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Since 2009, we have seen the commercial umbrella fund industry grow from just under 800 000 members to more than 1.6 million members today. The latest data from the Financial Services Board (FSB) indicate that assets under management in these funds are now at around R250 billion.

Although South African commercial umbrella funds have been around since the mid-1980s, the early models were often criticised for offering poor value for money and side-stepping many of the governance and representativity features of stand-alone retirement funds.

There have been significant improvement in commercial umbrella funds since then. They have really cleaned up their act, and the major funds are now leading models for good governance and value for money. Industry-leading independent professionals, often elected via members to comprise 50% of the boards of trustees, are becoming the norm rather than the exception.

These trends are borne out by the results of the 2015 Sanlam BENCHMARK Survey, a comprehensive annual review of South Africa’s retirement industry. The survey results showed that more and more stand-alone funds were moving to umbrella funds, for the following reasons:

  • Umbrella funds offer a holistic solution to institutional retirement funding beyond vanilla administration
  • The costs are lower than under stand-alone arrangements for the majority of funds
  • The governance framework tends to more robust, particularly when the sponsor is a recognised and established firm
  • Trustee liability under stand-alone funds is transferred
  • There is a much smaller burden on the employer in providing a retirement fund to its employees.

A new trend in the retirement fund space is the emergence of group retirement annuities (RAs) being promoted as competitors to umbrella funds. There are significant structural problems associated with group RAs, however, that make them sub-optimal choices for most employer groups, including worse tax deductibility, inaccessibility of savings before age 55, the voluntary nature of such arrangements, and the possible exclusion of many ordinary workers.

There may well have been valid criticism of benefit designs in the employee benefits industry in years gone by, but most commercial umbrella funds have over the past few years taken on board and tried to improve on these aspects. They include more cost-effective governance models, simpler ways to charge fees that make product comparability simpler, and elimination of unnecessary bells and whistles for ordinary members where cost efficiency is vital, while also allowing greater flexibility and customisation for the small number of affluent members prepared to pay for such additional features.

For example, the Sanlam Umbrella Fund has recently introduced a new retirement savings vehicle which offers an appropriate and competitively priced default investment strategy, while allowing for significant flexibility at an appropriate price for members wanting customisation. As such, it offers the best of both worlds, and has been designed to improve the retirement outcomes of all employees.

Other innovative features the Sanlam Umbrella Fund plans to introduce in the next few months include:

  • A phased retirement option (retirees will be able to keep their savings in the fund for longer)
  • Allowing members who resign to preserve their savings in the fund
  • An option to buy a pension from the fund instead of from an outside provider upon retirement.

The offerings in the commercial umbrella fund space will increasingly evolve as the crucial conversations and competitive pressures continue. The future of the retirement fund industry might be significantly different in the next 20 or 30 years, but umbrella funds continue to offer solutions designed to improve retirement outcomes for all South Africans.

Sanlam Life Insurance is a licensed financial service provider.
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