical related or lifestyle expenses associated with cancer such as transport cost to chemotherapy, home nursing care and equipment and certain lifestyle adjustment expenses. These additional expenses add up very quickly and can cause significant financial vulnerability at a time when patients need to focus their energy on recovering. In addition, members’ levels of disability cover may not be sufficient which means they may receive a lower income during disability.
Members may therefore be tempted to decrease their retirement contribution rates or pensionable salaries in an attempt to increase their take-home pay to cover their normal expenses as well as these non-medical costs. This will have a serious impact on their retirement outcomes.
The impact of a partner’s death
Although South Africans may outlive their retirement savings, the proportion of unnatural, or accident-related deaths is increasing based on Momentum Corporate’s internal data. Younger people, a rapidly-rising proportion of retirement fund members, are at increased risk for accidental death. The increase in the accidental death rate is also reflected in the latest StatsSA Mortality report.
The unexpected death of a life partner or spouse can have a severe impact on the retirement outcomes of the surviving partner. Due to the sudden loss of an additional income, the cost of a funeral and other related costs such as grief counselling, they may find themselves under severe cashflow pressure if their partner was not adequately covered. Besides most South Africans being underinsured and only able to replace approximately 38% of their salaries in the event of death, many do not take out spouse’s life cover.
This insurance gap may force members to dip into their nest egg or to reduce their retirement contributions or pensionable salaries, and even cash out their preservation fund savings to cover their expenses.
An integrated and comprehensive approach can help
The impact of pre-retirement risk factors on retirement outcomes highlights the important role that financial advisers play in ensuring that their clients’ employees’ retirement planning stay on track despite unforeseen life events.
Partnering with the right umbrella fund will promote a holistic approach to financial planning that will reduce the inherent conflict between saving for retirement and making sure members’ insurance cover is at the right level for their needs.
A highly integrated and flexible umbrella fund solution that is coupled with a rewards programme encourages a healthy lifestyle which leads to improved physical health, reduces the risk of disability and critical illness, and reduces medical expenses and insurance costs.
An innovative integration between the rewards programme and the fund can create a virtuous cycle in which employees’ healthy behaviour choices generate financial returns that can be used to cover medical expenses and can even be channeled towards retirement savings.
The right umbrella fund also offers integrated value added benefits to alleviate some of the financial pressures caused by death such as transporting the remains of the deceased and grief counselling.
With the right umbrella fund, all parts work together to fill the financial gaps that are associated with pre-retirement risk factors such as death, disability and critical illness.