The debate continues around whether companies are better off going it alone in a standalone retirement fund, or moving to an umbrella retirement fund managed by a financial services provider. ‘There’s a lot of noise in the market about this,’ says Malusi Ndlovu, Director: Large Enterprise at Old Mutual Corporate. ‘National Treasury has made its position clear: it is pushing for consolidation, which means a move towards fewer funds.’

Consolidation has been on the cards for a few years now. In a 2012 paper, South Africa’s National Treasury highlighted proposals that would ‘improve efficiency and good governance through consolidation of private-sector retirement funds’. The conversation has grown since then, to a point where, in 2021, Treasury’s position on key areas is clear.

‘Treasury believes that the number of retirement funds in the industry needs to be significantly reduced to assist in improving retirement outcomes,’ says Ndlovu. ‘Its position is that fund governance needs to be improved; that not enough employers are providing retirement benefits; and that there needs to be a reduction in members’ fees. It also maintains that there needs to be stronger oversight over trustees and administrators, and that retirement fund trustees need to pay closer attention to where they invest. Its sense is that better skills are required in terms of assessing funds’ investment options.’

Legal requirements of retirement fund trustees

Will bigger necessarily be better? The decision whether to remain in a standalone fund or to move to an umbrella fund boils down to four key factors: competency, capacity, cost and control.

Competency shouldn’t be an issue, yet in practical terms it often is, often a result of limited capacity. ‘Standalone and umbrella funds have the same level of governance requirements, so both sets of trustees have the same level of legal liability,’ says Ndlovu. ‘But a standalone fund usually does not have professional trustees, as they tend to be company employees. The question then becomes: can a standalone fund’s trustees stay up to date with the latest legislative requirements? Are they qualified to make the right decisions regarding investments?

‘You can outsource those responsibilities, but you can’t abdicate them.’

Costs associated with the two types of retirement funds

Perhaps the strongest argument in favour of umbrella funds relates to costs. The Old Mutual SuperFund, for example, has about 6 000 participating employers, who benefit from its economies of scale.

While each fund manages their expenses differently, Ndlovu points out that there are areas of cost saving which are not necessarily listed on the financial statements. ‘One of them is investment management charges, which are usually based on the size of the fund’s financial assets,’ he says. ‘As umbrella funds have greater assets, the reduced costs could be carried over to the members. Then there’s what we call the “management governance budget”, which is the time required to manage the fund. Given that a standalone fund’s trustees tend to be company employees, moving to an umbrella fund will free those employees up to do their primary job – in other words, to spend time on activities that will grow your core business.’

Who calls the shots?

In terms of control, employers often fear losing their independence when they move to an umbrella fund. ‘Some business owners and HR managers worry that the fund’s sponsor will call all the shots,’ says Ndlovu. ‘That feeds into broader concerns around representation. How, within an umbrella fund, do you ensure that the voice of the member is really heard?’ The answer will vary from business to business and from fund to fund.

‘It’s a complex issue, and there are no easy answers or one-size-fits-all solutions,’ says Ndlovu. ‘If you do make the move from a standalone fund to an umbrella retirement fund, you have to be very careful regarding which partner you select. Making the move is not necessarily a simple process, but it might be the right one for your employees.’

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