Many employers have provided their current and former employees with undertakings to provide some form of post-retirement assistance for the funding of medical scheme costs.
These undertakings impose a legal obligation upon the employer to fund these subsidies. These obligations may be in the form of a documented contractual promise (e.g. letters of appointment, company policy manuals etc.) or simply be a precedent arising out of established employment practice.
These obligations may only be amended through negotiation.
For many years employers were unaware of the financial quantum of this obligation until the introduction of accounting practices that required their valuation and disclosure.
The South African Account Standard, AC 116, was implemented with effect from 1 January 2001 and requires companies to value and disclose the quantum of these obligations in their financial statements for year ends after this date.
The quantum of these obligations can and do have a significant financial impact on employers placing pressure on management to manage them optimally.
The financial pressures on employers also apply to members who need to fund a part or all of their medical scheme contributions in retirement.
Firstly, a clear definition of the legal obligation needs to be determined by reviewing all documents and/or practices giving rise to the obligation.
The next step is to actuarially value the obligations in accordance with the requirements of AC 116 and sound actuarial principles.
Accordingly, legal, actuarial, accounting and financial resources are required to fully comprehend, quantify and communicate the various complexities arising out of the obligations.
Thereafter, strategies need to be developed to manage these liabilities which can involve one or more of the following:
- re-negotiating the undertakings given
- transfer the risk to alternative vehicles
- develop funding and investment strategies
The area of financial risk transfer and the legal and tax implications thereof are shrouded with a degree of confusion and controversy on account of the absence of appropriate legislation and clarity from SARS on many of the tax issues.
Accordingly, great care needs to be exercised as to which funding vehicles are to be used (e.g. retirement funds, sell captives etc.) and how they should be structured.
Another key element to the process is proper communication to all members.
For further advice on this complex matter please contact us.