Increased flexibility
In the old days, joining an umbrella fund meant a very limited set of investment options for participating employers – and the cost of any customisation outweighed its benefits. Today, many umbrella funds offer participating employers a range of default lifestage-model options and the ability to customise bespoke portfolios at very reasonable costs. This is possible due to systems enhancements, how funds are able to communicate with members and increased transparency around fees.
The introduction of default regulations in South Africa, particularly under Regulation 37 of the Pension Funds Act, has played a crucial role in shaping investment choice offerings in umbrella funds. These regulations, which became effective on 1 March 2019, were introduced as part of broader retirement reform initiatives to enhance retirement outcomes for members. They have significantly affected the flexibility and transparency of investment offerings while providing structured guidance on default investment strategies.
Investment flexibility to participating employers
In the past, participating employers in umbrella funds were significantly limited in terms of the investment options they could choose from for their members. Traditional umbrella funds were generally structured with a one-size-fits-all approach, with the fund’s trustees selecting a single or limited number of investment portfolios for all participating employers and their employees.
Most umbrella funds offered only one or two investment options, typically a default fund chosen by the trustees. This default was usually a balanced fund designed to meet the needs of the majority of members, regardless of individual preferences or risk tolerance. As a result, employers had little say in customising the investment strategy to suit their specific workforce.
Employers had no or very limited influence on the investment portfolios offered to their employees. The trustees of the umbrella fund made all the key investment decisions, and participating employers had to accept these choices. There was little room for employers to negotiate or to choose portfolios that matched their company’s risk profile or the demographic needs of their employees.
Many traditional umbrella funds adopted a conservative investment approach, prioritising capital preservation over growth. Consequently, portfolios were often heavily weighted to lower-risk assets like bonds or cash, which may not have maximised long-term returns for members who could have benefited from a more growth-oriented strategy.
Today, umbrella funds address the unique needs of participating employers by offering a high level of customisation. Employers can select a default investment strategy that aligns with their workforce’s age profile, demographics and specific circumstances – almost any innovative or modern investment option suitable for a retirement fund can be incorporated.
Participating employers have the flexibility to choose investment philosophies and styles that match their beliefs. They can opt for active management, passive strategies, a blend of both, specialist or balanced approaches. Employers can choose from well-established, large asset managers or smaller, nimble boutiques or a combination of both.
In terms of focus, employers can maximise offshore investments or prioritise those that drive growth and infrastructure development in South Africa. They can also tap into global themes such as artificial intelligence (AI) or healthcare innovation and emphasise environmental, social and governance (ESG) factors if these align with their values.
Investment choice for members
In earlier days, employees could not choose or switch investment portfolios. The same investment strategy applied to all members regardless of their age, financial situation or investment goals. This lack of personalisation often led to suboptimal outcomes for employees, especially for those with different risk preferences or retirement timelines.
While the default regulations focus on protecting members by automatically enrolling them into a suitable portfolio, they also promote greater flexibility by allowing members the freedom to choose their own investment strategy.
Fund members can now opt out of a default portfolio and select from a range of alternative portfolios offered by umbrella funds. This has pushed umbrella funds to offer more varied and flexible investment options to meet the different risk profiles, time horizons and preferences of their members.
In summary, the evolution of member investment choice offerings in umbrella funds has been dramatic. From limited, trustee-driven options, members can now access a broad range of flexible, personalised investment strategies designed to suit their individual circumstances and financial goals. This shift has empowered employees to take a more active role in managing their retirement savings and has improved overall retirement outcomes.
The role of technology and digital platforms
The rise of digital tools and platforms has also played a key role in enhancing member investment choice. Many umbrella funds now offer online portals that allow members to track their investment performance, switch between portfolios and access financial advice at their convenience. This technology-driven approach has made it easier for members to engage with their retirement savings and make informed decisions.
Is flexibility costing members?
I don’t believe so. Growing competition, the wider adoption of passive investment strategies (whether fully passive or partially within portfolios) and greater transparency have allowed members to benefit from more flexibility at lower costs.
Default regulations mandate that default portfolios should be cost-effective, meaning fees must be competitive, and there should be transparency around the costs of investment. This has led to a reduction in fees and a push for greater transparency in the management of funds, benefitting both employers and employees.
Fund trustees are required to monitor and review the performance and appropriateness of the default portfolio regularly to ensure that it continues to meet the needs of members.
Trustees are held to higher standards in terms of monitoring default portfolios and ensuring they are both cost-effective and in the best interests of members. This has resulted in better fund governance and more clarity around the performance and costs associated with different investment options.
The future
It is important to strike a balance between offering choice and flexibility without overwhelming participating employers and members or limiting their ability to meet investment objectives. Too much choice can create confusion, while too little can restrict members from achieving optimal outcomes.
The retirement fund industry in South Africa has evolved in response to demand for greater choice, personalisation and transparency, and we can expect this to continue. The competition between umbrella fund providers is fierce, and a lot of flexibility is provided in response to requests to accommodate certain employers/members. Employers now expect more say in the investment portfolios their employees participate in, and employees seek more autonomy to manage their retirement savings in line with their personal financial goals.
This transition reflects broader trends in the retirement fund industry, where greater competition and the need for more tailored retirement solutions have driven innovation and flexibility. Modern umbrella funds now offer employers a wider array of options and allow employees more control over their investments, marking a significant departure from the limited choices of the past. As the retirement industry continues to evolve, we can expect even more personalisation in member investment choice offerings.
Trends likely to shape the future include:
Robo-advisors – automated, algorithm-driven investment solutions that help members choose portfolios based on their risk tolerance and financial goals.
Targeted communication – more personalised financial education and communication, tailored to different life stages and financial needs.
Greater emphasis on alternative investments or unique investment opportunities – members may gain more access to alternatives like private equity, real estate or infrastructure investments and to exciting themes driving world growth, providing further diversification opportunities.
