Employee Benefits Trendspotting

By Viresh Maharaj, Sanlam Employee Benefits

March 2015

The Employee Benefits landscape continues to shift as market regulation influences structures, client needs evolve and providers innovate to serve new interests of their members. In this emergent context, a number of trends have been evident over the past year and will continue to gather momentum into the future:

1. Shift happens
There has been significant consolidation in the retirement fund industry as freestanding funds convert to umbrella funds at an accelerating rate. The FSB fund list, which once contained approximately 13,000 funds, now contains just 2,100. The bulk of the funds that have moved off of this list have converted into umbrella funds for a number of potential reasons:

• Umbrella funds offer a holistic solution to institutional retirement funding beyond vanilla administration;
• The costs are lower than under freestanding arrangements for the majority of funds;
• The governance framework tends to be more robust particularly when the sponsor is a recognised and established firm;
• Trustee liability under freestanding funds is transferred; and
• There is far less burden on the employer in providing a retirement fund to its employees.

These are compelling reasons that will result in the vast majority of the remaining 2,100 freestanding funds also moving into umbrella structures over the next few years.

2. Umbrella emporium
A number of participating employers have moved into umbrella funds over the past decade under legacy umbrella structures that struggle to compete with the latest platforms available. Accordingly, many of these employers are now re-broking their umbrella fund arrangements in order to test the market, and to provide their employees with the best possible solution to move them to a better day one of retirement.

In a similar vein, many participating employers of smaller umbrella funds are now also looking for the security and additional value-adds that come from joining an umbrella with a financially strong and reputable sponsoring entity. As the industry has matured, participating employers are not satisfied with just being in an umbrella fund … they now want to be in one that best meets their needs and are actively exploring their options.

3. Bridge the gap
Many of the remaining freestanding funds want the cost reductions that come with umbrella structures but are not yet operationally, emotionally or politically ready to fully transition into such an arrangement. There have been recent developments where retirement fund administrators have launched bridging products to meet such fund’s needs by providing simplified administration services at costs comparable to umbrella funds.

Other employers wish to enter into umbrella structures but wish to retain influence over investment related decisions as well as the granular investment consulting feedback loop that they are accustomed to under freestanding arrangements. Certain umbrella sponsors have responded to this call by providing implemented consulting solutions to such employers that empower them with investment decision making capability as well as the feel of idiosyncratic investment consulting within the umbrella structures.

Such alternatives are bridging the gap making it even more attractive for the remaining freestanding funds to transition into umbrella structures over the coming years.

4. Win/Win
Members approaching retirement have traditionally become more cautious in their investment outlook due to the perceived shortening of their investment horizon. Improvements in medical technology have dramatically increased human longevity resulting in significantly longer investment horizons for such individuals. As such, one’s investment strategy leading up to retirement should allow for exposure to risky assets in order to generate the returns required to fund an extended period in retirement. Progressively, we are seeing that such individuals want capital security blended with this market exposure to balance risk and returns. As such, smoothed bonus type products are being seen as a credible choice leading up to and through retirement due to their unique ability to offer downside protection and upside potential.

5. Blurred lines
The lines between the retail and institutional contexts are becoming progressively blurrier as individual members within retirement funds seek and obtain contextual advice relevant to the wholesale priced options available to them. Member services are therefore becoming more prominent in the narrative of the industry as individuals require financial plans that holistically incorporate their financial assets and available decision trees. Such blurring creates significant potential for employers and funds to develop member guidance support systems to facilitate better decision making by individuals planning for retirement.