New Hybrid model for move to Umbrella Funds

Companies’ search for greater cost-efficiencies is evident across most sectors in the COVID-19 battered economy, and retirement funds and group employee benefits are no exception. But it’s a lot more than cost efficiencies driving the move to umbrella funds, says Nashalin Portrag, Head of FundsAtWork at Momentum Corporate, as he explores the flexibility of certain umbrella funds and the additional value offered.

Greater efficiencies, reduced costs

Traditional stand-alone retirement funds are being replaced by professionally managed, multi-employer retirement funds which offer the most cost-effective retirement and insurance benefit solutions, according to Portrag. Economies of scale and operational efficiencies synonymous with this form of funding reduce costs for employer and employee. Ultimately this makes it possible to channel more money to members’ savings.

According to the 2020 Budget Review, future reforms in the retirement industry will focus on further fund consolidation. We would expect a reduction in the number of standalone funds and conversions into commercial umbrella funds, as the costs associated with smaller standalone retirement funds are much higher.

Portrag says, “As the regulatory pressure on governance standards rises, employers’ and trustees’ time commitment and risks increase. More businesses are recognising that the costs and time required to manage their standalone retirement fund takes the focus off their core business.”

Improved flexibility

According to Portrag, there is a general school of thought that umbrella funds lack the flexibility that standalone retirement funds offer. However, Portrag says that this is not true of all umbrella funds.

Drawing on his experience, he says some umbrella funds consciously design flexibility into the benefits available to members. Once the employer has made certain initial choices at group level, which they believe are suitable for their employees, flexibility at member-level allows employees to shape their retirement and insurance benefits according to their specific needs and situation.

New hybrid model that suites all employees

Apart from a proactive flexible design, implementation can also offer high degrees of flexibility.

A good case study is the large contingent of University of Pretoria employees who joined the FundsAtWork Umbrella Funds in 2019.

“We worked closely with the university to implement a flexible model that addressed the needs of all employees - young and old, current and future. Existing employees were given the option of staying on the existing standalone fund or moving to the umbrella fund. This process is an exciting and fresh approach to handle these conversions – where members are empowered to make the ultimate decision.”

“A comprehensive engagement programme of roadshows, workplace media and written communication made sure that all members had a clear understanding of the different options and were empowered to make an informed decision, in line with their specific needs,” says Portrag.

Employer retains control through advisory body

Portrag says that another inaccurate perception about umbrella funds is that employers lose control of the management of their employees’ retirement and insurance benefits in an umbrella fund. While umbrella funds are managed by a central board of trustees who looks after the interests of members from multiple employers, some umbrella funds make provision for each participating employer to appoint an advisory body. Advisory body members are elected by the employer and its employees and help to make sure the umbrella fund addresses the needs and interests of their specific employer and employees.

Today’s employees expect more immediate value

Umbrella fund members may also have access to value-added benefits that are not necessarily available through a traditional standalone retirement fund. Younger generations expect their retirement funds to add value throughout their working careers, and not just at retirement or when an unexpected event happens. Furthermore, certain umbrella fund sponsors have invested significantly in state-of-the-art digital platforms which enable a more integrated service experience and helps members make informed decisions which lead to better retirement outcomes.

Portrag concludes, “The move to umbrella funds has become well-established in recent years. We can expect the current economic situation to create further momentum for conversion of standalone umbrella funds into commercial umbrella funds.”

ENDS