In our previous article we discussed the following issues:
- Funds should provide adequately for retirement
- Why have a pension fund?
- Government is a key stakeholder in retirement provision
- The employer is a key stakeholder in retirement provision
- The employee is a key stakeholder in retirement provision
- Government wants the private sector to make provision for retirement
- ‘To provide adequately’ – is it in the eyes of the beholder?
- How much do I need to put aside to retire with dignity?
What about death and disablement?
In the previous newsletter we suggested that the main purpose of a retirement fund is to allow you to retire with dignity. We also pointed out that, depending on the net investment returns you will be able to achieve over the course of your membership, you need to set aside between 10% and 14% of your total remuneration in order to achieve an internationally accepted norm of a pension equal to 2% of your total remuneration, per year of retirement fund membership, i.e. 60% after 30 years or 80% after 40 years of membership.
Your, and your dependants’ needs should be provided for adequately
This rate of saving does not yet provide for any needs you and your family may have in the event of your death or disablement. Again it would be most meaningful to determine the needs of you and you dependants in terms of a regular monthly income, by reference to your regular monthly cost of living. Needs obviously vary widely depending on your life stage and the number of people dependant on you. Typically when you are young and have no dependents, you probably have little or no need for death cover. As you grow older, get married and your family expands your need for death cover increases, to eventually start decreasing again as your children leave the nest and your life expectancy decreases, until you reach retirement.
How much does your family need in the event of your death?
If you want to provide for your and your dependants’ needs in the event of your death, including the need to make provision for future inflation, you need to have capital at death of between 8 and 16 times your total annual remuneration, depending on your life stage and status of dependants. This amount would typically comprise partially of the retirement capital you have accumulated to that point and life cover making up the difference. For a retirement fund with a normal age spread, average capital required for death benefits would thus be around 12 times aggregate annual member remuneration of which, typically, between once and twice aggregate annual member remuneration would be derived from members’ accumulated capital. The difference of around 10 times annual member remuneration thus should be provided by insurance. At that level of insurance cover, you can expect the premium to be between 2% and 4% of aggregate annual member remuneration. Typically insurance companies provide in the event of death, either a lump sum or an income benefit to your spouse and/or children, or a combination of both benefits. Clearly an income benefit is preferable as it better matches the monthly cost of living across the different life stages of your dependants.
How much do you and your family need in the event of your disablement?
Now, what is the position in the event of your disablement. Here your needs are probably higher than they would be in the event of death, because you are still alive and you probably require costly care. Typically insurance companies provide in the event of disablement, either a lump sum or an income benefit, or a combination of both benefits, with a limit of replacing 100% of your remuneration. Once again the income benefit is preferable as it better matches the monthly cost of living across the different life stages of you and your dependants. The cost of a benefit that meets your needs, is typically between 1% and 2% of aggregate annual member remuneration.
Conclusion
To conclude this topic, you should now ‘have a good feel’ for what your retirement fund should aim to achieve and what you can expect the total cost of this package to be. Does it make sense to offer a retirement fund arrangement that does not, at least, adequately provide for retirement? Remember, if your competitor offers a better arrangement, you might find it difficult to attract and retain the right caliber of staff. And just one last thing, we have not addressed the costs of managing your fund, another cost factor to keep in mind.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.