Edition: July / September 2016
Editorials

FUNDS SURVEY

Sensitivities to be recognised

Special features of union funds. Reluctance to join umbrellas is one of them.

The annual Sanlam ‘benchmark’ surveys are a service to the retirement-fund industry. The constant theme in fresh research predictably underlines the exhortations to save, and to start saving early, usefully updating the difficulties of potential savers to provide adequately for their futures.

This year’s survey brings an additional dimension. It’s to open a window on trade unions’ standalone funds. How big are they? Why don’t they join commercial umbrellas? Are their contribution rates adequate? For the survey, interviews were undertaken with the principal officers of 11 defined-contribution union funds collectively responsible for R58,5bn in assets under management.

On average, then, the 11 funds each have some R5,3bn in AUM. It isn’t clear how representative the sample is, but it is clear that on this kind of relatively small size they’d be ideal candidates for migration to commercial umbrella funds.

Yet their principal officers, the survey reports, either haven’t or won’t consider it. Reason given by almost all respondents is that they fear a “loss of control”. The meaning of this term isn’t explained.

Union funds are touchy subjects for examination. These funds are inclined to have social agendas, such as a preference for local stocks against offshore exposure, that might not always be to the demonstrable financial advantage of members. They sometimes contend that the interests of fund and union are one and the same, whereas legally they aren’t.

And there instances, certainly not confined to union funds, where adequate governance has fallen short. (For example, see elsewhere in this TT edition the fulminations of Tony Mostert who acts as curator of the Saccawu fund. Note that this is not a standalone union fund, despite its linkage to the SA Commercial, Catering & Allied Workers Union, but a defined-contribution umbrella fund.)

Like associated unions, whose thousands of members range through any number of different funds, their potency is undeniable. It was unions that occasioned the delay until March 2018 of the requirement for members of provident funds compulsorily to purchase an annuity at retirement. Whether this delay is in the best interests of fund members, who’ll need accumulated savings at retirement whatever the ultimate arrangements for state-funded social security, is a topic to be argued from different perspectives.

But from the perspective of union funds, who represent a distinctive category of blue-collar workers, enhanced tax deductions – up to 27,5% of salary on contributions – are pretty much pie-in-the-sky. As a survey respondent put it: “The thought of saving one quarter of my income for retirement is not practical. How do we then manage our day-to-day living expenses as well as short-term savings goals?”

Phillip Mjoli, segment head of institutional business at Sanlam Investments, describes this comment as profound: “Our younger members do not have the leeway in their income significantly to increase their retirementfund contributions, regardless of the level of inherent tax benefits. At the same time, we need to consider the impact of compound interest and the financial impact of saving even an additional 1% a month.”

Overall, the survey finds that both member and employer contributions have declined to an average total of 15,92% against 17,55% of pay in 2015. For union funds specifically in 2016, the total provision for retirement (excluding deductions for life and disability cover, and administration costs) is 12,49% against a 14% industry average.

Most union funds allow members to make additional voluntary contributions, averaging at 2,13%. It’s well above the 1,44% recorded last year. “For some people this might not seem significant,” says Mjoli, “but we need to factor in the impact that just a 1% reduction in disposable income will have on entire household dependent on a single income.”



Mjoli . . . unique aspects

A distinguishing feature of most union funds is their belief that there is a cost associated with responsible investing, but appreciate that the social good outweighs the cost. Also noted by the survey is that selections of investment managers are critically driven by performance. The majority of funds say that they assess performance over a three-year period before deciding whether to continue with an existing service provider.

What would be most revealing for the future is a sample comparison of union funds’ investment performance against other standalones and umbrellas, as well as relative efficiencies in the distribution of benefits. It will enable a numbers-focused evaluation of the “loss of control” argument within the context of member interests, and indeed on the exercise of “control” in umbrellas themselves.