Umbrella funds are taking over as the vehicle of choice for occupational retirement savings as companies find the provision of stand-alone retirement fund arrangements increasingly burdensome from both cost and regulatory perspectives.
Umbrella funds are taking over as the vehicle of choice for occupational retirement savings as companies find the provision of stand-alone retirement fund arrangements increasingly burdensome from both cost and regulatory perspectives.
However, many umbrella funds do not offer what they portray, with fees and costs hidden in multiple layers of charges, and with total fees often well in excess of what an individual could achieve by saving through a retirement annuity fund and a unit trust.
Umbrella funds commonly charge three transparent tiers of fees; administration fees, consulting fees and asset management fees. There is a myriad of other fees, but those are typically well disguised.
In the spirit of innovation and its consumer-conscious product provision, Sygnia has launched a new umbrella fund which is designed to shake up the industry. Called the Sygnia Umbrella Retirement Fund (SURF), the fund is offered with only one, all-in cost, equivalent to the average asset management fee. Administration and client servicing are essentially provided free of charge.
“The margins in the active asset management industry are so high that we can take that margin and apply some of it to offset the cost of administration and consulting”, says Magda Wierzycka, the CEO of Sygnia. “Hence we can bring something truly revolutionary to the market which helps the man in the street to retire with more money. This is particularly relevant given prevailing market conditions, rising inflation and the challenge presented by increasing longevity. Lowering the cost of saving will have a material impact on the real returns earned by members and the benefits available to them at retirement”.
SURF fulfils National Treasury’s requirements outlined in the Draft Default Regulations issued in July 2015 and aimed at reducing the complexity and cost of saving for retirement. SURF is the first umbrella fund in South Africa to provide comprehensive in-fund solutions to members irrespective of a change in their personal circumstances. Umbrella funds are traditionally seen as retirement savings vehicles for pre-retirement savings only. SURF aims to change that by extending its service provision to members who change employment or retire. There is no need to move to preservation funds, living or life annuities, nor to change the existing investment strategy. These options, including a unique default annuity strategy, are available within SURF at no additional cost.
SURF offers two default investment strategies, either a blend of active and passive portfolios, or a passive solution. The latter is priced at an all-in fee of 0.59% per annum reducing to 0.39% as assets increase. This is a massive 70% lower than the fees currently charged by large umbrella funds run by Old Mutual, Sanlam,
Momentum, Liberty and Alexander Forbes. For small to medium sized companies, these average upwards of 2.0% per annum when expressed as a percentage of assets.
“Large umbrellas which have dominated this market have never passed the economies of scale onto consumers. We plan to change that,” says Wierzycka. “Costs and investment performance are the two key factors to achieving comfortable retirement. Based on our analysis, the choice of an umbrella fund can make the difference between retiring with an income equivalent to 50% of your pre-retirement income or 100% of that income, based on a 35 year time horizon”.
There is a belief that once a company outsources its retirement fund provision to an umbrella fund it loses interest and care. This is not always true. Many companies oversee the interests of their employees within an umbrella. However even an actively engaged employer is seldom encouraged to review umbrella fund providers. This needs to change. Employers should review the appointment on a regular basis.
“We believe that SURF, with its low cost structure and top performing investment strategies, can make significant in-roads into the umbrella fund market relatively quickly,” says Wierzycka.
Sygnia’s acquisition of Gallet Employee Benefits, and in particular the umbrella funds they sponsor, has meant that Sygnia has hit the ground running with a ready-made offering. SURF is open for business from April 2016.