In my September 2020 article on umbrella funds a number of shortcomings in umbrella funds were highlighted. Has anything changed?
My last article for Pensions World SA on umbrella funds highlighted a number of shortcomings, how the actual costs in an umbrella fund are not properly evaluated, and how many employer’s staff had ended up paying higher costs after moving to an umbrella fund. Many decisions had been taken based on the administration fee only, without a proper analysis of other material fees, for example investment fees. The Association for Savings and Investment South Africa (“ASISA”) had recently introduced the Retirement Savings Cost (“RSC”) measure to better understand the comparative cost of umbrella funds, but the provision of this comparison had limitations, and many non-ASISA fund sponsors did not provide the RSC in quotes anyway.
After asserting that umbrella fund should deliver better value to retirement fund members, with better communication and support, like counselling, this was not the case! The economies of scale benefits were devolving to the umbrella fund sponsor and the fund service providers (usually affiliated with the fund sponsor). I concluded by saying that advisors needed to obtain more knowledge and experience around umbrella funds. Consumers were not getting the correct advice or support from consultants to cut through the umbrella fund marketing material.
Are things any better four years later? Furthermore, what are the practical aspects of an umbrella fund assessment that should be considered before making the leap? An umbrella fund appointment has significant implications for an employer’s payroll, and this change is not something that can be undertaken frequently.
So with this criticism, what are the key areas to consider? Before penning some thoughts, I hasten to add that I am less critical now than I was then because the more one digs the more one finds how complex this field is. Possibly deliberately complicated?
1. Administration/operational effectiveness: the administration of any fund is the fund’s “shop window”. An analysis of the fund’s financial statements can provide insights on benefit payments, if the umbrella fund is prepared to make the full set of financial statements available. The abridged financial statements that can be purchased from the Financial Sector Conduct Authority (“FSCA”) provide very little insight without the notes. The financial statements should be read in any event, because these are an opportunity to glean additional insights, for example, in the Schedule I Factual Findings Report.
2. Investments: if administration is the shop window, then the fund investments are the engine room. A thorough understanding of what investment strategies are available to participating employers, and particularly what the investment fees for these options are, is critical. I battle to see a justification for why Total Expense Ratios (“TER”) of more than 1% per annum are charged in an umbrella fund with any scale. In this regard there are sources of interesting information from the likes of Alexforbes and Grayswan.
3. Governance: several umbrella funds are surprised when asked for the main rules of their fund. These rules are the framework by which the trustees have to apply themselves to their fiduciary duties, and the limited information in the employer’s special rules is merely the benefit structure summary. What does the fund’s Code of Conduct say, along with the other Circular PF 130 governance documents the FSCA looks at when they inspect the fund? These documents give a reasonable insight into the mindset of the trustees and how they approach their duties and the management of the fund.
4. Application and practice: it is useful to get some experience of an umbrella fund before making recommendations to most of a Financial Service Provider’s (“FSP”) client base. How does the umbrella fund apply Treating Customers Fairly (TCF), and what are the nature of the complaints against the fund at the Pension Fund Adjudicator? Whilst looking at the fund’s governance and compliance documents (procedural governance) is, knowing the “behavioural governance”, in other words, how the policy documents are applied, is more important in practice.
5. Financial management: some funds have effective controls and oversight processes (ISAE 3402 reports can be a useful insight, but not necessarily) while other funds will adopt practices where the fund liabilities are made to match the assets so any underlying problems are simply not detected. Private funds that outsource their administration often use the likes of Alexforbes or Solve Analytics to perform an independent check on the administrator’s financial management. This discipline should also be deployed by the trustees of umbrella funds.
6. Communication: I highlighted in the previous article that often communications are more marketing documents, but with the advent of Retirement Benefit Counselling and post the Two Component system requiring benefit preservation, are the trustees trying to “ensure better outcomes through the provision of better information” as stated by National Treasury as a key retirement reform objective?
7. Options and flexibility: in the previous article I also stressed the benefits of an “open architecture” umbrella fund for maintaining control over certain “cost levers”. The umbrella fund needs to provide efficiency, but there needs to be a reasonable level of flexibility too.
8. Longevity: with policymakers driving the retirement market towards consolidation with fewer umbrella funds to regulate, what is a particular umbrella fund’s prospects of survival?
There are various other sources of information, for example the PWC Retirement Funds Survey, the SNG Argen Umbrella Fund Survey, a presentation delivered at the 2021 Pension Lawyers Association conference, and a paper delivered to the Actuarial Society of South Africa on umbrella fund retirement fund charging models.
Because the above list of areas to evaluate are not exhaustive, I have come to believe that it is not consultants that need to upskill themselves on all this. The complexity of the umbrella fund market requires specialist skills to separate the wheat from the chaff. Like many insurance products, I believe the umbrella fund market has been made unnecessarily complex, and this is probably to make comparisons difficult. Umbrella funds are more often than not considered when cost is an issue, and employers are looking for a simple and cost-effective solution. This complexity does not lend itself to consultants expending the right amount of time to go through the various sources of information to arrive at comprehensive advice. There is a compelling argument for an independent industry survey that evaluates the spectrum of umbrella fund considerations objectively and makes those findings available in an easy-to-use format. Perhaps something under four key headings like fees, performance, risk, and customer satisfaction?
In an industry riddled with self-interest, the question is who is best placed to compile an extensive evaluation of umbrella funds, and also has the motivation, the time and the resources to do this?