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Retirement Planning
Wednesday, August 1, 2007
Grouping to cut costs

Deciding which type of retirement fund is appropriate for you or your staff is no simple task, although trends in the industry clearly favour an umbrella solution as appropriate for most.

While understanding the technical advantages and limitations of an umbrella retirement fund may seem like something best left to experts, members and participating employers should at least be clear on who and how the decisions on their investments and benefits are being made. Current South African legislation makes provision for retirement funds to operate as independent funds or umbrella funds, the latter providing a more packaged approach for smaller companies seeking an affordable option with less administration and management demand on the employer.
Liberty Life Corporate Segment Head, Bevan Heslop explains that, “Umbrella funds were originally intended for companies with small to medium size staff complements, enabling a number of them to participate in a single scheme, rather than each employer setting up their own fund, and thereby benefiting from the economies of scale previously only available to large employers.”
Granted, there may be something of a trade off in terms of flexibility and the degree of personalisation made possible by a stand alone fund. Substantial flexibility has, however, been built into modern umbrella schemes giving them more than enough leeway to meet the needs of most members.
“They also offer far greater ease of operation, which means that a smaller employer does not have to devote large amounts of time towards the administration on their particular scheme. Most small to medium sized employers do not have dedicated human resource departments to do this,” explains Heslop.

Trustees

This is welcome news given that the issue of administration, and more specifically trustees, is under the spotlight. Current legislation states that at least 50% of the board of trustees on an independent retirement fund must be member-elected. With an umbrella fund there is no such stipulation.
However, it’s important for employers who are considering joining an umbrella fund to consider questions such as: Will the trustees be appointed by an administrator, the insurer or perhaps a union? If so, are there any potential conflicts of interest? Will the trustees have the necessary credentials, skills and credibility in terms of taking care of a complex financial instrument?
There is also a strong argument that if a company is not going to be responsible for appointing or electing trustees on the umbrella fund in which they participate, it should institute a management committee to oversee the particular employer and their staff’s participation. This is not a legislated requirement but the committee can serve as a valuable ongoing monitoring mechanism of both the fund, and trustees’ performance.
Looking to the future, Heslop says that it’s encouraging the Second Discussion Paper on Social Security and Retirement Reform – released in February this year - acknowledges the quality of the private pensions framework in South Africa, describing it as: “Fully consistent with established international standards.”
It does, however, also acknowledge the need for improving skills and the fact that trustees need to be held more accountable. A painful case in point is the recent Fidentia scandal. The paper sees this being achieved through monitoring and regulation by bodies such as the Financial Services Board. It also emphasises a renewed focus on trustee education and skills training, via the combined efforts of the state, providers and employers.

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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