End of the road for com­pany pen­sion funds?

The de­fault pen­sion fund reg­u­la­tions could per­suade many em­ployer-spon­sored funds to move their em­ploy­ees to an um­brella fund. re­ports

Weekend Argus (Saturday Edition) - - SPORT -

IF YOUR com­pany has its own pen­sion fund, to which you are con­tribut­ing, it may be con­sid­er­ing join­ing the throng of em­ploy­ers that are mov­ing their em­ploy­ees into um­brella funds. The lat­est raft of reg­u­la­tions per­tain­ing to pen­sion funds, known as the de­fault pen­sion fund reg­u­la­tions, may well be the “last straw” that clinches the de­ci­sion to make the move.

Com­mer­cial um­brella funds are funds run by fi­nan­cial ser­vices providers that ac­com­mo­date a num­ber of em­ploy­ers – typ­i­cally with in­di­vid­ual re­quire­ments – within a sin­gle over-arch­ing struc­ture.

The mi­gra­tion of stand­alone em­ployer funds to um­brella funds has been a trend in the re­tire­ment land­scape for more than a decade. The un­der­ly­ing rea­sons, but not the only ones, are the in­creas­ing bur­den of ad­min­is­ter­ing a re­tire­ment fund and hav­ing to com­ply with bur­geon­ing regulation.

The gov­ern­ment’s aim in re­form­ing the in­dus­try has been to en­sure greater pro­tec­tion of your re­tire­ment sav­ings, im­prove trans­parency, re­duce costs, and boost your chances of re­tir­ing in com­fort.

The pen­sion de­fault reg­u­la­tions were signed into law in Au­gust last year. Funds have un­til March next year to com­ply. Briefly, they re­quire the boards of pen­sion funds to:

• Of­fer a de­fault in-fund preser­va­tion ar­range­ment to mem­bers who leave their em­ploy­ers be­fore re­tire­ment;

• Pro­vide a de­fault in­vest­ment port­fo­lio to con­tribut­ing mem­bers who do not exercise any choice about how their sav­ings should be in­vested;

• Have a post-re­tire­ment an­nu­ity strat­egy with an­nu­ity op­tions, ei­ther in-fund or out-of-fund, for re­tir­ing mem­bers; and

• En­sure mem­ber de­faults are rel­a­tively sim­ple, cost-ef­fec­tive and trans­par­ent.

David Gluck­man, the head of spe­cial projects at San­lam Em­ployee Ben­e­fits, says the num­ber of stand­alone funds has dwin­dled over the years, from about 13 000 funds in 2005 to about 5 000 now, ac­cord­ing to the lat­est Fi­nan­cial Ser­vices Board es­ti­mates, al­though prob­a­bly less than 2 000 are ac­tive funds, be­cause dereg­is­ter­ing a fund some­times takes a long time.

Gluck­man says that in the 2017 San­lam Bench­mark Sur­vey 38% of stand­alone funds’ prin­ci­pal of­fi­cers in­ter­viewed re­sponded “yes” to the ques­tion “Has the em­ployer ever con­sid­ered pro­vid­ing ben­e­fits to mem­bers via an um­brella fund ar­range­ment?”.

“That is a fairly sig­nif­i­cant mi­nor­ity, given that the sur­veyed funds were fairly large re­tire­ment funds, av­er­ag­ing more than 11 000 mem­bers with more than R2 bil­lion in as­sets,” he says. “This was be­fore the de­fault reg­u­la­tions were gazetted in Au­gust 2017. We await the 2018 Bench­mark Sur­vey re­sults on this topic with great in­ter­est.

“I don’t think we have yet seen what will tran­spire di­rectly as a con­se­quence of the de­fault reg­u­la­tions. Boards of trustees are prob­a­bly just start­ing those de­lib­er­a­tions,” Gluck­man says.

But he says the clock is tick­ing to­wards March 1, 2019, by which date all re­tire­ment funds must im­ple­ment the re­quire­ments.

“I am sure there will be some stand­alone funds that de­cide the de­fault reg­u­la­tions are a tip­ping point, and they will go the um­brella fund route, but it’s any­one’s guess how sig­nif­i­cant this move will be.”

