Umbrella retirement funds, which are used by hundreds of thousands of employees, are increasingly being seen by employers as a viable alternative to stand-alone retirement funds.
The basic structure of an umbrella fund is that employees working for many different employers sign up as members of a single fund. Some umbrella retirement funds are restricted to employees of particular industries, some to members of particular trade unions, while others are open to any group of employees.
The initial aim of umbrella funds was to provide small companies with a limited number of employees with an affordable vehicle for funding retirement.
As with stand-alone or segregated funds, which are provided or sponsored on a stand-alone basis 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 death or disability.
But there are distinct differences between segregated and umbrella funds. The main differences are:
- The boards of trustees. Umbrella funds may or may not have an elected board of trustees. With "open" umbrella funds offered by the large financial services companies, mainly - the boards of trustees are appointed by the financial services company. These trustees are drawn from the ranks of the administration company or the company that owns the administration company.
Stand-alone funds are required to have at least 50 percent of their trustees elected by their members.
Some umbrella funds may have one or more "independent" trustees appointed from outside the sponsoring company. The 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 act in the best interests of members.
However, research by Personal Finance shows that almost every open umbrella fund obtains most of its services from other divisions of the company that administers the fund. For example, the consultants used for actuarial services, asset management and group life assurance all come from the same company and, by a remarkable coincidence, in almost every case, these services are performed by the same company or associated companies. This can mean that members' interests are being guarded by the very company which provides the services to members.
In a nutshell, unlike with stand-alone funds, with most umbrella funds the trustees are not directly accountable to 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 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 employer or the fund's trustees.
A few open umbrella retirement funds, such as the semi-independent Total Care Strategy Fund, expect intermediaries to visit the fund at least once a year and to go through a prescribed list of issues affecting the fund, and to report back to the trustees via the administrator.
- Fund choices. Umbrella funds are defined contribution funds because their different employers cannot be expected to provide any guarantee of a pension at a pre-determined 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, the investment choices with an umbrella fund may vary from a basic choice between a market-linked investment - which will rise and fall in line with investment market conditions - and a capital guaranteed investment, through to potentially higher-risk and more expensive investment vehicles that offer a wide choice of underlying investments.
- Most umbrella funds were "audit exempt" because investments were done through a life assurance policy. As a result of problems with a number of umbrella funds, the Financial Services Board has now lifted this blanket exemption from full audits.
The lack of protection of member interests does not mean that umbrella funds are necessarily bad. However, until the law properly protects members' interests, they should follow the steps outlined below.
16 steps to protecting your interests
Umbrella retirement funds are a very useful way of providing employees of small- to medium-sized companies with retirement fund benefits. However, members must ensure they are getting value for their contributions.
Patently unacceptable practices that are not in the interests of members are taking place in the umbrella retirement funds industry, and members of umbrella funds have no real rights under existing legislation.
In the meantime, there are 16 steps you, as a member or prospective member of an umbrella fund, should take to protect your 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 members are kept properly informed about decisions that affect their savings. The joint member/participating employer committee should have a set of rules, similar to a stand-alone retirement fund.
2.
Establish whether your employer and/or senior management are also members of the fund. If they are not, they have less reason to be concerned about your interests. In such a case, you should 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 reports, and makes recommendations, to the joint committee only and not to the participating employer. If an adviser reports separately to the employer, insist that he or she be dismissed.
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 retirement fund, including commissions and inducements paid to a financial adviser. In times of low investment returns and ever-increasing costs - which often include perverse and partially disclosed incentives paid to financial advisers - the likelihood of you receiving a return, even one that equals the inflation rate, can be placed under severe threat.
6.
Insist that you are given a full list of the services you will receive from the financial adviser that justify the commission and any other inducements that may be received by the adviser. 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 or from another umbrella fund without the members being consulted and their approval being obtained. Switching from a stand-alone fund, or from one umbrella fund to another, will 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 switch from the participating employer and are not really concerned about your interests as a member. At the annual conference of the Institute of Retirement Funds, unsubstantiated allegations were made that some participating employers were receiving kickbacks from unscrupulous financial advisers to induce them to switch between funds.
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 court case involving Old Mutual's Orion umbrella fund. The court found in favour of Orion against a group of employees who presumed they were members of the fund but of whom Orion 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, Orion refused to pay out their retirement benefits, saying they had to claim them from the company, which had submitted neither membership details nor contributions. The court found that in terms of the rules of the fund, although the employees were members of Orion, they had to claim their benefits from the participating employer and not the fund.
10.
Get a written undertaking that the trustees of your umbrella fund will inform you within seven days if your contributions to the fund have not been received by the fund within seven days from the date on which your employer is due to pay your contributions to the fund. And the trustees must inform you what action they will take to recover the contributions from your employer if the fund does not receive the payments. This is very important in view of the Orion case.
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/or your employer, and the investment growth.
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 a conflict 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 retirement 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 receive.
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.