Assessing the impact of risk benefits on retirement funds
RETIREMENT funds find themselves facing growing governance requirements and uncertainty due to pending legislative reform.
Often overlooked is risk cover. Considering risk cover in the context of the three major drivers of members’ risk — sex, Aids and obesity, can be crucial in accurately planning and determining costs.
Neil Parkin, group assurance actuary at Old Mutual Corporate said the cost of risk benefits in a fund directly affects the level of money going into each member’s retirement saving, since there’s just one pot of money to draw from.
He cited 2011 statistics from the Medical Research Council, which estimated only 60% of 15-year- olds would reach age 60.
“The fact is many members simply won’t make it to the retirement party. As a result it’s important to be aware of the impact of the major risk drivers and how they could affect the fund,” he said.
The South African group risk market, similar to the European market, charges a single premium rate for all members. However, the profile of a member can vary — purely based on their sex.
“Worldwide, studies have found that women generally live longer than men. This experience has been echoed in our experience as well,” said Parkin.
Based on the average experience across the Old Mutual client base, “for every young woman that dies, we’d expect four older women and 11 older men to die,” said Parkin. Therefore, it followed that an employer with many young women on the books would have a much lower risk profile than one who employed many men.
“Many funds provide age-related benefits — where the amount of cover is determined by the age of the member. Cross-subsidies by age can typically be defended since most young members will age and then be subsidised by the next generation, but gender is unlikely to change, making the argument for gender-related benefits an interesting one,” he said.
He said another factor affecting the risk of a fund was the effect of medical advancements for Aids.
There was evidence the rate of Aids deaths was declining.
“Research across a number of our clients since 2008 shows a 20% reduction in the mortality rate,” he said.
“However, while we are seeing fewer deaths, we are also seeing more disability claims due to Aids. In 2001 just one percent of Old Mutual’s group disability claims were due to Aids. Ten years later Aids claims accounted for more than 10% of total disabilities.”
But, Parkin said, the disease was a short-term cause of disability, with most claimants recovering sufficiently to return to work.
“The hope is that the savings from fewer Aids deaths will filter through into enhanced disability benefits for all members,” he said.
Another silent epidemic exerting an influence on mortality and health was obesity.
“Obesity is on the rise in lowand middle-income countries. In South Africa it has reached epidemic proportions,” said Parkin.
Obesity is a risk because of life threatening conditions associated with it, such as heart disease, high blood pressure, high cholesterol, cancer and type 2 diabetes.
“Obesity is set to not only impact on life insurance, it will also have a profound effect on health costs. And when paying for health costs becomes a priority, less money is available for retirement savings or other risk cover.”
— Witness Reporter.