A bright horizon for umbrella funds?
While South Africa has a very sophisticated retirement industry, there are many challenges it needs to overcome in order for it to be comparable with international counterparts. While Government has acknowledged this and has expressed their concerns in four discussion papers outlining the need for retirement reform, there may be a significant movement within the industry towards reform without the need for government directives.
Because of issues such as cost containment and increased participation, there is a feeling among some in the industry that umbrella funds will evolve into an increasingly attractive savings vehicle. And what benefits can umbrella funds offer which are not offered by stand-alone vehicles?
Economies of scale attractor
Many industry participants feel that one of the major draw cards of umbrella funds will be the fact that its core functionality is driven by economies of scale.
Cobus Strydom, Head of Consulting at Absa Consultants and Actuaries feels that there are currently too many stand-alone funds which do not have the necessary critical mass to operate effectively within the industry.
Stand-alone arrangements only include the company and the employees of the company who are obliged to belong to that arrangement. It is this small participation which Strydom says drives up costs which is one of the biggest negative impactors on retirement savings.
"Umbrella funds include a number of companies who participate within the same fund. This creates an economy of scale which is able to absorb certain fixed costs. This is an aspect which will offer those saving for retirement, a significant benefit as savings can mature at a rate which has less restrictions,” says Strydom.
More room for participation
One of the biggest challenges facing the South African retirement industry is participation, or the lack thereof. Twenty seven per cent of South Africa's population is unemployed, and the majority of the employed population (73%) work for employers who employ less than 50 people. Because of the significant costs associated with retirement vehicles, these employers do not offer their staff retirement benefits.
However, Government is looking to impose auto enrolment legislation which would force employers to offer retirement benefits to its employees. Should this be imposed a cost containing retirement vehicle would become highly attractive for a large pool of employers.
Government is also concerned about the high costs in the industry and the fact that a significant portion of a member's contribution is being spent on risk benefits and cost containment while not enough is being used for savings. This will be a major driver towards stand-alone arrangements moving towards umbrella funds,” says Strydom who points back to the benefits of economies of scale.
Abandoning trusteeship
As part of its reforms, Government is looking to change its view on the qualifications needed to become a trustee of retirement vehicles.
"Some companies simply do not have the human capital to possibly live up to the new expectations which Government wants to impose, especially smaller companies. By joining an umbrella fund, companies are moving towards a vehicle which has an independent board of trustees. This takes the responsibility and hassle away from many companies,” says Strydom.
Editor's Thoughts:
There is no doubt that umbrella funds pose an interesting option to those who are looking into mass participation to reduce costs. However, the benefits that these funds offer are limited to companies and not individuals looking to enter a retirement vehicle in their private capacity. Perhaps product providers will take this into account as it may open up a whole new avenue of business. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
