Finance Minister Tito Mboweni’s 2020 Budget Speech earlier in the year included constructive measures to prepare tomorrow’s workforce for the Fourth Industrial Revolution (4IR). The measures would form part of Government’s plan to address unemployment and poverty, among other societal challenges. But this was pre COVID-19.
This is according to Blessing Utete, Executive Director at Momentum Consultants and Actuaries, “Due to COVID-19, businesses were suddenly disrupted in ways they have never experienced before. Some have had to close their doors, while others have seen their activities or production scaled down to comply with lockdown regulations. We’ve seen companies lay off staff, reduce their working hours, cut salaries, and put recruitment on hold.”
While new ways of working have long been explored and the relevance and applications of 4IR widely discussed, Utete explains that many companies have been slow to fully embrace its promised possibilities. “COVID‑19 has accelerated the need to adapt and companies no longer have the luxury of thinking how best to engage in the age of disruption, or how to effect a digital transformation strategy to ensure business continuity, and even survival,” says Utete.
What does it mean for employee benefits?
The time has come for traditional employee benefits arrangements to be reinvented to meet the needs of the technology-savvy younger employee generations who will lead the charge in this emerging era.
Utete highlighted that as employers become leaner and more agile, a key feature that will reshape employee-employer relationships is the appeal and likely increased prevalence of freelance work and short-term contracts and its lasting relevance after the COVID-19 crisis. “Cost pressures, recruitment challenges, restructuring, and retrenchments will continue to accelerate the gig economy and further change the way of working.
“Companies will increasingly depend on gig workers for the expertise they lack due to the shortage of staff, making it impossible to imagine the future employment landscape without gig workers,” said Utete. He believes that the rise of the gig economy is forcing companies to adapt their value propositions to accommodate gig workers, who will remain an essential part of the workforce, bringing their much needed skills and expertise as companies learn to navigate the new way of work.
If employers want to attract and retain these younger generations, Utete emphasises that they need to develop employee value propositions that address their specific needs, values and preferences.
Has the employee benefit industry kept pace?
The burning question is how retirement industry players, from the regulator to employers and trustees, financial advisers and insurers, can help gig-economy workers save for retirement while making benefits more portable without stimulating cashing out?
When asked about this, Utete explained that younger generations tend to change jobs regularly, withdrawing their retirement savings with each job change. This has dire consequences for their retirement outcomes. “This trend might change amid the uncertainty of the current economy, and for now, people might be less open to changing jobs. Still, our latest research shows that most millennials who leave their jobs withdraw their retirement savings and have to start saving for retirement all over again. All employees should have access to smart, technology-driven services, which tangibly demonstrate the implications of withdrawing savings, rather than staying invested.”
Historically, Utete pointed out that traditional employment-based retirement funds have been set up for permanent employees. Often, the rules prescribe that only eligible employees may be members. This typically excludes short-term contractors, who are required to make their own provision for retirement, insurance and health benefits in the retail market.
“A pure reliance on individual products for gig-economy employees means these employees will miss out on the economies of scale and cost-efficiencies synonymous with group savings and insurance cover. Umbrella funds are particularly cost-effective, and the lower fees mean a larger portion of the contributions are invested for retirement provision.”
Utete cautioned that where automatic, compulsory retirement fund membership is not part of the employee-employer relationship, there is a high risk that gig-economy employees may neglect to save for retirement or make provision for their personal health and insurance cover. This, he said may mean that the growing number of gig-economy employees end up a financial burden on their families or the State.
Employers will have to consider the eligibility criteria of their funds. Utete noted that the Pension Funds Act now provides for in-fund preservation to enable individuals to preserve their savings cost-effectively. But, he pointed out, this does not alleviate the financial need a gig worker may experience when a contract comes to an end before another one is lined up. “Employers should consider introducing tax-free savings accounts on a group basis which employees can contribute to and can be used as emergency funding rather than cashing out retirement savings.”
According to Utete, greater flexibility and control are what gig workers will be looking for from funds and insurers, with flexible contribution rates and insurance cover. He went on to say that this will enable them to determine how much they need to contribute to an emergency savings fund, how much to retirement savings and how much to insured benefits. “To make it possible for them to retain their insured benefits when contracts end, it may be time for insurers to reconsider conversion options by continuing to provide the insured benefits at group rates.”
The dawn of the Fourth Industrial Revolution and the enormous impact of COVID-19 has changed the nature of employment, bringing about new risks that will have to be managed carefully, concluded Utete. “It is time for regulators, employers, trustees, financial advisers and insurers to work together to reinvent employee benefits for the emerging workforce who will be instrumental in reviving the economy.”