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Through the looking glass

01 July 2022 Nzwa Shoniwa, Managing Executive at Sanlam Umbrella Solutions

For my review I revisited research results from 2012 where the key research objectives were to identify sponsors’ major challenges as well as get sponsors’ views on the reform process at the time.

Firstly, umbrella fund members have more than doubled in the last decade and assets have more than quadrupled to just under half a trillion in assets. Over the past few years, we have seen layer upon layer of legislation being added to our industry and the one theme that has remained constant from National Treasury is the need for consolidation as well as its intent to improve governance within the industry, thus ultimately protecting the interests of members.

This ultimately led to National Treasury releasing a paper on governance of umbrella funds in December 2021 in which it highlighted their main concerns, namely:

1. Weak governance

• Use of service providers affiliated with the fund
• Overdependence on product/service providers for advice
• Lack of member representation on the board of trustees of umbrella funds.

2. Complex charges

3. Barriers to entry / switching within the industry

• Inability of employers to switch between umbrella funds
• Locking in of service providers or other parties by fund rules.

In its most recent paper on governance of umbrella funds National Treasury is proposing the following:

• All board members (including independent board members) must not belong to more than three boards in any year
• Independent board members should not be contracted as consultants/service providers to the same fund of which they are trustees
• Management committees must be formalised and standardised
• Conducting ongoing value for money of the umbrella fund will be prescribed
• A disclosure-based initiative that would require funds to provide information on their cost structures
• Standardised provision of information to enable comparison between funds and to promote effective competition.

We thought we would test where the industry currently is about the concerns raised by National Treasury. Ninety per cent of the participating employers surveyed advised that they trusted their umbrella fund sponsor and were satisfied with their Trustees.

What the industry is telling us:

• High level of trust and satisfaction with umbrella funds used
• 90% trust the ethics of the sponsor
• 86% are satisfied/very satisfied with the fund trustees
• 58% are happy for the sponsor to appoint 50% or more of the trustees
• Although, 59% believe trustees should be independent
• And, 65% think member representation on the board would improve member outcomes
• 2 in 3 employers participating in umbrella funds believe trustees should have the right to fire/replace the sponsor as service provider
• Just over half (54%) would prefer that the joint forum/MANCO be formalised in legislation thereby creating responsibility and possible liability for the members of the joint forum/MANCO.

Fifty-eight per cent said they were happy with the sponsor appointing 50% or more of the Trustees even though 65% believed member representation would lead to improved member outcomes.

The onus is on us to find the right balance

The most contentious response was that two in three participating employers believed Trustees should have the right to fire their sponsor. This is quite a conundrum since umbrella funds have been set up by sponsors for commercial reasons. However, there is no doubt that both sponsor-appointed and member elected Trustees must continuously hold the sponsor accountable on behalf of their members.

Over half the respondents also felt that management committees should be formalised. We must always test the practicality of some of these proposals. The Sanlam Umbrella Fund currently has over 4 000 participating employers, some of whom have as few as seven members in total. In this instance, as much as member representation and compulsory joint forums are strongly encouraged, it is practically impossible to implement these across the board.

Management Committee / Joint Forum Meetings

• Only 1 respondent reports that management committee / joint forum meetings are a requirement at participating employer level and for this sponsor, member representatives are included in management committee / joint forum meetings.
• The other 5 sponsors report that management committee / joint forum meetings are encouraged, but are not compulsory one comments that such meetings are more typical amongst the larger employers and that member representatives are often included.

Conversions

The umbrella fund industry has more than quadrupled in size in the past decade. This has not been because of new retirement funds or companies being set up in South Africa but more because of larger stand-alone funds converting to umbrella funds – a trend that has continued to gain momentum since about 2014.

Ever Considered Converting to an Umbrella Fund? Reasons for converting to an umbrella fund in 2012

2012:

• More cost effective
• Choice of investments
• Transfer fiduciary responsibilities to professional trustees
• Brand
• Model of independence
• Clear reporting
• Access to advice and support

We asked whether employers were considering converting to an umbrella fund and 42% of the stand-alone funds indicated that they had considered conversion in the previous 12 months. I reviewed the 2012 research for the reasons sponsors believed employers were considering converting to umbrella funds at that time. It was no surprise that cost savings, flexibility in investment choices and a transfer of fiduciary responsibilities to a professional board of Trustees were top of the list. These reasons have remained constant over the years.

The conversion experiences

This year we asked employers how their conversion experience had been and most confirmed that the experience had been positive. Servicing and communication remained a worry. This is an aspect that umbrella funds need to address urgently as more and more employers and members convert. The service offering must respond accordingly to accommodate the influx.

