Why it matters? The Role of Employee Benefits

Employee benefits matter. They matter because in the periods when a breadwinner is unable to earn an income, they may be the only financial buffer that stands between a household and destitution. And that matters for South Africa. Benefits Barometer 2013 analysed why the current system is failing and identified that the key issue is the fragmentation of an interconnected system.

To fix this, all stakeholders need to work together – employers, the government, the financial services industry and, most importantly, fund members and their dependants, who are primarily represented by trustees and unions. Since then, we have realised that many stakeholders don’t grasp the implications of the system failing. They don’t see the bigger picture. So, in this and the next three chapters, we will layout exactly where employee benefits fit in for all South Africans. We will paint you the bigger picture.

How employee benefits fit into social protection

In Benefits Barometer 2013:'The outcomes of the employee benefits system', we identified four components of employee benefits: healthcare benefits, risk benefits, retirement funding and financial education. We will return to financial education in a later section as it influences the decision making behind the other three, but for the purposes of this section, we will focus on the first three. They all share the common characteristic of providing for a household in some way when the breadwinner can’t as a result of sickness, death, disability or old age. By providing for these emotional and financial shocks, these benefits act as social protection. Social protection exists to protect households from such shocks and provide a social floor. This means that employee benefits form part of the social protection structure for South Africa.

¹Good social protection is crucial for an economy. By protecting households from shocks and providing a social floor, it helps to prevent households from falling into poverty, reduces the duration of poverty, assists with redistribution to make a society more equal, and facilitates a pro-poor growth path¹.

This goes to the root of South Africa’s development conundrum. We cannot continue to grow with such deep schisms dividing the haves from the have-nots. We have to find a more inclusive growth path. The role of social protection in supporting this is clearly acknowledged in the National Development Plan (NDP):

“Social protection is at the heart of reducing poverty and inequality. It combines the objectives of alleviating and preventing poverty and protecting individuals against social risks, as well as empowering individuals to seize opportunities for decent employment and entrepreneurship. It should enable a degree of security in normal times and serve as a safety net in times of crisis²”

The main pillars of social protection

The provision of social protection can come from a variety of sources, including the government, the private sector or through families and communities. 

The government takes responsibility for providing the social floor, or minimum level of protection. In South Africa, the government provides this through a combination of social grants and in-kind benefits, such as free or subsidised healthcare and education. 

The challenge is that the government can only take responsibility, and only intends to take responsibility, for providing the minimum. However, once individuals have access to formal employment and a decent income, they are likely to maintain a higher standard of living and through the employee benefits structure, they have the ability to protect that standard of living. Employee benefits provide for a rising floor for households.

The NDP identifies the need for the private sector to transition individuals from being dependent on the government to relying on their own resources, both when their income is secure and when it is threatened. The government continues to play a role, but instead of being the direct provider of protection, it becomes the guardian of the framework. It provides incentives and ensures that the system, and what it offers individuals, is sound.

The private sector intermediates social protection for working South Africans employed in the formal sector, in the form of employee benefits. The government sets the objectives and the private sector identifies the appropriate mechanisms to achieve them. In 'How has it changed' we will look at how that intermediation works, how it has changed over time and the potential implications.

Communities and families also play a crucial role in providing social protection in South Africa. Other stakeholders, including policymakers and financial services companies, have often been slow to recognise the rationality of non-financial strategies for social protection. In 'What’s the context?' we will explore the role that these strategies play and the dangers of undermining one form of social protection in favour of another.

The financial provision of social protection

The purposes of social protection for the working class 
Employee benefits are often the only form of financial savings or safety net for many working South Africans, beyond the bare minimum provided by the government. Because they are not the poorest of the poor does not mean that providing for their social protection has any less of a role to play in developing a more inclusive growth path for South Africa.

Research³ shows that social protection for the middle class is also good for the poor in the long term. This is because by providing an income floor, social protection allows households to take greater risks, such as investing in human capital – for instance, through education – and making good decisions to improve their future income⁴.

This means that we have to get social protection rights for individuals. And for working households, this means getting employee benefits right. If it isn’t right, then it won’t alleviate risk; if it doesn’t alleviate risk, it won’t help households to boost their income over time; and if it doesn’t do this, it won’t lead to more inclusive growth. Social protection should improve the distribution of growth over time, and if it does not, we need to question its design.

Social protection also has ancillary benefits. For one, employee benefits should progressively assist in relieving the burden on the government. The NDP’s recommendations rely on a smooth transition from education to employment that progressively reduces reliance on the government. This only works if households shift from depending on the government when their income is threatened to depending on private protection, primarily provided through employee benefits.

If this doesn’t happen, the NDP argues that the social grant system will become unsustainable⁵. Currently, poverty in South Africa is frequently linked to disability and age. If employment doesn’t offer a meaningful way out of these traps through employee benefits, households will continue to place a strain on the government.

Employee benefits also pool savings for capital market development and investment – though this is not the primary purpose of any form of social protection. The challenge is to get these savings to serve the interests of society in the long term rather than just maximising short-term returns.

Conclusion

The implications for employee benefits 
By placing employee benefits into the wider context of social protection, it becomes apparent that this isn’t simply about maximising replacement ratios, death cover multiples or medical cover. It’s about something far more holistic and inclusive. It’s about an individual’s physical, mental and financial health. Essentially, the role of a retirement fund is to:

• Provide an income in retirement.
• Provide benefits to dependants or members should a member’s income generation cease.
• Invest assets in a way to ensure that the member can retire in a world where the quality of life and quality of the environment are worth something.

While these points link retirement funds directly to the social protections envisaged in the constitution and the NDP, they play an even bigger role.

Social protection exists to look after the household, and by doing so, serves its purpose for society. Acknowledging this should profoundly change how we view employee benefits. Getting employee benefits right isn’t about being nice to employees, it’s about safeguarding the future of our society.

The challenge is that employee benefits is only one element of social protection. At present, South Africa’s system is not comprehensive and while there are initiatives underway at a government and society level to improve social protection, they are likely to take some time.

In the interim, much can still be done to improve the employee benefits component, and in 'The way forward'to improving employee benefit engagement: We will explore some of the options that do exist. In designing these solutions, we always need to keep in mind the broader fabric of social protection, ensuring that employee benefits add to and don’t subtract from the protection households have.

We also need to keep in mind protections that are provided by the other elements of the system – the government and broader society, through families and communities. In doing this, the private sector – employers and financial services companies – can make a meaningful contribution to improving protection for households. What we need to be wary of are changes that improve employee benefit outcomes – replacement ratios or death cover multiples – at the cost of other forms of social protection.

We can’t neglect the bigger picture.

References

1 Aldermann & Yemtsov (2012)
2 National Planning Commission (2012)
3 Barrett, Carter & Ikegami (2008)
4 Aldermann & Yemtsov (2012)
5 National Planning Commission (2012)