Umbrella funds cut costs to grow retirement savings

Old Mutual Corporate’s Malusi Ndlovu says employees will benefit from the switch to umbrella funds.

When a company makes the move from a standalone to an umbrella fund, the board of trustees overseeing its retirement fund is making a decision that will help the households of its employees to be more efficient when saving for retirement – something every employee will welcome in these tough economic times.

No CFO or financial manager would have to delve too deeply into the books to know that widespread household income losses due to Covid-19 lockdowns have put South Africa’s retirement planning under pressure, as workers try to deal with the immediate financial impact of the pandemic.

At the same time, however, CFOs and the pension fund boards of trustees they likely sit on are in a unique position: while tasked with investing people’s retirement money, they can review the long-term suitability of their current retirement provision arrangements to maximise savings right now.

This is according to Malusi Ndlovu, Director of Large Enterprises at Old Mutual Corporate, who says that moving from a standalone to an umbrella retirement fund like the Old Mutual SuperFund can save money for members over a lifetime of investing.

“What employers and their retirement fund boards of trustees don’t consider is that the cost of administrating a standalone fund is largely passed on to the people who can least afford it, namely the members,” he says.

With the costs of benefits designed to protect members and their families against sickness or death increasing due to the impact of Covid-19, there is even less money available to put towards retirement savings every month.

Impact where it matters – the bottom line
“Well-administered and properly governed umbrella funds are more efficient because of their reduced complexity and economies of scale,” says Malusi. “With a standalone fund, on the other hand, you need an auditor, an actuary, an investment consultant and a host of communication and specialist service providers.”

While an umbrella fund needs the same kinds of services, “the umbrella fund creates an advantage of size, meaning that these costs are spread over a larger pool of contributors,” he says.

In addition to lower costs for members, the umbrella fund removes the administrative burden on companies needing to appoint a board of company trustees to meet the onerous governance, risk and compliance requirements, a board most CFOs will find themselves a part of.

“While these costs are harder to quantify, they are significant. They include the opportunity cost of time, skill, and other resources needed to run a standalone retirement fund," Malusi explains. “These men and women generally don’t work as full-time trustees, and are not experts on retirement regulation, investing or governance, yet they are expected to accept full responsibility for the retirement savings of their colleagues.

“In addition, the raft of continuous changes to retirement fund legislation places a further burden on these workers whose valuable skills and time could be better utilised in running the core business of their employer,” he says.

A win-win situation
Umbrella funds clearly offer numerous advantages for business in terms of both cost and freeing up senior staff to focus on their core tasks, but Malusi emphasises the advantages of umbrella funds for the ultimate focus of any pension fund – the member.

With any investment, it is vital that as much of the contribution goes to the savings pool as possible, says Malusi. “At the very least, trustees, employers and employees should be conversing on the merits of moving to an umbrella fund, seeing that the outcome has significant implications for members.

“In a very complex arena, it is essential to take a step back and compare the pros and cons of umbrella funds such as the Old Mutual SuperFund with typical standalone funds. This will help management and other stakeholders to make a more informed decision about their financial future,” concludes Malusi.λ

For more information, visit www.oldmutual.co.za/thegreatdebate

Contact [email protected]