Edition: December 2015 / February 2016


Welcome competition at last for Umbrella Funds

David Gluckman, head of special projects at Sanlam Employee Benefits,
highlights a watershed advance.

How things have changed since last year when I noted that the umbrella-funds market is increasingly dominated by five major providers which then collectively comprised an approximate 80% market share: “Concerns therefore can be expressed whether the optimum benefits from competitive forces will be harnessed. Significant new entrants do not appear to be entering the market” (TT Sept-Nov 2014).

So it was with a mixture of amusement and interest that I read newly-listed Sygnia’s November 2015 announcement that it intends to disrupt “the cosy relationships that have enabled umbrella funds to charge fees at multiple tiers without any scrutiny”.

This echoes a call we have been making every year since 2009 in our annual Sanlam Employee Benefits Benchmark Symposium.

Essentially, our long-held conviction has been that policymakers should concentrate efforts on building a more competitive umbrella-fund industry offering clients better products and better value. What is required, in my opinion, is a complete rethink of the legislative environment moving closer to a contract-based model than a trust-based model.

An analysis of the leading commercial umbrella funds is relevant (see table above). Even within these market leaders, there are huge discrepancies. The combined market share of the top five sponsors is more than nine times that of the next five sponsors.

The question can be asked: Why are other leading financial services institutions also not entering this market? Where, for example, are Allan Gray, Coronation, Discovery and Investec? Surely they should be entering a market that now comprises over 1,6m members and R250bn assets, and growing fast?

Possibly some of the important client requirements in this space involve venturing into unfamiliar territory (see table below), but I suspect a key reason has also been a lack of certainty from a policymaker perspective. It makes new entrants nervous to enter the commercial umbrella-fund market – especially when a significant capital investment is required to build a commercial umbrella fund with real substance.

Though now long outdated, still the only thorough analysis of charges was a paper that I co-authored and presented to the Actuarial Society of SA in 2011 entitled “A Critique of the Umbrella Retirement Fund Charging Model”. It included a detailed critique of the Sanlam Umbrella Fund charging model in particular. Here we commented on earlier findings of high industry charge levels by independent actuary Rob Rusconi as follows:

“… the most pragmatic way to reform the industry is by means of harnessing market forces to gradually improve the situation whilst minimising any transition risks or costs. As regards systemic reform, the following measures were recommended …:

  • The most obvious method is via consolidation of funds so as to enhance economies of scale;
  • Industry-agreed expense disclosures . . . in the wider retirement funds industry is recommended;
  • . . . effective competition in an environment underpinned by consumer education and awareness will result in cost reduction;
  • The important point is that we need to find ways to increase consumers’ awareness of their rights and all costs that are paid, and to break down the information gap that exists between consumers and providers. “

Our industry has come a long way since 2011, and even ASISA is now far down the line in introducing Effective Annual Cost as a new measure to allow consumers to fairly compare costs for both retail savings products and commercial umbrella funds. Once introduced, I predict this will be a watershed moment for the commercial umbrella funds.

At the 2015 Sanlam Employee Benefits Benchmark Symposium we made a new and very public call for the retirement-funds industry to stand up and truly make a difference in improving retirement outcomes for members; especially so now that commercial umbrella funds have achieved significant scale, enabling the market leaders to leverage this scale for the benefit of members.

Gluckman . . . the time has arrived

We also used the symposium platform to announce some of our thinking on how we intended to leverage the scale we’d achieved to further enhance the Sanlam Umbrella Fund before end-2015 i.e. planned new product features relating to default investment strategies, preservation strategies, annuitisation strategies, automated repacement-ratio reporting, mini-funds governance, large-funds customisation and lower charges. These have been followed by successful launches of new products. They include our industry-leading new-generation Optimal product option and some other exciting developments that will bring truly cost-effective cradle-to-grave solutions to our membership base.

We intend to continue on the journey, started with the launch in 2008 with the Sanlam Umbrella Fund, and to lead the industry into a new age when providers have a clear purpose to serve members better. Rather than consider increased competition to be a worry, we believe it to be healthy and an affirmation that we are on the right track. It will spur us on even harder to succeed.