When are Umbrella Funds the best option for SMEs?

Let's start by defining an SME: this is a small to medium enterprise that sells services or products to make a profit.  The service or product that they provide is their core business and many have no experience in providing benefits for their staff.  Naturally they look to their financial adviser for the best suitable solution.  Product offering and cost are the biggest factors in determining where to set up benefits for their employees.

I think that we all agree with the broad objectives of the National Treasury Reform that stipulates that retirement funding should be cost effective, prudently managed, transparent and fair and that we need to improve standards of fund governance, including trustee knowledge & conduct, protection of the member interests and disclosure of information to members.

So what is an umbrella fund?  An umbrella fund is a registered fund where a number of unrelated employers and their employees participate. There have been various criticisms in the past and the not so distant past regarding umbrella funds.  Some of these concerns are legitimate and should be considered by any employer that considers any type of fund as the correct retirement savings vehicle for his employees.  Before we go through these points lets consider that stand alone funds, these are funds that have one sponsoring employer, are not without their negative points as well.  A further point to remember is that when it comes to legislation the same applies to umbrella and stand alone funds.

Concerns have been raised in areas of transparency, costs and ease of switching. There are providers out there that, to this day have not woken up to the fact that transparency is the name of the game.  A prudent financial adviser must be able to read through the fine print of the service providers and spot where hidden costs or exit penalties are used.  If these do exist it would be beneficial to the employer to stay away from them.

Then we have the criticism that all the benefits are provided by one supplier and this hinders the production of a competitor analysis of standard practices and investment returns.  The critics are correct in that umbrella funds are one stop shops, with the aim of providing a consolidated solution to employers coupled with ease of use.  However the majority of them do allow the employer to choose a different supplier for insurance benefits or offer a vast range of investment portfolios managed by a number of asset managers.  Again the financial adviser with the employer must be able to tell whether the service provided is according to the service level agreements and there are numerous surveys in the market that compare the returns of the investment portfolios.  Let's not forget that the providers of services to stand alone funds are in most cases one stop shops as well combining the administration, investment consulting and actuarial disciplines under one roof.

What about cost you ask. The Life Offices Associations submission on retirement fund reform amongst others specifies the following:

* There is a significant cost advantage for employers with up to 1 000 employees participating in an umbrella fund rather than a stand-alone fund.

* Commercial umbrella funds offer flexibility to employers and employees that may not be available elsewhere.

 Critical mass within an umbrella fund allows administrators to pass the advantages on to all members under their administration.

So when cost is a big issue, umbrella funds should be one of the first considerations.

The four cornerstones of the Momentum FundsAtWork umbrella fund are flexibility, transparency, value for money and ease of use.

Whether you are a trustee, an employer, a financial adviser or a service provider the broad objectives of the National Treasury Reform must guide you. If they don't, then you have let down the members of your fund.

Helen Soteriades (AIISA), Head of Communications, Momentum FundsAtWork