Retirement reform in action

By David Gluckman, Sanlam Employee Benefits

The Umbrella Fund strategy is a viable alternative to the National Social Security System.

South Africa’s retirement reform debate started in earnest around 2007 when government first unveiled some details regarding a proposed National Social Security System (NSSS).

Our Sanlam Umbrella Fund strategy can be considered a response to these proposals. Our vision as then announced in Insight was: ‘Sanlam’s practical solution going forward is premised on using all of its intellectual capital to build the best multi-employer packaged retirement savings, risk insurance and administration offering in the market’.

In other words, we regard the commercial umbrella fund model as a viable alternative to NSSS – and a model that avoids the very significant transition risks and costs associated with NSSS.

Although South African commercial umbrella funds have been around since the mid-1980s, the early models were often criticised for offering poor value for money and side-stepping many of the governance and representativity features of standalone retirement funds.

But few can dispute that there has been significant improvements in commercial umbrella funds since that time.

Cleaned-up act
Umbrella funds have really cleaned up their act, and the major funds are now leading models for good governance and value for money. Industry-leading independent professionals, often elected via members to comprise 50% of the board of trustees, are becoming the norm rather than the exception.

These findings and trends are borne out by our Benchmark Survey results. Cost savings, better administration, less fiduciary responsibility and better investment expertise now rank as the major reasons why so many standalone retirement funds have opted to transfer members to leading commercial umbrella funds.

The market has clearly taken to this new model, and we have witnessed massive growth of the commercial umbrella fund market since 2009 when Association for Savings and Investment South Africa (ASISA) research indicated that umbrella funds needed to grow from around 786 000 members to around 1.6 million members to optimise the infrastructure.

The latest available Financial Services Board (FSB) published data shows that this hurdle has recently been achieved, and assets under management in commercial umbrella funds probably now stand at close to R250 billion.

New trend
A new trend we’ve recently witnessed is the emergence of group retirement annuities (group RAs) being promoted as viable alternatives to umbrella funds.

These products are mainly promoted by asset managers who perhaps are concerned about the business threat of the continued success of commercial umbrella funds, and who do not wish to invest in building an employee benefits administration capability.

But there are, in my view, some significant structural problems associated with group RAs that make them sub-optimal choices for most employer groups.

These problems include worse tax deductibility, inaccessibility of savings before age 55, the voluntary nature of such arrangements, and the possible exclusion of many ordinary workers.

But there is a social cohesion aspect to the debate. Solidarity was one of the cornerstone principles behind the government’s NSSS proposals. Group RAs endanger this fundamental principle, and it is not impossible in the long term that such a trend (if unchallenged) could result in higher savings and insurance costs for many workers plus the erosion of valuable cross-subsidies inherent in the current system, thereby placing many ordinary South Africans in a more vulnerable situation.

In the long term, such developments could even threaten the continued existence of the entire private sector retirement funding system.

Alternative path
Therefore we choose an alternative path – one that embraces the solidarity principle but also takes on board and tries to improve on aspects where there might be valid criticism of existing benefit designs in the employee benefits industry, in particular:

• Can a more cost-effective governance model be introduced for small employers?
• Can we find simpler ways to charge fees that make product comparability simpler for consumers and consultants?
• Can we find ways to eliminate unnecessary bells and whistles for ordinary members where cost efficiency is vital, while simultaneously allowing greater flexibility and customisation for the very important but relatively small number of affluent members who have such demands and are prepared to pay for such additional features?

I believe we can, and these conversations and competitive pressures can only be healthy for commercial umbrella funds as these offerings continue to evolve. New-generation umbrella funds that offer the best of both the institutional and retail worlds are the likely result. There is no reason why National Treasury’s call for defaults and lower charges cannot go hand in hand with customisation for the appropriate category of member.

Exciting times
Now that commercial umbrella funds have achieved the necessary scale, I foresee exciting times ahead as these models continue to evolve and adapt to serve as the instrument to reform the retirements fund industry for the ultimate benefit of members.

‘Let us therefore brace ourselves to our duty, and so bear ourselves that if the British Empire and its Commonwealth last for a thousand years, men will still say, “This was their finest hour”.’ – Winston Churchill, British Statesman and Prime Minister, 1940

Sanlam Life Assurance Company (Ltd) is a licensed financial services provider.