Umbrella funds: members may be at risk

FOR VARIOUS reasons, many retirement fund members are facing a future of eating cold baked beans. Perhaps their contributions weren’t effectively invested while they were saving. Perhaps, once they retired, they spent their money too quickly. Will reducing the number of pension funds and increasing regulation and oversight alleviate either of these problems? I think not.

Many smaller funds are already struggling to deal with the regulatory requirements for stand-alone funds. The initiative by the regulator to reduce the number of funds will simply mean that most smaller funds will be swallowed up by umbrella funds. Instead of members being represented by trustees with whom they work, they will be part of an amorphous pool of members who belong to a fund run by professional trustees. Furthermore, it is likely that the member profiles of stand-alone funds, and the investment strategies that match those profiles, will be lost. Customised investment strategies that serve a small, niche group of members are not only bespoke but aligned to investment goals, whereas a large pot of future pensioners may get exposure to a more generic, off-the-shelf offering. Yes, it may be cheaper in the short term, but at what cost to the member in the long term?

You can compare it to the difference between a “mom-andpop store” and a supermarket. In the mom-and-pop scenario, the owners know their customers, stock special items for them, and tailor their service offering to their needs. In the supermarket scenario, shoppers have no relationship with the individual store managers and have to accept the items and brands that a supplier has negotiated with the store to stock. They are also often given impersonal service at the check-out counter.

In the retirement space, trustees of stand-alone funds are more likely to know their members and care about what happens to them. With an umbrella fund, members become just a number, service levels slip, and the ultimate outcome – a decent income for the rest of your life – is more at risk.

Although regulation is necessary to weed out funds that are not fulfilling their responsibilities, it comes at a hidden cost, and the members could end up paying in the future. Petri Greeff is an executive at Ris-Cura, a global investment advisory and financial analytics firm.