The value in umbrella funds

The responsibility for establishing a retirement fund vests with both the employer and the employee - and the Umbrella Fund's flexibility in structuring an appropriate and affordable range of employee benefits is the ideal vehicle for such joint ventures.

Umbrella Funds have enjoyed a massive surge in popularity of late. But despite offering value when compared to retirement annuities and stand-alone pension funds, there are many experts who criticise the savings vehicle. Their criticisms range from accusations of indirect and ambiguous communication between the sponsor company and fund members, to questionable conflict of interest in the governance space. Are these concerns justified?

Xhead = Unfair criticism

The reality is Umbrella Funds present a competitive retirement savings solution. They are structured to provide value for individual members and for participating employers. In addition to economies of scale and increased governance, an Umbrella Fund boasts valuable characteristics such as prudential management and innovative communication infrastructure.

As a packaged solution, an Umbrella Fund tends to offer a more cost effective way of saving towards retirement than a stand-alone retirement fund. They allow smaller employers to provide a range of benefits to their employees that would typically only be available to members of a larger retirement fund. And often, an Umbrella Fund provides a starting point for small-company employees who would not have been part of any savings mechanism whatsoever.

Members of an Umbrella Fund collectively share in market-related risks. More importantly, they share the costs associated with fund administration, ranging from banking charges to indemnity insurances and actuarial service fees. The benefit of cost sharing is that focus is placed on retirement saving contributions rather than the costs surrounding the investment. Members are able to save more without too much of their monthly contribution being lost to costs.

Xhead = Reduced compliance burden

Retirement fund administrators are bound by strict legislation and ever-increasing governance requirements. That's why the trustee functions of an Umbrella Fund are handed over to a professional team of trustees and investment experts. This reduces the administration, compliance and governance burden on the employer as well as contributing to accountability and transparent reporting of investment performance. The Umbrella Fund structure enables both employer and sponsor companies to focus on their respective core business.

Those who criticise Umbrella Fund communication forget that the sponsor company (rather than the employee) has the infrastructure to provide informative communication by way of net replacement ratio and member benefit statements. The same infrastructure can be used to deal with member queries. By focusing on member interests and member education the sponsor company can assist members within the Umbrella Fund to chart their progress as they save towards retirement.

Xhead = Baby steps to reform

The most noteworthy value presented by an Umbrella Fund is that it supports the principles outlined in government's National Social Security reform discussion papers. These reforms would inevitably lead to the consolidation of an industry flooded by retirement funds and administrators. Umbrella Funds can be seen as a precursor to the consolidation that the reforms intend to achieve. Handing over business such as retirement fund administration to professional industry administrators not only streamlines the financial services environment but also consolidates an environment within which governance is often questionable.

The values already mentioned, coupled with appropriate utilisation, efficient management and transparent regulation should silence critics of Umbrella Funds. To maximise the value opportunities within this solution, Umbrella Funds should consistently be aligned to member needs, pooling similar employees together, communicating with those employees and safeguarding their interest and retirement savings. Umbrella Funds are a precursor to the consolidation of the financial services environment and will eventually silence their critics and affirm their place and purpose in the retirement industry.

For more information on Umbrella Funds, click on the link; http://www.fedgroup.co.za/distinctionUmbrella.html