Why it remains critical to consolidate into Umbrella fund structures

Arno Loots: Head, Umbrella Fund Solutions, Liberty Corporate.

The shift from standalone retirement funds towards umbrella structures continues to be a key theme shaping the evolving retirement fund industry in South Africa. The shift is being driven on two fronts: by government through retirement reform proposals; as well as industry, as service providers and funds seek to align themselves and stay competitive. The current environment necessitates a more customer-centric, simplified and cost-effective approach to retirement funding.

It is clear that over the last few years, fewer employers have chosen to set up their own funds and have instead opted for the simplicity and often cost efficiency provided by umbrella type schemes, along with reduced fiduciary responsibility for the employer. Many existing standalone funds of varying sizes are also opting to transfer to umbrella funds, including some very large employers.

These factors were highlighted in the 2014 PricewaterhouseCoopers’ Trustee Retirement Fund Strategic Matters and Remuneration report, which surveyed 183 retirement funds, including 31 umbrella and 116 standalone funds. According to the results, 76% of respondents say there is scope for simplification and cost reduction in their funds, compared to 68% in the 2012 survey.

Furthermore, 20% of respondents say they favour moving to umbrella funds as a key cost-reduction strategy, up from 13% in 2012. The Sanlam Benchmark Survey of 2014 also indicates that 55% of standalone fund boards stated that they had considered a transfer to an umbrella fund structure, a significant increase from the 44% in 2013.

Umbrella funds, backed by established retirement fund administrators, provide expertise and best-practice management at a competitive price, by capitalising on economies of scale. This allows the funds to decrease per-member costs as they gain in size, whilst simultaneously providing true value to members through proper governance structures and innovative products.

Costs of umbrella funds have reduced significantly over the past three years. The above survey reflects that members on average contribute roughly 1% of pensionable salary more towards retirement than three years ago. This is mostly due to a reduction in costs. The average member now saves 10.5% of pensionable salary, compared to 9.5% in 2011. The survey also indicates that average umbrella fund administration costs remain lower than those for standalone funds.

In the 2015 Budget Review, the Minister of Finance advised that the next draft paper on the Retirement Fund Reform series can be expected in the middle of 2015. The paper will provide an indication of the extent to which government intends to cap costs on retirement funds. Umbrella funds are expected to be in a good position compared to other retirement vehicles, due to the costs already being relatively low.

Having an umbrella participation in place, frees up employers to focus on their core businesses. By moving to an umbrella fund, employers and members get access to professional and experienced trustees that they may not easily have had access to in a standalone fund. Regulation of minimum levels of trustee qualification and knowledge on retirement funds is expected in the near future. This responsibility lies with the professional trustees in the umbrella fund and does not affect the employer or employee to the same extent as it would in standalone funds.

This trend towards umbrella structures has signalled that there is a desire to simplify retirement fund solutions for both employers and contributing members. The Financial Services Board expressed a similar desire in the Treating Customers Fairly principles. Insurers are increasingly focussing their strategy on customer needs in order to meet these demands from customers and the regulator. As retirement solution providers, we need to meet this demand head-on to alleviate retirement challenges faced by our customers. This will in turn result in more people achieving financial freedom in the future.

Umbrella funds are expected to be at the forefront of providing answers to the challenges and opportunities discussed above. Movement into umbrella funds is therefore expected to continue into the future.