Choosing the right retirement fund for your business
If you’re debating the pros and cons of stand-alone vs umbrella funds, this will help you decide
Every employer should review their retirement fund offering from time to time, and if you are in a stand-alone fund, this could be the time to consider changing to an umbrella fund.
With the National Treasury continuing its push towards consolidating the industry, many businesses are, in fact, making the move to an umbrella fund. “If you are a financial director or HR director, you want the reassurance that your fund is indeed the best option for you and your employees, whether it’s a stand-alone fund or an umbrella fund,” says Malusi Ndlovu, director of large enterprises at Old Mutual Corporate.
In the same vein, retirement fund trustees have a regulatory responsibility to act in the best interests of the fund’s members. It’s therefore important that trustees at least consider the move.
He recommends taking a careful, considered look at all the options. Here’s a checklist of what to do and consider to make sure the fund you choose is the right one for your business and employees.
MAXIMISE THE ADVANTAGES
“There are pros and cons to umbrella funds and stand-alones, and you have to ensure that you are enjoying as many of the benefits as possible,” Ndlovu says. He cautions against trying to replicate your stand-alone fund set-up in an umbrella fund. Understand the advantages of an umbrella or a stand-alone, and maximise them.
MIND THE COSTS
The cost of administering a fund affects the members as much as the business. Stand-alone funds, for instance, need an auditor, an actuary, an investment consultant and a host of communication and specialist service providers, which all add up.
“It’s easy to forget that these costs are largely passed on to those who can least afford it, namely the members,” says Ndlovu. With an umbrella fund, they are spread over a larger pool of contributors. The Old Mutual SuperFund, he says, has about 6,000 participating employers, who benefit from its efficiencies, reduced complexities and economies of scale.
CONTINUOUSLY CHANGING REGULATIONS
The same level of governance requirements applies to both types of funds, and both sets of trustees have the same level of legal liability. However, a stand-alone fund usually does not have professional trustees, as they tend to be company employees. They 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 BEST USE OF EMPLOYEES’ TIME
A board made up of company trustees carries an often overlooked opportunity cost. It’s harder to quantify, but significant. This includes the cost of time, skill and other resources needed to run a stand-alone fund, which could instead be used to perform business-critical functions.
TEST THE MARKET
Administrators of stand-alone retirement funds will often try to convince clients to move to their own internal umbrella solution. While that may seem like the easy option, it’s not necessarily the right one. “Even within the same administrator, such a move is fairly comprehensive. You want to make sure that you’re really moving to the best umbrella fund for your employees’ needs — so be sure to test the market.”
CHOOSE YOUR INVESTMENTS CAREFULLY
Retirement savings need to be well-managed and appropriately invested in portfolios that will ensure long-term growth. In an umbrella fund, the fund’s flagship portfolios usually get the most attention, but that doesn’t necessarily mean they’re the right choice for your members. While they typically are the best performing portfolios, you still have to be satisfied that it really is the case. If you’re in a stand-alone fund, look at your investment portfolio and find the best match in the umbrella fund you’re considering. It’s one of the best ways to do a like-for-like comparison.
TAKE THE OPPORTUNITY TO RESTRATEGISE
Moving from a stand-alone to an umbrella fund is an opportunity to step back and consider your set-up. There might be historical reasons for it. Use the opportunity to question what you need to do to put your members first. “In our retirement fund webinar, The Great Debate, a lot of the conversation was about flexibility and member choice. But the bottom line remains whether a fund offers the optimal retirement solution for your employees.”
SPEAKING OF CONTROL ...
Ndlovu says: “Twenty years ago every business had security guards on the payroll. Over time we saw the rise of specialist companies that provide security services, and businesses were happy to outsource that responsibility. Do they still have the same level of control? No. Are the guards on their payroll. No. Is the building secure? Yes.”
Whether in a stand-alone or an umbrella fund, the objective is the same: to ensure fund members get the right benefits when they retire or exit, and to know that the fund is appropriately governed. “In securing that objective, what do you want to have control or influence over, and what are you comfortable with handing over to a specialist organisation that does this for a living?”
CONSIDER YOUR FUNDING ARRANGEMENTS
“There are more than 4,000 stand-alone funds in SA, so a typical large employer could have anywhere from three to eight different retirement funding arrangements,” says Ndlovu. “If, or when, you move to an umbrella, you’ll enjoy the benefits of economies of scale — and get maximum bang for your buck — by consolidating as many of those funding arrangements as possible into one umbrella.”
CHECK OUT THE SPONSOR
When you move to an umbrella fund, you choose both the solution and the sponsor, so it’s important to check up on the sponsor’s credibility and trustworthiness.
“Business is all about partnerships. One of the points we discussed in The Great Debate was companies that fear getting ‘stuck’ in an umbrella fund. The truth is, you can change whenever you like, but if you work on finding the right sponsor to partner with upfront, you won’t need to.”
This article was paid for by Old Mutual.
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