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Slow but steady retirement industry consolidation continues

01 August 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

A number of local financial institutions use the July “Savings Month” as a platform for their savings surveys. The Old Mutual Savings & Investments Monitor, released 23 July 2012, focused on both attitudes towards savings and the uptake of savings product

The Benchmark Survey is compiled by an independent market research agency by way of face-to-face interviews with 188 principal officers and trustees of standalone retirement funds as well as six qualitative interviews with key decision-makers at sponsoring umbrella funds. To add spice to the survey results a second study collated the views of a broad cross-section of retirement fund members and retirees in Cape Town and Johannesburg. The results confirm that little has changed in the retirement funding environment over the past year or two. The good news is there have been benefits to average members through industry consolidation and the resulting reduction in administration costs...

Small steps, but in the right direction

Ongoing consolidation and increased competition in the sector is resulting in ‘positive passive reform’. What this means is that market forces rather than regulation is driving change in the industry. And it seems that both employers and the principal officers and trustees of retirement and provident funds are making commonsense decisions to ensure members’ interests are best served, including investing them in the lowest cost (in terms of administration) retirement structures.

The major trend exhibiting in the retirement fund industry – this year and probably over the past decade – is the consolidation of standalone retirement funds into so-called umbrella funds. “We are seeing a massive shift from small to large funds, with one quarter of all retirement fund members participating in larger umbrella funds in 2011,” says Danie van Zyl, Head of Guaranteed Investments at Sanlam Structured Solutions. “Going forward, we expect further product simplification, standardisation of the cost regime and further tax efficiencies as the retirement fund landscape continues to evolve.”

The Financial Services Board (FSB) reports in excess of 500 Type “A” Umbrella Funds comprising approximately R110 billion of assets in respect of approximately 1.5 million members… David Gluckman, Head of Research at Sanlam Employee Benefits provides another “approximate” view, saying that the industry manages more than R100 billion on behalf of a million-plus members, and pays out approximately R10-billion of insurance benefits per year.

Those who prefer “concrete” statistics can turn to the 2011 Benchmark Survey, where 26 major corporate umbrella funds, sponsored by nine companies, are singled out. These funds represent 80% of the industry and manage R87.792 billion on behalf of 1.131 million members. “Five ‘mega funds’ have emerged [in the umbrella fund landscape] and the resultant economies of scale hold the prospect of better retirement outcomes for members,” says Gluckman. As for the six umbrella fund sponsors included in the survey: At 31 December 2011 these funds covered some 793 657 members, 14 231 employers and R76.8 billion in total assets. “A very substantial proportion of the South African commercial umbrella fund market was included in the study,” he says.

Standalone funds still dominate the retirement landscape

The main argument for umbrella funds has been that of cost savings. The survey reveals that members of large funds save almost a percentage point more towards their retirement than those of smaller funds. This difference is largely accounted for by deductions for administration and operating fees, which amount to 1.24% of salary in small funds versus 0.56% of salary in large funds.

Based on the findings of the 2012 Sanlam Benchmark Survey, the total average “retirement” deduction from a member’s salary is 16.2%. This contribution has remained fairly constant over the past five years. Of the 16.2%, an average 12.4% filtered down to the eventual retirement funding vehicle last year, nicely ahead of the five-year average of 11.6%. You must remember that the deductions made from salaries are applied to death benefit premiums (1.59%), disability benefit premiums (1.11%) and administration and operating costs (1.07%), with the balance used to fund retirement.

Despite the shift to umbrella fund structures the bulk of retirement industry assets remains in standalone retirement funds. The 188 standalone funds surveyed for the Benchmark Survey boasted average total assets of R533 million per fund and some 2 266 active members. “With representation at the 2012 Sanlam Benchmark symposium from National Treasury, as well as organised labour (a sector accounting for one quarter of large retirement funds), this and other insights into the current and future state of the retirement fund industry were part of some robust discussions,” concludes Gluckman.

Editor’s thoughts: Over the past few years it appears as if government’s retirement reform plans are on hold for a more ambitious national health insurance solution. The good news is market forces are driving consolidation and cost reductions across the industry. It is hoped that a decade from today the retirement landscape will be dominated by a dozen (or so) umbrella funds with a few hundred massive standalone funds. Do you agree with the continued shift towards umbrella funds and are you impressed with the reduction in administration fees (in larger funds) to just 0.56%? Add your comment below, or send it to


Added by Harald, 01 Aug 2012

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