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UMBRELLA retirement funds received a poke in the eye last week after a new study, backed by the Association for Savings and Investment SA (Asisa) and the Actuarial Society of SA, found that the funds on average did not appear to have reached "optimal viable levels of operation".
The costs to administrators of running local umbrella funds, which pool together the retirement savings of different businesses, are still considerably higher than international benchmarks.
For many administrators, investment in IT infrastructure in anticipation of a membership boost has not yet paid off as numbers remain low, according to the study by Compass Management Consulting.
Members under administration need to double from 786 000 (in 2009) to 1.6 million, which will ensure the economies of scale to secure a 20% drop in costs, says Rowan Burger of the Actuarial Society.
This could happen quite quickly, local industry players say.
Since the report was compiled last year, membership has already grown to an estimated one million as more businesses give up on running their own pension funds.
Instead of a business having its own pension fund, a number of businesses join an umbrella fund and all employees' retirement savings are invested and administered jointly. Worker contributions are managed by a "sponsor" company – typically a big financial institution like Momentum, Liberty, Sanlam, Old Mutual or Alexander Forbes.
Lower cost vs flexibility
The first umbrella funds were established in SA during the 1980s, and were initially aimed at businesses with fewer than 50 workers.
The major benefits are that costs are shared between employers, and that they don't have to worry about the responsibility and compliance of managing a retirement fund together with the associated reputational concerns.
David Gluckman, managing director of Sanlam Umbrella Solutions, says the industry has seen "massive" growth recently.
There has been a sharp rise in retirement fund management costs (including professional advice and auditing fees), particularly due to increased compliance, and more companies find they don't have the expertise and appetite to take on the responsibility of a retirement fund.
Five years ago, businesses with up to a thousand workers would typically consider joining an umbrella fund – but now 5 000 employees seems to be the new threshold, says Hugh Hacking, umbrella fund product manager at Old Mutual.
A recent Old Mutual survey showed that many companies are considering moving to umbrella funds, and Hacking reports strong growth.
In the past five years, the number of pension funds has fallen from 13 000 to 5 000, and Gluckman expects the number to shrink to 2 000 "very shortly". "The umbrella fund industry can therefore reach scale quite quickly."
While it remains fairly difficult to keep administration costs (currently between R20 to R50 per member per month) low, umbrella funds are certainly economically viable, Hacking adds.
However, Rowan Burger of the Actuarial Society of South Africa says umbrella funds could cut down on administration costs by not offering many different kinds of options and investment choices, as well as standardising death and disability benefits.
In the retirement reform debate, South Africans need to consider if the flexibility of constructing unique benefit options for each participant warrants additional cost, as umbrellas are cheaper options for smaller employers than stand-alone funds.
For example, employers usually have the choice to pay out different death benefits – like 2, 2.5 or 3 times the annual salary or a pension for dependants. Burger says this could be standardised to one core option, which will save costs.
Social security threat
Umbrella funds have received a fair bit of criticism about a lack of employee representation.
Currently, no direct mention of umbrella funds is made in the Pension Fund Act and umbrella funds are not required to have employee representatives as trustees. (In retirement funds, 50% of trustees can be elected by employees.)
This has given rise to criticism about a lack of member influence in these funds, as sponsor companies and independent trustees currently dominate umbrella fund boards.
New-generation umbrella funds are making more progress with consultation and representation of employees through employer-level management boards, says Roy Zazeraj, head of consultation group Artique and a trustee of four national umbrella funds.
With anecdotal evidence suggesting that the downturn has seen more employers falling behind on paying over their pension fund contributions, this may be an increasingly important development.
But a darker cloud may be on the horizon.
The umbrella fund industry – along with the rest of the pension fund sector – has been in limbo as no visible progress was made on retirement fund reform and the planned national social security system (NSSS).
The industry has recognised the drive towards cheaper options, and has therefore been trying to lure smaller uneconomical stand-alone funds to join umbrella arrangements, Burger says.
One of the early NSSS proposals, requiring everyone earning below a fixed amount to make a mandatory contribution to a state-run fund, could severely reduce umbrella fund membership, says Zazeraj.
He estimates that between 80% and 90% of fund members could be forced out.
The actuarial society did some work three years ago and the number was roughly 70%, says Burger.
"It actually has a proportionally far bigger impact on your large stand-alone funds. Many of these will no longer be viable."
