How to retrench-proof your finances

Retrenchment insurance usually pays out 75% of your taxable salary for up to six months.

Low GDP growth and a struggling economy has translated to many South African companies resorting to retrenchment as they try to trim costs wherever they can to stay profitable. Investec’s chief economist, Annabel Bishop, says GDP growth in 2020 will likely be closer to 1.0% than 1.5% year-on-year. In the last month, the International Monetary Fund (IMF) has warned that it projects South Africa’s “economic growth to remain sluggish in 2020—below population growth for the sixth consecutive year. … With low growth and low job creation, the increasing labour force is projected to exacerbate unemployment pressures, poverty, and inequality.” This sets the scene for a bleak economic outlook as we head into the new year.

In the last year alone, more than 20 000 South Africans have been retrenched and this is set to increase next year. If you have managed to retain your job, it might well be time to consider how you can retrench-proof your finances so that you have a financial cushion if you happen to receive a retrenchment letter from your boss.

Retrenchment insurance

The good news is that you can take out retrenchment insurance when you take out an income protection policy or you can ask your insurer to include it as an add-on when you take out life insurance. Retrenchment insurance usually pays out 75% of your taxable salary for up to six months. In order to claim on retrenchment insurance, you must prove that your retrenchment was in line with labour law requirements. This means that your retrenchment must be subject to certain conditions, for example, adverse business conditions, a restructuring within the business or the introduction of new technology.

The fine print: exclusions

When you take out any new financial services product, you should always read the fine print to ensure that you understand the exclusions on the policy. Most retrenchment insurance policies will have similar exclusions. You cannot claim if:

  • you resigned or are fired;
  • you took a voluntary retrenchment package; or
  • you have declined a reasonable offer for an alternative job from either the employer that retrenched you or another potential employer;
  • you are self-employed, a director or an independent contractor or you are employed by a family member.

There are also certain conditions you must satisfy before you can claim. These include a waiting period, which may vary from one month to six months, depending on your insurer. The waiting period commences from the date you receive your final salary.  You must be permanently employed for at least a year with the same employer before you claim.

Which companies offer retrenchment insurance?

Kresantha Pillay, lead specialist: lifestyle protector at Liberty Group, says the company launched a retrenchment insurance product, the Liberty Protector in 2011. “We are one of the few insurance players open to new business. We believe that the benefit adds to the comprehensiveness of the Lifestyle Protector offering and is one that fulfils a customer need especially in the poor economic environment that South Africa currently faces. The Retrenchment Protector has done fairly well and performed within our expectations,” she says.

Pillay notes that the Liberty Retrenchment Protector is one of the few benefits in the market that is not linked to a life cover policy. “The pay-out is not linked to your salary but rather on the amount of cover taken out. You can select to have inflation-linked premiums where your premium and cover amount increases each year or you can choose a level premium,” she explains.

In terms of the premium payable, Pillay provided the following example, adding that premiums will vary between individuals, depending on their individual profile. A male non-smoker aged 30,  employed as an actuary with an after-tax income of R30 000 who has taken out R1 million life cover and opted to have the maximum retrenchment cover for 75% of his after-tax income would pay a monthly premium of R234.

  • Old Mutual Green light policies offer retrenchment insurance as part of their “lifestyle adjustment cover”, where you can protect your income from R3 000 to R30 000, up to the age of 65.
  • net offers retrenchment cover for up to six months.

Other forms of retrenchment assistance

  • Absa offers a “credit protection plan”, which will pay 10% of your average outstanding credit card balance or loan for four months if you are retrenched.
  • ooba – this mortgage originator includes a retrenchment benefit as part of its credit life policy offering for your home loan.
  • Liberty Investments – a premium waiver for six months.
  • First for Women – a premium waiver benefit for up to six months.

Bleak economic outlook

Workplace solutions company Adcorp CEO Innocent Dutir, notes that the economy’s labour intensity has been dropping steadily. He says that in the 25 years prior to 1995, a percentage point of economic growth was associated with a 1.3% increase in employment. In the 25 years since 1995, a percentage point of economic growth has been associated with a 0.2% increase in employment. “To put it another way: In 1995, it took 7.3 workers to produce R1 million of output. Today, it takes 4.4 workers to produce the inflation-adjusted equivalent – a drop in the economy’s labour intensity of 39.7%. Economic growth is certainly helpful for employment growth, but it is not a panacea,” Dutiro explains.

  • This article was first published on Moneyweb on 11 December 2019.

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