Small employers need to choose carefully
Benefits and their costs not always market related
ONE SECTOR OF the retirement fund industry that employs independent trustees is umbrella funds, which are used by several, typically smaller, employers to meet staff retirement needs. But there are some concerns about them.
Ideally, an umbrella fund should a be good solution for a small company. In theory, several participating employers should help reduce costs, but this isn’t always the case, according to Edward Thomson, MD of Verso Financial Services.
His main concern is that some umbrella funds use only one supplier for all benefits, including death and disability cover and investment services.
“These benefits and their costs may not always be market related. When there is a sole supplier, it becomes difficult to do a competitor analysis of standard practice and market-related investment returns. Costs such as commission and administration charges may not be distinguishable for each service.”
A further disadvantage is that many umbrella funds charge a penalty on withdrawal, for instance when employees leave the company and want to move their retirement savings to another fund. Thomson says these charges might be so severe that any move is rendered completely unviable.
“All employees are entitled to the best possible retirement provision and practices, regardless of the size of their employer. It is therefore incumbent on smaller companies to adopt best practice by considering various criteria before choosing the appropriate umbrella fund for their staff.” These criteria include: • employers must ensure the umbrella fund allows investments and risk benefits to be placed with different companies they must obtain professional advice on the investment options most suitable for their staff they must also receive continuing advice regarding employees’ risk cover, analysis of investment performance and market trends they must ensure the umbrella fund is fully transparent in disclosing all related costs, commissions and fees, and how these will affect investment returns. Thomson says Verso follows best practice in all these areas for its umbrella funds. Trustees, who are not Verso staff, are appointed to the fund. They act as independent trustees, have an agreement in place and are paid for their services.