The South African retirement fund landscape has seen massive growth of the umbrella fund market over the past few years, with the number of stand-alone retirement funds rapidly decreasing as employers continue to transfer to leading commercial umbrella funds. These funds are an effective retirement funding vehicle for all South Africans, and may well be an alternative to Government’s proposed National Social Security Fund, says David Gluckman, head of special projects at Sanlam Employee Benefits.
“We have seen the commercial umbrella fund industry growing from just under 800 000 members in 2009 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,” Gluckman says.
He says 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 improvements 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 show that more and more stand-alone funds were moving to umbrella funds, for the following reasons: cost savings, better administration, less fiduciary responsibility and better investment expertise.
“We now regard the commercial umbrella fund model as a viable alternative to a National Social Security Fund, since it avoids the very significant transition risks and costs associated with implementing such a fund,” says Gluckman.
He says 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 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.”
Gluckman says social solidarity is one of the cornerstone principles behind Government’s National Social Security Fund proposals. “Group RAs endanger this fundamental principle. Such a trend may result in the erosion of valuable cross-subsidies inherent in the current system, thereby placing many ordinary South Africans in a more vulnerable situation.”
Commercial umbrella funds have not only embraced the principle of social solidarity, but have over the past few years taken on board and tried to improve on aspects where there may be valid criticism of existing benefit designs in the employee benefits industry, he says.
These aspects 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.
“The Sanlam Umbrella Fund has, for example, recently introduced a new retirement savings vehicle called the Optimal Product Option, 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.”
“The offerings in the commercial umbrella fund space will increasingly evolve as the crucial conversations and competitive pressures continue. New-generation umbrella funds that offer the best of both the institutional and the retail worlds are the likely result. 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,” Gluckman concludes.