Umbrella funds lead the way in meeting key objectives

While meeting some of the reform objectives will be prescriptive, the industry has moved quickly to innovate and address many issues. Umbrella funds have been at the forefront of this rapid change.

Perhaps the biggest step forward has been the consolidation of funds in SA. Standalone funds reduced to just over 6 000 (from nearly 13 000 five years ago). The cost of managing smaller funds was high, especially given the new statutory requirements. But many funds opted for the standalone route, despite high yield reduction, because umbrella funds were not robust or flexible on either a scheme or member level.

The status quo has changed radically and these funds have now flocked to umbrella structures.

Until recently, funds offering individual member investment choice would have been charged significantly for this functionality by the retirement administrators, even though research shows that only five years ago less than 5% of members would use that facility. Today, with financial adviser assistance, funds can choose default benefit structures that fit the profile and needs of the average person in the group or subgroup.

If a member needs higher benefits, he or she can use product flexibility within the product, picking up an additional cost. Alternatively, if a needs analysis indicates that the default benefits are too high for the individual, the member can ‘flex down’, in which case there will be a cost saving. This has been taken a step further by one of the Providers who is able to offset the contributions by the increase or decrease in costs. Member needs differ and a ‘pay for what you use’ institutional arrangement can satisfy these needs.

Finance Minister Pravin Gordhan confirmed in February in his annual budget speech that mandatory preservation will become a reality. Some umbrella fund providers can ensure that a member who leaves his or her current employment can be automatically preserved to the pre-selected preservation fund at no additional cost and in the same investment vehicle that the member was invested in while still an active member in the fund.

National Treasury has proposed that standardising products will be one way to reduce costs. This might be true but it does not address Treasury’s ultimate objective – enabling people to retire comfortably.

The objective should be to ensure that the retirement industry is adding value to members throughout the value chain. With a standard option, there is also no need for advice, which would then lead to an unfortunate consequence of negatively impacting consumer education levels.

In SA, the average retirement fund with fewer than 100 members has four times as many assets per member, compared to funds with 3 000 or more members. Given this dynamic, a single option might reduce costs, but is unlikely to be suitable for these two very different funds. With a standard option, there is also no need for advice, which would then lead to the unfortunate consequence of negatively impacting consumer education levels.

We think that a member needs a replacement ratio of at least 75% of salary to be able to retire comfortably, especially if one considers longevity risk, the rising cost of healthcare and that employer sponsored benefits are often the only form of insurance individuals have for themselves and their families against the risk of disability or death.

While everyone has a role to play in meeting these needs, from the industry’s perspective, the aim is to offer members and employers more flexibility used appropriately with sound advice to increase the value offered by the retirement industry. This is a very different objective than reducing costs only.