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Thursday, May 1, 2008
Removing the cap

More than 6%* of South African workers become disabled before retirement age and rising inflation should be a major source of concern for them. While employees will expect their employers to provide some financial relief by giving inflation-related salary increases, disability claimants frequently do not have this luxury.

Old Mutual Group Assurance says it offers an uncapped inflation-linked option in its disability income solutions for retirement funds and other institutional clients.
According to Sathyen Mahabeer, Old Mutual Group Assurance Actuary, many disability claimants are covered by their employer’s group assurance scheme, where the level of annual increase is chosen when the policy is taken out. “Employers typically select either a fixed rate of increase or ‘capped-inflation’ increases on disability benefits. Capped-inflation increases match inflation, but are restricted to a maximum cap e.g. 5% per year.”
Employees that become eligible for a disability benefit from their employer’s group assurance scheme are locked into the increase regime originally selected by the employer. “What this means for many South Africans who are currently disabled, is that their disability income will not keep up with the rising cost of living at times like these. Even claimants who were part of schemes where employers opted for a higher inflation cap of 7.5%, are currently experiencing an erosion of their benefits.”
The accompanying graph tracks CPI inflation since January 2000 and highlights times when inflation breached a typical 5% cap.
“The cumulative impact of the cap over this eight-year period would have been a 10% reduction in the purchasing power of the individual. Considering that most claimants receive only 75% of their pre-disability income, this ongoing erosion could place severe strain on the disabled person’s ability to maintain his standard of living.”
However, Mahabeer says that with Old Mutual’s uncapped inflation protection option, should inflation peak at any time over the disability claimant’s lifetime, their income stream will keep pace with inflation.

Mahabeer says the cost of the uncapped CPI-linked annual increase will vary per group of employees and may also vary under different economic conditions. To illustrate, the current average cost of the uncapped option relative to a ‘5% capped-inflation’ option is a mere 6% addition to the capped premium. And for higher existing caps the additional cost drops significantly. “The cost is small compared to the long-term benefit improvement for a young adult who becomes disabled.
“Employers and trustees should carefully structure each component of their disability income protection insurance. This ensures that the benefit will meet the real financial needs of employees who become disabled during their economically active years.”
*Based on Statistics SA, “Prevalence of Disability” paper, using Census 2001 data

Copyright © Insurance Times and Investments® Vol:21.4 1st May, 2008
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