The more than R2 trillion invested in South Africa’s retirement funds should mean that members have significant bargaining power. But members are disconnected from their funds, and their interests are not always given the highest priority, independent actuary Rob Rusconi says.

Members should use their investment muscle to negotiate lower costs and better investment choices, he told a South African Rewards Association employee benefits workshop in Sandton recently.

Fifteen years ago, South Africa had over 15 000 stand-alone retirement funds; today there are less than 3 000.

A stand-alone fund is for the employees of a particular company. An umbrella fund is for employees of different companies. Many stand-alone funds have been collapsed into umbrella funds.

The move to umbrella funds seems logical and practical. The increase in regulation and higher governance requirements have made it more expensive and an administrative burden to manage a retirement fund, particularly a small fund.

Employers do not regard managing a retirement fund as their core responsibility and choose to outsource this task to an expert.

Umbrella funds are sold on the basis that their economies of scale will enable them to charge lower costs, and that they will be independent.

Have they lived up to these promises? Costs are difficult to measure, and some funds are independent. There have been other consequences of the shift to retirement funds, such as members becoming disconnected from their funds and unaware of their benefits and rights.

“Costs matter, because they have a permanent effect. A 0.5-percent-a-year difference over a lifetime reduces a pension by in excess of 10 percent,” Rusconi said.

Rosemary Hunter, a pension lawyer and the former Deputy Registrar of Pension Funds at the Financial Services Board, told workshop delegates: “Unfortunately, I don’t think the anticipated benefits of reductions in costs that a lot of employers hoped for have happened. The outcomes are not as expected.”

There is no evidence to support the claim that umbrella funds’ costs are lower. “I have tried in the past to verify this, but I didn’t get answers,” Rusconi said.

David Gluckman, the head of special projects at Sanlam Employee Benefits, said: “The jury is still out when it comes to costs.”

Sygnia Asset Management conducted research into costs before entering the umbrella fund market in April this year with what it claims is a low fee.

“Disclosed charges average 2.2 percent of the asset value per year,” Magda Wierzycka, the chief executive of Sygnia, said.

Umbrella funds have multiple layers of charges for services such as consulting, platform availability, and liability administration, and total charges can be as high as
five percent in some funds. On the other hand, the costs of passively managed retirement annuities, such as Sygnia’s, are as low as 0.4 percent, Wierzycka says.

Comparing costs across pro-ducts and funds is difficult, because there is no standardisation of costs across umbrella funds. “Charges are expressed in many different ways; even for experts, it can be very difficult,” Gluckman says.

Gluckman has previously told Personal Finance that costs are not the only issue employers planning to move to umbrella funds need to consider. For example, it may be more cost-efficient to pay for good administration that ensures members’ funds are invested quickly.


Members are disconnected

Hunter said that members have become distanced from their funds. Intermediaries or consultants who advise on retirement funds will often advise employers, not employees.

She emphasised that members need to have more contact with, and a greater say in the running of, their retirement funds, and funds should have members’ contact details. Most of the workshop attendees agreed, including at least one principal officer.

Hunter said ensuring that members’ contact details were up to date could go some way to ensuring that unclaimed benefits are paid to the right beneficiaries.

“A lot of funds are not able to get direct contact information on members because employers and intermediaries don’t want to disclose personal information. We need a special code for the industry to authorise the release of contact information to retirement funds,” Hunter said.

If a fund doesn’t have your contact details and you die while in employment, the fund will struggle to trace your dependants, who may be entitled to benefits.



Rusconi said funds were not always managed in the best interests of members. Many umbrella funds in South Africa have been set up by large financial services companies.

“It is not possible for a for-profit entity to look after your members the way you can, because if they did, their shareholders would fire them. I cannot find a way around this fundamental problem,” he says.

Rusconi was challenged by workshop attendees and conceded that good service deserves a good fee. But he said he is still convinced that members’ interests aren’t always put first, and he would like to see more not-for-profit umbrella funds established.

The case for umbrella funds holds: bigger funds should be able to reduce costs, and independent trustees should put members’ interests forward, he says.



If you are a trustee of a stand-alone retirement fund that is considering switching to an umbrella fund, you should:

• Ask questions about the numbers and statistics put in front of you; ask financial services providers and funds what the numbers mean for members and their pensions. Don’t accept vague answers, such as “costs are competitive”. An entire industry can be uncompetitive, Rob Rusconi says.

• Ask for details on costs – expressed in terms that you and your members will understand.

• Appoint an independent consultant.

• If performance fees are charged, ask how these will affect investment management, and what protection members have against investments being made for the sake of achieving a performance fee benchmark.

• Ask how the fund would fire a service provider.

• Know the relevant legislation.



If you are a member of a fund, you can ensure you stay connected with your fund by:

• Making sure you are represented by independent trustees who are asking the right questions. Attend fund updates and participate in trustee elections.

• Ensuring your beneficiary nomination details are up to date.

• Informing your spouse and dependants that your are belong to a fund, and that if something should happen to you, they are entitled to benefits.