In this model, depending on how much the employer and employee are willing to contribute, it could take over four years and three months to accumulate the required amount of three months’ salary. This may just not be viable. Employers might need to set higher minimum contribution rates as one solution. At an employee contribution rate of 5% and matching employer contribution rate of 5%, it would take just over two years to save the required amount. This seems like a much more reasonable amount of time.
The success of this method relies on how generous employers are willing to be. Securing the employee’s peace of mind could be an easy investment decision for many employers. Structured correctly, an employer could even justify funding the exercise from employee engagement resources.'Why South Africans can't meet their funding needs now' takes a closer look at how we can solve for an emergency savings fund while addressing the member’s other long-term savings objectives.
CUTTING THE CLOTH TO FIT THE COMPANY
To illustrate how broadly different the optimal solution for a given company could look, let’s examine how two different employers have implemented this at two very different set-ups.
Model 1: Consciously rewarding prudent savings behaviour
In this example, the employer determined that a reasonable emergency savings cushion would be approximately three months’ after-tax salary. They also recognised that accumulating such an amount without putting significant pressure on the family would take too long. Given this constraint, the employer stipulated that the employee only had to save up to one and a half month’s salary by making monthly contributions over two years. In turn, the employer agreed to make an up-front contribution of one and a half month’s salary into the savings pool every time a new employee came on board.
As the employee contribution would come out of employees’ after-tax income, the employee would be free to withdraw the funds at any time, for whatever personal reason they might have. But, should a real financial crisis emerge, the employer would only release their contribution pot if they receive a legitimate emergency claim.
One challenge here might be determining what constitutes a genuine financial emergency. Again options will be necessary. If there was indeed a financial crisis and the employee had demonstrated a responsible commitment to saving, the employer could release the matching amount. Clearly such a crisis would have to pass a qualifying test, which could be vetted through a set of pre-existing rules.
The claim of a financial emergency could also trigger a session with a Financial Well-Being Consultant. This would ensure that any employee experiencing a financial crisis receives help as to how to get their financial affairs back on track.
Model 2: Helping employees help themselves
The thinking behind this model is to have as little employer intervention as possible and to capitalise on the ways that peer groups with a common purpose and common needs provide some of the most effective policing and coaching support.
In this case, the employee joins a workplace stokvel specially designated for their employer, but controlled exclusively by the members. Payroll would still automatically collect monthly contributions to this stokvel, but these funds would then be channelled into a single pool and invested into a unit trust specially designed to service stokveltype savings clubs.
A stokvel is an informal rotating credit union or saving scheme where members contribute fixed amounts of money regularly to a central fund. What makes them particularly effective is that members generally know each other and ensure that each participant fulfils their obligation to the savings club. Stokvels are exempt from the Banks Act. For further discussion, please see 'What do our members want?'.
Like many stokvels, this fund would function yearly. Contribution rates could be determined in advance by the individual for the year and apportioned into monthly deductions. Should an individual require access to emergency funding, they would be entitled to their full year’s contribution at any point, but there would be a nominal interest charge on that loan and the borrower would forgo any capital gains or interest accumulation that their investments would have earned. The great power of the stokvel model is that regular monthly meetings offer all-important peer-group support where tips and insights become a real bonus for the participant.
