Debunking the myths about Umbrella Funds

In the wake of the Covid-19 pandemic, the need for more significant economies of scale to reduce costs and remove the fiduciary burden on employers running a standalone pension fund has never been more apparent.

This is according to Malusi Ndlovu, Director of Large Enterprise at Old Mutual Corporate, who notes that despite the clear advantages offered by umbrella funds, misconceptions about them persist.

"In a nutshell, the economies of scale generated by umbrella funds offer advantages for both employers and employees that standalone retirement funds simply cannot replicate, says Ndlovu.

"Well governed umbrella funds foster greater accountability and more transparency. They can make a big impact on transformation – and to growing long-term savings."

The following four misperceptions currently prevail and need to be addressed.

Myth #1 Umbrella funds offer no choice in decision making

Ndlovu notes that under the new generation of umbrella funds, such as the Old Mutual SuperFund, management committees are empowered to make their own decisions. "Most large umbrella funds put in place management committees per participating employer. Membership of the management committee typically consists of at least 50% elected members.

"Management committees serve an important role in ensuring compatibility between the funds offering and the needs of the group of members it is responsible for. This can include investment choice, member communication, choice of adviser, choice of service providers, service levels, for example. This job is critically important and should not be underestimated, " he says.

Myth #2: Umbrella funds limit the choice of service providers

Ndlovu says the new generation of umbrella funds give groups of members from an employer the authority to choose their own service providers.

He says Old Mutual’s SuperFund, for example, allows groups of members from one employer to select their own insurer; consultants; and investment provider, subject to certain conditions. It even allows the current monitoring officer or principal officer of a standalone fund to come across and provide the role of monitoring for a particular group of employees from one employer.

“This makes this next generation of umbrella funds much more suitable for groups of employees where there are complex decision-making and multiple stakeholders that need to be accommodated,” he says.

Myth #3 Umbrella funds will hamper transformation

Ndlovu notes that umbrella funds such as the Old Mutual SuperFund empower employers to use their management committee structures to choose service providers in line with their companies’ BEE policy.

"Depending on the package chosen by a participating employer, there is flexibility to choose service providers. Employers can therefore use this as a tool for transformation in line with their transformation policy," he says.

Ndlovu says that due to the scale offered by an umbrella fund, such as Old Mutual SuperFund, capital can also be used to make a real impact by investing in private assets such as infrastructure, schools and housing. "By using their capital to transform disadvantaged communities, investors can move the dial," he says.

Myth #4 – Umbrella funds have less accountability and transparency

Ndlovu says that trustees are legally accountable and are overseen by professional bodies and organisations. "The duties of the trustees of retirement funds have been codified in sections 7C, and 7D of the Pension Funds Act, and are further regulated by the Financial Sector Conduct Authority," he says. In an umbrella fund like Old Mutual SuperFund the majority of trustees are independent and have careers as professional trustees or directors.

"Umbrella funds are transparent and provide detailed annual reports publically to members and management committees. By offering annual interactive roadshows, there is no room for opaqueness", he says.

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.