What Is an Umbrella Fund and How Does It Work?

The South African retirement fund landscape is shifting, with employers increasingly moving their employees out of individual standalone funds and into commercial umbrella funds, which house a number of employers under one roof. This shift has been mainly driven by increasing administrative and compliance demands on employers operating their own funds and by moves to consolidate the industry.by the regulator, the Financial Services Conduct Authority. 

Whether you are an employee-member of an occupational pension fund or a business owner looking at providing employment benefits for your staff, it’s important to understand the differences between standalone and umbrella funds, and the implications of the shifting landscape.

Niki Giles, Head of Strategy at Prescient Fund Services, says umbrella funds have become a cornerstone of South Africa’s retirement industry. “These occupational retirement funds pool contributions from multiple employers under a single legal structure, offering cost efficiencies and professional management. For employers, they promise simplicity and scale,” she says.

Originally the domain of the large pension fund administrators such as Alexforbes, Old Mutual, and Sanlam, financial services companies whose prime business is asset management are also entering the umbrella fund space, widening the options for employers. These include Allan Gray, Sygnia, Prescient, and 10X.

“Another reason for the decline of standalone funds,” Giles says, “has been a growing reluctance by administrators to administer them, which may be why even some larger standalone funds have collapsed into umbrella funds.”

How are umbrella funds structured?

An umbrella fund has a board of trustees containing a mix of representatives of the parent financial company (sponsor) and independent professional trustees. Unlike standalone funds, employers and their employees are not represented on the board. However, at management level each participating employer has a management committee (Manco), which reports to the board and manages its own interests. At this level, there may be employee-member representation.

There are two basic types of umbrella funds. In each, the umbrella fund is responsible for all administrative and actuarial functions, which are typically undertaken by the sponsoring financial services company. 

1. Type A funds have sub-funds for participating employers. Each sub-fund has its own set of rules specific to the benefits the employer offers its employees.

2. Type B funds have a single set of rules governing a benefit structure for all the members of the fund, irrespective of their employers. In these funds, the participating employers may be linked at an industry or union level. 

Advantages of umbrella funds … and some drawbacks

Giles says that umbrella funds offer distinct advantages for both employers and members. These include:

• Professional governance: “Boards of standalone funds were made up of a combination of employer and employee trustees. These weren’t professional trustees – it was an add-on to their day job. Umbrella funds, on the other hand, have independent, professional trustees who have market experience, put time into the fund, and understand the fund environment. So from a governance perspective, there should be better governance,” Giles says.

• Economies of scale: “Size brings economies of scale,” she says. “The cost of running the fund is shared by a higher number of people than would typically be the case in a standalone fund – and this hopefully flows through to the members.”

• Purchasing power: Because of their size, umbrella funds have greater negotiating power with investment managers. “Obviouly, if there’s a large amount of money that’s going to come from the fund, they will be able to negotiate a lower asset management fee,” Giles says.

• Resources for members: An umbrella fund is likely to have a wider range of investment options than a small standalone fund and to have more sophisticated education and communication resources available to members to track their investments and broaden their financial knowledge.

On the negative side, concerns have been raised about conflicts of interest – for example, the financial company sponsoring the fund has an interest in directing members’ savings into its own products.

Giles says a discussion document published by National Treasury in 2022 raised concerns about conflicts of interest, opaque selection processes, and inadequate employer oversight in umbrella funds. She says that while the presence of professional, independent trustees on the boards of umbrella funds safeguard against conflicts of interest and promote good governance, employers still have a vital role to play. 

“The discussion document urged employers to stay engaged, establish advisory bodies, and avoid restrictive arrangements that lock them into underperforming funds. The message is clear: selecting an umbrella fund is not a tick-box exercise for employers; it’s an ongoing governance responsibility,” Giles says.

Reference:

Introduction to Umbrella Funds – Atleha-edu (Asisa)