/ 8 July 2008

Changing jobs could be costly

Changing jobs could cost you R300 000 in medical funding. As companies move from traditional company benefits to cost-to-company packages, many people are unaware of the value of their existing pension benefits. David O’Brien, head of retirement reform at Old Mutual, says prior to 1998 many large corporates offered post-retirement medical aid funding as part of their retirement package.

But, as companies became increasingly concerned about the liability this created for the future, new employees were not offered similar packages. The recent Old Mutual survey shows that 26% of companies offer medical benefits after retirement.

The public sector, however, does still offer it. So if you are fortunate enough to have this benefit, you need to understand the financial consequences of changing jobs. The actual figure on your new employment contract may not be as good as it looks.

Bernie Clark of Alexander Forbes Health says for a 50-year-old whose current employer provides a 50% subsidy on medical aid contribution post-retirement the current value of that benefit is in the region of R302 000.

If you do not have this retirement benefit, it is a strong reminder of the need to ensure that one has saved enough for retirement. O’Brien says employers have moved the risk of retirement funding on to employees without employees fully understanding what that might cost them in the future.

If you are moving to a cost to company package, you should save an additional amount every month into a retirement annuity (RA) to ensure that your post-retirement medical costs are covered. Clark says that a 40-year-old who wishes to make provision for medical aid contributions once he or she is retired would have to save an additional R2 467 a month. If you are leaving behind post-retirement medical provision when you change jobs, you need to make sure you save this additional amount each month and build it into your new employment contract.

When changing jobs you also need to find out what risk benefits your new employer offers. John Kotze of Old Mutual says that with the dramatic increase in Aids deaths, which has seen death claims doubling over the past 20 years, many companies have adjusted their risk benefits because of rising costs of death and disability. The funds have either absorbed this cost by reducing the amount of money allocated to retirement funding or by decreasing death and disability benefits.

Different industries have had different cost impacts depending on the level of death claims. For example: the transport and mining industry experiences on average 20 death claims per 1 000 employees each year, compared to about four death claims per 1 000 employees in the financial sector.

So when you’re planning on changing jobs, find out if your new employer offers a similar level of risk cover. If not, work out how much you would have to pay an insurer to maintain your risk cover and build that into your salary negotiations.

Trustees may prevent withdrawals
Asking people to save extra each month to fund medical care is pretty irrelevant when people are already not saving enough. The latest figures show that 90% of South Africans retire with inadequate savings. The problem is not that people do not save every month into their pensions, but rather that they withdraw on resignation.

The Financial Services Board’s 2006 annual report showed that R72-billion flowed into the private pension fund industry in 2006, yet a massive R86-billion was withdrawn because of death, disability and resignations.

Craig Aitchison, head of Old Mutual Actuaries & Consultants, argues that trustees could protect the interests of existing members by automatically moving the withdrawal benefit to a preservation fund and providing counselling for members o­n the importance of not spending their accumulated retirement savings.

Aitchison says members who feel that they need access to money to tide themselves over until starting their next job can then elect to make a withdrawal from their fund. Depending on the rules, preservation funds usually offer a once-off withdrawal before retirement. The Old Mutual survey showed that 93% of all funds indicate a sense of responsibility in encouraging exiting members to preserve their retirement fund benefits while only 50% provide advice and counselling to members who exit the fund for reasons other than retirement.