The evolution of remuneration packages in the more recent past has undermined and diluted the implicit goals of retirement fund benefit and contribution structures in the last few decades. This is a much discussed shortcoming of remuneration structures nowadays. It is important that employers understand the implication of this for their retirement fund members and that they consider their position carefully. Staff generally do not understand or appreciate the implicit goals of their retirement fund while they are young, healthy and mobile, job-wise, and often only realise their folly when it is too late! This is where the employer has to take a more paternalistic, long term view to ascertain that the short-term view of staff does not prevail, to their own detriment. We all know of course that employees have a tendency to point a finger at others when they realise their own follies.

We suggest the principle should be that the guaranteed package is used as the basis for determining your member’s provident fund contribution, rather than basic salary or wage. The typical retirement fund structure, as it evolved over the past 100 years, which may be referred to as the ‘norm in the market’, aims to provide members with a reasonable income replacement in the event of death, disablement and eventual retirement. The ‘norm in the market’ for retirement, broadly speaking, is about 2% of final income, times years of service and requires a total contribution accumulation of around 15% of income, while employed. To this contribution accumulation towards retirement has to be added the cost of death and disability as well as fund management. We suggest the ‘norm in the market’ for a total contribution rate is between 10% and 11% by employer and around 7% by employee.

Strictly speaking, the ‘norm in the market’ should be set at 100% of remuneration package. In the case of an employer whose total fund contribution rate exceeds the above ‘norm in the market’, this norm of 100% can be tempered due to the above average contribution rate towards the fund, that in itself should secure benefits above the ‘norm in the market’, presumably at the expense of employees’ take home pay. If your total fund contribution rate for example totals 20%, which is above the ‘norm in the market’ alluded to above of around 17%, we would suggest that the desired minimum contribution rate should be set at 85% of remuneration package, to still achieve the implicit goals of retirement funds.

This is an important topic that trustees should discuss with their employers and their fund consultant.

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.