Illustration: Mangena

If your company has its own pension fund, to which you are contributing, it may be considering joining the throng of employers that are moving their employees into umbrella funds. The latest raft of regulations pertaining to pension funds, known as the default pension fund regulations, may well be the “last straw” that clinches the decision to make the move.

Commercial umbrella funds are funds run by financial services providers that accommodate a number of employers – typically with individual requirements – within a single over-arching structure. 

The migration of standalone employer funds to umbrella funds has been a trend in the retirement landscape for more than a decade. The underlying reasons, but not the only ones, are the increasing burden of administering a retirement fund and having to comply with burgeoning regulation.

The government’s aim in reforming the industry has been to ensure greater protection of your retirement savings, improve transparency, reduce costs, and boost your chances of retiring in comfort.

The pension default regulations were signed into law in August last year. Funds have until March next year to comply. Briefly, they require the boards of pension funds to:

• Offer a default in-fund preservation arrangement to members who leave their employers before retirement;

• Provide a default investment portfolio to contributing members who do not exercise any choice about how their savings should be invested;

• Have a post-retirement annuity strategy with annuity options, either in-fund or out-of-fund, for retiring members; and

• Ensure member defaults are relatively simple, cost-effective and transparent.

David Gluckman, the head of special projects at Sanlam Employee Benefits, says the number of standalone funds has dwindled over the years, from about 13 000 funds in 2005 to about 5 000 now, according to the latest Financial Services Board estimates, although probably fewer than 2 000 are active funds, because deregistering a fund sometimes takes a long time.

Gluckman says that in the 2017 Sanlam Benchmark Survey 38% of standalone funds’ principal officers interviewed responded “yes” to the question “Has the employer ever considered providing benefits to members via an umbrella fund arrangement?”. 

“That is a fairly significant minority, given that the surveyed funds were fairly large retirement funds, averaging more than 11 000 members with more than R2 billion in assets,” he says. “This was before the default regulations were gazetted in August 2017. We await the 2018 Benchmark Survey results on this topic with great interest.

“I don’t think we have yet seen what will transpire directly as a consequence of the default regulations. Boards of trustees are probably just starting those deliberations,” Gluckman says.

But he says the clock is ticking towards March 1, 2019, by which date all retirement funds must implement the requirements.

“I am sure there will be some standalone funds that decide the default regulations are a tipping point, and they will go the umbrella fund route, but it’s anyone’s guess how significant this move will be.”

The big umbrella fund providers – Old Mutual, Liberty, Momentum, Sanlam and Alexander Forbes – are well equipped to meet the regulatory requirements and to greet new employers into their folds. Their comprehensive employee benefit packages typically include group life cover, a seamless transition for members from pre- to post-retirement investment products, and bells and whistles such as apps that give members up-to-the-minute information and data on their retirement savings.

However, the transition from an employer-controlled fund to an umbrella fund is not easy, particularly for the larger employers, says Saleem Sonday, the head of group savings and investments at Allan Gray, who heads Allan Gray’s new umbrella fund (see “Asset managers muscling in on umbrella fund space”, below). “It is important for the employer to thoroughly ensure that there is good alignment with the product provider and that the benefits outweigh their concerns of giving up control,” he says, adding that employers also need to obtain buy-in from their employees.

Other options

Petri Greeff, an executive at RisCura, a global investment advisory and financial analytics firm, is of the view that standalone funds have other options than going the umbrella fund route. 

He says he has noticed the move of standalone funds to umbrella funds for a while now. “This is certainly not a new phenomenon and seems to have been largely driven by the increased governance burden that standalone funds have been facing in recent years. 

“We can appreciate that trustees may feel that the new default regulations are adding to their existing heavy burden and, in a few cases, could be the last straw that breaks the camel’s back when it comes to running a standalone fund versus outsourcing it to an umbrella fund,” he says.

Greeff says, however, that there are ways the trustees of standalone funds can reduce the administrative burden without taking such a drastic step and handing over the reins to an umbrella fund. 

He says the default regulations will not necessarily increase the ongoing administrative burden for trustees.

“It will require some upfront work by trustees to consider the various options for their funds. But once those are put in place, the administrative burden should be limited to monitoring the default options – not much more than what they are already doing for their existing funds.” 

Greeff says he expects many positives to come from the new regulations, such as institutional fees forcing down high retail fees, seamless transitions in members’ “cradle-to-grave” journeys, and members generally retiring better through improved investment strategies and lower fees. 

But he also sees some risks. “Our biggest concern is actually around trustees, not the service providers. Trustees need to understand and buy into the thinking behind the regulation and acknowledge their members’ retirement journeys and expectations. Otherwise, it may lead to short-sighted decisions and off-the-shelf solutions, which take away the ability of a standalone fund to offer customised solutions to its members. 

“We also see the risk of traditional retirement products just being retooled for the institutional market and the industry not really coming up with innovative solutions. An important role trustees need to play is in demanding innovation that puts their members’ interests first.”

Asset managers muscling in on umbrella fund space

Although dominated by the big life companies, smaller players such as asset managers are entering the commercial umbrella fund space. Sygnia launched its Sygnia Umbrella Retirement Fund (SURF) in 2016 and Allan Gray launched its umbrella fund in May last year.

Saleem Sonday, the head of group savings and investments at Allan Gray, says, according to research done by Credit Suisse in 2016, the South African retirement industry (excluding the Government Employees Pension Fund) manages assets of about R1.8 trillion. Of this, about 49% is in non-commercial funds (which include standalone employer funds and trade union funds), 17% is in commercial umbrella funds, and about 34% is in individual retirement annuity and preservation funds. Over the four years to 2016, the market share of commercial umbrella funds increased by 70%, at the expense of standalone employer funds.

Sonday says Allan Gray sees the shift continuing, but at a slower pace, and says it is mainly confined to funds that have assets of under R1 billion. The larger standalone funds are moving over at a much slower pace, he says.

He says the entry of asset managers into the industry is providing much-needed competition and innovation. Allan Gray’s offering, he says, is backed by a strong investment team and superior administration capability. It has a simple and transparent fee structure and is able to compete on value for money and service. 

SURF’s package includes group life cover, but Allan Gray’s does not – employers need to arrange separate life assurance for their employees, although Allan Gray can assist in this process. Sonday says separating the two means that members know their contributions are used for the intended purpose: saving for retirement.

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