Can ‘21 Questions’ reveal everything about an umbrella fund?
The short answer to the question posed in the article headline is “no”. But then the 21 Questions referred to were never intended to provide such a conclusive analysis. Instead they were created as a realistic starting point from which decision makers cou
What is an umbrella fund?
Of course the 21 Questions will mean nothing to you unless you have a clear idea of what an umbrella fund is. Sanlam and the FSB define umbrella funds as “cost effective retirement saving vehicles which pool the savings of employees from more than one employer to reduce costs and increase investment returns.” The FSB currently recognises two categories of umbrella funds. The first is referred to as the Type-A Umbrella Fund – a fund which has a set of general umbrella fund rules AND a special set of specific umbrella fund rules for each sub-fund. The second is known as a Type-B Umbrella Fund and is only bound by a set of general umbrella fund rules.
At present the FSB estimates there are 200 umbrella funds providing retirement savings solutions to as many as one million South Africans. And there’s a reason for the growing popularity of this type of retirement fund solution. The industry has finally realised that to maintain more than 13 000 funds in an economy the size of South Africa is untenable. David Gluckman, managing director of Sanlam Umbrella Solutions notes that as many as 5 000 funds are “in the process of being liquidated or being transferred to an umbrella arrangement” as part of a much needed cost rationalisation process. He says apart from the difficulty in sourcing trustees, smaller funds have to “consider the cost of running [their] fund versus the benefits of an umbrella arrangement.”
Umbrella funds will play a big roll in the retirement industry
Since umbrella funds will undoubtedly play a big roll in the industry going forward it makes sense to assist decision makers in choosing the right umbrella fund for their requirements. Davids notes: “There are a few key areas which should be analysed when selecting an umbrella fund, including governance and member representativity, fund sponsorship, member communications, investments, insured benefits, costs and advice.” And these are the seven categories which broadly outline the 21 Questions that the FSB and Sanlam propose decision makers ask.
Some of the basic requirements of an umbrella fund include:
- the fund should give members excellent representation and choice
- participating employers should have the power to select benefits and contribution structures appropriate to their employees
- the fund should have a robust administration platform and a competent board of trustees
- a financial adviser should be made available to assist members in making their investment choices
- annual statements should be produced (as a minimum legal requirement) showing members’ retirement fund values
- sufficient call centre facilities should be available to handle member queries
- the fund should encourage the establishment of an employer/employee committee for each employer group it houses
A thorough assessment of responses to the 21 Questions will give the decision maker ample feedback to determine whether the umbrella fund in question lives up to these requirements.
Brokers and financial adviser will play a key role
The 21 Questions Booklet is “a tool for use when researching umbrella funds with financial advisers, brokers or financial houses.” Once an employer has answers to the various questions posed in this booklet he will be in a “better position to find the most suitable umbrella fund” for his needs. Gluckman says “By asking these questions it should become clear fairly quickly whether the fund is structured with the member in mind.”
With the number of multi-employer umbrella funds likely to increase exponentially in South Africa over the next few years, the 21 Questions Booklet should prove invaluable to financial advisers in the Employee Benefits area.
Editors’ thoughts:
The main argument in favour of an umbrella trust fund is economy of scale. Arguments against mainly centre on the loss of employee input in the appointing of trustees to the fund… Traditionally 50% of trustees would be appointed by employees. Do you think the umbrella fund solution will become the standard interim solution until government implements the long-awaited social security reforms? Add your comments below, or send them to [email protected]
