What is an umbrella retirement fund?

What is an umbrella retirement fund?

On taking up a new job, you may be invited to join the company’s retirement savings fund or obliged to join as a condition of employment.

If your employer is a large company the retirement fund could be a standalone one – a fund set up for the employees of the company or group of companies only.

Staff at a smaller company are more likely to join an umbrella retirement or multi-employer fund - a fund run by a sponsor and providing for the employees of various companies.

These umbrella, or multi-employer, funds appeared in South Africa in the 1980s for smaller businesses to provide retirement savings options for staff.

These days they attract large and small employers as a cheaper, easier way to provide retirement savings options to staff.

Two kinds of umbrella funds

There are two types of umbrella funds in South Africa.

Commercial umbrella funds: Commercial umbrella funds are set up by a financial services company, the sponsor, for a variety of participating employers, usually each with its own contribution rates and rules on eligibility, retirement age, risk benefits, and so on. These are known as type A umbrella funds and each employer is accommodated in a sub-fund with its own special rules.

The sponsor sets up the fund and invests in the administration system for it. It will also market the fund. The sponsor is typically contracted to provide some or all of the administration, investment, group life and other services.

Industry, union or bargaining council umbrella funds: These funds serve as the fund for all employers in an industry sector fund – for example, a fund for all employers in the security sector or metal industry. The sponsor may be a union and membership may be compulsory and covered by a bargaining council agreement.

These funds typically have standard rules and benefits for all members (known as type B umbrella funds). They are open to employers in that industry or governed by a bargaining council. The bargaining council agreement may oblige employers to enrol and contribute on behalf of the employees in that sector.

What are the benefits of using an umbrella retirement fund?

 Smaller employers may choose to use an umbrella fund for various reasons:

• Cost-effective – an umbrella fund caters to a much larger number of members – typically tens of thousands or even hundreds of thousands of members – much more than there would be if a small employer had its own fund. This creates economies of scale and lower administration costs and costs of other services such as communication, legal or actuarial services. Investment fees are also typically based on the amount invested so larger funds get lower rates.
  
  
• Less of an administrative burden – the employer only needs to select an umbrella fund in which to participate and to notify employees. It does not have to set up and register its own fund, or comply with all the necessary regulation.
  
  
• Professional trustees - in an employer-sponsored fund, the employer needs to find staff with the necessary expertise or time to serve on the board and both employer-selected and member-elected trustees have to undergo training before serving on the board. They are unlikely, however, to have as much training and expertise as professional trustees.
  
  
• Investment choice – larger funds typically offer more investment choice on investment platforms and this choice may include access to lower cost passively managed funds.
  
  
• Other benefits, such as access to technology like apps and tools that educate and inform members about their benefits.

While costs play a crucial role in the amount of savings you, as a member, retire with, a fund that is badly governed – for example, if the trustees fail to manage the collection of contributions from employers, fail to ensure the administrator keeps good records or make poor benefit or investment decisions – can also make the difference between a comfortable retirement and a poorly-funded, miserable one.

Larger employers may prefer to keep a standalone fund because the employer then has more control over the investment strategies and benefits offered.

In a case of a standalone fund, employee representation on the board of trustees can mean a more personalised service, especially in dealing with, for example, the death of a member.

Does an umbrella fund have the same protection as a standalone fund?

Both umbrella and standalone funds are governed by the Pension Funds Act and regulated by the Financial Sector Conduct Authority (FSCA).

Both kinds of funds are governed by a board of trustees who are legally obliged to act in members’ best interests.

While an umbrella fund relieves the employer of many governance responsibilities, they continue to have a fiduciary responsibility to members. The employer must hold the sponsors to their promises on services and costs. The employer should also re-evaluate the umbrella fund’s offering regularly to ensure it is still best for its employees. Importantly, the employers hold a trump card in that they can terminate the agreement and move to another umbrella fund if they are unhappy.

Governance of an umbrella fund

In a standalone fund, 50% of the board of trustees is made up of company representatives and the other 50% is elected by the members of the fund (the participating employees).

In umbrella funds, a typical model is that 50% of the board is made up of representatives of the sponsor and 50% can be elected by the members from a list of professional trustees.

An umbrella fund can apply for an exemption from the Pension Funds Act requirement that members elect 50% of the trustees. Unions may have other ways of representing members and commercial umbrella funds may appoint trustees if it is too difficult to hold elections among members.

The rules set out how the trustees are appointed and elected.

The pros and cons

The advantage in a commercial umbrella fund is that the trustees are experts in their fields while at a standalone fund they are employees who have been selected as representatives by their employer or colleagues.

The disadvantage in a commercial umbrella fund is that the sponsor is driven by a commercial objective. The independence of the board of trustees and its ability to act in the best interest of members is key. Trustees appointed by the sponsor may be conflicted by their loyalty to their employer and unlikely to suggest or vote in favour of changing the fund’s service providers away from the sponsoring company.

Some umbrella funds allow participating companies to elect their own management committee with half of the committee elected by members, which mimics the board of trustees on a standalone fund. Their role is set out in the rules of the fund and is not at the same level as the board of trustees. They can, however, they can have some influence, for example reviewing other umbrella funds’ offerings and administration, overseeing service providers, perhaps even selecting risk providers. They can also select the default investment strategy for members from the default options approved by members.

The management committee will also typically have an important communication role between the fund and members. It will be involved in the education of members, giving member feedback on benefit decisions and assisting with death and disability claims.