The decision on whether or when to move your organisation from a standalone retirement fund to an umbrella fund is not a simple one. This was made clear in Old Mutual Corporate’s recent webinar on the subject, The Great Debate: Standalone vs Umbrella Retirement Funds. But it’s a decision every business must at least consider, as it fulfils its promise to act in the best interests of its employees’ financial futures.

Estelle Midgley, an independent principal officer with experience in large corporate funds, has been involved in the process several times. During the panel discussion at the webinar event, she outlined three key factors that employers should consider when comparing the two fund types.

1. Flexibility

‘The employer needs to assess how much flexibility they want, and why they want that flexibility,’ Midgley said. ‘Through that, you look at the products and who provides those products.’ Flexibility is, of course, linked to control, and some employers fear losing control over key aspects of the retirement fund when they move to an umbrella fund, or having to pay excessive costs to get the flexibility they want or need.

She advised that the employer needs to look at whether they are locked into the sponsor’s products. ‘If you are, where does the flexibility come in? Where does the cost-saving come in? And whereas you might start with a very cheap deal, as time goes on those products might escalate in costs.’

2. Costs

Ultimately, retirement funds exist to maximise employees’ retirement outcomes. That’s why the money spent (or saved) in a standalone compared to an umbrella fund is such an important factor in this debate. Midgley highlighted the importance of knowing what all the most important costs are. ‘By far, it’s the investment cost, which includes asset management fees, trading costs, investment consulting fees, and so on. Employers should ensure that they have a breakdown of those costs when they compare their options.’

Other costs to consider include communication and – especially – risk costs. Since the cost of death and disability benefits increase over time, the employer needs to ensure that they keep that price comparison going every year so that they can get the best deal.

3. Service providers

The reason employers should look so closely at costs is to ensure they are comparing like for like, they know what is not included in the cost and also which service providers they’d get locked into.

One of those ‘locked-in’ costs is the umbrella fund’s management board (trustees), and another is its various subcommittees. ‘A lot of the work really gets done in the subcommittees,’ Midgley warned. ‘So although you’ll have your experts in the management board, those subcommittees also need to be very strong.’

The same goes for the principal officer, as they are the ones pulling it all together. ‘They are the gatekeeper for the sponsor, and they ensure there’s due diligence. The independence of the board, the subcommittees and the PO is very important.’ An informed decision on whether to remain in a standalone fund or move to an umbrella option should not be made without consideration of these three factors.

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