Allan Gray launches competitive fund

Saleem Sonday,Head of Group Savings and Investments at Allan Gray

The South African retirement industry (excluding the government pension fund) manages assets of around R1.8 trillion.

Of this, around 49% is in non-commercial funds, 17% in commercial umbrella funds and around 34% in individual retirement annuity accounts and preservation funds. Over the last four years, the market share of commercial umbrella funds has increased by 70%, at the expense of standalone employer funds.

Positives outweigh negatives

This should be a good thing. Since an umbrella fund clubs together multiple employers and its employees in a single fund with standardised rules and a single board of trustees. It is more efficient to govern and administer than a stand-alone employer fund.

Like all employer-sponsored funds, umbrella funds are also typically better than individual retail arrangements.

With employer-sponsored retirement saving, employees save for retirement as part of their conditions of employment (which should mean lower distribution costs for providers and thus lower fees) and employers represent a big enough group of employees to negotiate better fees than each employee could on their own. These advantages should result in better outcomes for members than what small and mid-sized employer-sponsored funds can offer, but this is not always the case.

The commercial umbrella fund market is dominated by large life insurers which together make up 85% of the market. Although there are some funds that offer super-efficient administration and simple products that sell themselves, mostly, umbrella funds today have a reputation for high costs, poor transparency and ill-disciplined (or maybe worse, contrived) complexity.

A good umbrella fund

Umbrella fund members need high quality investment management, value for money and great service.

Retirement savings should not be complicated at all: the service offered is standardised and price and value-for-money should be easy to compare. However, the way fees are disclosed varies from one provider to the next making decision-making challenging and often leading to poor outcomes for members.

Fee disclosure is critical to ensure that where a member or employer representative is exercising choice, they understand what they will be charged for and how much, and are equipped to make the right decisions.

Another key factor to consider is investment returns: investment returns have a large impact on retirement fund members’ capital over time. The best investment teams in South Africa are independent: they are not allocated assets preferentially from an in-house balance sheet and they do not have sales armies pushing their funds in an in-house distribution force. Without these advantages, independent managers are heavily dependent on their performance in order to run sustainable businesses: the survivors are better because of natural selection. A good umbrella fund should offer members unbiased access to the most highly-regarded SA investment managers.

Transparent easy-to-understand solution

A new entrant using technology to provide better service than the incumbents at a competitive and more transparent price could improve the South African retirement saving system.

The recently launched Allan Gray Umbrella Retirement Fund aims to give employers and members a transparent and easy-to-understand retirement saving solution. It has a simple product and fee structure, which means that employers and their employees have clear sight of contributions, returns and charges.

Members benefit from excellent service, access to their investments via a secure online account, competitive administration and investment management fees – and there are no hidden costs. The product makes things simple for employers and puts member needs at the center by offering an unbiased, limited range of high-quality investment managers, fair and transparent pricing and great service. Everyone gets the same excellent service regardless of their contribution levels.

The Fund offers no built-in risk benefits: retirement fund contributions are only used for their intended purpose, i.e. saving for retirement. Group risk cover can be arranged by putting the employer in touch with an independent risk benefits provider.