Pooling employees into an umbrella retirement fund is a cheaper alternative for companies, but may disadvantage you through poor governance and representation.
Pooled retirement funds could be the next big trend for South African pension funds as companies shy away from shouldering the onerous responsibilities of managing retirement funds for their employees. This is according to a biennal survey of retirement benefits published by Sanlam Employee Benefits.
Kobus Hanekom, the head of employee benefit consulting at Sanlam Wealth Management, says the indications are that there will be a significant move away from individual, or single defined contribution, funds to umbrella funds over the next few years. Hanekom says umbrella funds offer a solution for companies that want to offer competitive salary packages that include retirement plans, without them having to take on the direct costs and responsibilities of setting up and managing a pension fund.
"Many employers don't want a Rolls Royce , they just want a push bike that will provide simple, yet effective, retirement provision," Hanekom says.
Smaller companies in South Africa typically make use of umbrella funds, because they are more cost-effective than setting up an "in-house" fund for a few staff members.
The expected increase in the number of smaller companies in South Africa should stimulate the popularity of umbrella funds.
At the recent conference of the Institute of Retirement Funds (IRF) in Johannesburg, Eric Visser, the chief executive of the Mine Employees Pension Fund and the Sentinel Mining Industry Retirement Fund, outlined various trends in the retirement industry that are making umbrella funds an attractive option:
- The responsibilities of trustees are growing and becoming more complex. Trustees can no longer properly fulfil their responsibilities on a part-time basis;
- Employers want to concentrate on their core businesses and don't have enough time to deal with pension fund issues; and
- Fund members are demanding greater investment choice.
Umbrella funds offer a solution to the above problems because they employ professional, full-time trustees, Visser says.
There are, however, problems with umbrella funds that were highlighted at the IRF conference. They include:
Governance
Frans Mahlangu, the principal officer of the Mineworkers' Provident Fund and vice-president of the IRF, says the governance of umbrella funds is a problem. For instance, in funds run by trade union members, the trustees may follow the line of thought of the unions to the possible detriment of non-union members.
Mahlangu says the solution to this problem is not to appoint professional trustees. Such trustees will not understand the industries represented in the fund, and because they do not have a relationship with the members, they will be unable to properly represent the members.
Desiree Partridge, the head of legal services at Alexander Forbes Financial Services, says the Financial Services Board (FSB) is planning to address concerns about how umbrella funds report on their finances to the regulator. The FSB is planning to remove the audit exemptions on umbrella funds that are currently exempt from being individually audited because they are audited as part of a life assurer's overall business.
Partridge says the FSB should also extend the reporting requirements of umbrella funds to ensure that these funds are properly managed. For example, funds could be obliged to report six-monthly or even monthly on, for instance, which employers paid their contributions to the fund late or which employers ended their participation in the fund.
The FSB should also introduce more onerous rules for umbrella funds to ensure that they operate more efficiently, Partridge says. She says the priority is to change legislation to compel umbrella funds to more clearly distinguish between their participating employers.
Gavin Williams, the chief executive of Ten50Six Fund Administrators and a trustee and chairman of several pension and provident funds, warns that any piecemeal tinkering with the legislation governing umbrella funds will have an impact on the retirement funds industry as a whole.
Williams says the problems faced by umbrella funds can be overcome with tighter controls and improved supervision that ensures that funds are financially sound; that the administration of funds is improved; that funds comply with the relevant legislation; and that professional trustees are properly accredited.
Member representation
There are concerns about the lack of member representation in umbrella funds. Partridge says these concerns can be addressed by umbrella funds adopting a two-tier management system in which second-tier management boards, which represent each employer, can feed information about the members and industry to the trustees of the fund.
Second-tier management boards can consist jointly of member- and employer-elected representatives.
Conflicts of interest
Wilma Mokupo, the head of retirement funds at the FSB, says the regulator is concerned about the conflicts of interests that may exist in umbrella funds. An example of such a conflict is if the administrator of a fund serves as a trustee of the same fund. (See Conflicts of interest and your retirement savings)
Mokupo says it is important that the trustees are not under the undue control of their employers.
She warned that the FSB will not register the rules of funds that prevent trustees from exercising their independence.
Cross-subsidisation of costs
A cross-subsidisation of costs takes place in some umbrella funds. Standard investment portfolios are offered to fund members, but when a few members want tailor-made portfolios, which are more expensive, these costs are borne by the fund, and therefore ultimately, the rest of the members.
Hanekom says it is up to umbrella funds themselves to manage the costs of the few members who desire greater investment flexibility so that these costs are not subsidised by the rest of a fund's members.
What it is
An umbrella fund is a single fund that provides retirement benefits to the staff of more than one company or employer. Umbrella funds are usually administered by life assurance companies and pension fund administrators, but can be managed by anyone who is registered with the Financial Services Board as a benefit administrator.
Tips
If you are a member of an umbrella fund or your company is considering using an umbrella fund to provide retirement benefits, ask the following:
- Can your company (and its staff) choose where to buy its risk assurance (death and disability cover) and its investments. You don't want to be forced to invest with any particular provider simply because you are in an umbrella fund established or run by that provider;
- Can your company (and its staff) take its business elsewhere without incurring penalties; and
- Are the fees charged reasonable and justified in relation to the services offered by the umbrella fund?