As part of the 2010/2011 budget review announced last week, reference was made to the obvious need for an appropriate and affordable retirement savings mechanism for low-income earners.
This need is backed up by the findings of the Old Mutual Savings Monitor, which surveyed 1000 South African households in the main metropolitan areas working either in the formal or the informal sector. This survey found that only 41% of South Africans working in formal employment in metro areas belong to a pension fund. It further revealed that only 54% of South Africans in pre-retirement age (45-59) have formal pension funds.
The budget review made mention of the fact that Government is considering the design of a standard, basic retirement saving and income protection scheme that is affordable, simple, cost-effective and available to low-income employees and those with irregular earnings.
It further stated that Government is also considering allowing accredited private funds to operate alongside a statutory default arrangement that would grant workers access to affordable and secure savings arrangements, while allowing existing provident and pension funds time to adapt to more stringent minimum standards.
According to Hugh Hacking, Umbrella Fund Product Manager at Old Mutual Corporate, Old Mutual welcomes the possibility of the continued use of accredited private funds as part of the proposed retirement reforms.
He says that they would, however, probably be subject to stricter minimum standards that could entail additional administration, time and costs. He says that if this were to happen, it would make sense for many private funds to move to umbrella funds. An umbrella fund is essentially a retirement savings vehicle catering for more than one employer group.
“The larger umbrella funds already meet strict governance requirements, are more cost effective and offer protection benefits for employees such as death and disability cover.”
There has already been considerable growth in umbrella funds in recent years as employers seek to transfer trusteeship responsibility to specialists in an increasingly legislated industry, while also attempting to reduce costs.
Hacking says the growth in the popularity of umbrella funds has also been boosted as a result of them having successfully addressed some of the previous criticisms leveled at them and having become more flexible for employers and members.
“The appeal of umbrella funds lies primarily in the fact that they offer the ability to transfer the responsibilities of fund administration and trusteeship away from the employer. They also embed the expertise of providers, offer better value, lower cost and better benefits than comparable stand-alone funds.”