That there are ‘horses for courses’ and that no single solution works for all situations cannot be disputed. But an ever-increasing number of ‘horses’ will find they are better suited to a group retirement annuity (RA) solution than to an umbrella fund solution, says Dave Johnson
Umbrella funds were originally designed for employers that had an insufficient number of employees to warrant the establishment of a private retirement fund. It was accepted that the downside was the limited flexibility of the umbrella fund offering.
Umbrella funds have progressed significantly since then and now offer flexibility to almost match the private funds, providing members with a range of investment portfolio options. owever, this flexibility comes at a price, and as a result most umbrella funds have introduced a minimum administration fee. This minimum tends to apply once the number of employees drops below 50, which makes the admin cost less attractive for smaller employers. The alternative is a low-cost umbrella fund solution with limited flexibility, and the investment option limited to the guaranteed bonus fund of the sponsoring insurer.
It is not only the size of the employer that needs to be considered but also the profile of the employees. Even larger companies with professional employees may want to consider group RAs due to the flexibility they provide and because educated employees are able to take on greater responsibility for retirement provisions.
COMPULSORY MEMBERSHIP
Umbrella funds by definition require an employer to make it compulsory for all new employees to join the fund. This can be a deterrent to attracting certain employees, who may already have adequate retirement saving provisions. A group RA arrangement does not have the same restriction, allowing an employer to offer new employees the option not to participate.
Contribution flexibility
Participating in an umbrella fund would mean the employer has its own special rules, which are approved by the Financial Services Board (FSB).
These rules will define the various contribution categories and it is a requirement to conform to these special rules at all times. Any variation will require a rule amendment before implementation.
With a group RA there is total flexibility around contribution rates.
EMPLOYER LIABILITY AND INVOLVEMENT
An employer legally participates in the umbrella fund and this brings a degree of fiduciary responsibility. I anticipate legislation which will more clearly define this liability and the role of the employer-established management committee. Smaller businesses may not want to have any such responsibility.
In a group RA arrangement, the employer’s role is limited to the administrative function of paying the monthly contributions to the fund on behalf of its employees. A group RA involves individual retirement annuities and the employer has no legal right to receive any member information.
Some employers want to take a maternal approach to caring for employees. This is better achieved via an umbrella fund, as the employer is legally involved in the arrangement and has access to employee information.
The reality is that more and more employers are distancing themselves from their employees’ personal affairs.
PAYMENT OF BENEFITS ON WITHDRAWAL
Currently on resignation from employment and withdrawal from the umbrella fund, a member has the option to receive a cash benefit (subject to tax). This is not an option with the group RA, where the employee merely takes over the retirement annuity with an option to continue contributing.
Moves by government to introduce legislation regarding the compulsory preservation of benefits will make this less of an issue.
While there are increased situations where a group RA structure seems appropriate, it is important to remember that there are a range of umbrella funds and a range of group RA solutions. Assess the costs associated with the particular solution you are considering and be wary of layers of asset-based fees that some service providers include in their solutions. For many people the focus is on admin fees, while the more significant factor will be the combined asset-based fees.
Author: Dave Johnson is Company Secretary at Sygnia Asset Management
