It’s Umbrella Fund weather! Here’s why!

As legislation makes it more difficult and costly to run freestanding funds, there’s been a significant shift into Umbrella funds, says John Anderson, Portfolio Manager, Sygnia.

There are currently just over 2000 active funds in South Africa in the private sector of South Africa, while more than a decade ago there were around 12 000 funds.

We have seen significant consolidation from freestanding funds (where an employer runs their own fund) into Umbrella funds (where they become a participant in an umbrella which is sponsored by a financial services company).

This trend is expected to continue as a result of increasing legislative requirements being imposed on retirement funds, making it more difficult and costly to run freestanding funds.

Considerable advantages of Umbrella funds for employees

Employees can benefit from tax deductions on their contributions and their fees are based on group rates rather than individual rates, often providing a substantial saving on fees.

Also most employers look very carefully at available options, providing additional protection to the individual compared to sourcing their own retirement savings options.

Employers would typically ensure that the employees receive good service and good value for money from the umbrella fund provider on an ongoing basis.

Employers also benefit enormously

Umbrella funds are generally more cost effective than other ways of providing for retirement (except perhaps for very small employers in which case Group RA’s may be more cost effective in some cases).

Employers can still exercise control in terms of which umbrella to utilise as well as which investment options and benefit options to make available on the umbrella chosen.

Employers can decide on moving umbrellas if they are dissatisfied with the service or offering, which protectsemployees without the hassle of having to run a retirement fund operation.

The regulatory burden is passed on to the financial services company sponsoring the umbrella as well as the trustees of the umbrella.

Employers can focus on their core operations instead of the business of running a retirement fund.