Are umbrella funds changing the retirement industry for the better?

And are members seeing the benefit?

It is generally held that South Africans are not good savers. We know that the household savings rate in this country is far too low.

Despite this, however, South Africa’s pension fund industry is relatively robust. The 2017 Global Pension Assets Study by Willis Towers Watson puts the local industry’s assets to GDP ratio at 73.8%. That is above the average of 62.0% across the 22 countries surveyed in the study.

South Africa’s pension assets to GDP ratio is higher than any other emerging market looked at by Willis Towers Watson, and is significantly higher than in the likes of France (5.9%), Italy (8.2%) or Germany (11.9%). In nominal terms, there is also more money in South African pension funds ($207 billion) than in far more populous countries, like India ($105 billion), Mexico ($154 billion), and even China ($141 billion).

We can assume that most of this money is held in employer-sponsored pension schemes. And that suggests that when South Africans don’t have a choice, they are actually not such bad savers.

The irony, of course, is that the industry struggles to get people to appreciate just how important their pensions are. For many employees, it remains a grudge purchase. They would rather get the cash.

More concerning, is that most people have no idea how or where their pension money is invested. The deduction goes off their salary each month and they simply have an idea that some time in the future it will be there for them.

“The largest part of most individuals’ wealth is in their pension savings,” says Dawie de Villiers, the CEO of Sanlam Employee Benefits. “But actually most people have no idea about how these schemes are put together.”

There are many legacy issues involved here. In the days of defined benefit schemes, where employees were guaranteed a certain percentage of their final salaries when they retired, the employer ran everything and there was little need for employees to wonder how the funds were invested.

Since defined contribution schemes have become the norm, however, employees are in a very different set of circumstances. Now, it is up to them to ensure that they have put enough away for retirement, because they are only going to get back their own portion of what is in the fund.

The good news is that there has been a regulatory response to this. Government recognises the importance of making it cheaper and easier to save.

“In the past, regulation was about how you control companies to stop them from ripping people off,” says De Villiers. “Now it’s about how we make it easier for individuals to understand what they are doing.”

One of the ways in which this has happened is through the introduction of umbrella funds. There is a huge burden on employers having to run their own pension schemes, and umbrella funds allow a number of companies to all belong to the same scheme.

This not only has significant cost benefits due to economies of scale, but has further implications as well.

“Consolidation is rooting out many issues in the industry because governance at the big administrators is pretty strong,” argues David Gluckman, the head of special projects at Sanlam Employee Benefits. “Being a reasonably competitive industry, there is also a lot of innovation.”

In standalone pension funds run for single employers, he believes the opposite is true.

“Within the not-for-profit model where funds are run by trustees, the typical behaviour from the vast majority is that they will say they have a set of rules, they have compliance in place, and they will wait for regulation to change before they change anything themselves,” Gluckman says. “There’s nothing in it for them if they innovate, in fact quite the opposite. If something goes wrong, they could be personally liable.”

Umbrella funds, however, are able to move ahead of the regulation. They can watch consumer dynamics and innovate accordingly.

“Some of the regulations like default options or preservation may be a damp squib by the time they come in because the industry has already moved ahead,” Gluckman says. “Some umbrella funds are offering these already.”

The way that benefits are communicated to members is also improving in these funds. Online portals and apps are being developed to provide direct access to information that will help them to calculate whether their savings are adequate.

Equally compelling is that there is evidence that the costs of umbrella funds have been coming down as they achieve greater economies of scale. A study Gluckman presented at the 2016 Actuarial Society Convention showed that the mean reduction in yield across a selection of umbrella funds dropped from 1.90% in 2011 to 1.66% in 2016. Weighted by assets, the mean reduction in yield has dropped to an even lower 1.30%.

There are therefore clear benefits to members. The challenge to the industry now is to communicate this more effectively so that more employers are willing to offer these solutions and bring more people into the net.

“In the past the costs were too high and the effect that had was that people thought it was too expensive to buy a policy, and so they didn’t save at all,” De Villiers says. “But umbrella funds now allow even a one-man-business to save at wholesale prices.

“There’s still a lack of trust in the industry, but we need to get that right,” he concludes. “And that will only happen if people see us doing the right thing. And the right thing is to help people to save more.”

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