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Key trends shaping the retirement funds space

26 March 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The financial services industry seldom stands still. One of the biggest shifts in the domestic retirement fund industry is the speedy whittling down of the number of traditional company retirement funds. In the last decade the industry has contracted from more than 13 000 pension and provident funds to somewhere in the mid-4000s today, with more consolidation to come. To find out more about key trends shaping the retirement funds industry, FAnews attended an Old Mutual Corporate media presentation on the group’s Retirement Funds Survey 2010.

More of the same

A number of trends established in previous years remain in tact. Top among these is the continued growth in both size (assets under management) and popularity of umbrella funds. Hugh Hacking, umbrella fund product managers at Old Mutual Corporate, said the trend gathered momentum despite the negative impact of recession on the savings industry. “Although we saw a big dip in the SMME market, we still saw a big move to umbrella funds,” he said. There are numerous opportunities to offer umbrella fund solutions to SMME’s, and to extend pension coverage to employees in that market segment.

“The appeal of umbrella funds for employers lies primarily in the fact they offer the ability to transfer the responsibilities of fund administration and trusteeship away from the employer,” said Hacking. An umbrella fund is essentially a retirement savings vehicle catering for multiple employer groups.

Another important trend is the continued drive to improve corporate governance, especially for company sponsored funds. The need for good governance and appropriately skilled trustees has remained ‘top of mind’ after a raft of financial scandals, most notably the Fidentia debacles, that made headlines early in 2007. Trustees take financial decisions impacting thousands of members’ lives, and funds cannot afford to appoint incompetent individuals in these positions. Communication with – and education of – retirement fund members remains important too.

 

New and emerging trends

Government’s proposed National Social Security system (retirement reform), although nowhere near final implementation, is central to current stakeholder decisions. Industry stakeholders have to consider future reforms when implementing business plans. Decision makers must also consider the impact of the global economic recession and slower economic growth on the industry as a whole.

What should we expect from the industry over the next five to 10 years? Old Mutual says there will be a continued decline in the number of company funds as employers cotton on to the cost savings associated with umbrella fund solutions. 89% of survey respondents had a good understanding of the umbrella fund concept, with 97% of those involved in the umbrella fund industry saying their expectations were met.

Members will demand and receive more investment choices in the future. And there’s going to be a significant upward trend in retirement ages too. “In Australia they recently introduced the concept of a phased-in retirement, where individuals would take retirement at the normal age, but return to work in a limited capacity. If you can supplement your income post-retirement, the extra income makes a huge difference to your retirement funding,” said Hacking.

Four improvements the industry has to make

Each stakeholder has a role to play to ensure the industry remains relevant to South Africa’s retirement savers. Old Mutual discussed the required improvements under four headings: governance, umbrella funds, communication and education, and service providers.

Governance must be a priority for all stakeholders in the industry. Pension fund trustees have to become more knowledgeable and accountable against a backdrop of ever-changing regulation. The need for professional trustees and the cost escalations associated with providing wider member choices are among the drivers of the shift to umbrella funds. Employers at smaller companies are quickly catching on to the economies of scales offered by larger membership pools. Communication and education are key components of sustainable improvements across the retirement industry. Members require direct ‘one on one’ communication around retirement planning, the importance of preserving retirement savings and the benefits in retiring later. The communication challenge is of particular concern in umbrella funds due to their size.

Service providers have to play the game too. There will undoubtedly be further consolidation in the provider space as they offer their clients improved service, better value and innovation. To deliver on this mandate service providers must improve the knowledge and qualifications of their investment managers.

Editor’s thoughts: Although official pension fund statistics are scarce, the Registrar of Pension Funds’ Annual Report 2006 clearly illustrates the benefits of large funds over small. On a cost efficiency argument alone an umbrella fund is the way to go. Do you think umbrella funds will dominate South Africa’s retirement industry ten years from now? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Greg, 26 Mar 2010
I think umbrella funds will evolve into being embedded with other products such as group risk and medical aid (or medical insurance type products) into branded clustered products to meet specific aggregate consumer needs. We may see the situation where the 'manufactures' of the products being the wholesalers and intermediary retailers and wholesalers bundling these products for the end aggregate users, down to to the lowest SOHO /SMMME's . Flexibility of entering exiting such schemes needs to be improved on and ideally SARS would play a positive as opposed to punitive role in this regard.
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