Switch to DC funds leaves members underinsured

One of the major reasons that so many South Africans have too little risk life assurance is the conversion, during the 1980s and 1990s, of retirement funds from defined benefit (DB) funds to defined contribution (DC) funds.

Most DB funds assured their members for a fixed amount of cover based on a multiple – an average of two or three times – of their annual pensionable salary. If a member died before retirement, the member’s spouse would receive a pension calculated mainly as if he or she had been a fund member from the date of employment until the normal age of retirement.

In the DC environment, the nonmember spouse will receive only the amount of money saved, plus investment returns, and then an assured amount as a multiple of the fund member’s salary. So if you, the fund member, die relatively young, before you have accumulated much in the way of retirement savings, the life assurance component, as a multiple of your salary, will not be enough to meet the needs of your dependants.

On the flip side, a fund member who is approaching retirement will need very little life assurance cover.

Retirement fund members are now being offered products that allow them to choose, above a minimum amount, how much of their retirement fund contributions must be allocated to retirement savings and how much to life assurance; or they are being offered products that pay a much higher benefit (say, eight times their annual pensionable salary) when they are young, and the benefit decreases to one times their salary as they near retirement.

But group cover that pays a multiple of salary remains largely the norm, so fund members, particularly those with dependants, must ensure that their own risk cover will make up for any shortfall.