Let’s Talk About Umbrella Fund Fees

Umbrella funds are slowly taking over as the retirement savings vehicle of choice in South Africa. The regulators have a stated objective of reducing the number of stand-alone employer-sponsored retirement funds by encouraging their closure, with retirement benefits being provided instead by umbrella retirement funds sponsored by financial services institutions.

The trend towards umbrella funds is expected to increase in momentum given the increasing regulatory burden being placed on trustees of free-standing funds. One of the motivations of the regulators is that they believe costs associated with managing small retirement funds are too high and members should benefit from lower costs, through economies of scale, if they belong to larger retirement funds.

The five largest commercial umbrella funds are currently offered by Old Mutual, Alexander Forbes, Momentum, Liberty and Sanlam. Hence, the chances are that if you are not a member of your employer’s retirement fund, your savings are being administered and managed by one of these umbrella funds.

Umbrella funds are themselves retirement funds with boards of trustees overseeing their affairs. However, as these boards of trustees are appointed by the institutions which offer or ‘sponsor’ the umbrella fund, their independence mostly translates into implementing the recommendations of the sponsoring institution while maintaining regulatory governance oversight. Hence most umbrellas serve to distribute the products of the sponsoring institution. Those in-house products are not limited to the provision of the umbrella fund alone.

They span:

• insured risk benefits (death, disability and funeral cover),

• preservation funds when a member discontinues employment, including the financial planning advice at that point, and

• life and living annuities when a member retires, including the financial planning advice at that point.

These are seldom the most competitive options available to you, with multiple layers of charges being levied. Many standard umbrella options limit the choice to their own products, enabling the provider to charge for those products at will, particularly if the employer has not appointed an independent advisor.

In fact, once you are a member of an umbrella fund, the objective is to provide you with a ‘cradle to grave’ service – at a fee, of course.

Some participating employers establish their own management committee to look after your best interests, many do not. Hence, once your savings move into an umbrella fund they are at the mercy of the sponsors. Unfortunately, ‘mercy’ is not a word that has come to be associated with the costs built into an umbrella fund. And there are many layers of costs. Some are disclosed, others are obfuscated.

Many members of umbrella funds believe that those costs are lower than what they would pay if investing via an individual retirement annuity and purchasing their own life and disability cover. That may be true for lower income earners and people in ill-health. It is unfortunately not true for the majority of higher and middle income earners.

Once you ask the right questions and do a detailed comparison of the ‘disclosure’ of fees, you will discover that all the main umbrella arrangements cost approximately the same amount.

My best advice to companies and their HR departments is to at least ask for competitive quotations from other service providers once every three years. It is important to ask for all the various charges to be able to perform a ‘like for like’ comparison. Scan the market for new propositions. Do not remain at the mercy of one provider – more than anything, it is your own savings as well.

I thought it would be useful to provide you with a table which you can use to ask your umbrella fund provider to fill out (and sign) which would allow you to at least determine what it is that you are paying out of your retirement savings.

Here are the different types of fees that can be levied – a testament to the creativity of business development departments. Not all umbrella funds levy all these fees. Your ‘fee menu’ will depend on which umbrella fund you have selected.

https://www.sygnia.co.za/images/default-source/news-insights/lets-talk-about-umbrella-fund-fees-graph-1.png?sfvrsn=0

Let’s add up some of these over a year for an average member earning R20 000 per month, contributing R3 000, or 15% of earnings, to the umbrella fund, with existing savings of R400 000. The annualised numbers below are based on the actual fee structures of five umbrella funds, and exclude the profit margin made on risk benefits and provision of products and advisory services to members exiting the umbrella fund.

The truth is that some of the most competitive looking umbrellas are in fact the highest charging ones, once you add it all up. And this is before you consider the relative investment performance of umbrella funds, where the default investment option will always be an in-house product with the highest profit margin to the sponsor, and the limited availability of more cost effective index-tracking investment options to the members of these funds.

What must be said, though, is that there are some smaller umbrella funds which are not tied to life insurance companies and therefore have fewer opportunities to cross-sell products. Most are sponsored by small and medium-sized administration companies. These umbrellas make a genuine effort to seek out the most cost-effective investment and risk benefits solutions for their members. Unfortunately, most do not have the marketing budgets to take on the big five and make their propositions heard. In fact, many struggle to make a profit and are looking to exit the market or consolidate with other bigger umbrellas.

ADDITIONAL NOTES

**MAGDA WIERZYCKA

CEO, SYGNIA GROUP**

Magda qualified as a Fellow of the Faculty of Actuaries (Edinburgh) in 1994. She has over 20 years’ experience in the South African asset management industry and has published widely in the field. She has also served as a board member of the Actuarial Society of South Africa.

She started her career as a product development and investments actuary at Southern Life in 1993, where she designed and managed index-tracking funds, followed by two years at Alexander Forbes as an investment consultant. In 1997 she joined Coronation Fund Managers as Head of Institutional Business and a director. While at Coronation she was responsible for growing the institutional assets under management of the company fivefold. Magda left Coronation in 2003 to start IQvest, a fund of hedge funds company. Later that year, after selling IQvest to the African Harvest group, she was appointed to the position of CEO of African Harvest. Under her stewardship the assets under management of the company grew from R10 billion in 2003 to R35 billion in 2006. After negotiating the sale of African Harvest Fund Managers to Cadiz Financial Services in 2006, she led the management buy-out of the remainder of the African Harvest group which resulted in the formation of Sygnia. Since 2006 she has headed Sygnia as its CEO.

SYGNIA GROUP

The Sygnia Group comprises six operating companies; Sygnia Life, a life assurance company, Sygnia Asset Management, a licensed asset management company, Sygnia Collective Investments, a unit trust company, Sygnia Financial Services, a LISP, Sygnia Securities, an execution-only stockbroker and Sygnia Systems, a financial software development company.