Issue: March / May 2013
Expert Opinions

Employers urged to focus on a smooth transition to umbrella funds

The drive for improved cost containment and fund governance, as well as the onerous risk and responsibility of trustees in an increasingly legislated environment, has seen many employers in the SA retirement industry opt for umbrella funds as a way to manage their employees’ retirement and risk obligations.

“While the umbrella funds were initially adopted mostly by small to medium-sized employers, we are increasingly seeing very large companies also electing to go this route,” says Hugh Hacking, head of Retirement Fund Solutions at Old Mutual Corporate.

An umbrella fund pools the retirement investments of multiple employers. This reduces the average cost per member and provides other advantages such as professional governance.

Hacking points out that managing a smooth transition is a critical but often overlooked aspect of making the move to an umbrella fund: “The most important consideration for employers facilitating the switch from a standalone fund to an umbrella fund is not to make too many changes at the same time as this can create uncertainty and confusion among employees.”

Especially in these turbulent economic times, Hacking says companies can ill-afford any employee uncertainty and disruptions to operations. Therefore, employers need to implement a tested and structured transition process to facilitate the move to an umbrella fund.

The first step is to ensure that everything is technically in order. The umbrella fund’s service provider should be able to advise and assist the employer in this regard.

Another key aspect is to ensure that there is continuity from an investment and risk- benefits perspective when switching to an umbrella fund. It’s important to choose a service provider that can provide investment and risk options consistent with the previous fund, so that members are not required to alter their strategies unnecessarily.

Hacking emphasises that constant engagement with staff is required throughout the process to assure employees of the security of their retirement savings in an umbrella fund.

Many people are particularly sensitive to financial changes. So it’s crucial that there’s regular communication with employees and that the benefits of the change to an umbrella fund are made clear to them.

One of employees’ greatest concerns with umbrella funds is likely to be that there could be a loss of control over their money by the employer due to a perceived barrier that exists between trustees and members.

“In order to address this concern, employees need to be reassured that the umbrella fund enables them to access independent trustees with a range of expertise,” Hacking advises. “Employers should also be encouraged to set up a member committee that specifically deals with the retirement fund and is able to play a crucial interface role between the umbrella fund and the employees.”