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 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 keywords 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.
The rise of the Umbrella Fund
Umbrella funds have subsequently seen the light and is a solution to a critical headache experienced in the retirement fund industry. We have listed key areas to assist you to understand the mechanics of the Umbrella fund:
- 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.
The duties of trustees continue to become more burdensome with increased liability for poor governance. Umbrella funds are more likely to have professional trustees. 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. However, with increasing governance standards as above, the rise of the independent trustee looks set to address such concerns.
- Effective representation
Umbrella funds are not held to the requirement for employee and employer representation on the trustee board. However, the increasing prevalence of management committees does allow for some representation of employees within an umbrella arrangement.
Umbrella funds provide relevant communication to members in a generic manner, but if an individual employer wants to customize this information, costs are likely to increase.
Umbrella funds are making it much easier for employers to offer benefits to their most important resource, their employees. Lastly, we also need to make you aware of the fact that an Umbrella fund allows the investor access to the best investment portfolios or funds on offer in South Africa:
Access to experienced investment managers
Umbrella funds offer employers and employees access to a selection of portfolios from the best investment managers in South Africa, at competitive fees.