The more things change, the more they stay the same

As part of my 10-year review of umbrella funds I considered the challenges sponsors faced in 2012 vs today. Over the decade, there has been a consistent theme of:

• Regulation and its impact on costs;
• Communication challenges with members; and
• Uncertainty about reform

Challenges

Biggest Challenges for Umbrella Funds 2012 Mentions

• Consolidation of Umbrella Funds to achieve economies of scale
• Margin attrition and maintaining commercial viability
• Client education and ensuring implementation of good governance
• Reform and the uncertainty around the NSSF
• Legislative change and its impact on costs
• Encouraging member preservation / becoming more member centric
• Migrating funds from standalone to umbrella funds
• Cost of communication
• Dealing with intermediaries who have diverse skills & abilities

Biggest Challenges for Umbrella Funds 2012

• Regulation and its impact on costs, time and complexity of administration
• Reliance on a strong economy – currently experiencing high levels of unemployment and liquidations
• Being invited to pitch for new business / broker inertia
• Communicating “value” to clients, partly due to a lack of direct access to clients
• Communication and engagement with members
• Keeping costs down to remain competitive
• Slow speed of Section 14 transfers
• Ensuring members understand the importance of retirement savings / preservations
• Low level access to financial advice for members
• Clients allocating more to risk and less to retirement savings as a result of COVID

The Section 14 process

The one common theme that has remained throughout the decade has been queries about the section 14 process that allows for the transfer of funds to umbrellas. This was the biggest concern raised by sponsors back in 2012.

6 out of 6 Umbrella fund sponsors highlight section 14 process as a major practical challenge for industry.

“Some employers who know that they ought to change their administrators, do not because they have a fear of the Section 14 process”

“There needs to be faster turnaround time, because the process is too slow. The timing is an issue for legal processes because it is too cumbersome, and the client loses out. A reasonable expectation to client is that it should not take more than a month….and we are not close to that.”

Unfortunately, when we fast-forward to 2022, the situation does not seem to be improving. The latest stats from the FSCA show that the number of outstanding valuation reports has increased by just over 800% in the past decade, which means the section 14 backlog has worsened over this period. Perhaps this is the barrier to entry / switching to which National Treasury alludes.

National Social Security Fund (NSSF) uncertainty

In my review I also considered other major concerns that had been raised by sponsors in 2012. I was not surprised to learn that the NSSF was very topical at that time.

“Reform - NSSF. The uncertainty around design and timing, i.e. when it will come into play, and the uncertainty around the structure. That is a big issue.”

Of the sponsors interviewed, two felt that it would be implemented within the following five years (2017), and the biggest concern at the time was the uncertainty about timing as well as participation rules.

Fast-forward to 2022 and as much as National Treasury says Retirement reform is alive and well, the uncertainty remains.

Currently the industry is dealing with the proposed two-pot system. In our Benchmark research we provided retirement fund members with an opportunity to share their views on current proposals regarding the two-pot system.

As many as 40% were not familiar with the current proposals. Just over 30% said they would cash in some of their retirement savings. Over 40% felt that it was a good thing because members were struggling and needed to have access to that money.

2032

Up till this point my review has included a comparison of 2012 to 2022. Speculating on what is to come in the next decade, we believe:

• Larger funds will also convert to umbrella funds for reasons mentioned earlier. In fact, our own Sanlam Staff Fund will be converting to the Sanlam Umbrella Fund, which will constitute an additional R13 billion assets transferring later in 2022.
• Umbrella Funds will continue to position an integrated value proposition that combines healthcare, wealthcare and selfcare.
• The fight for the most digitally advanced offering will be accelerated as millennials now constitute the largest proportion of umbrella fund membership.
• Along with the National Treasury, the industry will continue to pursue better retirement outcomes for all members to create a truly inclusive retirement fund industry.
• It is even possible that some employers may offer members a choice of umbrella funds (like they do for medical aid), where at joining a member will have a choice between two or more.
• Lastly, and probably the most important, are financial inclusion and transformation

Financial inclusion and innovative solutions

In the FSCA ‘Financial Inclusion Strategy’ paper, specific sections were dedicated to the following three topics:

• Supporting technological innovation that enables financial inclusion
• Supporting small financial service providers who typically serve lower-income customers with simple and affordable products, and
• Promoting the supply of appropriate financial products and services to SMMEs.

Research indicates that out of 16 million employed people under the age of 65, only seven million contribute to pension or provident funds. We believe this is because many of these people form part of the SMME sector where contributing to a retirement fund is not a priority. It is with this in mind that Sanlam Corporate has decided to make it easier for these members to contribute to retirement savings by creating a fully digital facility to which employers can sign up. A retirement funding facility that is quick, simple and effective in achieving the goal of improving access to a good retirement outcome.

At Sanlam we constantly reflect on how far we have come as an industry and whether we have transformed accordingly and improved retirement outcomes for the ultimate beneficiaries – our members. When we look back to 2012, the big question is whether we have walked far enough, like Alice in Wonderland, to reach a desirable destination.

Or have we simply crawled towards the door without even opening it for our members to enter and secure better retirement outcomes?

“One day Alice came to a fork in the road and saw a Cheshire cat in a tree. “Which road do I take?” she asked. “Where do you want to go?” was his response. “I don’t know,” Alice answered. “Then,” said the cat, “it doesn’t matter.” “

Quick Polls

QUESTION

A recent discussion on the ‘successful intermediary of tomorrow’ offered some tips to help financial and risk advice practices to thrive through 2022 and beyond. Which of the following do you think will give your practice an edge over the competition?

ANSWER

Achieving cost and scale through digitalisation
Offering customisable product solutions to meet customers’ unique needs
Specialising in one advice discipline only
All of the above
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