Issue: March 2013 / May 2013


Standalones aren’t alone

They’re merely becoming fewer and fewer. Those which choose not to go into umbrella arrangements will still have takers competing for a low-margin but critical aspect of their operations.

Look at it this way or that, but the decision of Old Mutual to “move away” for offering administration services to standalone retirement funds appears to have created more flurry than it deserved. As an exercise in public relations, Mutual could probably have handled it better than an abrupt notice that took larger clients by surprise (TT Dec ’12-Feb ’13).

Yet it might have been difficult to have sweetened the pill. Such are the upheavals for clients in moving from one administrator to another that, however politely it was announced, an outcry was unavoidable.

For its part, Mutual has put in place numerous checks to counter the contention that the umbrellas it sponsors will become captive for cross-selling of products and services more lucrative than administration. Moreover, although Mutual is the biggest of the life offices, it’s by no means the biggest of the fund administrators.

For the standalones wanting to remain standalones, there are competitive administrators only too happy to entertain Mutual’s clients. None of these administrators has indicated an intention to followMutual’s move.

Moreover, there are a few hundred funds of sufficient size that the economies of scale offered by umbrellas (funds where the retirement savings of members across multiple employers are pooled) needn’t attract them. This is particularly the case with large employers, with workplaces in many different locations, that prefer to liaise directly with employees whose profiles and needs differ widely.

The underlying dynamic, nevertheless, is fund consolidation. The number of standalones is rapidly dwindling in favour of umbrellas. Reasons relate primarily to cost efficiencies (economies of scale), governance abilities (sufficiently skilled trustees being in short supply) and management competencies (getting the best from service providers). The process will accelerate with introduction of the National Savings & Social Security Fund, taking into its fold the mass of employees below a defined income threshold and so morphing bigger standalones into smaller.

In descending order, standalone administrators larger than Mutual are Alexander Forbes, Absa, Sanlam, MMI (Momentum having previously discarded the service, but brought back into it by the Metropolitan merger), and NBC.

Kieswetter...strong position

By far the largest, in terms of market share, is Forbes which will continue to offer standalone administration services. Says chief executive Edward Kieswetter: “We’re fortunate in that our Operations & Administration business has significant scale. While we understand that administration services are low-margin, we have for a number of years focused on ensuring that we price these services competitively but also at a level where our O&A unit operates at a profit and contributes to the overall group trading results.”

Liberty Corporate chief executive Seelan Gobalsamy is looking neither to close nor expand its administration business for standalones: “Administration is about doing what is right for customers and offering a service at the lowest cost is doing what is right.  For some customers a standalone fund is the right vehicle to meet member needs but for most an umbrella solution is preferable.”

With over 7 000 employers participating in its umbrellas, Liberty is probably the largest by this measure. Gobalsamy foresees growth not in poaching standalones from other administrators but in persuading appropriate standalones to switch into umbrellas.

The most exciting potential, he believes, is with smaller and medium-sized enterprises: “A Department of Trade & Industry survey showed a few years ago that there were more than half a million SMMEs of which fewer than 80 000 had pension funds.” Although many SMMEs have less than five employees, better suited to retirement annuities, there’s still a huge market.

Robert Roux, head of Sanlam employee benefits, points out that the quest for improved cost efficiencies is ongoing amongst standalones and umbrellas alike: “Cost pressures are on us all. There’ll always be larger funds wanting to remain standalone, and we can have a viable business in this space. The more that big standalones come onto our administration platform, the better the efficiencies.”

Golbalsamy business sense

A slightly different take is adopted by Etienne de Waal, chief executive of Momentum employee benefits. He doesn’t see it as a debate between the relative advantages of umbrellas against standalones. Rather, in terms of the regulator’s approach to prevent smaller funds from eroding members’ money, he points to “the reality for all administrators” that the market for administration of standalones is shrinking because smaller funds simply aren’t cost-effective.

Momentum will continue to support both the standalone and umbrella models, he adds: “Every part of our business must pay for itself. Although there aren’t big profits in administration, at least the business is viable.”

And presumably it will remain so for as long as the various standalones feel that the costs can be justified and that there are other advantages which outweigh those in switching to an umbrella. This is a call to be made by trustees, with the regulator breathing down their necks. At least they can be comforted that there remain service providers who anticipate an opportunity in filling the gap opened by Mutual.

Hacking...poked the bees

It isn’t an opportunity that Mutual will easily allow, for it must retain clients to grow its umbrella business. Part of the strategy is to show that it isn’t only members of smaller funds who’re better off in umbrellas, but members of larger standalones too. Hugh Hacking, head of retirement fund solutions at Mutual, is sufficiently confident to take the chance: “If we can’t convince them that they’re better off, they’re free to go elsewhere. We can’t force them into umbrellas.”

For the entire set of standalone funds that Mutual wants to move into umbrellas, it calculated the change in costs for members.

General trends were found:

  • Assets remain the same or similar so that the investment fees remain the same or similar;
  • A number of management expenses (such as audit and communication) reduce significantly;
  • Administration fees reduce.

In the heat of competition for umbrellas, Hacking pleads for industry standardisation of charge disclosures. Showing fees on the same basis is the only way that clients and potential clients can compare them.

Mutual’s calculation was based on its product that would be most suitable for a particular client, including distribution and servicing-related costs. For standalones, it analysed the actual financial statements including all expenses such as consulting and communication, but excluded the assets that remain largely unchanged.

The analysis resulted, says Hacking, in an accurate apples-with-apples comparison between the positions of standalones and umbrellas: “We saw that the average cost per member does not increase for any client, large or small, that we are looking to move to an umbrella.”

Costs are one issue. Governance is another. By definition, each umbrella fund must have a sponsor. When the sponsor is a financial-services institution, offering a range of services for retirement funds, what checks are there that the sponsor does not drive the selection of services and products to its own institution? Or exploit the platform for cross-selling?

Tests must be in the application of formalised contractual arrangements between the sponsor and the fund, from the sponsor’s declaration of interests to the appointment of competent trustees; the fiduciary duty of the latter, as with a standalone, being to promote the best interests of the fund alone. In practice, trustees must have the unconstrained independence to select the service providers of their choice; the sponsor, at most, can have a first-mover advantage but certainly no exclusive access to bid for business.

It’s true that there’s little money to be made in administration. The money’s to be made in the related services and products that retirement funds must buy. This invites inherent conflicts that have to be managed.

They’re within the institution, not to exploit its dual role as sponsor and service provider. The fund has a legal responsibility act in its own best interests, for the benefit of its members; the institution, on the other hand, is a profit-making entity responsible to its shareholders. 

As the umbrella-fund industry evolves, so should potential conflictsbe resolved. Industry leaders already have processes and structures in place to address them. They’ll be stress-tested by implementation.

While it might be utopian to conceive a playing field that will always be level – for instance, there’s nothing to prevent a sponsor from offering default choices – oversight will be the strongest control.

It will come from the regulator, to be sure, and from the competition authorities, quite likely.Most definitely, it will come from the market rivalry between peers themselves. The role of trustees is accentuated.