Retirement reform shifts to private sector umbrella funds
Three years ago phrases like ‘retirement fund reform’ and ‘national social security system’ dominated the domestic retirement space. Government was hell-bent on a fast-track implementation of a mandatory-contribution state-controlled retirement fund. The initial enthusiasm for the plan has fizzled out, and the 2010 deadline for a National Social Security system (NSSS) implementation passed without so much as a whisper. The new focus – briefly acknowledged in the 2010/11 budget review – is on an appropriate and affordable retirement savings mechanism for low-income earners. Why the shift in focus?
A recent survey by Old Mutual Savings Monitor suggests only 41% of individuals working in formal employment in metropolitan areas belong to a pension fund, while only 54% of South Africans of pre-retirement age (45-59) are members of formal pension funds. The survey sample was relatively small – only 1 000 households – but confirms what most industry commentators already know. The majority in post-Apartheid South Africa are woefully unprepared for retirement.
Umbrella funds
The ‘over the top’ NSSS could be replaced by a basic retirement saving and income protection scheme for low-income employees – and the private sector is going to be instrumental in providing such solutions. Could umbrella funds fit the bill? We spoke to David Gluckman, Managing Director at Sanlam Umbrella Solutions, for some of his views on the retirement fund industry.
An umbrella fund is a multi-employer retirement fund. Each umbrella fund is a free-standing legal entity in which many employers participate. “The primary argument for umbrella funds is one of economies of scale,” said Gluckman. Retirement funds incur a variety of fixed costs regardless of size, with the result ‘per member’ costs drop significantly in larger funds. The economy of scale benefit is clearly illustrated by statistics supplied in the latest Registrar of Pension Funds annual report. The average cost-to-annual-contribution ratio recorded at 1 494 retirement funds with 20-members or less was a staggering 63.45%. In funds with 10 000 or more members this ratio was a trifling 0.69%.
Governance issues also contribute to the growing popularity of umbrella funds. “The responsibilities of trustees and principal officers have dramatically increased over the last couple of years,” said Gluckman. This leaves company sponsored retirement funds in a bind. They struggle to find suitably qualified members to act as trustees, while the cost of hiring professional trustees is inhibitive. The evolution of the retirement industry also means companies have less of a financial interest in retirement funds. They no longer suffer the liability associated with the defined benefit funds of the past. Companies simply transfer employees’ retirement contributions to the fund and let their employees carry the risks associated with market performance.
The future of the retirement fund industry
The key trend in the retirement space is one of consolidation. At one stage there were more than 13 000 active retirement funds doing business locally. This number BREAK plummeted to around 5 882 funds by 2006 and is probably nearer 4 000 funds today. Many of these funds are relocating to umbrella fund structures for the reasons highlighted earlier. The 2009 Sanlam Employee Benefits Benchmark Survey, South Africa’s most comprehensive annual retirement research, showed that 43% of standalone retirement funds had seriously considered moving to umbrella funds. And of funds with less than 100 members, 70% said they were considering going the umbrella fund route!
Sanlam Umbrella Funds – which operates three umbrella funds to accommodate pension funds, provident funds and blue collar workers – has grown from approximately 11 000 members at 1 January 2008 to more than 67 000 members by year-end 2009. Assets under management increased from R1.1bn to R4.3bn over the same period. “If the current tax treatment of pension and provident funds are smoothed out we could offer a single umbrella fund solution in the future,” said Gluckman.
Gluckman sees a very different industry five to 10-years down the line. He believes as few as 150 active retirement funds will remain by 2015. This number would include government’s national social security fund, approximately 100 of the largest employer funds where there are enough members to maintain cost efficiencies, the 10 largest institutional umbrella funds, and a handful of union and industry funds. “We’re looking at a dramatically different industry – but the exact structure is anyone’s guess,” he said.
Editor’s thoughts: During our chat with David Gluckman we discovered how out of date South Africa’s retirement fund statistics are. Does anyone else see the irony in the flashing “new” banner alongside the Registrar of Pension Funds, 48th annual report 2006 (issued November 2009), as published by the FSB? Add your comments below, or send them to [email protected]
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