There are signs that owner-managed businesses, typically seen as unwilling to provide pensions and insurance cover for their workers, can become enthusiastic contributors if the fund is affordable and tailored to their needs.
Small business owners’ single-minded focus on the survival of their business rather than on the financial well-being of their workers has certainly contributed to their bad reputation as providers. But the exponential growth of a little-known provident fund shows that if the scheme is right, business owners are willing to join.
Absa’s Small Enterprise Provident Fund does not have a marketing budget, says the bank’s Leon Mostert, because it will drive up the costs of the low-fee fund. Yet, in the two years since the bank has transformed the scheme from a small provident fund for domestic workers into one for the employees of small businesses, 1 200 businesses have joined up 14 000 employees and the fund’s assets have grown to R41-million.
This is despite the fact that the marketing of the fund through the traditional channels of financial advisers is “a major challenge”, according to Mostert, because brokers tend to focus on higher-earning, high-end products. “We try to market it by word of mouth,” says Mostert.
Business owners’ interest in the scheme has little to do with the planned national social security scheme, according to which all employers will have to contribute a percentage of wages to a pension fund. Mostert believes that they are largely unaware of the coming changes in the law, due over the next few years. Rather, employers are fearful of losing their employees in a skills-scarce environment, and financially literate workers are increasingly putting pressure on small employers to contribute.
Their willingness to join seems to have to do with affordability. Where traditional umbrella funds — pooled pension funds to which more than one employer can belong — often turn away businesses with fewer than 10 employees, a single worker can join the Small Enterprise Provident Fund.
The minimum contribution per employee required by traditional umbrella funds, expressed as a percentage of wage, also tends to be prohibitive. But the Small Enterprise Provident Fund is plan-based, not salary-linked, offering business owners 10 different packages to choose for their employees.
Each employee can be signed up to a different package.
The two cheapest packages, Plan A and B, for example, require monthly contributions of R80 per worker — to be raised in August to R100. Plan A is a pure savings package for an employer who may have already taken out a life insurance policy for his worker and is now looking for pension provision only.
Plan B is a combination of savings, life insurance cover of R5 000, disability of R5 000 and funeral cover of R7 500.
The successive plans increase in contributions and benefits, and go up to Plan J, which requires a contribution of R1 020 per month, offering life insurance of R200 000, disability of R200 000 and R10 000 funeral cover. An amount of R623 of the R1 020 contribution goes towards pension investment, and the rest to insurance and administration. There is no ceiling for the contribution to Plan J, so that extra savings can be paid in over and above the R1 020.
Because it is a group scheme, the insurance cover is much cheaper than buying a policy for an individual worker, says Mostert. “In the retail market, you will not get R10 000 worth of funeral cover for less than R30, but (with Plan J) it only costs R15.”
The administration fees charged begin at R11 per month for the cheapest package and goes up to R85 for the highest plan.
“All workers [of a joining business] do not have to belong to the same plan. If a business owner has 10 workers, each can take out a different plan according to their needs,” says Mostert.
If the business joining the fund is registered as a CC or a company, the business owner himself can also become a member, together with his workers. The contribution of a sole proprietor for his own membership is not tax deductible.
Mostert says that while the scheme beats the cost of any other umbrella fund, it is not ideal for high-earning employees who need salary-linked pension contributions in order to optimise tax efficiency.
But why is this fund the only one of its kind in South Africa if Absa has proven that it can be sustained and that the demand for it exists? Mostert says that, because of its low cost structure, it is simply not profitable enough for financial institutions to focus on. The systems have to be strongly geared for the lowest possible operating costs. “You have to collect the contributions from 1 200 different pay points; you have to reconcile them and allocate them to every member. It becomes very expensive if your systems can’t cope with it,” says Mostert.
Absa regards the fund “as almost social responsibility”, and as a way of drawing in growing business owners as clients, who later become profitable to the bank in other ways, says Mostert. But, it also provides the bank with an opportunity if the planned national social security scheme will allow employers businesses to opt out of a future national state pension fund in favour of approved private schemes.
Absa has a similar plan-based scheme for domestic servants as well as for farm workers.
David Gluckman, Sanlam manager for umbrella solutions, says only about 40 000 employers with more than 10 workers belong to umbrella funds. A further 80 000 do not belong to any fund. He says cost advantages only tend to kick in when an employer brings in more than 20 workers into an umbrella fund.