More and more employers are using umbrella retirement funds to manage the pension benefits of their staff, but as a member of such a fund you must make sure that your employer is looking after your interests.
Umbrella retirement funds are increasingly being seen by employers as a viable alternative to stand-alone retirement funds. Small employers in particular, are opting for umbrella funds to provide retirement benefits for their employees because these funds ostensibly, but not necessarily, offer a cheaper and easier alternative to running their own pension funds.
Umbrella retirement funds are mainly sponsored by financial services companies - particularly the life assurance companies.
Unlike a closed pension fund run by an employer, an umbrella retirement fund allows employees of different companies and organisations, or members of industry organisations or unions, to place their retirement savings in a single fund.
Although this frees each employer from having to manage its own stand-alone fund, umbrella fund members do not have the benefit of the same protection which members of other retirement funds enjoy under the Pension Funds Act. The most notable safeguard which umbrella funds bypass is section 7 of the Act, which stipulates that at least 50 percent of the trustees on a pension fund's board must be elected by the fund members.
The defining characteristic of an umbrella retirement fund is that employees working for different employers sign up as members of a single fund. Membership of some umbrella funds is restricted to employees in a particular industry or organisation, such as a trade union, while other funds, such as those managed by life assurance companies, are open to any groups of employees.
Umbrella funds are intended to provide an affordable vehicle to fund the pension plans of small companies with few employees, or small groups of employees across an industry.
As with stand-alone or segregated funds provided by individual employers, umbrella funds are required to collect and properly invest the retirement savings of their members, while providing benefits such as group life assurance against the death or disability of members.
But there are distinct differences between segregated and umbrella funds. The main differences are:
- The boards of trustees. Umbrella funds need not have an elected board of trustees. With the "open" umbrella funds offered by the large financial services companies, the boards of trustees are mainly appointed by the financial services company which administers the umbrella fund. These trustees are drawn from the ranks of the administration company or the company that owns the administration company.
On the other hand, an umbrella fund serving a trade union may have more than the average number of elected trustees.
Some umbrella funds have one or more "independent" trustees appointed from outside the sponsoring company. These trustees may or may not be of a high calibre. Most of them face a conflict of interest, because they are answerable to their employer, as well as to the fund - although, in terms of the law, they are obliged to always act in the best interests of members.
- Participating employers. Most contracts, particularly with open umbrella funds, are between the fund and what are called participating employers, and not with the members (who are the employees of the participating employers).
This means that employers can make decisions in their own interests rather than in the interests of members. The decisions employers can take without consulting members include: the selection of the umbrella fund; investment choices (without taking proper account of the risk profile of members); and the level of group life assurance.
Some umbrella fund administrators insist that participating employers establish joint committees with employees, who are members of the fund, to ensure that members are properly informed and play a role in the decisions made by the employer.
- Reporting structures. With most segregated funds, members have a direct link to their trustees and, through them, to the fund's various service providers, such as asset managers, fund advisers and providers of group life assurance.
Most open umbrella funds have a commission-earning intermediary between the employer and the fund. In most cases, the intermediary has no contractual obligations to the members, the participating employers or the fund's trustees.
- Fund choices. Umbrella funds are defined contribution funds because their different employers cannot be expected to provide any guarantee of a pension at a predetermined level. However, most umbrella funds allow members to choose between joining a defined contribution pension fund and a defined contribution provident fund.
As with a stand-alone fund, in an umbrella fund the investment choice offered to members can vary from a basic choice between a capital guaranteed investment and a market-linked investment - which will rise and fall in line with investment market conditions - through to a much wider choice of underlying investments housed in a potentially higher-risk and more expensive vehicle.
Steps you can take to protect your interests
Since umbrella retirement fund members do not have the same legal rights as members of stand-alone retirement funds, you need to take extra precautions. Here are 16 things you, as a member, can do to protect your retirement savings:
1. Insist that your employer establishes a joint employee/employer committee that takes all decisions relating to the fund. A joint committee will help to ensure that you are kept properly informed about decisions that affect your retirement savings. The joint committee should have a set of rules, similar to those of a stand-alone retirement fund.
2. Establish whether your employer and/or senior management are also members of the fund. If they are, ensure that all decisions are made only by members of the fund and not by the participating employer.
3. Ensure that the financial adviser involved with your fund submits reports and makes recommendations to the joint committee only and not directly to the participating employer.
4. Establish what portion of your contributions goes towards retirement savings and what portion goes towards group life assurance against death and/or disability.
5. Demand full details of all the annual costs levied on your fund, including commissions and inducements paid to any financial adviser.
6. Insist that you are given a full list of the services you will receive from the financial adviser in return for the commission and any other inducements that may be paid to the adviser or intermediary. Remember that costs, including commissions, can be negotiated.
7. Ensure that the financial adviser to your fund is properly qualified. He or she should preferably be a Certified Financial Planner.
8. Get an undertaking from your employer that no decision will be made about switching to another umbrella fund without the members being consulted and their approval obtained. Switching from a stand-alone fund, or from one umbrella fund to another, could swallow up to eight or nine percent of your retirement savings. In terms of the way most umbrella funds are managed, the sponsors of the fund only seek permission to do such a switch from the participating employer and are not really concerned about your interests as a member.
9. Ensure that you receive confirmation from the fund that you are registered as a member. This is very important in the wake of a recent court case in which the court found in favour of an umbrella fund and against a group of employees who presumed they were members of the fund but of whom the fund had no record. The participating employer deducted contributions from the employees' wages, but did not submit the contributions to the fund. After the employees were retrenched, the fund refused to pay out their retirement benefits, saying they had to claim them from the company, which had submitted neither membership details nor contributions.
10. Get a written undertaking that the trustees of your umbrella fund will inform you personally within seven days if the fund has not received your contributions to it within seven days of the date on which your employer is due to pay the fund. And if this is the case, the trustees should inform you what action they will take to recover the contributions from your employer.
11. Establish in writing that you will receive a statement of your retirement savings at least once a year. The statement should reflect contributions made by both you and your employer, and the investment growth on those contributions.
12. Establish whether you can take what is called a deferred pension from your fund. Some funds allow this and others do not. If you leave your employer (through, say, retrenchment or resignation) and you cannot keep your money in the fund until you retire, you could lose up to eight or nine percent of your retirement savings in costs when transferring the money to a retirement annuity or preservation fund.
13. Establish who your trustees are. Ask for details about their qualifications and for whom they work. Find out if they are or were members of the company sponsoring the fund. If they are associated with the financial services company sponsoring the fund, ask these trustees whether they declare conflicts of interest and withdraw from the decision-making process when the trustees are considering using the sponsoring company to provide any service to the fund.
14. Ask for and read the rules of the fund. The fund is obliged to provide you with the rules on request.
15. Establish the investment strategy of your fund and how it has been risk-profiled. For example, is it following a high-risk strategy that could place your savings at risk? Also establish whether you are expected to make your own choices about the fund's underlying investments and, if so, what assistance you can get.
16. Find out if you will receive proper advice from the trustees or their delegated representatives - such as a properly qualified financial adviser - on how to manage your retirement savings when you retire.
Part 25:
Retirement annuities