The employee benefits system consists of a number of inter-related benefits, including retirement benefits, death and disability benefits, medical scheme subsidies and financial education. The stakeholders in the system include households, the government, unions and employers and these too are connected. Employee benefits are typically designed to deliver physical, mental and financial well-being. These affect each other. If the employee benefits connection between different aspects of well-being.
Say you are an employed South African. You have an employer that pays you a salary and offers you employee benefits. You have boards of trustees and the company’s human resources department looking after these benefits. You may belong to a union which protects your right to a fair remuneration package and your right to strike. You may even have taken out some of your own personal insurance policies and bought more savings products from a very large, and presumably very smart, financial services company. Finally, you have the government providing a safety net if everything goes horribly wrong.
Certainly, you should have every expectation that this system will meet your financial needs. Think again.
Financial health involves having enough income and net assets to meet your needs throughout your life with enough protection in place to ensure that you can maintain this, irrespective of what life throws in your path. The fact is that you, and many other employed South Africans, are probably not financially healthy, despite the efforts of employers, unions, financial services providers and the government.
South African Reserve Bank (SARB) data indicate that between the fourth quarter of 2005 and the first quarter of 2012, South African households had more debt than savings1. There has not been such a sustained period of household indebtedness since the Reserve Bank began recording this data in 1960. The average retirement fund member is projected to replace just 39% of their gross income relative to an ideal target of 100%2 they need if they want to cater for their healthcare and other needs in retirement.
This poor financial health may be placing additional pressure on other aspects of well-being. When considering people in poor financial health, 82.5% reported a deterioration in physical and mental health3. In turn, poor physical and mental health can jeopardise job security4 and be extremely costly. These two factors impact negatively on financial well-being. This is explored in greater detail in 'Unhealthy finances'.
While individuals must bear much of the responsibility for their financial well-being, improving the employee benefits system requires a broader outlook with input from all stakeholders.
A holistic approach is essential to improving the employee benefits system. This involves an increased focus on the integration between all stakeholders and all benefits. In addition, the understanding that physical, mental and financial health are inter-related is critical.
The Importance of Integration South African employers have long offered employee benefits, such as retirement funds, group risk benefits, healthcare subsidies and financial education. However, given the increasing financial pressures on employers, we need to pay more attention to designing benefits that better meet both the employers’ and employees’ needs. Employees may try to address potential shortfalls in their overall personal wellness by buying additional financial products and services. These may be bought either by the household directly or through affinity groups such as unions. But even with additional products and services, expectations might still not be met because of a lack of integration. These interdependencies are illustrated below
The ripple effect from a single change of one aspect of the complex system of benefits provision can be significant, particularly if not understood or managed.
A holistic approach is essential to improving the employee benefits system. This involves an increased focus on the integration between all stakeholders and all benefits. In addition, the understanding that physical, mental and financial health are inter-related is critical. Ignoring the interactions between the various components creates inefficiency in the employee benefits system. For example, the government’s older person’s grant (OPG) may be enough to meet the basic needs of a low-income earner. Requiring this individual to contribute to a compulsory employer-based retirement fund while working may reduce their standard of living due to the contributions payable, as well as cause them to lose access to the OPG for which they may otherwise have qualified. This is discussed in the article 'Low-income earners'.
By way of a second example, trustees of a retirement fund may try to increase the portion of contributions directed towards retirement funding by reducing the amount paid for disability insurance. One way of reducing the cost is to increase the waiting period that must elapse before the benefit starts. However, an employee with a disability claim may then run out of paid leave before the disability benefit starts, resulting in a break in income. This in turn may leave them unable to afford continued medical scheme membership at a time when they need it the most. The irony is there may be cases where early intervention triggered by an absenteeism management programme could have kept the employee productive. 'Absenteeism and incapacity' are discussed in more detail later on.
Hence, the ripple effect from a single change of one aspect of the complex system of benefits provision can be significant, particularly if not understood or managed. This inter-connectedness can also be used to effect positive change. An employee assistance programme can offer employees financial advice, which can help with their levels of indebtedness, which in turn frees up more money for saving or buying risk benefits as a household. Integrating this with a wellness programme that allows employees to track and be rewarded for their progress may support these positive changes. 'Incentives' are discussed in more detail further on.
Many employers have not reviewed their employee benefits structure in over a decade5, despite the rapid changes in the economic climate. Now might be a good time to stand back and consider what benefits are offered to which employees and the objectives of such a programme. Employers may not extend benefit coverage to all employees. Informal and temporary workers may be excluded, as discussed in 'Temporary and informal workers'.
Employee benefits can also benefit the employer when they are structured in such a way that they improve organisational performance, as discussed next. The impact of employee benefits on organisational performance is twofold:
Employee engagement and organisational performance
An engaged work unit is 38% more productive and 27% more profitable than a disengaged one6. In addition, organisations with top quartile employee engagement levels have enjoyed a growth in earnings per share 2.6 times greater than organisations with below-average employee engagement levels6. Another study found that over a 12 month period, organisations with high levels of employee engagement showed an improvement in operating income of 19.2%7. In contrast, organisations with poor employee engagement levels saw a decline in operating income of 32.7%7.
