Edition: March - May 2015
Editorials

RETAIL DISTRIBUTION REVIEW 2

Employee benefits for the employer

Where one party gets advice and another pays for it,
there’s a poser for retirement funds.

By definition, the RDR deals with financial advice in the retail market. But this is not always entirely so. The proposals can impact on retirement funds too.

Take the common situation where advice is provided to an employer on employee benefits. Are the advice fees to be paid by the employer directly or the employee indirectly, and to whom is the advisor responsible for ongoing service inclusive of fees? Can the advisor be an agent for both employer and employee, especially given the RDR’s pains to avoid interest conflicts?

Employee benefits are often found in employment contracts. They may include:

  • Membership of an occupational retirement fund, either a standalone fund of a single sponsoring employer or an umbrella fund of many unrelated employers;
  • Group life cover offered on an ‘unapproved’ basis i.e. where a group life policy is issued by the insurer to the employer. On the death of an employee before retirement, the insurer will pay an amount to the employer. It will then use this amount to meet its liability to pay the benefit promised in terms of its contract with the employee;
  • Group life cover offered on an ‘approved’ basis i.e. by the occupational retirement fund to which the employees belong under their conditions of employment. If the fund’s liability for the payment of a benefit on the death of an employee member is underwritten by an insurer, the policy will be in the name of the fund;
  • Group short-term disability cover. As retirement funds cannot now (for tax reasons) offer shortterm disability cover, this is usually provided on an ‘unapproved’ basis i.e. in terms of a policy issued by an insurer to the employer, the insurer will pay the employer a monthly amount for a limited period for passing on this amount to the disabled employee;
  • Group permanent disability cover provided on an ‘unapproved’ or ‘approved’ basis;
  • Group funeral-benefit cover;
  • Membership of a medical scheme. The scheme might be either a ‘restricted membership scheme’ as defined in the Medical Schemes Act (in which case membership of the scheme is limited to employees and retirees of specific employers), or an ‘open’ medical scheme (in which case membership of the fund is not so limited and the employer will not have any liability to the scheme itself for payment of premiums/contributions/membership fees. The employer’s liability will be to its employees, but the 46 Today’s Trustee March/May 2015 employer will facilitate payment of membership fees to the medical scheme through its payroll.)
 

The advice given to an employer in relation to the occupational retirement fund, to which its employees must belong in terms of their employment contracts, could include advice on investment portfolios. These would be portfolios to which the employees may be entitled, in terms of the fund’s rules, to instruct the fund to invest the balance of the contribution(s) paid to the fund each month for their benefit.

This would be after deduction from those contributions the amounts required to provide for such costs as premiums to the fund’s insurers, the fund’s administration costs, and certain commissions. Advice on these employee benefits is usually provided to employers without regard to the specific circumstances of individual employees.

However, the cost of this advice is often borne by the employees themselves. It happens by the deduction of commissions payable to the advisors from the premiums payable (whether by the employer or the occupational retirement fund) to insurers, contributions payable to retirement funds, medical schemes and funeral schemes by the employers and/or the employees, particularly if the employees are employed on a total cost-to-company or total-package basis.

If they are, then the employer – to whom the advice on the choice of insurance product to manage its liabilities for ‘unapproved’ risk benefits (such as group life, group short-term and/or group permanent disability cover and funeral cover) – may not be particularly concerned about the cost of the cover. This cost will be borne by its employees by adjustments to their take-home pay.

The problem posed by the provision of cover to the employer at cost to its employees may be aggravated by arrangements where the occupational retirement funds – to which the employees belong– act as “conduits” for the transmission of premiums to underwriters of both the employer’s (unapproved) risk benefits and/or the retirement fund’s (approved) risk benefits.

For example, there’s a contract between an employer and its employee which provides that the employer will contribute to the occupational retirement fund at an annual rate of 10% of the employee’s pensionable remuneration and the employee will contribute to it at a rate of 7,5% of that remuneration. Then the fund– by agreement with the employer, and without the employee necessarily knowing – may make certain deductions from the employer’s contribution to the fund.

These would be the costs of premiums payable by:

  • The occupational retirement fund to the underwriter of its (approved) risk-benefit liability for employees who are members of the fund, and
  • The employer to the underwriter of its (unapproved) risk-benefit liability for the same employees.

As is often the case, the underwriter is the same for both sets of cover and quoted on the provision of both. Here the cost of the employer’s premiums will serve to reduce the amount otherwise allocated by the occupational retirement fund to the provision of retirement benefits for the employees, even if they are not employed on a ‘total cost of employment’ basis.

By arrangement with the insurer, the occupational retirement fund may deduct from the premiums the commissions payable to the employer’s advisor and pay them to the advisor.

The advisor may also be rewarded for investments made by the occupational retirement fund in specific investment portfolios on the instruction of an employee member of the fund, whether or not the investment was made on the advice given by the advisor to specific employees. That reward may be payable by:

  • The provider of the platform, if the fund’s investments are made in portfolios constructed and managed on a multi-manager basis or simply listed on a platform accessible to the occupational retirement fund, or
  • The advisor may be rewarded by an open medical scheme, or its administrator or a related party, for advising an employer to require its employees to belong to the medical scheme as a condition of their employment.

This latter reward may take the form of a commission deducted from the contributions paid by the employees each month to the medical scheme, even if they were not themselves advised by the advisor..

Likewise, the advisor may be rewarded by the provider of funeral-benefit cover for placing the employer’s funeral-benefit business with it. In either case, if the employees of the employer are remunerated on a ‘total cost of employment’ basis, these employees will bear the cost of the advisor’s reward.