Hacking and Gluckman say that the uncertainty has not affected business, and may even have encouraged more companies to consider umbrella funds as they seek to shed risk.
- Fin24.com
The costs to administrators of running local umbrella funds, which pool together the retirement savings of different businesses, are still considerably higher than international benchmarks.
For many administrators, investment in IT infrastructure in anticipation of a membership boost has not yet paid off as numbers remain low, according to the study by Compass Management Consulting.
Members under administration need to double from 786 000 (in 2009) to 1.6 million, which will ensure the economies of scale to secure a 20% drop in costs, says Rowan Burger of the Actuarial Society.
This could happen quite quickly, local industry players say.
Since the report was compiled last year, membership has already grown to an estimated one million as more businesses give up on running their own pension funds.
Instead of a business having its own pension fund, a number of businesses join an umbrella fund and all employees' retirement savings are invested and administered jointly. Worker contributions are managed by a "sponsor" company – typically a big financial institution like Momentum, Liberty, Sanlam, Old Mutual or Alexander Forbes.
Lower cost vs flexibility
The first umbrella funds were established in SA during the 1980s, and were initially aimed at businesses with fewer than 50 workers.
The major benefits are that costs are shared between employers, and that they don't have to worry about the responsibility and compliance of managing a retirement fund together with the associated reputational concerns.
David Gluckman, managing director of Sanlam Umbrella Solutions, says the industry has seen "massive" growth recently.
There has been a sharp rise in retirement fund management costs (including professional advice and auditing fees), particularly due to increased compliance, and more companies find they don't have the expertise and appetite to take on the responsibility of a retirement fund.
Five years ago, businesses with up to a thousand workers would typically consider joining an umbrella fund – but now 5 000 employees seems to be the new threshold, says Hugh Hacking, umbrella fund product manager at Old Mutual.
A recent Old Mutual survey showed that many companies are considering moving to umbrella funds, and Hacking reports strong growth.
In the past five years, the number of pension funds has fallen from 13 000 to 5 000, and Gluckman expects the number to shrink to 2 000 "very shortly". "The umbrella fund industry can therefore reach scale quite quickly."
While it remains fairly difficult to keep administration costs (currently between R20 to R50 per member per month) low, umbrella funds are certainly economically viable, Hacking adds.
However, Rowan Burger of the Actuarial Society of South Africa says umbrella funds could cut down on administration costs by not offering many different kinds of options and investment choices, as well as standardising death and disability benefits.
In the retirement reform debate, South Africans need to consider if the flexibility of constructing unique benefit options for each participant warrants additional cost, as umbrellas are cheaper options for smaller employers than stand-alone funds.
For example, employers usually have the choice to pay out different death benefits – like 2, 2.5 or 3 times the annual salary or a pension for dependants. Burger says this could be standardised to one core option, which will save costs.
Social security threat
Umbrella funds have received a fair bit of criticism about a lack of employee representation.
Currently, no direct mention of umbrella funds is made in the Pension Fund Act and umbrella funds are not required to have employee representatives as trustees. (In retirement funds, 50% of trustees can be elected by employees.)
This has given rise to criticism about a lack of member influence in these funds, as sponsor companies and independent trustees currently dominate umbrella fund boards.
New-generation umbrella funds are making more progress with consultation and representation of employees through employer-level management boards, says Roy Zazeraj, head of consultation group Artique and a trustee of four national umbrella funds.
With anecdotal evidence suggesting that the downturn has seen more employers falling behind on paying over their pension fund contributions, this may be an increasingly important development.
But a darker cloud may be on the horizon.
The umbrella fund industry – along with the rest of the pension fund sector – has been in limbo as no visible progress was made on retirement fund reform and the planned national social security system (NSSS).
The industry has recognised the drive towards cheaper options, and has therefore been trying to lure smaller uneconomical stand-alone funds to join umbrella arrangements, Burger says.
One of the early NSSS proposals, requiring everyone earning below a fixed amount to make a mandatory contribution to a state-run fund, could severely reduce umbrella fund membership, says Zazeraj.
He estimates that between 80% and 90% of fund members could be forced out.
The actuarial society did some work three years ago and the number was roughly 70%, says Burger.
"It actually has a proportionally far bigger impact on your large stand-alone funds. Many of these will no longer be viable."
Hacking and Gluckman say that the uncertainty has not affected business, and may even have encouraged more companies to consider umbrella funds as they seek to shed risk.
- Fin24.com
