Medical aid cover after retirement
The cost of provision for medical cover after retirement is underestimated worldwide and very few employers still provide any form of subsidy to employees after retirement.
Until we start doing the maths and understand what percentage of our pension income will be required to pay a medical scheme contribution when we have only our pension income to rely on, we tend to significantly misjudge this figure – what’s more, according to the 2020 Sanlam Benchmark Survey, 61% of pensioners can’t make ends meet.
With this in mind, it is a scary thought that whereas many of our expenses may decrease after retirement, medical expenses are more likely to increase, whether funded privately or via a medical scheme contribution.
Although Prescribed Minimum Benefits (PMB) do provide some form of guaranteed cover, we know that additional benefits can and will be required as one gets older, especially where specialised treatment is needed.
Options should therefore be carefully reviewed during the annual option review periods, to consider your needs, affordability, and health risks to select appropriate options for the year ahead. While some medical schemes do allow upgrades during the year after certain specific life-changing events, the industry norm is to provide members with the option to upgrade annually in January.
At retirement, the assistance of an experienced, accredited healthcare consultant can be invaluable to provide advice when moving your membership from the employer group medical aid fund (where applicable) to individual cover, and to make an informed decision in selecting the most appropriate option.
How can we manage these escalating costs during retirement?
Most medical schemes offer plans with savings accounts allowing members to build up funds in these accounts over years, which can be a form of prefunding for retirement. It is interesting to note that amongst Simeka Health’s client base, between 40% and 50% of members on a savings-type plan do roll over savings from previous years, in a client base where 85% of members are on mid- to lower-end plans without any above-threshold benefits.
Although one could argue that a Gap Cover product might be sufficient to support medical cover into retirement, as it provides additional cover for shortfalls in hospital payments and co-payments, Gap Cover products do not offer any cover for extended day-to-day claims. In addition, it is important to note that Gap Cover products are short term by nature and, as such, the costs and benefits are only guaranteed for a year and can be reviewed annually by the insurer. There is, therefore, no guarantee that your Gap Cover product will remain affordable over years, especially with the claiming trends experienced at retirement.
National Health Insurance (NHI) might provide some resolve, as pensioners could receive some form of cross-subsidy under this health financing system. However, with the financial constraints faced by the fiscus, it is not expected for NHI to offer more than a basic set of benefits and medical schemes will then still be able to provide cover for the benefits falling outside of NHI. These might become quite expensive, as many young and healthy persons will opt out of medical schemes, which will cause medical scheme membership costs to increase due to the loss of the cross-subsidising effect of younger, healthier members being part of the risk pool.
Calculations
| Example 1 – Lump sum required to fund a medical scheme membership on a popular medical aid saving’s option | Example 2 – Monthly amount a married male retiring at age 60 would need to set aside to reach this healthcare goal | ||||
| Age | Male | Female | Age | Monthly Amount | |
| 60 | R1,244,151 | R1,162,433 | 30 | R5,325 | |
| 63 | R1,162,433 | R1,070,199 | 40 | R7,003 | |
| 65 | R1,101,101 | R1,008,104 | 50 | R12,187 | |
Assumptions used:
- Main member contribution – R3 485 p/month
- Adult dependant contribution – R2 750 p/month
- Duration (to determine the discount rate and CPI) – 10 years
- Discount rate (or investment return) – 12.43% p/annum
- Healthcare cost inflation (CPI+2%) – 9.10% p/annum
- Decrements – e.g., mortality, spouse age gap
Conclusion
The principle remains: You need to put aside now what you will be needing after retirement. If you are expected to live for 20 years after retirement, you need to save an amount equal to your current contribution for at least 20 years.
We should be cognisant that medical costs do increase with age. Members should be aware of this and try to provide for additional healthcare funding for retirement. Members could consider prefunding for their medical expenses during retirement by increasing their retirement fund contributions, provided their retirement fund has contribution flexibility. In addition, if possible, retire later or try and secure an income after retirement and, very importantly remain as healthy as possible for as long as possible by maintaining a healthy lifestyle.
Content contributed by Simeka Health with additional input by Simeka Consultants and Actuaries