Emergency savings as an employee benefit
IN THE Benefits Barometer, Vickie Lange, a best-practice specialist at Alexander Forbes, and Michael Prinsloo, the executive head of institutional research and product development, posed the question: “If a financial crisis is one of the contributors to poor preservation, why aren’t we doing more to make saving for an emergency a focus and even an automatic process for employees?”
Lange and Prinsloo say the key issue addressed through an emergency savings regime is that if a financial crisis occurs, the employee can deal with it without destabilising any long-term savings strategies.
“But how can we create a solution that both allows someone to save for retirement while also accumulating an emergency savings cushion?”
They say you can achieve this by splitting off a portion of a member’s pension fund contribution into an emergency savings vehicle. Then over subsequent years, the member’s pension fund contribution is increased each time they get a salary increase. What effectively happens, they say, is that the member achieves long- and short-term targets without having to incur a dramatic shift in his or her consumption.
They give an example of 4% of salary going into an emergency fund until the age of 49, with the contribution towards retirement savings increasing as one gets older, from 10% to 20% (see table). In this scenario, if you earn R7 000 a month, after five years you will have saved R20 000 in the emergency fund, or almost three times your monthly salary. Unused emergency savings would revert to long-term savings.
Lange and Prinsloo suggest that the emergency savings option should be the default one, with members needing to actively opt out if the option was not to their liking.
If they leave the company, Lange and Prinsloo say, employees will have achieved at least two things:
1. They will have accumulated some short-term and long-term savings.
2. They will have learnt about savings and developed a savings habit, and could continue saving in their personal capacity, because the savings vehicle is in their name, not the employer’s name.