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01 April 2015 Viresh Maharaj, Sanlam Employee Benefits

The employee benefits landscape continues to shift as regulation influences structures.

Client needs are evolving and providers are innovating to serve these new interests.
In this emergent context, a number of trends have been evident over the past year and will continue to gather momentum into the future.

1. Shift happens

There has been significant consolidation in the retirement fund industry as freestanding funds are converting to umbrella funds at an accelerating rate. The Financial Services Board fund list, which once contained about 13 000 funds now only contains anywhere between 1,500 to 2,000 funds.

The bulk of the funds that have moved off of this list have converted into umbrella funds for a number of potential reasons:

• Umbrella funds offer a holistic solution to institutional retirement funding beyond vanilla administration.
• The costs are lower than under freestanding arrangements for the majority of funds.
• The governance framework tends to be more robust, particularly when the sponsor is a recognised and established firm.
• Trustee liability under freestanding funds is transferred.
• There is far less burden on the employer in providing a retirement fund to its employees.

These are compelling reasons that will result in the vast majority of the remaining freestanding funds to also move to umbrella structures over the next few years.

2. Umbrella emporium

A number of participating employers have moved into umbrella funds over the past decade under legacy umbrella structures that struggle to compete with the latest platforms available.

Accordingly, many of these employers are now rebroking their umbrella fund arrangements in order to test the market and to provide their employees with the best possible solution to move them to a better day one of retirement. In a similar vein, many participating employers of smaller umbrella funds are now also seeking the security and additional value adds that come from joining an umbrella structure with a financially strong and reputable sponsoring entity.

As the industry has matured, participating employers are not satisfied with just being in an umbrella fund, they now want to be in one that best meets their needs and are actively exploring their options.

3. Bridge the gap

Many of the remaining freestanding funds want the cost reductions that come with umbrella structures but are not yet operationally, emotionally or politically ready to fully transition into such an arrangement.

There have been recent developments where retirement fund administrators have launched bridging products to meet such fund’s needs by providing simplified administration services at costs comparable to umbrella funds.

Other employers wish to enter into umbrella structures but wish to retain influence over investment related decisions as well as the granular investment consulting feedback loop that they are accustomed to under freestanding arrangements.

Certain umbrella sponsors have responded to this call by providing implemented consulting solutions to such employers that empower them with investment decision making capability as well as the feel of idiosyncratic investment consulting within the umbrella structures.

Such alternatives are bridging the gap making it even more attractive for the remaining freestanding funds to transition into umbrella structures over the coming years.

4. A win-win situation

Members approaching retirement have traditionally become more cautious in their investment outlook due to the perceived shortening of their investment horizon. Improvements in medical technology have dramatically increased human longevity resulting in significantly longer investment horizons for such individuals.

As such, one’s investment strategy leading up to retirement should allow for exposure to risky assets in order to generate the returns required to fund an extended period in retirement. Progressively, we are seeing that such individuals want capital security blended with this market exposure to balance risk and returns. As such, smoothed bonus type products are being seen as a credible choice leading up to and through retirement due to their unique ability to offer downside protection and upside potential.

5. Blurred lines

The lines between the retail and institutional contexts are becoming progressively blurrier as individual members within retirement funds seek and obtain contextual advice relevant to the wholesale priced options available to them. Member services are therefore becoming more prominent in the narrative of the industry as individuals require financial plans that holistically incorporate their financial assets and available decision trees.

Such blurring creates significant potential for employers and funds to develop member guidance support systems to facilitate better decision making by individuals planning for retirement.

Quick Polls

QUESTION

In your opinion, what do organizations and customers rely on intermediaries for?

ANSWER

Advice based on their knowledge and expertise
Getting the best deal
Understanding their needs and explaining products
Identifying risk exposure
All of the above
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