Four questions every employer with a stand-alone fund should ask themselves.

There is much debate about the pros and cons of umbrella funds versus stand-alone retirement funds. If you currently participate in a stand-alone fund, how do you know this is the right decision going forward?

Many South African employers have had stand-alone retirement funds for longer than they can remember. They run well, they have specialist advisers and providers that are tried and tested, and they aren’t facing any major pressure to change. As they say, “If it ain’t broke, don’t fix it.”

If that’s you, it may be helpful to have a quick checklist that can confirm that there’s not a good reason to go through a disruptive change. If you can check all these boxes, you probably have no reason to invest time and effort in a thorough analysis.

1. Are we already giving members the best bang for their buck?

Umbrella funds deliver all the benefits of stand-alone funds, but spread the overhead cost of administering and governing a fund across many employers and many members. This can result in a significant cost-saving when transitioning from a stand-alone fund.

If you are already getting the all-in cost of administering and governing your fund for a reasonable fee, then an umbrella is unlikely to offer your members better material value. What is reasonable? Most stand-alone funds could get the cost to under R50 a member per month in an umbrella, and many would be able to get it as low as R20.

2. Do our members have access to the latest digital, incentive and communication tools to drive better decision-making?

There is hopefully no debate that the purpose of your fund is to help people to get to a well-funded retirement (and, depending on your mandate, to make sure they have risk cover in place along the way).

The main reason people do not get to a well-funded retirement is that they make poor decisions. Unfortunately, wherever you look, the statistics in this regard are dismal. People face major behavioural obstacles in making good, rational decisions about contribution levels, preservation and investments.

Some umbrella funds, like Discovery’s, have invested in incentives and digital journeys that tap into the same behavioural biases that make people so likely to make bad choices, in order to nudge them towards better ones.

This is the single most important factor to have in place in a retirement fund. If your fund has access to effective technologies to incentivise healthy financial behaviour through your administrator, you have the biggest tick box checked.

3. Does our board of trustees have significant experience and expertise in managing retirement funds – and does it have a succession plan in place?

The governance requirements of retirement funds seem to grow every year. Trustees from an employer sponsor organisation spend many expensive hours a year in trustee meetings. Much of that time is spent on items that would be taken over by an umbrella fund board of trustees.

Boards of trustees with standalone funds rarely provide for succession planning either in key trustees, the principal officer or key service providers. But this is important, because any change can place the ongoing management of the fund at risk.

In an umbrella solution, what would remain for the employer and member representatives would be to work as a MANCO within the umbrella fund, making decisions about insurance structures and providers, bespoke communication strategies to drive member outcomes, and overall accountability for the service providers.

Involvement in death claims, investments and communications could be limited to almost nothing, or could be accommodated if the MANCO had particular interest in remaining involved. Involvement in annual financials, valuation reports, detailed administration reports, adherence to regulation 28, 37, 38 and 39, and investment considerations like CRISA would be entirely removed.

As an employer, if the continued investment of employee time in those functions is something that those employees really value, and as an employer you value them doing, then it may make sense to retain the stand-alone structure.

4. Do we have service providers we consider key to driving member outcomes and who we’d not find in an umbrella fund?

Most umbrella funds allow for bespoke structures for large employers to accommodate specialist roles such as principal officer or investment adviser within the umbrella structure. Many also allow for bespoke investment solutions on their platforms, and so it’s unlikely that this is a real impediment.

However, if you are convinced of the differentiated excellence of your service providers and if umbrella funds were unwilling to accommodate them, this would be a reason for remaining with the status quo.

The ultimate consideration in reality should be the extent that you are able to improve the retirement and financial planning outcomes for your members. Often much time and energy is spent on implementing, reviewing and managing complex structures, and yet the funds fall well short of their objective of helping members achieve the best possible retirement outcome.

What if I’m not sure?

If you went through the list above and your responses to one or more of the questions were not unquestionably in favour of remaining a stand-alone fund, it may be worth investigating the merit of an umbrella solution.

It would be relatively easy, either directly or through your adviser, to arrange for a proposal from a few umbrella fund providers with reputations that speak to the four points above. If those initial proposals show good reason to consider an alternative to your current structure, then a more thorough process could be followed – potentially one to the benefit of you and your members.

Guy Chennells is the Head of Product at Discovery Employee Benefits. He is responsible for product research and development, pricing, technical marketing, strategy, and digital experience across employee benefits – including group risk and umbrella funds. Previously, he filled the role of Strategy and Innovation Executive at Old Mutual Corporate for four years. He has also held various positions within Old Mutual South Africa and Kotak Insurance in India, where he honed his expertise in employee benefits, product development and capital management. He is a fellow of the Actuarial Society of South Africa and holds a BBusSci (honours) degree from the University of Cape Town. Guy is an employee benefits innovator and thought leader, tackling pernicious challenges in an old industry with new tools, creative insights and bold ambition.