If your company joins the trend of decommissioning its standalone pension or provident fund and moving your retirement savings into an umbrella fund, it may retain a high degree of involvement in how your savings are managed, or it might virtually stop its involvement altogether. Whatever happens, the arrangement will be more commercial than is the case with standalone funds, where the employer has traditionally played a paternal role.

In a presentation to the annual conference of the Pension Lawyers Association in Cape Town this week, Graham Damant, a partner in the employment and benefits practice at Bowmans, said there had been two major shifts in the retirement industry over the past 20 years.

The first was the move from defined-benefit funds to defined-contribution funds in the late 1990s and early 2000s, and the second was occurring now: the move from single-employer standalone funds to umbrella funds. An umbrella fund is typically offered by an established financial services company and accommodates many employers and their employees. These funds have many benefits, but they bring their own set of challenges, Damant says.

The relationships among the different parties in a standalone fund are relatively straightforward. The employer determines the rules of the fund, which is governed by a board of trustees, representing the employer and its employees. The administration of the fund is outsourced to a fund administrator, which acts in accordance with a service-level agreement between it and the fund. The board makes decisions on investments and on the distribution of death benefits, among other things.

Overall, Damant says, the “world of standalone defined-contributions funds was a peaceful one”. Under this system, employers showed a high degree of paternalism and care for their employees.

But this paternalism has diminished in recent years. “There is less interest on the part of employers in pension funds and pension arrangements, and they are more removed in what are now more commercial arrangements.”

In a commercial umbrella fund (there are also non-commercial funds that serve trade unions or industry sectors), there need to be multiple service-level agreements in a negotiated, tripartite arrangement involving the employer, the fund and the administrator, Damant says.

Each participating employer in the umbrella fund has a management committee (or manco), which serves almost as a sub-board in representing its interests and those of its employees. A manco will typically comprise members and employer representatives.

Some employers show a low level of interest in what the manco is or what it does, because they have really passed on their responsibilities to the third-party provider, Damant says. With other employers, however, the manco plays a much more significant role, and with that comes the issue of delegation of duties.

The service-level agreement between the employer and the administrator will, among other things, determine fees and investment charges, and spell out indemnities and limits on liabilities for the fund and its administrator. These agreements can get quite complicated where, for example, in a change-over from a standalone fund to umbrella fund, the employer, employees and former trustees of the standalone fund want to retain many of their powers, Damant says.

The manco may have some powers delegated to it by the employer and some by the fund’s trustees, and it is important to determine which powers are delegated by which party, as this can affect who is liable if things go wrong. Very often, Damant says, the fund rules will allow the employer to choose investment portfolios and will govern whether members have investment choice or not. These are powers that are delegated to the employer, and the employer, in turn, delegates them to the manco.

There will also be issues over whether the manco has a say in investment strategy, which is actually the responsibility of the trustees of the fund, and whether the manco can appoint financial advisers to advise on investment strategy. There may also be an interest on the part of the employer and manco into the allocation of death benefits of employees. The potential liabilities need to be identified and properly catered for in the tripartite arrangements, and if necessary, adequate insurance arrangements implemented.

In this type of set-up, employers can find themselves facing more legal hurdles than they would have anticipated, Damant says.