So there is a clear relationship between employee engagement and financial results. The precise role of employee benefits in stimulating employee engagement is difficult to quantify but is relatively intuitive. In an Alexander Forbes Survey8, all respondents stated that the wrong employee benefits could lead to disengagement. When asked if employee benefits were important for employee engagement, 84% of the employers responded ‘yes’ with just 13% stating that other aspects of the work environment were more important and 3% of employers stating that they were uncertain.
Physical, mental and financial health and organisational performance
Holistic employee benefits programmes that are structured to address physical, mental and financial health can offer employers a significant return on their investment. For every rand invested, returns can range from R4.50 to R23.009. This return is delivered through improved financial health and savings on absenteeism, retraining costs and the cost of insured benefits.
Clearly, offering the ‘right’ employee benefits package is important. This involves finding the right mix of pay, employee benefits and other benefits like training. These three components form the total rewards system.
There are five factors that can assist in determining employee benefits structures that deliver value for employers and employees:
Statistics suggest that, to date, South African employers have not been successful at offering a full spectrum of wellness benefits, let alone integrating them. Although 92% of the employers we surveyed agreed that looking after the financial, physical and mental wellness of their employees would boost productivity, only 28% of them incorporated all three into their wellness programmes10.
Wellness programmes and initiatives to boost employee engagement may yield mediocre results unless education and communication strategies support them.
Perhaps employers are reluctant to invest more in their wellness programmes because of the poor uptake of these interventions. Almost two-thirds of employers surveyed reported that their wellness programmes were used by less than half of their workforce, mainly due to a lack of interest or awareness10. Wellness programmes and initiatives to boost employee engagement may yield mediocre results unless education and communication strategies support them.
Educate and communicate
Where the default employee benefit arrangements are not appropriate to employees’ needs, individuals may make certain choices to try to rectify this. These might be choices exercised within the employee benefits system or decisions to buy additional products. Unfortunately, employees are seldom proactive and when they do make choices, they can often be inappropriate. This may be because they do not understand their overall financial state or the impact of their decisions. The dynamics of choice are discussed in more detail in 'Choice', but part of the problem is the lack of a benefits education strategy, which includes meaningful and adequate communication.
Focus on needs
Understanding Maslow’s Hierarchy of Needs11 helps guide the discussion as to how employer benefits packages could be more effectively structured. Maslow argues that a specific need cannot be met until the needs lower down the hierarchy are met. We can see that medical scheme subsidies may meet an employee’s need for health security but this benefit would have considerably less value to an employee without access to the more basic need of clean water. Another example of an employee benefit interpretation of Maslow’s Hierarchy of Needs can be seen in a pilot survey12 conducted by Alexander Forbes. The survey shows that the most popular benefits for blue-collar workers correlated with physiological and safety needs, whereas management had greater achievement needs as indicated by the graph below. This demonstrates the dangers of a ‘one size fits all’ approach to employee benefits design.
If a company is conveying an image of ‘quality’ externally, it would be somewhat jarring if its employee benefits were ‘cheap and cheerful’.
Organisational value consistency
Every organisation requires a brand that speaks to their values. Millions of rands are spent on building and maintaining brand messages to generate current and future revenues. But are those same messages being conveyed to employees through the employee benefits system13? If a company is conveying an image of ‘quality’ externally, it would be somewhat jarring if its employee benefits were ‘cheap and cheerful’. All communication about employee benefits should continue to promote the organisation’s values. The result is the feeling of a bespoke programme that is part of the organisation that the employee belongs to.
Given the rapid pace of change for both employers and individuals, it is unlikely that a static package will meet everyone’s needs over time. However, while almost half of employers perform some level of review of their benefits programme annually, a further 34% seldom review their programme14, as shown in the graphic above. A survey of over 1 000 funds in 2011 confirmed that 94% of retirement funds had not reviewed their death benefits in a decade15. Clearly, more needs to be done to ensure benefits keep pace with economic and demographic changes. The below protocol can be used to perform this regular review.
Employee benefits systems can improve the overall well-being of employees as well as raise employee engagement levels. However, unless the inter-dependencies between different aspects of well-being, different stakeholders and different benefits are recognised, the system is unlikely to deliver to its full potential. At a high level, if the system is integrated and the benefits structures are needs-based, regularly reviewed, values-consistent and coupled with an education strategy, this should improve employee welfare and employer profitability.
1 South African Reserve Bank, KBP6287L, Household Savings Rate as a Percentage of Disposable Income, Seasonally Adjusted Data
2 Butler & Van Zyl (2012b)
3 Garman et al (1996)
4 O’Neill et al (2006)
5 Alexander Forbes Research and Product Development
6 Gallup Organisation (2006)
7 Towers Perrin – ISR (2006)
8 Future of Employee Benefits Employer Online Survey 2012
9 Data from Alexander Forbes Health Management Services for a large client
10 Hot Topics Summit Employer Survey 2012
11 Maslow (1943)
12 Future of Employee Benefits Employer Online Survey 2012
13 Hunt & Landry (2011)
14 Total Rewards Perspective Survey 2010
15 Alexander Forbes Research & Product Development