You could be caught up in swing to umbrella funds

The implementation of proposed default investment and annuity options could be the tipping point that will push many employers that sponsor, and the trustees who manage, stand-alone retirement funds into switching to umbrella funds. Bruce Cameron reports

If you belong to a stand- alone employer- sponsored occupational retirement fund, it’s likely that you will be caught up in the growing swing towards umbrella retirement funds as more and more employers and fund trustees find it too onerous to manage a fund.

The sponsors of the major occupational umbrella funds say there has been a steady growth in the number of participating employers and members, although much of this is a result of employers providing retirement benefits to their employees for the first time rather than transfers of existing members.

However, providers of commercial umbrella funds expect a surge in stand-alone funds converting to umbrella funds if proposed regulations that require retirement funds to offer members a range of default options are implemented.

If the proposals are implemented in their current form, retirement funds – stand-alone, umbrella and retirement annuity (RA) funds – will have to offer you, the member: ◆ Default investment options; ◆ Default preservation funds; and ◆ Default pensions. John Kotze, the head of group savings solutions at Old Mutual Corporate, says the proposed default options will add significantly to trustees’ responsibilities; in particular, they will have to ensure that members receive financial counselling and that the default options Some major commercial umbrella retirement funds have set up, or are setting up, structures that anticipate the implementation of National Treasury’s proposed regulations on default options.

Kobus Hanekom, a pension fund lawyer and the head of strategy, governance and compliance at Simeka Consultants and Actuaries, says there is no reason retirement funds cannot start to introduce most of the proposed changes now. However, they cannot implement the changes in full, because:

◆ Umbrella funds are currently not permitted to have preservation funds within their structure that enable members who leave the employ of a participating employer to preserve their savings until retirement. In the meantime, the sponsors of umbrella funds are offering members who leave are appropriate for members.

“The obligations under default annuitisation are particularly complex and onerous, with retirement funds becoming akin to a broader [financial] services provider if the default strategy is an in-fund annuity (provided by the fund itself and a participating employer default preservation funds from within their stable of products.

◆ Some of the default structures that have been put in place by some umbrella funds may not survive the regulations (see page 4). For example, Old Mutual’s Superfund umbrella fund offers smoothed/stable bonus products as a default investment option for pre-retirement savings and with-profit annuities as a default pension at retirement. National Treasury has indicated that it does not favour smoothed/stable bonus and with-profit annuity products in their current form.

John Kotze, the head of group savings solutions at Old Mutual Corporate, says the Superfund offers default investment options for preretirement savings, the preservation of savings and an annuity at retirement. not outsourced to a life assurance company or linked- investment services provider). It will challenge the knowledge and skill required from trustees.”

Kotze says the two main consequences are likely to be the consolidation of stand-alone retirement

Dave Hufton, the head of institutional business at Alexander Forbes, says the Alexander Forbes Retirement (umbrella) Fund has three default lifestage portfolios for preretirement savings: passive, specialist and balanced. He says the principles that underlie these defaults comply with National Treasury’s draft regulations, except that the specialist and balanced portfolios charge performance fees. However, these fees are being phased out.

The Sanlam Umbrella Fund hopes to have changes in place by the end of the year that will align the fund with the proposed regulations.

The Financial Services Board has approved changes to the fund’s rules that will allow for default investment strategies. funds into umbrella funds and an increase in the costs incurred by stand-alone funds.

Dave Hufton, the head of institutional business at Alexander Forbes, says the growth of the Alexander Forbes Retirement (umbrella) Fund in its first 10 years was mainly the result of employer- sponsored, stand- alone funds converting to umbrella funds, whereas more recently it has been the result of employers transferring from other umbrella funds.

However, Hufton says he believes the proposed default regulations – which will come on top of the Treating Customers Fairly regulatory regime and the Protection of Personal Information Act – will again see umbrella funds growing because of stand-alone funds converting to these funds.

Kobus Hanekom, a well-known pension fund lawyer and the head of strategy, governance and compliance at Simeka Consultants and Actuaries, says employers that sponsor stand- alone funds and trustees of these funds have the following concerns about the changes:

◆ The risk that a fund may make decisions that are not in members’ best interests will increase;

◆ Employers and trustees will have to devote more time to attending to retirement fund matters, at the expense of their jobs; and

◆ The choices that funds will have to offer their members will create complexity and additional risks.

“Traditionally, retirement funds have been concerned only with members who are employees of the sponsor of the fund saving for retirement. Retirement funds are now being forced to offer services and benefits designed to meet the changing needs and desires of members,” Hanekom says.

The new tax regime for contributions to retirement funds, which is scheduled to be implemented on March 1 next year, will also place an additional burden on retirement funds, because members will have greater choice of the rate at which they want to contribute to the fund (between the fund’s minimum contribution and a maximum of 27.5 percent of remuneration).

Variable contribution levels will place an additional burden on employers’ payroll administration systems and funds’ administration systems, he says.

According to the Financial Services Board’s website, there are about 1.5 million members of umbrella funds, which hold almost R200 billion in assets – and the number is growing rapidly every year.

There are now 74 commercial umbrella funds provided by 14 financial services companies. About 10 years ago, there were about 16 000 stand-alone occupational retirement funds registered by employers. This has declined to 5 340 funds, of which only about 3 000 are fully active. ◆ Umbrella retirement funds are being challenged by a new concept, the group RA. Look out for the article in fourth-quarter 2015 edition of Personal Finance magazine that explains the differences between the two. The magazine goes on sale on October 30.