If you belong to a stand-alone employer-sponsored occupational retirement fund, it’s likely that you will be caught up in the growing swing towards umbrella retirement funds as more and more employers and fund trustees find it too onerous to manage a fund.

The sponsors of the major occupational umbrella funds say there has been a steady growth in the number of participating employers and members, although much of this is a result of employers providing retirement benefits to their employees for the first time rather than transfers of existing members.

However, providers of commercial umbrella funds expect a surge in stand-alone funds converting to umbrella funds if proposed regulations that require retirement funds to offer members a range of default options are implemented.

If the proposals are implemented in their current form, retirement funds – stand-alone, umbrella and retirement annuity (RA) funds – will have to offer you, the member:

  • Default investment options;
  • Default preservation funds; and
  • Default pensions.

John Kotze, the head of group savings solutions at Old Mutual Corporate, says the proposed default options will add significantly to trustees’ responsibilities; in particular, they will have to ensure that members receive financial counselling and that the default options are appropriate for members.

“The obligations under default annuitisation are particularly complex and onerous, with retirement funds becoming akin to a broader [financial] services provider if the default strategy is an in-fund annuity (provided by the fund itself and not outsourced to a life assurance company or linked-investment services provider). It will challenge the knowledge and skill required from trustees.”

Kotze says the two main consequences are likely to be the consolidation of stand-alone retirement funds into umbrella funds and an increase in the costs incurred by stand-alone funds.

Dave Hufton, the head of institutional business at Alexander Forbes, says the growth of the Alexander Forbes Retirement (umbrella) Fund in its first 10 years was mainly the result of employer-sponsored, stand-alone funds converting to umbrella funds, whereas more recently it has been the result of employers transferring from other umbrella funds.

However, Hufton says he believes the proposed default regulations – which will come on top of the Treating Customers Fairly regulatory regime and the Protection of Personal Information Act – will again see umbrella funds growing because of stand-alone funds converting to these funds.

Kobus Hanekom, a well-known pension fund lawyer and the head of strategy, governance and compliance at Simeka Consultants and Actuaries, says employers that sponsor stand-alone funds and trustees of these funds have the following concerns about the changes:

  • The risk that a fund may make decisions that are not in members’ best interests will increase;
  • Employers and trustees will have to devote more time to attending to retirement fund matters, at the expense of their jobs; and
  • The choices that funds will have to offer their members will create complexity and additional risks.

“Traditionally, retirement funds have been concerned only with members who are employees of the sponsor of the fund saving for retirement. Retirement funds are now being forced to offer services and benefits designed to meet the changing needs and desires of members,” Hanekom says.

The new tax regime for contributions to retirement funds, which is scheduled to be implemented on March 1 next year, will also place an additional burden on retirement funds, because members will have greater choice of the rate at which they want to contribute to the fund (between the fund’s minimum contribution and a maximum of 27.5 percent of remuneration).

Variable contribution levels will place an additional burden on employers’ payroll administration systems and funds’ administration systems, he says.

According to the Financial Services Board’s website, there are about 1.5 million members of umbrella funds, which hold almost R200 billion in assets – and the number is growing rapidly every year.

There are now 74 commercial umbrella funds provided by 14 financial services companies. About 10 years ago, there were about 16 000 stand-alone occupational retirement funds registered by employers. This has declined to 5 340 funds, of which only about 3 000 are fully active.

Umbrella retirement funds are being challenged by a new concept, the group RA. Look out for the article in fourth-quarter 2015 edition of Personal Finance magazine that explains the differences between the two. The magazine goes on sale on October 30.


Umbrella funds allow a number of employers (known as participating employers) to sign up for membership of a retirement fund. Each employer, in effect, is a sub-fund. There are two types of umbrella funds:

Type-A funds: these are mainly commercial umbrella funds, which require special rules and provisions specific to each employer (such as retirement date and contribution rate) and are usually open to any employer/employee group or company. The funds are usually sponsored and administered by financial services companies on a for-profit basis.

Type-B funds: these do not have special rules or provisions for different employers – the rules apply uniformly to all employers. The employers are usually limited to those in a particular industry, such as the building industry, or type of employer (such as local authorities). Trade union funds are usually type-B funds. These funds do not usually have a commercial sponsor with a profit-making incentive.

Most commercial umbrella funds fall into the defined-contribution category, meaning that the contributions by the employer and employee are guaranteed, but the pension is not guaranteed at retirement.


The Pension Funds Act protects the interests of members of stand-alone occupational retirement funds whose employers want to move them to commercial umbrella funds, Rosemary Hunter, the deputy executive in charge of retirement funds at the Financial Services Board (FSB), says.

However, you cannot prevent a transfer if it is a condition of employment that you belong to a fund of your employer’s choice. But you can object to the transfer if you believe you are being prejudiced by the scheme put together to facilitate the move.

