There has been a significant reduction in the number of stand-alone retirement funds over the last six years as regulation increasingly sees these funds being swallowed by larger umbrella funds.
An analysis of data from the Financial Services Board (FSB) shows that the number of active stand-alone funds (including industry umbrella funds) have dropped from 1 439 in March 2012 to 982 by February 2018. The number of commercial umbrella funds have been fairly static at about 200 over the period.
To a large extent, this has been the result of increased regulation – including the additional costs associated with Regulation 28 reporting and the introduction of default regulations. Defaults are automatic choices made on behalf of retirement fund members who do not exercise their choices in a given situation. The latter is an effort by government to improve the retirement fund outcomes for members by ensuring that they get good value for their savings and maintain their standard of living in retirement.
Despite it being a slow and sometimes painful process, reform is ongoing. National Treasury announced in the 2018 budget that retirement funds would be able to increase their offshore allocation from 25% to 30%. This impacts the asset allocation limits set by Regulation 28. Former finance minister Malusi Gigaba also said Treasury has directed the FSB to proceed with measures to improve the governance of retirement funds. All funds will have to submit audited financial statements annually in future.
More stringent regulation has increased the governance burden for trustees. Many trustees of smaller stand-alone funds have argued that it would be more effective from a cost and time perspective to move to a larger umbrella fund.
Against this backdrop, one should expect more stand-alone funds to be swallowed by umbrella funds. And while a smaller number of large umbrella funds may well offer economies of scale, lower fees for members, and put regulators in a position to provide more effective oversight, there may also be some unintended consequences.
RisCura executive Petri Greeff says among smaller stand-alone funds, trustees commonly include member and employer-elected individuals that know the members personally and that have an emotional connection to the business. As a result, they often feel a personal responsibility toward these members.
In a large commercial umbrella fund, the trustees are highly skilled professional types, but the member is often only a number and chances are that the process will be clinical and driven by commercial interests.
While a smaller stand-alone fund would be able to build unique investment strategies in line with the needs of a particular workforce, larger umbrella funds would generally employ more generic strategies, which may not reflect the unique profile of a particular group of employees, Greeff says.
The trend towards umbrella funds may also hamper transformation in the industry as large funds will likely stick to well-known names in auditing, fund management, accounting and actuarial consulting to provide professional services instead of fostering emerging black firms, he adds.
Concentration risk may also become a factor as a small number of umbrella funds increasingly dominate the industry. This was highlighted by the demise of Steinhoff in December. Africa’s largest pension fund – the Government Employees Pension Fund with more than 1.2 million members – recorded a loss of 0.6% of its total portfolio in the wake of the accounting scandal at the global retailer, news of which broke in December 2017.
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