Move from stand-alone to umbrella fund can help households save better for retirement

Widespread household income losses due to Covid-19 lockdowns have put SA’s retirement planning under pressure. While workers deal with the immediate financial impact of the pandemic, employers are in a position to review the long-term suitability of their retirement provision arrangements to maximise savings.

Malusi Ndlovu, director of large enterprise at Old Mutual Corporate, says moving from a stand-alone to an umbrella retirement fund such as the Old Mutual SuperFund can save money for members over a lifetime of investing. “Employers don’t consider that the cost of administering a stand-alone fund is largely passed on to the people who can least afford it, namely the members.”

With the costs of risk benefits designed to protect members and their families against sickness or death increasing due to the impact of Covid-19, there is even less money going to retirement every month.

“Umbrella funds are more efficient because of their reduced complexity and economies of scale. With a stand-alone fund, you need an auditor, an actuary, an investment consultant and a host of communication and specialist service providers. 

“The umbrella fund creates an advantage of size, meaning these costs are spread over a larger pool of contributors,” he says. 

In addition to the lower costs for members, the umbrella fund removes the administrative burden on companies needing to appoint a board of trustee-employees to meet the onerous governance, risk and compliance requirements.  

“While these costs are harder to quantify, they are significant. They include the opportunity cost of time, skill, and other resources needed to run a stand-alone retirement fund.  

“These men and women generally don’t work as full-time trustees, and are not experts on retirement regulation, investing or governance, yet they are expected to accept full responsibility for the retirement savings of their colleagues. 

“The continuous changes to the retirement fund legislation places a further burden on these workers who naturally struggle to manage this responsibility and their day jobs,” he says. 

With any investment, it is vital that as much of the contribution goes to the savings pool as possible, says Ndlovu. “At the very least, trustees, employers and employees should be conversing on the merits of moving to an umbrella fund, seeing that the outcome has significant implications for members.

“In a complex arena, it's essential to take a step back and compare the pros and cons of umbrella funds such as the Old Mutual Superfund and conventional stand-alone fund. This will help management and other stakeholders make a more informed decision about their financial future.”

Click here to register for the Old Mutual Corporate Great Debate webinar on Aug. 25 that promises to help employers and trustees select the best retirement fund for their workplace. 

This article was paid for by Old Mutual.