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Introduction to umbrella funds

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Standalone vs umbrella funds
There are two main types of retirement funds in South Africa at present, with fund members either belonging to a standalone fund or an umbrella fund. These may include vocational or bargaining council and commercially sponsored funds. There are both advantages and disadvantages to be taken into account when an employer is considering whether to opt for a standalone or umbrella fund to see to their employees’ retirement needs.

A standalone fund is a retirement fund set up for employees by their employer. This type of fund needs to be managed by a board of trustees consisting of both employer and member-elected
representatives.

An umbrella fund, consisting of multiple participating employers, is set up by a sponsor, such as a life insurer, and is designed to allow more than one employer to participate (and offer
membership to their employees). These funds are managed by a board of trustees and offer various levels of involvement and control for the various participating employers within the fund. Retirement contributions from participating employers, and their employee members, are pooled together and contribute into this umbrella fund – the result is a larger fund with members from a number of unrelated employers. Umbrella funds are also regulated by the Pension Funds Act.

  • Sponsor: The financial institution that has established and registered the umbrella  fund.
  • Participating employer: An employer who joins an umbrella fund and whose employees are members of that umbrella fund.
  • Sub-fund: Each participating employer and its members (and their portion of the total fund assets) make up a sub-fund within the overall umbrella fund.

 

Why do umbrella funds exist?
Umbrella funds were first introduced in South Africa in the mid-1980s. Over the last few years, there has been a drive to consolidate standalone funds into umbrella funds – a move supported by
the Financial Sector Conduct Authority (FSCA).

The benefits of consolidation generally include cost and resource efficiencies; improved fund governance; and compliance capabilities due to increased resources available to umbrella funds compared to standalone funds.

Types of umbrella funds

  • Type A umbrella fund: Type A umbrella funds are managed by an independent management board (trustees) and each employer operates a sub-fund within the umbrella fund. General rules can be set up at the fund level to guide the benefits structures, investments, etc. Special rules can then be drawn up at employer level for their specific sub-fund within the parameters set out by the general rules. These would be specific to that employer and its employee members, and each participating employer can have their own set of special rules. Administration, accounting and actuarial services take place at the main fund level and are usually provided by the sponsor and paid for by the members.
  • Type B umbrella fund: In a Type B umbrella fund, the main rules set up at the fund level govern the retirement savings and benefit structures for all the members of the fund, irrespective of their different employers. All participating employers are then linked in some way – such as at an industry or union level. Only employers who are linked in this way are eligible to participate. The fund rules clearly outline how trustees are appointed and elected to make sure members and employers are well represented.

Cost benefits:
In the case of standalone funds the administration and investment management services are usually outsourced to various service providers, which can prove costly for small- and mid-sized employers and fund members. They can therefore benefit from more resources and cost efficiencies by providing retirement fund benefits for their employees through an umbrella fund.

Examples of cost and resourcing benefits may include:

  • Lower investment management fees – all the assets in the umbrella fund are combined and the fund can negotiate competitive investment management and administration costs from appointed service providers;
  • Lower operational costs, such as fund administration and professional fees – all costs are shared by all participating employers, and their fund members, instead of a single employer.

Examples of governance and compliance benefits may include:

  • Smaller standalone funds may struggle with the increased burden of regulatory compliance. Due to their typically larger size, umbrella funds generally have more resources in place than standalone funds.
  • Similarly, umbrella funds will have a professional and independent trustee board in place ensuring that the fund complies with all regulatory requirements.

Umbrella funds and employer requirements
Customisation vs one-size-fits-all

Standalone funds can tailor benefits and investment strategies to the needs and configuration of their employees. It is important that employers participating in the umbrella fund have a management committee (MANCO) in place to assist with the management of the umbrella fund to insure that members interests are represented and communicated.

The role of each MANCO will depend on the fund rules and the board of trustees of the umbrella fund. The functions of the MANCO could include member communication, member education, benefit decisions or cost analysis and ongoing performance reviews.

Management Committee / MANCO: An employer-level management committee set up to manage the interests of the participating employer and its employees who are members of an umbrella fund.

Management board: The board of management appointed by the sponsor or fund to oversee the management of the fund.

Disclosure and breakdown of fees

Transparency around the costs of umbrella funds has come under scrutiny over time. It has been argued that fees differ significantly across funds and that costs are disclosed in different ways, making fund comparisons difficult. This challenge has been addressed by ASISA’s introduction of the Retirement Savings Cost Standard (RSCS) in 2019, which is applicable to all ASISA members. The recent disclosure standard encourages umbrella fund providers to disclose a breakdown of umbrella fund costs in the same format, making it easier for an umbrella fund’s existing and potential clients to understand and compare costs on a like-for-like basis.

REFERENCES
1. www.oldmutual.co.za
2. www.sanlam.co.za
3. www.allangray.co.za

To learn more about this topic, please visit our website www.atleha-edu.org or contact us on 021 851 0091 to find out more about our educational workshops and events.