In terms of the Pension Funds Act, any scheme to transfer members and their savings from one fund to another must be approved by at least 75 percent of the members of the fund.

Hunter says any transfer of members between occupational retirement funds – from a stand-alone fund to an umbrella fund, or between umbrella funds, or between stand-alone funds – or any amalgamation of funds must comply with section 14 of the Pension Funds Act.

Retirement fund trustees have to take account of any objections they receive from members. If an objection cannot be resolved, it must be brought to the attention of the FSB.

Hunter says if your retirement savings are to be transferred from one fund to another, the trustees of both funds must comply with a number of duties, including:

  • Taking all reasonable steps to ensure that your interests are protected at all times in terms of the rules of the funds and the Pension Funds Act;
  • Ensuring that members and beneficiaries are properly informed of their rights, benefits and duties in terms of the rules of the funds; and
  • Ensuring that you are kept informed of your rights and choices, if any, and the progress of the transfer.

Hunter says transfers are also affected by the new principles-based regulatory regime of Treating Customers Fairly, particularly outcome three, which requires that consumers are provided with clear information and kept appropriately informed before, during and after the point of sale.

Hunter says the FSB handles transfers between occupational retirement funds differently from transfers between retirement annuity (RA) or preservation funds.

She says if you join an RA fund or a preservation fund, your membership will be a matter of personal choice. If you later choose to end your membership of that fund and join another RA or preservation fund, the approval of the FSB is not required, unless the fund is required to have an actuarial valuation.

She says that transfers between workplace (occupational) retirement funds in terms of contracts of employment are different from transfers involving RA or preservation funds.

“The trustees of a workplace fund cannot decide for employers and employees which fund the employees will belong to. So, if the employers and employees (in some cases represented by employer organisations and/or trade unions) have agreed, or their existing contracts of employment allow the employer to decide, that the employees will belong to a different fund in the future, the trustees of their current fund are not entitled to interfere in those contractual relationships by trying to prevent the termination of the employees’ memberships, even if they think that the employees would be better off if they remained members of their current fund in the long term.”

However, Hunter says a number of conditions must be met when transferring your savings from your current fund (the transferor fund) to another fund (the transferee fund).

These conditions include:

  • You must be informed of the transfer;
  • Any objections to the transfer that were conveyed to the trustees of the transferee fund must be resolved to the satisfaction of those trustees; and
  • The FSB must approve the scheme of transfer.

The FSB will approve the transfer only if it is satisfied that a number of conditions have been met. These conditions include:

  • The transfer must be authorised in terms of the rules of both the transferor fund and the transferee fund;
  • Reasonable and equitable provision has been made for the transfer of your assets and benefits, including any share of a surplus or reserve account;
  • Your rights and expectations of a reasonable benefit are protected, at least as they relate to your period of membership before the date of transfer;
  • The trustees of the transferor fund have investigated whether members may be prejudiced in that they may receive smaller benefits;
  • You must be informed of the amount, or a reasonable estimate of the amount, of your transfer value at the effective date of the transfer;
  • You have the right to object to the transfer scheme (but not to membership of the new fund) within 30 days of being notified of the transfer, and you must be told how to lodge an objection with your trustees.


Some major commercial umbrella retirement funds have set up, or are setting up, structures that anticipate the implementation of National Treasury’s proposed regulations on default options.

Kobus Hanekom, a pension fund lawyer and the head of strategy, governance and compliance at Simeka Consultants and Actuaries, says there is no reason retirement funds cannot start to introduce most of the proposed changes now. However, they cannot implement the changes in full, because:

Umbrella funds are currently not permitted to have preservation funds within their structure that enable members who leave the employ of a participating employer to preserve their savings until retirement. In the meantime, the sponsors of umbrella funds are offering members who leave a participating employer default preservation funds from within their stable of products.

Some of the default structures that have been put in place by some umbrella funds may not survive the regulations. For example, Old Mutual’s Superfund umbrella fund offers smoothed/stable bonus products as a default investment option for pre-retirement savings and with-profit annuities as a default pension at retirement. National Treasury has indicated that it does not favour smoothed/stable bonus and with-profit annuity products in their current form.

John Kotze, the head of group savings solutions at Old Mutual Corporate, says the Superfund offers default investment options for pre-retirement savings, the preservation of savings and an annuity at retirement.

Dave Hufton, the head of institutional business at Alexander Forbes, says the Alexander Forbes Retirement (umbrella) Fund has three default lifestage portfolios for pre-retirement savings: passive, specialist and balanced. He says the principles that underlie these defaults comply with National Treasury’s draft regulations, except that the specialist and balanced portfolios charge performance fees. However, these fees are being phased out.

The Sanlam Umbrella Fund hopes to have changes in place by the end of the year that will align the fund with the proposed regulations.

The Financial Services Board has approved changes to the fund’s rules that will allow for default investment strategies.



IOL Retirement

24 October 2015

Bruce Cameron