• Editor

Umbrella funds: Technology, market forces and innovation will improve member retirement outcomes


Umbrella funds are the single most effective vehicle for reforming the South African retirement fund industry. The opportunities that rest in their economies of scale - their ability to reach thousands of employers and hundreds of thousands of employees - will be the most efficient way to improve the retirement outcomes for South Africans. This is the view of David Gluckman, Chairperson of the Sanlam Umbrella Fund.


The context for Gluckman’s comments was a discussion paper entitled Governance of Umbrella Funds issued by National Treasury last December. Gluckman congratulated the Treasury for the strong intent behind the paper. However, he echoed the view that “governance is the least pressing challenge in the retirement fund space”. He said that he could not think of a single governance scandal among the major commercial umbrella funds in the past decade. He believes improving retirement outcomes will not come from more ‘hoop jumping’, it will come from allowing the market to be more competitive, vibrant and innovative.


#Reform


Speaking at a Batseta webinar entitled Practical proposals for quick wins in the commercial umbrella fund market, Gluckman said that, in his view, customers much prefer product offerings promoted and backed by well governed financial institutions rather than relying on a few trustees in their personal capacities standing as final guarantors for billions of Rands of members’ money. This has also been borne out in the Sanlam Benchmark research findings.


The major umbrella fund sponsors - of which he listed 12 currently dominating the market - have the resources and capital to invest in technology and other enhancements that will ultimately give members better outcomes. These include four new sponsors that have entered the list over the past decade. Gluckman believes that the continued focus of regulation should be on further enhancing the economies of scale, competition and efficiencies which would continue the improvement trends evidenced over the past decade.


“Ultimately it is customers not regulators or providers that determine the winners in a competitive industry. I differ from some who feel the private sector cannot be trusted. I trust market forces that naturally self-regulate in terms of prices, quality, service, etc.” said Gluckman.


#Costs


Steven Nathan, founder and former CEO of 10X Investments who is currently on a sabbatical, highlighted the well quoted statistic that only 6% of South Africans retire comfortably, and explained that the reason this statistic is so difficult to significantly improve is that members need to save reasonable amounts for decades, preserve money on changing jobs, earn decent investment returns and keep costs under control.

Gluckman noted that the Sanlam Umbrella Fund had been the industry leader in published research into member level costs, and the improvements achieved over the past decade. He believes that “an industry-wide cost analysis using similar methodology would be very useful to even better appreciate the power of competition in our space”.


Gluckman and Nathan agreed that rather than increasing the onerous regulation around retirement funds which must push in the direction of higher charges ultimately being borne by members, the focus should be on improving efficiencies with time-consuming and onerous Section 14 transfer requirements highlighted as a major problem.


#PassiveInvesting


As evidence of retirement reform in action, Gluckman highlighted the tremendous growth of passive offerings within the Sanlam Umbrella Fund. The passive investments are managed by Satrix, the Morningstar Large Fund Manager of the Year for both 2021 and 2022. Clearly the increasingly competitive environment had resulted in customers being attracted to such cost-effective offerings.


Gluckman mentioned that launching a new Satrix Umbrella Fund as a competitor to the Sanlam Umbrella Fund is one “crazy and ambitious” idea with which he is toying. Provided it can get to scale relatively quickly, he believes that such a new entrant could become a major player in the market, and that additional disruption must be to the benefit of South Africans.



ENDS