• GJ Mellet – Actuary and Retirement Fund Valuator

The rise of Umbrella Funds – making the right decisions

There has been a major shift in the retirement fund industry from private standalone funds to multi-employer commercial umbrella funds. This is definitely not news to anyone even remotely involved with the industry, but is it the right decision to follow the herd?

The Financial Sector Conduct Authority (FSCA) is actively driving the reduction of the number of active funds to about 200, with the two main reason being consolidation and costs. The idea is to have a few large umbrella funds, large union-driven funds and some large standalone funds. This means that the members of approximately 90% of standalone funds is expected to find a new retirement fund home in a commercial umbrella fund. The last few years saw a big increase in the number of commercial umbrella funds which defeats the FSCA’s plan of a “few large umbrella funds”, but there is no doubt that the number of standalone funds will continue to decrease, especially in the aftermath of the Covid-19 pandemic.

This raises the following questions:

Reasons for the move to umbrella funds

The main reason for the move to umbrella funds is costs. The general perception is that umbrella funds offer economies of scale and can offer administration, consulting and investment services at a much lower cost than standalone funds. This is especially true for standalone funds with a small number of members.

There is also an ever-increasing onus placed on trustees in respect of fiduciary duties and governance responsibilities. Umbrella funds offer professional and independent trustees, in addition to trustees employed by the sponsor, which eliminate the time and governance responsibilities for some of the employer’s top employees who would have been trustees for a standalone fund. Participating employers could have a management committee which facilitates the relationship between the umbrella fund and the employer and monitor actions, but without the personal risks faced by trustees.

Other reasons for the move to umbrella funds could include access to a broader range of investments and investment managers as well as lifestaging and in-fund annuity options which might not be feasible for small standalone funds. There is also an expectation that umbrella funds will offer better member communication since they have the resources, experience and required expertise to address members’ needs.

Factors to consider when choosing an umbrella fund

It is important to note that all umbrella funds are not equal and even different options offered by a specific fund can vary widely. Some umbrella funds or options offer a straight-forward vanilla fund at a low cost, while other funds or options offer greater flexibility, i.e. any and all the bells and whistles required to customise the benefit structure, at a more expensive cost.

Since all umbrella funds are not equal and considering the fact that there are good and bad umbrella funds for a specific scenario, we need to answer the following question:

The answer to this question is not all about costs. If costs are considered as the only factor to choose an umbrella fund the wrong fund will likely be chosen. The full features and value-add of an umbrella fund should be considered, covering at least the following:

1. Governance

The governance factors to consider include the following:

  • number of trustees, especially the number of independent trustees;

  • level of fidelity cover in place;