Old Mutual puts its weight behind umbrella funds as reform gains momentum

Jonathan Faurie, FAnews Journalist

As Government gets serious about retirement reform, the belief that umbrella funds will be the future of the retirement industry in the country is gaining serious momentum. This has been affirmed by the news that Old Mutual, who was traditionally one of the largest administrators of stand-alone retirement vehicles in the country, is moving away from stand-alone funds to umbrella funds.

Towards the end of 2012, the company made a conscious decision to move towards umbrella funds. It informed all of its clients who were part of Old Mutual stand-alone funds of this move and indicated that they had a year to become part of the move or to find other companies to administer their funds.

MD of Old Mutual Corporate, Bongani Madikiza says that the move in this direction means that the company would be able to create value for its clients on a sustainable basis.

Reaping the benefits

The benefits that umbrella funds can offer companies and those investing in the funds are undeniable and were highlighted in A bright horizon for umbrella funds. Issues such as cost cutting and participation are stand out benefits of umbrella funds as economies of scale does not only mean that costs are significantly reduced, but it becomes an attractive option from a participation point of view as companies and participants wants to buy into this process.

However, Madikiza points out that there are other benefits which are unique to the Old Mutual umbrella funds which the public will find attractive.

"In the past, participants in traditional umbrella funds used to be exclusive in terms of providers of risk cover and investment funds. We have taken the stance to allow participants in our umbrella funds to choose their own service providers, depending on the option chosen,” he says.

Setting the record straight

This move, has led many to believe that all may not be well, at what was, at one time one of the country's biggest administrators of retirement funds.

But Madikiza denies this saying that this move is a proactive step towards falling in with Governments retirement reform plans. "On the contrary, Old Mutual has posted good profits in the last three years, so the viewpoint that the company is struggling to come to terms with costs within the industry is false. There are significant cost pressures in the industry. Companies who do not come to terms with these costs, irrespective of profitability, will find themselves fighting an uphill battle,” he says.

But while umbrella funds may resolve issues such as cost cutting and participation there is still the major issue of preservation which Government needs to resolve.

"The preservation issue will not go away overnight. There is still significant work which needs to be done in this area and it will involve a large scale education drive. Industry does have a role to play and we feel that being one of the top retirement providers in the country, we have significant weight with which we can move the industry in a specific direction. We have already built this into our umbrella solution through our default preservation option,” says Madikiza who adds that "the issue of starting to save for retirement too late is also a significant concern which needs to be addressed.”

"We have developed a number of solutions in line with these proposals, such as our default preservation and annuity solutions. We have also focused extensively on reducing the costs of saving towards retirement by creating umbrella fund structures which make retirement benefits available to employees belonging to small through to large businesses” states Madikiza.

Outlook

Madikiza also believes that Old Mutual's single-minded focus on their umbrella business will benefit advisers as they concentrate their resources on enhancing the Old Mutual umbrella solution.

But those who participate in the Old Mutual umbrella funds hold the advantage of participating in the fund and will have a first-hand account of the benefits which the fund has to offer. "This will give advisers a unique selling point in that they can give testimonies to clients about the cost benefits related to the fund. It also gives independent advisers an improved offering of services that it can offer the public,” concludes Madikiza who points out that not only will it be business as usual for advisers, but that they may find themselves in a good position going forward.

Editor's Thoughts:
When a company with the history of Old Mutual makes a move such as this; the market inevitably sits up and takes notice. There is however some questions which need to be asked: why is Old Mutual forcing this move onto its client base? And why is the company so firm on its year long time line when the main aim of the company should be to allow for the largest number of clients to make the move? And will brokers see any real benefit from this move? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.