Picture: 123RF/ra2studio
Picture: 123RF/ra2studio

If an employer chooses to provide retirement benefits for its employees through an umbrella fund it should have certain statutory duties, a leading pension lawyer suggests.

Speaking at the recent annual conference of the Pension Lawyers Association in Sandton, Jonathan Mort, a former chairman of the association and a member of the International Pension and Employee Benefits Lawyers Association, said employers should do due diligence on an umbrella fund before transferring employees’ savings into the fund and should review that due diligence annually.

Employers should also check the systems of the administrator, review the costs and how reasonable they are and ensure there is proper oversight of the fund in line with guidance from the Financial Sector Conduct Authority (FSCA), he says.

Umbrella funds are intended to provide a cost-effective and time-saving alternative to each employer having their own retirement fund — employees belong to their employer’s sub-fund under a single umbrella that shares administration and other services.

Some umbrella funds serve employers in particular industries or have members of a particular union. There has been huge growth in the membership of commercial umbrella funds set up by financial institutions that market their services to employers.

In commercial umbrella funds, the sponsoring financial institution typically locks the fund into using the services of providers within its group and the fees are not negotiated at arm's length, Mort says.

The sponsor determines the investment arrangements, making use of its own investment platform, setting its own portfolios as the defaults and incurring higher retail, rather than institutional, costs for members, he says.

The board is generally more constrained than the board of a standalone fund. The trustees on umbrella funds are often employees of the sponsor and although the sponsor may claim that the trustees are independent trustees, it is difficult to find trustees who are truly independent, Mort says.

Employers have a relationship with the sponsoring institution but often take a passive role in oversight of the fund despite the direct impact on employees’ savings and income during retirement.

“The challenge is to find a way for umbrella funds to provide optimal benefits for members at a low cost in a way that can be trusted,” Mort says.

Rowan Burger, head of strategy at Momentum Investments, who debated proposals to improve the governance of umbrella funds with Mort at the conference, says many employers will outsource that due diligence to their employee benefits consultant, auditor or valuator — all of whom are conflicted to some extent. The FSCA should therefore standardise the due diligence process, he says.



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Mort says an alternative to making employers responsible is to give employees the option to choose their own fund and to move their savings between, without penalties or “lock-ins”, whenever they felt they were getting a raw deal.

But Burger says many employees do not have the ability to make informed decisions and the retirement funds with the biggest marketing budgets would then win the day.

In addition, in a system where you could choose your own fund you would lose the advantage of risk benefits provided on a group basis, which is likely to become increasingly important to those who have health issues, he says.

Mort says in occupation-based funds, including umbrella funds, the fiduciary duty of the employer is quite extensive because members are subject to arrangements made on their behalf about investments and costs. Members cannot exit those arrangements, and those arrangements affect their retirement outcome.

The governance arrangements therefore need to reflect those more extensive duties in occupational funds, including umbrella funds, he says.

Mort says the governance arrangements of funds should ensure that:

  • The benefits promised to members are delivered;
  • The benefits are optimal with an acceptable level of risk;
  • Costs are transparent and defensible; and
  • The stakeholders can trust the process of delivering benefits.

This cannot be resolved with ever-increasing regulation, but rather through holding people, such as trustees who have power, accountable, he says.

Holding the sponsor accountable does not make sense because the sponsor sets up an umbrella fund for its own benefit, he says.

Instead, employers need to be given certain obligations and an oversight board with member representation should be set up to oversee the actions of the trustees.

Members are typically not equipped to question professionals who provide actuarial, asset management or other services to a retirement fund. Therefore, Mort says that fund trustees should be independent professionals with the necessary skills, rather than member representatives.

Members can, however, ask trustees about the investment or benefits and costs, and the engagement of service providers.

Mort proposes that the oversight board be able to

  • Hire and fire trustees;
  • Conduct board appraisals;
  • Agree to trustee remuneration;
  • Convene member AGMs;
  • Require reporting by trustees or PO on specific issues;
  • Review and approve governance budget;
  • Obtain expert advice on any issue; and
  • Complain to either the Pension Funds Adjudicator or the FSCA if someone wasn’t doing what they should.

Mort suggests the oversight board should report to the members and should be paid within strict limits set by the FSCA.

Burger agrees that an oversight board will have the advantage of giving the board strategic direction when most boards focus only on operational issues. He feels it could be more pro-active in ensuring funds are not governed badly. This will be beneficial since the regulator tends to step in when is too late.

But, he says, he would caution that such a board would add an additional layer of costs and must therefore add value.

Trustees would still be accountable and could not abdicate responsibility for their decisions to the oversight board, Burger says.

Mort says he thinks good governance is worth the additional costs.

Both Burger and Mort believe the current management committees set up to give employer groups a way to engage with the umbrella fund are adding to complexity and cost by demanding customised investment and insurance options for different employer groups.

They believe an oversight committee made up of members from the different employer groups would be more effective in representing member interests.