Moving to an umbrella fund helps saving for retirement

Opinion by Malusi Ndlovu, Director of Large Enterprise at Old Mutual Corporate

Moving from standalone to an umbrella fund can help households be more efficient when saving for retirement during these tough economic times.

Widespread household income losses due to Covid-19 lockdowns have put South Africa’s retirement planning under pressure. While workers deal with the immediate financial impact of the pandemic, employers are in a significant position to review the long-term suitability of their current retirement provision arrangements to maximise savings.

This is according to Malusi Ndlovu, Director of Large Enterprise at Old Mutual Corporate, who says that moving from a standalone to an umbrella retirement fund like the Old Mutual SuperFund can save money for members over a lifetime of investing. “What employers don’t consider is that the cost of administrating a standalone fund is largely passed on to the people who can least afford it, namely the members,” he says.

With the costs of risk benefits designed to protect members and their families against sickness or death increasing due to the impact of COVID-19, there is even less money going to retirement every month.

“Umbrella funds are more efficient because of their reduced complexity and economies of scale, says Ndlovu. “With a standalone fund, on the other hand, you need an auditor, an actuary, an investment consultant and a host of communication and specialist service providers.

“The umbrella fund creates an advantage of size, meaning that these costs are spread over a larger pool of contributors,” he says.

In addition to the lower costs for members, the umbrella fund removes the administrative burden on companies needing to appoint a board of trustee-employees to meet the onerous governance, risk and compliance requirements.

“While these costs are harder to quantify, they are significant. They include the opportunity cost of time, skill, and other resources needed to run a standalone retirement fund.

“These men and women generally don’t work as full-time trustees, and are not experts on retirement regulation, investing or governance, yet they are expected to accept full responsibility for the retirement savings of their colleagues.

“In addition, the raft of continuous changes to the retirement fund legislation places a further burden on these workers who naturally struggle to manage this responsibility and their day jobs,” he says.

With any investment, it is vital that as much of the contribution goes to the savings pool as possible, says Ndlovu. “At the very least, trustees, employers and employees should be conversing on the merits of moving to an umbrella fund, seeing that the outcome has significant implications for members.

“In a very complex arena, it is essential to take a step back and compare the pros and cons of umbrella funds such as the Old Mutual Superfund and conventional standalone fund. This will help management and other stakeholders make a more informed decision about their financial future,” concludes Ndlovu.

Click here to register for the Old Mutual Corporate Great Debate webinar on 25 August that promises to help employers and trustees select the best retirement fund for their workplace.