As more and more companies abandon their stand-alone retirement funds in favour of offering their employees umbrella fund arrangements, it becomes more important to monitor the ‘value for money’ that employees receive.
As more and more companies abandon their stand-alone retirement funds in favour of offering their employees umbrella fund arrangements, it becomes more important to monitor the ‘value for money’ that employees receive.
Fortunately, most companies that have made the change have put a management committee in place to do just that. Unfortunately, South African umbrella funds well deserve the moniker of ‘opaque’ when it comes to full disclosure of all fees and charges.
As it currently stands, most commercial umbrella fund arrangements are provided (under the label of being ‘sponsored’) by the same financial services companies that provide consulting and administration services to the stand-alone retirement funds. The ‘big five’ umbrella funds are offered by Alexander Forbes, Momentum, Old Mutual, Sanlam and Liberty.
Hence, when a stand-alone retirement fund folds into an umbrella fund, the board of trustees tends to be steered, through a carefully-choreographed tender process, into retaining the same consultants and administrators as they had as a stand-alone fund. This is a major error of judgement, as the relationship going forward is rife with conflicts of interest.
Where the consultant is employed by the sponsor of the umbrella fund, there can be no independent, objective advice with respect to any aspect of the umbrella fund arrangement. The only exception is the rare umbrella fund where the sponsors are themselves independent consultants and all the providers are appointed on an arms-length basis.
To fully appreciate the insidious nature of the large umbrella funds, it is enough to look at the range of products and services built into these arrangements – and charged for – by the sponsor:
Consulting services
Investment products
Investment administration platform
Liability administration
Risk benefits (death and disability cover)
Ancillary benefits e.g. wellness programmes, funeral cover
Where all of the above are provided by a single party there is huge scope for abuse. The key party contributing towards the status quo being maintained for service providers is, of course, the consultant. In practice the consultants employed by the large institutions steer the management committees away from fair and transparent competitor reviews and maintain the illusion that the client is receiving the best cost and investment performance proposition. At the end of the day his/her salary and bonus depend on the sponsor – his/her allegiance is thus not difficult to figure out. And yet so many management committees miss this point entirely, blindly trusting the consultants to provide objective advice. As one of my ex-bosses was fond of saying, you are asking turkeys to vote for Christmas.
I was very very amused by a recent Moneyweb articlein which Anne Cabot-Alletzhauser, the head of the Alexander Forbes Research Institute, was brave enough to say that pension fund savings should be provided at a total charge of 0.75% pa. I am prepared to put my head on the block that not a single Alexander Forbes consultant has taken that message back to their clients and definitely not those who participate in the Alexander Forbes Retirement Fund and who, in most cases, pay between two to four times more than the quoted 0.75% pa.
So what does a good governance model look like in the umbrella fund environment?
The fundamental first step for any company considering the move to an umbrella fund, or reviewing their current umbrella arrangement, is to appoint a consultant independent of any sponsor of an umbrella fund to oversee the tender process. Once in an umbrella fund, the appointment of an independent consultant should be a prerequisite. In fact, it is something that the regulators should insist upon. Once the consultant is in place he should be tasked with regular reviews of the quality of service provided by the umbrella fund, the investment performance delivered and the costs associated with the arrangement. Risk benefits should be put out to tender at least once every three years to make sure that members benefit from the lowest quotations.
The appointment of an independent consultant is the key to ensuring that employees retire in comfort. The best part is that most companies already pay for that ‘consulting’, bundled as it is into the umbrella fund proposition. So there should be no increase in cost – there is merely a switch from tied non-independent consulting advice to objective independent advice.
I cannot emphasise this enough. A consultant seconded to the management committee by the umbrella fund sponsor is highly unlikely to alert the management committee to poor investment performance or to high costs. Nor is he likely to recommend any other risk provider than his own employer.
To disclose my own conflicts of interest, Sygnia recently launched the Sygnia Umbrella Retirement Fund (SURF), with no consulting or administration fees. There is only one fee, an asset management fee. The objective has been to leave plenty of ‘financial’ scope for the appointment of the independent consultants.
The launch of SURF has been met with dismay by the umbrella fund industry, which promptly responded by dropping administration fees to nil for new business quotes. Again I am willing to put my head on the block that the ‘consultants’ associated with those umbrella funds did not present the ‘nil administration fee’ proposition to their existing umbrella fund clients (for the sake of full transparency, we have recently encountered both Old Mutual and Sanlam umbrella funds quoting nil administration fees on new business).
In fact, most umbrella funds have cut their charges over time to attract new business as competition in the umbrella fund space has grown. Once again, the consultants have seldom taken the lower fees offered to new clients to their existing client base. That fact alone should destroy the perception that independent advice is being provided and that the fundamental trust in the relationship with a tied consultant is one of fiduciary care.
It is time for corporate South Africa to take back control of their retirement savings arrangements from the financial services industry. It only takes one step. It is also time for regulators to become involved. Again, all it would take is one directive to clean up the greatest abuses in the retirement savings industry to the great benefit of all South Africans valiantly saving for their retirement.