At a recent webinar on the two types of group retirement funds in South Africa, Malusi Ndlovu, Old Mutual Corporate’s Director: Large Enterprises, made the point that umbrella funds have evolved significantly since the ’80s when they were mainly used by small employers. In the past decade, employers with tens of thousands of employees have moved into umbrella funds.

But size is not the factor that should make or break a decision between a standalone or umbrella structure for your company retirement fund. It’s important for your business and your employees to be in the right fund with the right benefit structure and degree of flexibility.

These five points, raised during the discussion, is a good starting point towards an informed decision. (If you’d like to learn more about the different retirement funds and what each one offers and requires, watch The Great Debate: Standalone vs Umbrella Retirement Funds.)

1. What should be your point of departure when comparing standalone and umbrella funds?

‘Remember what the member wants. The member wants to make sure that their savings are safe, they’re getting a good net return and that they can get their benefits when they need them. All of this has to filter through. If you’re going to go from a standalone to an umbrella fund, that’s actually what you’re going to get in the end – that the benefits will hopefully be better than what they got in the standalone fund, the costs will hopefully be less and the arrangements about delivering the benefits will hopefully improve.’

– Jonathan Mort, Director at Jonathan Mort Attorneys, specialists in pension fund law and governance

2. What questions should employers ask about the sponsor before joining an umbrella fund?

‘Employers going into an umbrella fund must realise that the sponsor [the financial institution] becomes one of the fund’s stakeholders. They need to ask themselves what roles are the sponsor going to play and how much influence they have? What are the processes that are followed in making decisions by the trustees? What does the sponsor actually do, and is the sponsor someone with experience in this industry? Are they someone with deep pockets to continue investing in the capability, particularly the retirement fund administration capability, which can be quite complex?

‘Then, are they someone who has a voice, so that, when there are changes in the industry, they can influence them in the right direction?

‘And ultimately, is the sponsor someone you can trust? How do they conduct themselves in the market?’

– Malusi Ndlovu: Director: Large Enterprises at Old Mutual Corporate

3. Will the trustees still have a say in an umbrella fund?

‘The sponsor can’t call the shots. The fiduciary duty continues to sit with the trustees, whether it’s a standalone fund or an umbrella fund. The presence of a sponsor does not change that.

‘That’s why it’s so important to make sure that the trustees are independent-minded, that the majority are not appointed by the sponsor but are from the industry and sit in other industry funds, and understand that the sponsor is there, but that they must not fetter their decisions and what the trustees do under any circumstances.’

– Malusi Ndlovu: Director: Large Enterprises at Old Mutual Corporate

4. And what about the employer? Will they lose all control in an umbrella fund?

‘The more accurate way of describing it would be that they’re losing some influence. If you’re a chief executive in a standalone fund, you can phone the chairman of the board of that fund and be a vastly more influential voice being heard by the trustees than if you’d phoned the chairperson of a very large umbrella fund and said, look, can we discuss this default option.

‘It just is different and that is something an employer has to appreciate. As we were saying earlier, there are pros and cons to this decision. The employer will always have the nuclear option of being able to terminate participation in an umbrella fund and move to another, but you obviously don’t want to do that. So it’s very important that you know what you’re getting into in the beginning, that you are comfortable with the people you are dealing with and that you trusts that they are going to take the same kind of wise and prudent decisions that the trustees in a standalone fund would have.’

– Jonathan Mort, Director at Jonathan Mort Attorneys, specialists in pension fund law and governance

5. How much flexibility do employers have in an umbrella fund?

‘If you’re a large employer, you generally command the ability to negotiate more flexibility. But it also depends on the flexibility that you’re looking for. If you’re looking for flexibility in respect of benefit structure, there is generally a menu of what you can structure on that basis.

‘If you’re looking for flexibility in respect of investments, it becomes a little more complex, because the product construction is often based on where the economies are for the sponsor and where the sponsor makes their income. So the product construction will often funnel, as far as possible, participating employers into the sponsor’s investment products. If you want to opt out, there are generally costs to that. ’

– Jennifer Grefen, independent employee benefit consultant

Watch the full webinar for a detailed discussion with our retirement fund experts.