The shift to umbrella funds is real: but is it the right option for your company?
By: MICHELLE ACTON, Principal Consultant of Old Mutual Corporate Consultants
Given the increasingly complex retirement fund landscape and ever-expanding regulatory requirements, implementing a scheme for employees to save for retirement may seem like a daunting prospect for a business.
Research conducted by the 2016 Old Mutual Savings & Investment Monitor shows the strong need for businesses to implement retirement fund benefits. As many as 63 percent of consumers – specifically metro, working South Africans – are experiencing severe financial stress and, as a result, depleting their savings and increasingly relying on credit.
Not only do formalised employee benefit arrangements help staff to achieve financial wellbeing in retirement, they also ensure that family members are provided for, should an employee responsible for household income die.
Broadly speaking, employers who want to provide retirement benefits for their employees have two options available.
A standalone fund, whereby the employer establishes a retirement fund specifically for its employees, is managed by a board of trustees comprised of both employer and employee representatives. The other option is an umbrella fund, which is a fund that accommodates the employees of multiple employers and is managed by a professional board of trustees.
Employers are increasingly opting to outsource non-core activities to expert providers. So instead of managing employee benefits in-house, they are opting for umbrella funds.
We are definitely seeing an increased interest in umbrella fund structures, and this is due to a number of reasons:
- We are seeing increased time pressure within employers, where they do not have the “management time or resources” to continue managing their own retirement funds and therefore are looking to move to umbrella funds as a form of “outsourcing”.
- There is a much bigger focus on costs, and seeing where funds can be more efficient. At a high level, the typical costs that you would incur within an umbrella fund would be asset management fees, administration fees and consulting fees. Within a standalone fund, the costs that would be incurred over and above these would include audit fees, actuarial fees, communication costs, and investment consulting fees. Moving to an umbrella fund means that one can benefit by the economies of scale.
- Increased governance requirements within a pension fund. The regulations around governance and requirements for management boards is increasing, and therefore employers can delegate those requirements to an umbrella fund board of trustees when they move away from a standalone retirement fund. Large umbrella funds are also able to invest more into the development of strong governance structures.
Umbrella funds have evolved substantially over the past 10 years, and today are capable of managing the most complex company requirements. They have become a lot more sophisticated, and therefore can more closely cater for the needs of a wide range employers, from the simplest needs through to the most complex, and therefore umbrella funds have become a good choice for larger employers.
Historically, umbrella funds were the cost effective option for small employers and medium and large employers would remain standalone. Now with a much bigger focus on costs and efficiency, we are seeing a shift from all size employers (even as large as over 20 000 members) to move to umbrella funds. This is where the industry has significantly changed over the past few years. What we are seeing with the larger employers, is that they are selecting the more sophisticated umbrella fund options which are slightly more expensive to manage but provides more flexibility and control for members, whereby the smaller employers are looking at the more standard umbrella fund options.
Umbrella funds offer participating employers various levels of control in relation to the benefits provided to their employees.
For those companies with an existing standalone retirement fund, deciding whether or not to move to an umbrella fund is not a simple decision and can’t be determined based on cost alone.
There are pros and cons to both types of funds and the most appropriate solution will depend on the size of the company and number of employees, as well as the nature of the existing employee benefit arrangements and the company’s willingness and ability to deal with the complexity and risks associated with the standalone fund’s management.
Even once the decision to move to an umbrella fund has been made, choosing the right umbrella fund is also not a simple task. Selecting an appropriate umbrella fund is a complex decision that requires careful consideration, including a detailed evaluation of the various umbrella fund options available. Employers should gain an in-depth understanding of the features and flexibility of the specific solutions being offered, before selecting an option for their employees.
It is important for employers to consider all these elements and then select the fund type that best suits the company and its employees.
This is a very niche area, and can become quite complex when comparing how the different umbrella funds, in terms of their fee structures, operate. It is therefore important that before going through the process, employers select the services of a consultant who is experienced in employee benefits and the selection of associated service providers, to help them select the most relevant umbrella fund for their needs.