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Retirement Planning
Monday, July 27, 2015 - 02:16
Cost wrong criteria

If innovation is the panacea for South Africa’s retirement savings woes, then a radical rethink of the umbrella fund landscape is long overdue. Far too many employers focus only on costs when choosing a retirement fund provider, instead of also taking into account value-added features which could be of enormous benefit to members, according to Shakeel Singh, client relations executive at Sanlam Employee Benefits.

Speaking at the 2015 Sanlam Benchmark Symposium in Johannesburg recently, Singh said many company decision-makers tended to view the retirement fund as part of a ‘bare minimum’ package of benefits that had to be offered to employees, rather than considering the fund as an integral part of the employee value proposition.
The results of Sanlam’s 34th Benchmark Survey, which were released at the Symposium, showed that 57% of employee benefits decision-makers surveyed get hung up on cost when migrating to an umbrella fund. Ease of administration and a reduction in fiduciary duties are mentioned as motivating factors by 46% and 45% of the 2015 survey respondents respectively.
“Their approach is short-sighted, since cost savings are often won at the expense of important value-adding features such as ongoing service, appropriate investment framework, the institutional backing the fund enjoys, and more importantly, member communication and education,” Conrad Roper, new business development consultant at Sanlam Employee Benefits, told the Symposium.
Roper illustrated the risk in obsessing over costs with a simple example: “Imagine if I offer you an opportunity to buy the cheapest vehicle on our roads today which, for just R65 000 on the road, offers a three-cylinder 0.8-liter petrol engine that delivers 38kW of power and 70Nm of torque. Would you be prepared to ‘free up some cash’ by trading in your current vehicle for the ‘fantastic’ cheaper car, without taking into account concerns over reliability, safety, quality and performance? Probably not. In the same way, an employer should not allow the costs associated with an umbrella fund solution to divert attention from the basket of benefits on offer.”
Costs are not the sole determining factor as to whether or not the members of an umbrella fund accumulate enough capital for retirement. Of far greater importance is the employees’ understanding of the retirement funding model and an appreciation for the impact that their decisions regarding contributions, preservation and withdrawal will have on their retirement outcomes.
Are umbrella funds the end game? “Large standalone funds continue to provide meaningful benefits to their members, but we have seen a steady migration away from these funds to umbrella funds over the past decade, and the trend is here to stay,” said Singh.
“An umbrella fund frees the employer and stakeholders from the arduous administration and governance tasks associated with a standalone fund, and creates opportunities to engage with employees about important retirement concepts.”
As the retirement model evolves from one of benefit statements that reflect accumulated capital to one of lifestyle outcomes, it is likely that umbrella funds will play an increasingly important role.
Employers that outsource the labour-intensive aspects of retirement provisioning to an umbrella fund administrator will have more time to engage constructively with employees, beginning at ‘day one’ of employment.
The Symposium heard that the industry would benefit if employers were able to dedicate more time and resources to educating employees about all aspects of retirement funding, including contribution levels, sensible investment portfolio selection and adequate insured benefits.
 

Copyright © Insurance Times and Investments® Vol:28.7 1st July, 2015
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