Umbrella funds opening up
Cost comparisons of these retirement funds will become easier
Umbrella retirement funds sponsored by large life assurance companies that belong to the Association for Savings & Investment South Africa will disclose the costs they charge employers and members in a standardised way from March 2019.
This will make it easier for employers and their consultants to find the most cost-effective umbrella funds for their staff.
Umbrella funds provide a single retirement fund for several employers whose members belong to sub-funds all using the same administration and investment services. Commercial umbrella funds are sponsored by large life assurers, and the services are typically provided by those companies.
Currently, funds charge for services in a variety of ways and levy either rand amounts, or percentages of the money invested in the fund or an employer's payroll, making comparisons almost impossible.
Improved disclosure of umbrella fund costs through the new retirement savings cost disclosure standard is particularly important, given an increasing trend among employers to use these funds rather than set up or maintain standalone funds.
Union and bargaining council umbrella funds as well as some run by employee benefits consultants will not be bound by Asisa's cost disclosure standard. However, the Financial Sector Conduct Authority (formerly the Financial Services Board) is expected to borrow from industry cost standards when setting disclosure standards for all retirement funds' default options.
Four types of costs must be shown and totalled as an average cost for the fund, but the disclosure is not aimed at showing what an umbrella fund member is paying to save in the fund chosen by their employer.
The costs may vary depending on how much you have saved in the fund and how much you are contributing.
As part of the new disclosure, umbrella funds operated by Asisa members have to show employers the costs as a percentage of the assets invested for members on each of three salary bands - R60000 a year, R240000 a year and R600000 a year, and for each of three levels of savings in the fund - R0, R100000 and R500000.
But you will not be able to determine the costs that apply to your individual salary or savings level. The retirement savings cost disclosure standard also does not apply to standalone retirement funds, retirement annuity funds, preservation funds, beneficiary funds and other retirement savings products offered to individuals.
Two years ago, Asisa member companies adopted the effective annual cost measure as a standardised cost disclosure method for investment products, including RAs and preservation funds, offered to individuals.
Taryn Hirsch, a senior policy consultant at Asisa, says the retirement savings cost disclosure standard for umbrella funds, which is aimed at employers and trustees, should not be confused with the retail effective annual cost, aimed at individuals.
Hirsch says a working group in Asisa has the development of a member-level disclosure standard for retirement funds as its next priority.
The umbrella fund cost standard obliges Asisa members to disclose, as a percentage of the assets in the fund, the following costs:
• Investment management charges;
• Advice charges;
• Administration charges;
•Other charges including regulatory, compliance and governance costs; and
• The total cost.
These costs must be shown over four periods - one year, three years, five years and 10 years - and certain predetermined assumptions about the growth in assets and salary increases must be made.
David Gluckman, head of special projects at Sanlam Employee Benefits, says the standard is a reasonable one for facilitating quotation cost comparisons between providers, but costs are not the only, nor the most important, feature to be considered.
David Hufton, head of special projects at Sygnia, which in 2016 launched a new umbrella fund with a single all-in fee, says Sygnia welcomes the new standard and thinks it will ensure that all costs, many of which are obfuscated, are disclosed.
In an article timed with the launch of Sygnia's umbrella fund, company CEO Magda Wierzycka outlines all the costs that umbrella funds charge.
She says that besides the expected risk benefit premiums and administration, asset management and performance fees, umbrella funds charge employers and members a participation fee, commissions on investment and risk benefit advice, investment platform administration fees, insurance policy levies, capital guarantee fees for smoothed bonus investments, governance, scheme and contingency reserve fund levies, switching fees, transactional fees (for example, for a divorce payout) and fees for legislative changes.
Gluckman and Hufton agree that unless providers are dishonest, the standard should ensure that all the odd charges are disclosed in writing, with a profound effect.
Asisa members have to submit a compliance certificate annually, certifying that the retirement savings cost standard disclosure calculations and disclosures comply with the letter and spirit of the standard.
Asked if the new standard will improve competition and reduce costs in commercial umbrella funds, Hufton says he would expect greater disclosure to reduce costs.
Hufton says the competitiveness of funds like Sygnia's will become much more obvious and Sygnia has seen some of its competitors bringing down their costs.
However, Gluckman says he is sceptical as the commercial umbrella fund market is already highly competitive.
Hugh Hacking, Old Mutual's general manager of operations, says the new standard will make the value for the price clearer but does not necessarily mean prices will drop. Employers and consultants who prefer more expensive options will still buy them if they see value.