Issue: Sep / Nov 2013

In praise of umbrellas

SA companies must adopt new retirement solutions, urges Liberty Corporate divisional director De Wet van der Spuy.

Van der Spuy ... many advantages

The vast majority of South Africans who reach retirement age are unlikely to be able to support themselves financially in later years. This has serious implications for individuals and businesses alike.

Several factors have contributed to this dilemma. For one, we have a longer life expectancy. As an illustration, recent research by the UK Department of Work & Pensions indicated that one in three girls born today in Britain will reach her 100th birthday.

While South Africans may have a lower life expectancy on average, our overall health and longevity are better than at any given time in history. This is attributed to modern medicine and technology, but these improvements bring their own challenges.

For example, the average retirement age is between 60 and 65. In the past, we may have had to plan for 15 years of retirement. Now we must plan for 20 to 25 years. It raises the possibility of having to work longer.

In the broader economy, South Africans face high debt, high unemployment and a culture of poor savings. There are currently around nine million South Africans with credit accounts in arrears.
It is a staggering number for a country where only 13 million people are employed.

We simply do not have sufficient capital saved to comfortably support our economy, or ourselves. As a result, we rely on capital from abroad to finance our economic growth. This leaves us vulnerable to the turmoil in global markets.

It is therefore crucial that South Africans start to take responsibility for their own financial future. As a vehicle to pool occupational retirement savings, an umbrella fund provides an excellent option for employers to consider for their employees.

Typically, an employer would choose to participate in an umbrella fund rather than its own standalone fund. A multi-employer umbrella brings critical mass to offer a more cost-efficient, sound and bundled retirement fund solution.

It gives access to retirement savings and group risk benefits, while effectively outsourcing the complex administration of such an arrangement. This underscores the National Treasury proposals to address, amongst other things, complexity and lack of transparency in retirement funds.

Further, an umbrella-fund model offers a vehicle for employees to save for retirement in a
tax-efficient manner as well as the ability to pool risk. However, in choosing an umbrella provider it is crucial to consider the default investment vehicle available to members. Its ability to deliver on a high-growth investment promise will be the test of whether members’ retirement objective has been achieved, and less so the administrator of the umbrella.

In addition, a company generally carries a substantial management burden in setting up its own standalone retirement fund. By contrast, an umbrella fund removes this burden from the business by offering its own set of professional trustees who adhere to regulatory requirements and implement proper governance.

From a cost point of view, businesses then have access to economies of scale through umbrella funds in terms of administration, governance and investment costs. In addition, by collaborating with an established employee-benefits provider, a participating employer gains access to expertise in benefit design and the assurance of expert governance.