Is it time for stand-alone funds to gather under one umbrella?

In the past umbrella funds were viewed as retirement savings vehicles best suited to small companies with a smaller number of employees. But continued changes to South Africa’s retirement funding landscape could force employers, retirement fund members and their administrators to rethink the status quo.

A significant contributor to this paradigm shift has been the increasingly regulated retirement fund industry, with the plethora of additional requirements attached to the Pensions Fund Act. The much debated PF130 has increased the administration burden and costs of operating a stand-alone retirement fund, for example.

One of the key aims of government’s proposed retirement fund reforms is to reduce the costs of administering and investing member funds. This focus will lead to a sharp reduction in the number of registered retirement funds over time.

Against this backdrop, there has been a notable increase in the number of stand-alone funds – many of them boasting fairly large memberships – moving to, or considering a move to, umbrella fund structures.

These structures are increasingly popular across the full spectrum of South African retirement fund providers. The decision about whether to opt for a stand-alone or umbrella fund is certainly not one to be taken lightly.

The most important consideration is whether the move will add value for fund members. The fund trustees should also consider how the ‘move’ will affect costs, the quality of the services and service providers within the umbrella vehicle, and how to ensure a smooth transition from one structure to the other.

The following factors should inform the "umbrella fund or not” debate:

An umbrella fund arrangement could mean that members have easier access to qualified, independent financial advisers.

You should consider whether the larger risk pool in an umbrella fund result in lower risk premiums or more comprehensive benefits for fund members. Similarly, find out if the umbrella fund arrangement allows you to retain the right to select preferred risk benefit providers in order to secure the most competitive risk prices for your members.

It is important to consider whether the move to an umbrella fund will result in more or less member investment choice. Although studies show that most members opt for the default investment portfolio, the ability to appropriately structure retirement savings remains important.

A careful and thorough assessment of the available investment portfolios should be made. You must ensure that the umbrella fund’s underlying portfolios are suited to your current fund member profiles.

Will the move to an umbrella fund hurt or improve the overall perception employees have of the organisation? And, equally importantly, will this fund help to make the business more attractive to future employees?

It is also essential that fund members feel connected to their retirement fund and that they feel it empowers them to make wise decisions regarding their future financial security. You should evaluate whether the umbrella fund will put members or employees in a more financially empowered state, through regular communication and reliable and accurate fund statements.

The employer needs to assess whether switching to an umbrella fund reduces its risk, since it no longer needs to sponsor a legal fund entity or appoint dedicated trustees from the employer group. However, one must consider whether this lower risk comes at an acceptable trade-off in terms of the ability to customise the fund.

A careful assessment of the abovementioned factors will assist retirement fund trustees in making the correct decision about their members’ ongoing retirement fund requirements. In most cases – especially where smaller stand-alone schemes are concerned – such assessments highlight the umbrella fund structure as the optimal solution.