Financial PlanningRetirement

Umbrella Funds: Employer Risk, Fact or Fable?

There are three different types of Umbrella Fund arrangements when it comes to recognition of duties to be performed by the participant employers or their member committees:

  • Type 1 Umbrella Fund – defines the duties assigned to the employer or member committee in the Master Rules of the Fund.
  • Type 2 Umbrella Fund – defines the duties assigned to the employer or member committee by way of an agreement.
  • Type 3 Umbrella Fund – has no rigid written definition of the duties that the employer is expected to perform.

Duties that are commonly allocated to Employers or Member Committees are:

  1. The responsibility for choosing suitable investment options for the membership from the range set by the Master Rules is the domain of the Member Committee.
  2. The communication responsibilities lie with the Member Committee.
  3. The investigation and suggested allocation of benefits on Death of a member lie with the Member Committee.
  4. The responsibility of monitoring employer contributions and supplying member details as required by Section 13A and Regulation 33 lie with the Member Committee.
  5. Ensuring suitability of member benefits lies with the Member Committee.
  6. The compilation of the Investment Strategy and the Policy on Investments lies with the Member Committee.
  7. Dealing directly with member queries and complaints is the domain of the Member Committee.
  8. In many cases the interface with the service providers is at Member Committee level and Trustees of the Umbrella Fund are remote from this interface. Irrespective of which Umbrella Fund category above, it must be emphasized that the Board of any Umbrella Fund that has many participants is not able to perform the duties listed above for each employer. Reality dictates that these duties must devolve down to the employer or member committee, in order to avoid confusion and potential risk to the Umbrella Board.

Current Perception

Umbrella Fund participation is largely directed by advisors who recommend this option to employers wishing to offer their employees a participation in a retirement fund, without the liabilities and duties that surround the more onerous stand alone arrangements. This loss of liability and duty disposes with the need for any training surrounding the running and management of the Participating Employers Fund. An added bonus in this Umbrella arrangement is the fact that fees and rates offered by administrators and risk carriers can be lower, due to the aggregation of many funds and lives. Investments are usually offered from a range of opportunities which are available to the specific Umbrella from time to time. The perpetuation of the faulty perception of no risk attracts many employers into Umbrella arrangements and is a time bomb which could have serious ramifications for our fragile industry if challenged.

If an analysis of the three different types of Umbrella arrangement is done, the following risks are exposed:

Type 1 Umbrella – although this arrangement is the most transparent in defining duties for member committees, the Boards of these Umbrellas do not do enough to organize and promote training of their participants in the areas of their defined duties or make them aware of the potential liabilities that accrue from their duties.

Type 2 Umbrella – where the rules are silent but duties are assigned to participant employers by agreement, the arrangement is fragile and lacks transparency and direct force of the rules, exposing both the Board and employer to undue areas of uncertainty. Training of the member committees is not often offered as the advisors themselves see no need.

Type 3 Umbrella – the rules, policies and agreements are silent on duties assigned to employers or their member committees. This practice raises enormous liability for all concerned parties and these Umbrellas rely on the current misconceptions to promote participation in their arrangements.

The common thread is one of transparency in essential allocation of duties for the employer or member committee. Where duties are assigned, agreed or implied, the resultant action or decision raises a potential liability and risk which cannot be denied. At the top of this risk are the Umbrella Board Members followed closely by advisors, employers and members.

The most efficient way of dealing with the issues above is laid out in PF130 ’delegation through use of sub-committees’ and the section on ‘Risk Management’.

In conclusion, formal mandates for participating employers or their member committees should either be incorporated in the Umbrella rules or structured to identify the member committee as a sub-committee of the Board. Elements such as duties, risk, training and insurance cover should be transparently covered in the allocation and acceptance of the duties.

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