Dave Johnson, Independent Consultant for Go Benefits 

Umbrella retirement funds or multi employer retirement funds are positioned as vehicles for employers to provide employee benefits for their staff. But we are seeing an ever increasing membership of umbrella funds who are no longer associated with a participating employer.

Regulation 38 effectively required pension and provident funds to amend their fund rules by no later than 1 March 2019, to provide that members who terminate service before retirement become paid-up in the fund, until the fund is instructed by the member in writing to make payment of or transfer his/her benefit.

A ”paid up” member can retain their retirement savings assets in the fund, but will no longer make monthly contributions to the fund. Normal benefits in terms of withdrawal, death and retirement would apply to such “paid up” members.

Regulation 38 impacted the membership profile of umbrella funds as previously funds intentionally did not allow for paid up membership and unclaimed benefits were transferred to unclaimed benefits funds.

There are two types of members who will become paid up members. There are the genuine defaulters, who exit their employment and fail to provide an instruction regarding their retirement savings. Often these are members with small balances and often with tax issues. They are probably unaware of the existence of their benefit and unless they change their approach soon the umbrella Fund will lose contact with them. The second are members who consciously decide to leave their savings in the fund.

The introduction of the two-pot system is going to increase the number of paid up members, as members cannot cash out their retirement pot balance and must retain it in a retirement funding vehicle until they reach retirement age. Unless they transfer to their new employer’s arrangement, the majority will leave their retirement pot in the current fund.  Again, some will do so intentionally and others by default.

The group who consciously elect to leave their savings in the fund, are interesting as possibly they appreciate that the assets are often invested in a lower fee class investment portfolio than would be applicable to some retail solutions such as many preservation funds. The regulations are clear that the paid up members cannot be charged a different investment fee to the contributing members, so they will benefit from the economies of scale of the umbrella fund.

It is possible that advisors will persuade members to transfer to preservation funds presumably because the higher asset based fees are offset by the access to a much wider range of investment portfolios. But we are also seeing that the historic issue of asset fees differing between retail and corporate solutions is starting to disappear, presumably as a result of these scenarios.

I am not convinced that the umbrella funds are doing much to make the option of remaining as a paid up member an attractive option.

Consider the issues of contactability, advice and investment strategy.

Contactability: Hopefully they have the member’s contact details at date of exit from employment (as employers are required to provide contact details for all employees as part of the monthly contribution schedule), but these details will soon be outdated unless effort is made to ensure up to date information. The group who elected to be paid up may make an effort to keep in contact, but the defaulters will not.

 Advice: Few umbrella funds make provision for the member to appoint an advisor and remunerate them via an asset based fee deduction.

Investment strategy: Some umbrella funds seem to default the investor into trustee default portfolios which tend to be the sponsored linked portfolios.

What appears to be happening is that many umbrella funds remain focused on the participating employers and the consultants to these participating employers. However, the paid up members tend to be “de-linked’ from the participating employer. They will not receive any communication which is distributed via participating employers and their consultants. I thus question who is considering the needs of these paid up members? Is enough effort going into tracing these members, especially the genuine defaulters, and proper communication with them once they have been traced?

It will be interesting to see how quickly the paid up members increase as a percentage of the total members of an umbrella fund. The rate of increase will be much quicker now that the two-pot system has been implemented. Members seem fixated on their savings pot and many will end up with paid up retirement pot balances by default. It is only a matter of time before an umbrella fund could have more paid up members than active contributing members. Surely umbrella funds cannot afford to keep ignoring the needs of this silent majority.

In the meantime, we can expect to see most employee benefits consultants continuing to recommend umbrella funds based on the outcome for active employees. The decision by an employer in selecting an umbrella fund is probably not going to factor in the approach the fund has to its paid up members. We can also expect that financial planners will continue to encourage members to transfer to preservation funds even if the fees are higher.

Does this defeat the aim of the regulator? Probably not. The regulator seeks increased preservation of benefits and also to ensure that members’ interests are foremost when trustees make decisions related to fund governance. I am not sure the regulator is too concerned as to whether the preservation is in the umbrella fund or a preservation fund.

I would like to see an umbrella fund embrace their paid up members. Allow them to appoint financial planners and create an offering that competes with the preservation funds and other retail solutions. Make it easier for financial planners to include such paid up benefits in their total financial planning exercise.

For decades we have had individual life arrangements and employee benefits / group arrangements. In such a historic structure, paid up members are individuals. But surely we are in an age when group arrangements can accommodate individuals requirements. Flexible risk benefits, member investment choice are examples of this. Surely umbrella funds can adjust to improve their focus on their paid up members?

Umbrella funds are seeking ways to address member representation. Either by formalising the role of employer manco structures or developing mechanisms for employers / members to elect trustees. What about the paid up members?

Technology is key to implementation and web portals are key to members accessing information. Excellent development is taking place in this space, but there does not seem to be a clear strategy on how to engage and satisfy the needs of paid up members. This group will soon become the silent majority.

ENDS