Under my umbrella

"The costs of belonging to such a fund are generally lower than a standalone fund,” says Craig Chidrawi, head of Umbrella Funds at Alexander Forbes Financial Services. "If members have more money invested in their retirement savings, and less going towards costs, the benefit is worth the move, provided the fund selected meets the needs of the group.”

Reduced costs for administrators, and ultimately members, is a definite plus, says Jocelyn Hathaway, CEO: Retirement Fund Administration at Sanlam Employee Benefits, adding that employers with fewer than 1 000 retirement fund members may find that having savings pooled will brings costs down.

Hathaway says that standalone funds have an important role to play and employers with more than 1 000 retirement fund members should not automatically move over to umbrella funds. She says there is some advantage to having employer- and member-appointed trustees having specific control over fund governance.

"Each fund has its own Board of Trustees, with employee and employer representation, and it submits independently audited annual financial statements,” she says. "These funds allow for customised arrangements and specific benefits for members, which might not be available through more standardised umbrella funds.”

For this reason, she says that standalone funds should not be written off, despite the prevailing trend.

 

Joe Karabus, Senior Business Development Manager: Administered Funds, Employee Benefits Momentum, says that cost is not the only issue at stake. "The decision around good or bad can only be considered from a member’s perspective. Which option would lead to the maximisation of the long-term expected retirement replacement ratio?”

It is possible that funds with up to 5 000 people will find umbrella funds cost-effective but if the fund saves R30 a month what does this do to the replacement ratio?

"The ability to generate long-term investment returns and to have the options available to tailor a solution for all members in the scheme is paramount,” he argues. "One would ideally need some guaranteed, active, money market active and passive solutions and the guidance of the adviser.”

John Field, CEO FedGroup, says that whatever option you choose should be backed up by sound reasons. "It should not come down to convenience or profit maximisation,” he says. "The main consideration should be members’ interests.”

Larger administrators are closing the door on standalone funds and the trend may leave these funds with little choice, which would be a shame. "It is no secret that better profits come from cross-selling investment and risk products from within an umbrella fund’s sponsoring institution,” he says, adding that this may not be in the members’ best interests at all.

But Chidrawi feels that umbrella funds do offer some significant advantages over standalone funds, including investment flexibility and the ability to tailor the investment strategy to the needs of members. "Insurance arrangements can also be tailored to meet the needs of members and are rated for that group,” he says. "Also, the cost of communication can be spread across the full membership and possibly included in overall cost.”

 

Chidrawi believes another of the benefits of umbrella fund membership is strict governance: "The trustees of the umbrella fund are usually professional trustees with specific expertise in aspects of managing retirement funds. This is not often the case in a freestanding retirement fund, where trustees are appointed by the employer and members of the fund,” he says.

However, Hathaway says that standalone fund employers can remain directly involved in the day-to-day operations of their fund, through the personalised service offered by the fund administrator, which usually involves a dedicated team managing the fund. "Participating employers within an umbrella fund do not get involved at this level, as these matters are managed by the fund’s trustees and the administrator on their behalf,” she says.

The jury is therefore out on the question of governance!