Risk benefit provision through provident and pension funds

Risk benefit provision through provident and

pension funds

Research undertaken for South African National

Treasury

17/10/2007: VERSION 1.1

Authors:

Simon Hendrie

Anja Smith

Timothy Hobden

Omoneka Musa

Subcontractor:

Genesis Analytics (Pty) Ltd

2nd Floor, No 3 Melrose Square, Melrose Arch, Johannesburg

South Africa, 2196.

Post to: Suite 3, Private Bag X1, Melrose Arch, Johannesburg, South Africa, 2076.

Tel: +27 11 214 4080, Fax: +27 11 214 4099

genesis-

Subcontractor contact:

Simon Hendrie

Email: simonh@genesis-

Office: +27 11 214 4018

Contract: PCE-I-00-98-00017-00, Task Order No. 844, issued by United States

Agency for International Development

Contractor

Abt Associates Inc

55 Wheeler St

Cambridge, MA 02138, USA

Contractor contact

Rebecca Rishty,

SEGA-MESP II

Bank Forum Building Lobby 1

337 Veale St

Niew Mucklenuck, Pretoria, South Africa

Email: Rebecca_Rishty@

office: +27-12-460-3481

i

TABLE OF CONTENTS

List of Figures

iv

List of Tables

iv

Executive Summary

v

1.

INTRODUCTION

8

2.

BACKGROUND

9

2.1. Objectives and Principles underlying national social security

9

3.

2.2. The importance of risk benefits

11

RESEARCH OBJECTIVE AND STRATEGY

14

3.1. Review

14

3.2. Scope

15

3.3. Methodology and limitations

15

3.3.1. Evaluation and Design considerations

4.

16

FINDINGS

17

4.1. Introduction

17

4.2. The Retirement and Risk Landscape

17

4.2.1. Definitions

17

4.2.2. Industry structure and Features

20

4.2.3. Ways in which employees access group risk benefits

24

ii

4.3. Disability and survivor benefits currently provided

5.

26

4.3.1. Introduction

26

4.3.2. Death

27

4.3.3. Disability

30

4.4. Retirement and risk coverage

33

4.4.1. Retirement funds

33

4.4.2. Risk Cover

34

4.4.3. Individual risk cover

36

4.4.4. Reasons for poor take-up in the low-income end of the market

37

4.4.5. Risk benefit costs

37

4.4.6. Risk pooling

44

4.5. International experience

50

4.5.1. Risk benefit provision in the chilean system

52

4.5.2. Risk benefit provision in the Australian system

54

DESIGN CONSIDERATIONS

57

5.1. Introduction

57

5.2. The key decisions

57

5.2.1. Institutional structure

58

5.2.2. Membership and coverage

59

5.2.3. Benefit design

60

5.2.4. Incentives

66

5.2.5. Cost levels

66

5.2.6. Risk pooling

67

5.3. impact on existing industries

68

5.3.1. Impact on Membership

69

5.3.2. Impact on Individual Risk

69

5.3.3. Impact on Employment

69

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