Look at cost and representation when choosing an umbrella fund

Pension fund law reforms will change the landscape of retirement planning, making umbrella funds more popular with employers, says Ryan Knipe, head of retail servicing at Investment Solutions, South Africa's leading multi manager.

Knipe says the introduction of social security funds into South Africa will see more salaried employees brought into the retirement savings net, but simultaneously, individuals will seek out additional return on investment beyond what the social security system can provide.

In addition, says Knipe, different retirement savings vehicles will increasingly be put on similar footings, bringing the benefits of umbrella funds to the fore.

Migration to umbrella funds will also be helped by proposed moves towards compulsory preservation and the tailing on effect of the move towards defined contribution.

Knipe says companies looking at whether or not to join an umbrella fund should look specifically at two things, namely costs and employer representation.

Looking at the first of these, Knipe says costs can differ significantly, depending on the options taken.

"On the one end of the scale, you have restricted investor choice, with low costs, and on the other, high investor choice, with typically higher attached costs. Others will have some group risk cover built in as well, which also has a cost," says Knipe.

Employer representation can be a complex issue, says Knipe. Typically the sponsor appoints the board of trustees, but employers form part of the process, depending on which options they go for and the rules governing these.

"The rules can be of a more general nature, in which the sponsor is given the mandate. But you also get special rule funds, in which each employer has its own rules, depending on contribution rates, benefit structures and so on," says Knipe. "This of course has a cost impact that employers will need to weigh up."

A number of umbrella funds allow for the appointment of a management board, which represents the views of the corporate members (representing both employers and employees) and these are a voice to the board of trustees.  

"The critical issue is the extent to which employers want representation," says Knipe. "Often they don't, and are happy that mandates are stuck to and with communication by the fund direct to members."