The big um­brella fund providers – Old Mu­tual, Lib­erty, Mo­men­tum, San­lam and Alexan­der Forbes – are well equipped to meet the reg­u­la­tory re­quire­ments and to greet new em­ploy­ers into their folds.

Their com­pre­hen­sive em­ployee ben­e­fit pack­ages typ­i­cally in­clude group life cover, a seam­less tran­si­tion for mem­bers from pre- to post- re­tire­ment in­vest­ment prod­ucts, and bells and whis­tles, such as apps that give mem­bers up-tothe-minute in­for­ma­tion and data on their re­tire­ment sav­ings.

How­ever, the tran­si­tion from an em­ployer-con­trolled fund to an um­brella fund is not easy, par­tic­u­larly for the larger em­ploy­ers, says Saleem Son­day, the head of group sav­ings and in­vest­ments at Al­lan Gray, who heads Al­lan Gray’s new um­brella fund (see “As­set man­agers muscling in on um­brella fund space”, above). “It is im­por­tant for the em­ployer to thor­oughly en­sure that there is good align­ment with the prod­uct provider and that the ben­e­fits out­weigh their con­cerns of giv­ing up control,” he says, ad­ding that em­ploy­ers also need to ob­tain buy-in from their em­ploy­ees.


Petri Gre­eff, an ex­ec­u­tive at RisCura, a global in­vest­ment ad­vi­sory and fi­nan­cial an­a­lyt­ics firm, is of the view that stand­alone funds have other op­tions than go­ing the um­brella fund route.

He says he has no­ticed the move of stand­alone funds to um­brella funds for a while now. “This is cer­tainly not a new phe­nom­e­non and seems to have been largely driven by the in­creased gov­er­nance bur­den that stand­alone funds have been fac­ing in re­cent years.

“We can ap­pre­ci­ate that trustees may feel that the new de­fault reg­u­la­tions are ad­ding to their ex­ist­ing heavy bur­den and, in a few cases, could be the last straw that breaks the camel’s back when it comes to run­ning a stand­alone fund ver­sus out­sourc­ing it to an um­brella fund,” he says.

Gre­eff says, how­ever, that there are ways the trustees of stand­alone funds can re­duce the ad­min­is­tra­tive bur­den with­out tak­ing such a dras­tic step and hand­ing over the reins to an um­brella fund.

He says the de­fault reg­u­la­tions will not nec­es­sar­ily in­crease the on­go­ing ad­min­is­tra­tive bur­den for trustees.

“It will re­quire some up­front work by trustees to con­sider the var­i­ous op­tions for their funds. But once those are put in place, the ad­min­is­tra­tive bur­den should be limited to mon­i­tor­ing the de­fault op­tions – not much more than what they are al­ready do­ing for their ex­ist­ing funds.”

Gre­eff says he ex­pects many pos­i­tives to come from the new reg­u­la­tions, such as in­sti­tu­tional fees forc­ing down high re­tail fees, seam­less tran­si­tions in mem­bers’ “cra­dle- to- grave” jour­neys, and mem­bers gen­er­ally re­tir­ing better through im­proved in­vest­ment strate­gies and lower fees.

But he also sees some risks. “Our big­gest con­cern is ac­tu­ally around trustees, not the ser­vice providers. Trustees need to un­der­stand and buy into the think­ing be­hind the regulation and ac­knowl­edge their mem­bers’ re­tire­ment jour­neys and ex­pec­ta­tions. Oth­er­wise, it may lead to short-sighted de­ci­sions and off-the-shelf so­lu­tions, which take away the abil­ity of a stand­alone fund to of­fer cus­tomised so­lu­tions to its mem­bers.

“We also see the risk of tra­di­tional re­tire­ment prod­ucts just be­ing re­tooled for the in­sti­tu­tional mar­ket and the in­dus­try not re­ally com­ing up with in­no­va­tive so­lu­tions. An im­por­tant role trustees need to play is in de­mand­ing in­no­va­tion that puts their mem­bers’ in­ter­ests first.”


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