Evaluating umbrella funds

At the recent inaugural Allan Gray Retirement Benefits Conference, Andile Khumalo, founder of KhumaloCo, hosted a panel discussion via Zoom webinar to explore the elements that consultants, advisers and employers should consider when looking to join an umbrella fund. Hazel Hopkins, senior partner at Axiomatic Consultants, Vusi Maswili, director at ASI Financial Services, and Adv. Christi Franken, business development executive at Efficient Benefit Consulting, shared the factors they think are most important when evaluating umbrella funds.

The number of umbrella funds available, as well as the assets under management in umbrella funds, has grown significantly over the last five years as smaller standalone funds seek to manage costs and administration procedures more efficiently, according to a recent Financial Sector Conduct Authority (FSCA) report. Employers who decide to transition from a standalone arrangement to an umbrella fund are tasked with choosing retirement fund solutions that lead to the best outcomes for their employees. This can prove challenging, as the available service offerings vary considerably.

Understand the governance of the fund

Each umbrella fund is governed by a board of trustees tasked with performing an oversight function and making decisions that ensure the best possible outcomes for members. Hazel Hopkins, senior partner at Axiomatic Consultants, advises employers to examine the structures of these boards, paying careful attention to the balance between sponsor-appointed trustees and independent trustees, and to ascertain whether members have any input when it comes to appointing trustees.

“I believe we should be looking at ways in which we can include members in some of those choices,” she says.

Adv. Christi Franken, business development executive at Efficient Benefit Consulting, agrees and says it is important to identify any conflicts of interest that the trustees may have – particularly when dealing with “one-stop shops”, as trustees should be able to make unfettered decisions.

Vusi Maswili, director at ASI Financial Services, says that in addition to testing the credibility of trustees, one should examine the annual financial statements and reports, explore the fund’s track record, find out how many complaints have been lodged against the fund and whether there have been any non-compliance issues. This can help paint a picture of how well a fund is managed.

Unpack the costs

When weighing upquotations from various providers, one needs to ensure that they are comparing apples with apples. “Cost is a trigger for value assessment”, says Maswili, noting that it shouldn’t be the sole consideration when evaluating umbrella funds.

He says that providers may present a variety of cost structures: Your quotation could come as a percentage of salary, a percentage of assets under management, a fixed cost per member per month or a blend. These structures will vary based on the underlying benefits offered by each fund. This can make it difficult to compare funds. “It is the reason why ASISA moved to implement the Retirement Saving Cost (RSC) Disclosure Standard – to simplify and standardise cost comparison.”

Although she thinks that the RSC disclosures are a good start, Hopkins cautions that these disclosures are often based on averages over three years and do not represent the actual costs that members may experience. “Until we get to member-level upfront reporting, we’re not going to have full transparency on cost. There are many hidden costs that are often covered by a governance levy.”

Franken echoes these concerns and says that the RSC disclosures are a great tool in evaluating fees across providers but should be considered in conjunction with other fees not included in the calculation, such as risk charges and in-fund preservation, where applicable.

Seek independent advice and flexibility

In addition to aiding employers in choosing an appropriate umbrella fund solution and unpacking governance issues and costs, Maswili says that independent intermediaries can play an ongoing role. Intermediaries can help hold service providers to account, support trustees to ensure that members receive adequate communication and make sure that member interests are better served. It is also useful to offer members access to independent financial advice, particularly as they approach retirement age.

As umbrella retirement funds have evolved, many are being bundled with additional benefits, such as employee assistance and healthcare schemes. Hopkins warns employers that bundling all your services with one provider can make it increasingly difficult to extricate yourself if you are no longer happy with your service provider. She suggests looking for solutions that allow employers access to independent investment and benefit advisory services and offer greater choice around risk management providers.

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