Welcome Competition At Last for Umbrella Funds

By David Gluckman, Head : Special Projects, Sanlam Employee Benefits

“The market is increasingly dominated by five major providers that today collectively comprise an approximate 80% market share. Concerns therefore can be expressed whether the optimum benefits from competitive forces will be harnessed; Significant new entrants do not appear to be entering the market;”                         David Gluckman, Today’s Trustee, Sep-Nov 2014 edition

It was with a mixture of amusement and interest that I read newly-listed Sygnia’s November 2015 announcement that they intend to disrupt “the cosy relationships that have enabled umbrella funds to charge fees at multiple tiers without any scrutiny”.

This echoes a call we have been making every year since 2009 in our annual Sanlam Employee Benefits Benchmark Symposium.

Essentially our long held conviction has been that policymakers should concentrate efforts on building a more competitive umbrella fund industry offering clients better products and better value. What is required, in my opinion, is a complete rethink of the legislative environment moving closer to a contract-based model than a trust-based model.

An analysis of the leading commercial umbrella funds makes interesting reading (see Table 1). But even within these market leaders, there are huge discrepancies with the combined market share of the top 5 sponsors being more than 9 times that of the next 5 sponsors!

The question can be asked why are other leading financial services institutions also not entering this market? Where, for example, are Allan Gray, Coronation, Discovery and Investec? Surely they should be entering a market that now comprises in excess of 1.6 million members and R250 billion assets (and growing fast)? Possibly some of the important client requirements in this space involve venturing into unfamiliar territory (see Table 2), but I suspect a key reason has also been a lack of certainty from a policymaker perspective – this makes new entrants nervous to enter the commercial umbrella fund market – especially when a significant capital investment is required to build a commercial umbrella fund with real substance.

I find it interesting that Sygnia decided to recruit high profile Alexander Forbes experts as part of their newly announced strategy. The market dynamics that resulted in Alexander Forbes becoming the biggest industry player might be changing.

Though now long outdated, still the only thorough analysis of charges in this market was a paper that I co-authored and presented to the Actuarial Society of South Africa in 2011 “A Critique of the Umbrella Retirement Fund Charging Model” and including detailed critique of the Sanlam Umbrella Fund charging model in particular. Here we commented on earlier findings of high industry charge levels by the independent actuary Rob Rusconi as follows:

“… the most pragmatic way to reform the industry is by means of harnessing market forces to gradually improve the situation whilst minimising any transition risks or costs. As regards systemic reform, the following measures were recommended …:

• The most obvious method is via consolidation of funds so as to enhance economies of scale.
• Industry agreed expense disclosures … in the wider retirement funds industry is recommended.
• … effective competition in an environment underpinned by consumer education and awareness will result in cost reduction.
• The important point is that we need to find ways to increase consumer awareness of their rights and all costs that are paid, and to break down the information gap that exists between consumers and providers. “

Our industry has come a long way since 2011, and even ASISA are now far down the line in introducing Effective Annual Cost as a new measure to allow consumers to fairly compare costs for both retail savings products and commercial umbrella funds. Once introduced, I predict this will be a watershed moment for the commercial umbrella fund market.

The 2015 Sanlam Employee Benefits Benchmark Symposium was where we made a new and very public call for the retirement funds industry to stand up and truly make a difference in improving retirement outcomes for members. Especially so now that commercial umbrella funds have achieved significant scale and that the market leaders are now in a position to leverage that scale for the benefit of members.

From a Sanlam Umbrella Fund perspective, we intend to continue on the journey started with our launch in 2008 and to lead the industry into a new age where providers have a clear purpose to serve members better.  Rather than worry about increased competition, we regard such developments as healthy and an affirmation that we are on the right track, and to spur us on even harder to succeed!

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