Over the past two decades, there has been a notable shift from standalone retirement funds to commercial umbrella funds. This transition has been driven by increased cost pressures, tighter regulatory requirements, increased demands on trustees, the desire of companies to focus on their core business, the investment required to keep pace with legislation and the administrative burden associated with managing standalone funds. Additionally, National Treasury has clearly stated its support for the consolidation of funds, aiming for a smaller number of well-governed and cost-effective funds.
As with most things in life, change is difficult at first. Employers and trustees of employer-sponsored retirement funds may be concerned that transitioning to an umbrella fund could result in losing control over certain matters affecting their members. This article aims to clarify some common misconceptions about umbrella funds and to highlight how a well-run solution adds value to members and participating employers.
Myth 1: Control
The prevailing perception is that employers may lose oversight over the management of their employees’ retirement benefits.
While a professional board of trustees manages umbrella funds, ensuring the interests of members from multiple employers are safeguarded, these funds allow each participating employer to appoint an advisory body or a management committee. The employer and its employees elect management committee members to ensure that their interests are represented and communicated to the umbrella fund, and that the umbrella fund remains well-managed and governed in accordance with their needs and expectations.
Many umbrella funds will assist employers in ensuring their members’ interests are represented, communicated, and that the fund is professionally managed and governed. With this approach, the burdens previously felt by the employer when managing their employees’ retirement benefits are reduced significantly whilst at the same time putting employers back in control in the areas that matter, feeling confident about staying close to all matters affecting their members.
Myth 2: Costs
Some claim that umbrella funds have hidden fees, making them less cost-effective. Whilst this may be the case in some instances, well-run umbrella solutions established by credible providers with relevant track-records are cost effective and transparent. Umbrella funds offer scale benefits which are passed on to participating employers and their members. In many cases this results in umbrella funds being competitive relative to free-standing funds when one takes all the costs of running a fund into account.
The ultimate aim is to maximise the effectiveness of the spend on administration, insured benefits and investment management so that more of a member’s contributions can go towards retirement savings for them to achieve their retirement outcomes.
Larger umbrella funds have a better ability to provide these scale benefits.
Myth 3: Personalisation
There is a belief that umbrella funds are a generic, one-size-fits-all solution that don’t cater to the specific needs of employers and their members. The reality is that umbrella funds have come a long way since their introduction decades ago. Today, umbrella funds can offer a degree of customisation when it comes to investment options and benefit structures to suit the unique requirements of their participating employers. There are different service offerings with varying degrees of flexibility to cater to different needs and preferences – each with its own approach when it comes to deciding what will provide the greatest impact for members.
Where traditionally only smaller employers considered umbrella funds, we have seen larger employers moving into umbrella solutions given that their benefit structures can be catered for, while still enjoying the cost savings.
Myth 4: Partnerships
Trustees are under increasing pressure to ensure their standalone funds deliver enhanced value, to achieve better member outcomes and provide greater certainty regarding retirement objectives. This necessitates specialised knowledge, time, and resources. Consequently, some employers have sought assistance from third-party service providers, thereby fostering robust and valuable relationships with these external experts, such as independent principal officers and specialised consultants, who provide invaluable support. Many employers are concerned about losing this valued expertise and support by moving to an umbrella fund.
Modern umbrella solutions, however, do allow for these relationships and expertise to be retained. In this way there is a more seamless transition between the existing free-standing arrangement and the umbrella arrangement which mirrors the key aspects valued by the employer and their members. It also ensures that there is continuity in relation to the delivery of the benefits.
Myth 5: Impact
A common concern is that umbrella funds, due to their aggregated nature, may dilute the visibility and impact of benefits to individual members compared to standalone funds. Critics argue that the tailored and direct communication of standalone funds makes members more aware of their contributions and benefits, thereby enhancing their perception of value.
However, this view overlooks the advanced communication strategies and personalised services that most modern umbrella funds now provide. These umbrella solutions are designed to maintain transparency and ensure that members are well-informed about their benefits, fostering a sense of direct impact and engagement. By leveraging technology and robust member communication frameworks, umbrella funds can effectively highlight the benefits and positive outcomes for each member, much like standalone funds.
We expect the consolidation of the industry to continue, which will be accelerated with the recent introduction of the Two-Pot system. We believe that the trend of larger employers to consolidate to umbrella solutions will continue, especially as umbrella funds have evolved to cater for their needs. When considering a move to an umbrella fund, employers and trustees must conduct thorough due diligence to find the right solution to cater for their governance and flexibility needs. We believe that by partnering with the correct provider, participating employers are able to implement the optimal structure for their members in order to improve outcomes.
