The role of being a retirement fund trustee has become increasingly complex and onerous over time. Gone are the days when a trustee could merely attend quarterly meetings with minimal preparation and forget about their role until the next meeting.
The role of being a retirement fund trustee has become increasingly complex and onerous over time. Gone are the days when a trustee could merely attend quarterly meetings with minimal preparation and forget about their role until the next meeting. Over the past number of years many new regulations have been introduced by the regulator that stress the responsibilities of retirement fund trustees and add to the burden of these responsibilities.
The role is a highly responsible one – rightly so when one considers that by acting as a trustee of a retirement fund one takes on the fiduciary responsibility for managing and directing what is possibly the largest single asset of most of the members of the fund and certainly the most important asset that will determine their long-term financial wellbeing.
The regulator has for many years actively been striving to reduce the number of private retirement funds that are in operation. There are still far too many small retirement funds, where inevitably the costs of administering the funds are excessively high. By encouraging small retirement funds to consolidate with other funds, the per-member costs should reduce and members should get a better deal from their funds. Costs have a material impact on the value of the eventual benefits that members receive in retirement. The compounding effect of small annual savings over many years can be pretty significant at the end.
The regular increase in complex regulation and the increase in the burden of responsibility have led many companies that previously operated their own private retirement funds to discontinue those funds and transfer their employees’ retirement funding assets to umbrella retirement funds.
Umbrella retirement funds are large funds where employees of a number of different employers all belong to a single fund. Each group of members can have its own benefit structure detailing issues such as contribution rates and death and disability benefits, but they should all benefit from the lower costs of aggregating many more members into a single fund. Umbrella retirement funds have been major beneficiaries of the increased burden placed on retirement fund trustees and there has been a regular procession of members out of private retirement funds to umbrella retirement funds.
This will have pleased National Treasury as the number of small unwieldy funds has shrunk rapidly, but there is another consequence that will almost certainly be worrying to the policy-maker. This is that most of the large umbrella retirement funds are associated with the large insurance companies and financial institutions. The umbrella retirement funds are legally separate entities from the companies that established the funds, but they are by-and-large treated by the sponsors as products of those financial institutions.
The sponsor appoints the trustees and the trustees inevitably appoint the sponsor to provide all the services that the fund requires. The sponsor will probably provide consulting services to the fund, do the administration, insure the death and disability benefits and almost certainly provide the majority of the investment products. The trustees will seldom benchmark costs against other providers or consider whether other service providers might offer services that would benefit the members more. Where insurers sponsor umbrella retirement funds, their very expensive in-house smoothed bonus funds inevitably receive a high proportion of the members’ investments.
This situation cannot be desirable. Members may have left high-cost small private retirement funds, but they are now committed to umbrella retirement funds where they are easy fodder for the sponsoring financial institution.
It would be a bold step, but National Treasury should consider requiring umbrella retirement funds to cut the umbilical cord that ties them to the original sponsor of the fund. After a period of, say, five or ten years, the sponsor should no longer be able to appoint the trustees. Participating employers should be able to select half of the trustees and the participating members should be able to select the other half. The trustees should be obliged to consider other potential service providers besides the original sponsor of the fund.
This change would inevitably be strongly resisted by the incumbents but, if implemented, would eventually lead to a more competitive market in services to umbrella retirement funds and this would benefit the members. That should be a desirable outcome.