Old Mutual foresees key role for umbrella retirement funds

Sustained growth in the SMME sector will create more jobs, but won't necessarily have much impact on the massive shortfall in retirement savings unless more employers provide cost-effective retirement vehicles for their staff.

This is the view of Seelan Gobalsamy, General Manager at Old Mutual Corporate.  He says some 66% of South Africans rely solely on the state when they retire, placing a considerable burden on the fiscus. Those who are not lucky enough to be supported by friends or family often have to live in dire conditions and when they become infirm have no backup other than the national healthcare system or social welfare organisations.

"Sustained economic growth will stimulate SMME growth, but the irony is that we could find a situation where more people are employed but that we're not making much progress in resolving the retirement savings problem."

Gobalsamy says the National Savings Fund envisaged in the government's retirement reform objectives, could mean that many stand-alone funds might lose existing economies of scale; something that will effectively force companies to look for alternatives. Therefore umbrella funds will increasingly be part of the solution as they provide a cost-effective and efficient way of providing for employees' retirement.

In addition, offering a good retirement package should give SMMEs an advantage in a competitive labour market.

Multi-employer funds have the following advantages over stand-alone funds:
* Cost savings is one of the key benefits. Typically the costs of multi-employer pension funds are 20% to 40% lower than the corresponding stand-alone arrangements for small to medium sized enterprises.
* Setting up a new stand-alone retirement fund is expensive, complex and time consuming.  A multi-employer arrangement is an ideal way to provide employees with retirement benefits and expertise, with limited expenses compared to stand-alone funds. 
* The governance of stand-alone funds is expensive and needs to be highly professional, particularly with more onerous regulatory requirements in the offing for trustees.  Trustees and employers may be held liable for breaches of governance and acquiring the services of professional, independent trustees is an additional cost.
* The economies of scale that result when a number of employers participate in a single retirement fund, sharing services such as auditors, administration, asset management and consulting are an obvious benefit.
* Most umbrella funds have independent, professional trustees, with the concomitant knowledge and expertise that can result in better decision making.
* Stricter legislation and increased regulatory requirements can be a major drain on resources, something that most SMME's simply cannot afford. By contrast, employers and members of an umbrella fund can maintain their involvement by setting up member committees to represent them at fund meetings.
* Group life assurance and disability costs can be negotiated at much more competitive premium rates from insurers.

Gobalsamy says that it is not just employers who benefit. Market research by Old Mutual shows that a multi-employer arrangement is likely to generate in excess of 30% greater retirement benefits after 30 years relative to a small stand-alone arrangement for members. The saving is even greater if annual audit fees, trustee expenses and risk costs are taken into account.

Gobalsamy also says that better, more efficient retirement fund products need to go hand-in-hand with a consumer education campaign that encourages South Africans to make adequate provision for retirement and to preserve their retirement benefits when they stop working.