From the discussion about social protection, it should be clear that the central objective is to make households sufficiently secure. It is through this security that we are able to build a more inclusive economy.
This security should also be valuable to the household, but as we discussed in 'What’s the context?' about communities and families, many South African households seek this security through other non-financial, informal arrangements. They also often have different priorities and see more security in a house or a well-educated child than they do in a retirement pot. As work from the World Bank and Organisation for Economic Co-operation and Development showed in 'Why it matters?', this is neither irrational nor unfounded. But it does complicate matters for employee benefits.
What further complicates this is that households seldom represent themselves at the table. Instead, they are represented by various agents in different phases of the development of employee benefits.
This use of agents may be eminently sensible. Many of the decisions raised by employee benefits are both cognitively complex and clouded by multiple behavioural biases. However, where it can complicate matters is when the interests of households and their agents are not entirely aligned.
In the first phase of negotiating an overall pay package, many households are represented by unions. Unionised workers rely on collective bargaining to shape their remuneration structure, which includes their employee benefits. By bulking their bargaining power and using informed representatives, this in theory provides better outcomes for individual workers.
Once an overall remuneration structure is set, households are typically represented by trustees. These trustees are drawn from unions, employers and directly elected by members. Where umbrella funds and open medical schemes are involved, trustees are typically professionals from the financial services industry. There is an option for management committees from the participating employer to be involved and represent the specific needs of their employees, particularly in restricted medical schemes.
While these agents are meant to represent the interests of households and seek the best solutions for them, interests may not always be aligned. For instance, sometimes pension fund trustees interpret their fiduciary duty to protect member interests as best achieved by taking the most conservative route – minimising contributions and investment risk – but this may mean that households are unlikely to accumulate what they need.
The same may be true in medical schemes where trustees might choose lower investment risk for fear of reducing solvency levels, but where a less conservative – but still well-thought-out – strategy may assist in reducing contribution inflation over time and improve solvency levels.
Control of the considerable assets at the disposal of some pension funds can also confer significant power on the wielder. Using this power could be an attractive lure to distract agents from their primary purpose of safeguarding household interests. Households may not always understand or agree that a particular decision is in their interests.
Financial services industry
As a stakeholder in the private sector, a more inclusive and sustained growth path should be eminently valuable to the financial services industry. But as social protection, especially employee benefits, evolves to close gaps and respond to government reform, the industry’s role in the system is likely to shift.
In 'What’s the context?' on culture, we indicated that the financial services industry needs to apply their expertise and resources to a wider demographic. Critically, experts in the financial services industry can help households manage the complex issues around trade-offs in their financial decisions.
To this end, the more we can understand about the complete picture for the individual and their dependants the more meaningful the advice on trade-offs can become. The industry needs to move toward helping individuals assemble the complete picture.
In 'How has it changed' we discussed how moving from DB to DC has changed the industry’s roles and responsibilities. As risks have shifted from employers to households, this has created the need for the financial services industry to redirect its expertise towards helping households manage these risks.
In all of this, a key challenge remains resolving the information asymmetries in the industry. It is in this vein that much of the reform in this industry is emerging, including Treating Customers Fairly (TCF). It is difficult for households to understand the products provided by this industry and how they can be used to meet the households’ goals. The expertise of the industry needs to be directed continually towards helping households to understand what they do need, what they don’t need and the simplest way to meet their needs.
The financial services industry has a key role to play in employee benefits. In playing this role, it will need to ensure profit-making and social purpose remain aligned. If it does this, it can regain trust, make money and make a difference.