An umbrella fund is a retirement fund that accommodates several employers under a single ‘umbrella’ with a variety of savings, insurance and related benefit options. These were originally created in the 1980s, mainly to service smaller companies by pooling them into a single fund that attempted to reduce costs and offer a semblance of the benefits available only to larger standalone funds.
The trend has now swung decisively in favour of umbrella funds and away from standalones – a trend supported by National Treasury, which would like to see far greater consolidation among the 4 000-odd standalone funds still remaining in SA. Treasury welcomes this as part of a trend towards reducing costs and improving governance in the retirement sector.
The same trends are evident in other parts of the world, such as Australia (where they are known as superannuation funds) and the UK.
“One reason for the trend towards umbrella funds and greater flexibility is that it allows employers to focus on what they are good at and outsource their retirement fund management,” says Malusi Ndlovu, director: large enterprise at Old Mutual Corporate.
Ndlovu says roughly 60% of SA’s working population is covered by some kind of retirement fund. “That’s very high by emerging market and OECD [Organisation for Economic Co-operation and Development] standards, and this has been achieved by private sector providers, not by compulsory savings schemes as is the case in many other countries. This high voluntary retirement savings coverage rate suggests people have a high level of trust in the retirement industry.”
Employees value benefits differently based on their incomes.
Higher earners tend to place greater emphasis on the types of underlying investment, while lower income earners have a greater demand for benefits such as insurance risk benefits. “This is understandable, as this segment of the population is more vulnerable to financial shocks arising from incidents such as a death in the family, or an accident, or disability,” says Ndlovu.
“Therefore, it’s important to offer the right balance of options. These people exist in the same workforce, even the same company, so they need cost-effective flexibility of choice within a fund.”
How Covid has impacted the retirement industry
Ndlovu says a clear trend since the onset of Covid-19 is a spike in the number of talented people looking for new or different work opportunities. People who previously survived on multiple incomes have had to make do with a drop in one or more sources of income, and that’s forced them to adjust their lifestyles.
“One of the things that is top of mind for employees in the Covid environment is the employee benefits that come with the remuneration package. The new additional benefits most in demand include the ability to work remotely, flexible working hours, wellness benefits and, increasingly, the ability to advance one’s career through online courses,” he says.
“Covid is also changing demand for the ancillary benefits offered in the workplace. For example, we are noticing greater demand for death counselling, wellness advice and counselling, as well as Covid contact tracing.”
Umbrella funds, with their scale, are well placed to negotiate for these at better rates for their participating employers.
As for the impact of Covid on retirement savings, Ndlovu says within the Old Mutual stable, just 25% of employers asked for contribution holidays. “By the first quarter of 2021 that was unwound, indicating that the impact of Covid was short term in nature, and there seems to be some evidence that employers are keen to continue and reinforce good savings habits,” he says.
Green paper on the proposed mandatory social security fund
Asked for Old Mutual’s response to the Green Paper on Comprehensive Social Security and Retirement Reform – which proposes setting up a new fund that will provide pensions to formal, informal and self-employed workers who reach retirement – Ndlovu says the document is still being studied.
“It is important to remember that this paper is a discussion document, and there is still a lot of work that needs to be done before any of these proposals could be implemented. The bottom line is any changes to the existing system must be affordable and not disrupt what is already working. We have a system of retirement saving in SA that is excellent by world standards, so we must be careful not to disrupt or damage this.”
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