The umbrella dilemma

It is hardly ground-breaking to raise the topic of umbrella retirement funds against so-called stand-alone retirement funds. However, employers and trustees alike have grappled with the issue over the past 10 years and continue to revisit it as an important part of reducing retirement fund costs in South Africa.

This article is not a definitive guide for employers at a crossroads, but aims to outline the key considerations to help in making the right decisions.

Why the fuss?

The formalised retirement fund industry in South Africa is over 50 years old and we have learned many lessons along the way. We have also found that escalating stakeholder requirements have led to increased complexity, otherwise read as ‘more costs’.

If you have followed the retirement fund industry over the past few years, you will be aware that the key words are ‘costs’ and ‘consolidation’. While it is not necessarily the case that these are the key factors that lead to a comfortable retirement, but they have definitely become driving themes of the pending Retirement Reform.

In 2011, the National Treasury’s National Budget Review specifically outlined ‘addressing high costs and moving toward more consolidation’ as both desirable and achievable. With this in mind, it was only natural that the discussion on umbrella funds and the merits thereof would intensify.

Navigating the crossroads

If you only focus on one factor when making decisions on umbrella funds, you may end up with an easier decision process, but may be disappointed down the line when the missed factors manifest themselves. These key areas of consideration include:

• Economies of scale/costs
  Umbrella funds provide the opportunity for multiple employers to share costs. As such, many costs that would be the burden of a single fund (e.g. consulting fees, financials, valuations, etc.) can be less significant as economies of scale come into effect. However, this is not a universal standard as there are funds that find their cost structures more efficient on a stand-alone basis.

• Governance
  The duties of trustees continue to become more onerous with increased liability for poor governance. Umbrella funds are more likely to have professional trustees, but stand-alone funds are also able to compete for the services of independent trustees in order to achieve a high level of governance. It remains the responsibility of the fund and employer to decide on a structure, that will ultimately suit the needs of the members.

• Conflicts of interest
  Most of the larger umbrella funds have sponsor trustees, which may present a potential for conflicts of interest. This case is not so prevalent in stand-alone funds where there is mandatory employer and employee representation. However, with increasing governance standards as above, the rise of the independent trustee looks set to address such concerns, albeit at an increased cost.

• Effective representation
  Umbrella funds are not held to the requirement for employee and employer representation on the trustee board. As such, representation that is more effective is likely to be found in stand-alone funds over umbrella funds. However, the increasing prevalence of management committees does allow for some representation of employees within an umbrella arrangement.

• Communication
  Umbrella funds provide relevant communication to members in a generic manner, but if an individual employer wants to customise this information, costs are likely to increase. Stand-alone funds by their nature provide communication tailored to the specific profile of their membership.

If there is anything to take from the aforementioned content, it is that the decision on choosing to move to an umbrella fund, between umbrella funds or to stay or move to a stand-alone offering, should not be taken lightly.

Smaller retirement funds that are stand-alone should ensure that they have fully considered their reasons for remaining stand-alone and can field any challenges to their position. Larger funds should equally ensure that they have done the work to ensure they are optimally structured.

Umbrella funds have their place and the employer and trustees need to apply themselves rigorously to task of ensuring any decision ultimately benefits all stakeholders after all factors are considered.