Edition: September / November 2017
Editorials

UMBRELLA FUNDS

Bases for comparison

It’s long overdue. Now the cat is set amongst the pigeons.
Challenge employers and trustees on their selections.

In the rapid consolidation of smaller standalone retirement funds into multi-employer umbrella arrangements, trustees find comfort in the lower costs and reduced administrative burdens offered by the umbrellas’ institutional sponsors. But what causes trustees to select a particular umbrella arrangement over another?

There are two reasons that they shouldn’t feel entirely comfortable. One is that several institutions also have in-house consultants on employee benefits. Thus the advice offered to the standalone fund, on which umbrella to select, might be compromised by the consultant’s family bias. This isn’t necessarily bad so long as trustees are aware of it and can obtain from the consultant competitive information to reach decisions of their own.

The second is that such information is not readily available; not, that is, until an independent review commissioned by Investec Asset Management from NMG Consultants has become available.

The survey focuses only on quantitative aspects of default portfolios – not on such qualitative deliverables as service, communication and governance in these or other portfolios of respective umbrellas – but is nonetheless valuable in showing that all umbrellas aren’t much of a muchness.

That’s strikingly evident in terms of both performance and fees (see boxes). The survey can certainly help to stimulate competition on the costs aspect alone.

Importantly in reading the entire survey, it notes that a true reflection of risk and return is obscure in the smooth-bonus funds of default portfolios because they are “intentionally designed for favourable risk/return outcomes”. There were wide variations in the risk/return analyses for funds that aren’t smooth bonus. Findings and tables reflect positions as at end-March 2017.

The market values of assets under management in all umbrella portfolios was largest at Old Mutual (94,6bn). It was followed by Alexander Forbes (R64,5bn), Momentum (R42,5bn), Liberty (R34bn), Absa (R33,8bn) and Sanlam (R10,5bn). Smaller players were NMG and Prescient. Mutual and Sanlam had the largest proportions of their umbrellas’ portfolios in defaults.

Now former trustees of standalones can go to the tables and tick the boxes for findings that make their own decisions, on umbrella selection, look objectively most defensible. Or otherwise. It will be a worthwhile exercise for present trustees too. And to find faults in the survey if they can.