Umbrella Funds vsStand-alone Debating the Differences …€¦ · Umbrella Funds vsStand-alone Debating the Differences Hugh Hacking, CFA 23 September 2011

Umbrella Funds vs Stand-alone

Debating the DifferencesDebating the Differences

Hugh Hacking, CFA

23 September 2011

Umbrella vs Stand-alone – Debating the DifferencesCorporate

Why is this discussion important?

� After you cut through all the noise and complexity involved with retirement funds there only one thing that really matters:

– Does the chosen arrangement make the best use of contributions?


Getting to the answer

� To answer the question you need to consider two aspects:

– What are the member needs?

– What arrangement best uses contributions to achieve these needs?

� Bottom line - There are going to be trade-offs.� Bottom line - There are going to be trade-offs.


Umbrella vs Stand-alone

Umbrella Funds Stand-alone Funds

Multiple companies One company

Sponsored by a third party (normally

profit driven)Sponsored by the employer

Professional trustees Trustees from the member group

Generic features Features specific to the employer group


New Generation Umbrella Funds

� Good governance

– Independent trustees

– King III

– Clear and transparent sponsor relationship

– Transparent fees

– Provision for Member Committee at employer level– Provision for Member Committee at employer level

– Complaints process

– S37C process


Umbrella Funds Are Efficient

� 70% of funds have assets of < R6m (source FSB)

– An annual audit could easily cost > 1% of the total assets

� Umbrella funds are able to spread the costs of managing the fund over a large group of members

– An annual audit of a large umbrella fund would probably be less than 0.05% of the total assets


Umbrella Funds Outsource Risk

� What happens when something goes badly wrong – who pays?

– Stand-alone funds: probably the employer, the members or the trustees (who are employees)

– Umbrella funds: probably the sponsor or the trustees (who are professionals)


LARGE FUNDS HAVE BUYING POWER

� A large fund is able to negotiate lower rates

– Investment managers, auditors, administrators, etc

� A large fund has enough members to afford specialisedservices

– Education seminars, internet access, remote branch infrastructure, etc


When Should you consider an umbrella fund?

� TOTAL Costs provide direction

– Umbrella funds spread fixed costs and are better for smaller schemes

– Large schemes have sufficient scale and buying power to be competitive

� But when is a scheme “small enough” for an umbrella fund?


illustration: Cost and fee assumptions

(These will differ depending on actual circumstances. FSB Levies excluded.)(These will differ depending on actual circumstances. FSB Levies excluded.)

Stand-Alone

Membership

Member Related Fees Asset Related Fees Fixed Expenses

Admin Fees

(Rand per

member per

month)

Communication

Costs (Rand per

member per

month)

Distribution

(Rand per

member per

annum)

Investment

Charges (%

per annum)

Average

Assets per

Member

(000's Rand) Audit Fees

Consultant

Fees

Bank,

Trustee and

Other

Charges

0 to 500 60 30 - 1.00% 100,000 50,000 50,000 25,000

501 to 1000 50 30 - 1.00% 100,000 50,000 50,000 25,000

1001 to 5000 25 20 - 1.00% 200,000 100,000 100,000 50,000 1001 to 5000 25 20 - 1.00% 200,000 100,000 100,000 50,000

5000 to 10 000 20 20 - 0.90% 300,000 250,000 100,000 50,000

> 10 000 18 15 - 0.80% 300,000 500,000 200,000 80,000

Umbrella

Membership

Member Related Fees Asset Related Fees Fixed Expenses

Admin Fees

(Rand per

member per

month)

Communication

Costs (Rand per

member per

month)

Distribution

(Rand per

member per

annum)

Investment

Charges

Average

Assets per

Member Audit Fees

Consultant

Fees

Bank,

Trustee and

Other

Charges

0 to 500 60 - 180 1.20% 100,000 - - -

501 to 1000 50 - 120 1.10% 100,000 - - -

1001 to 5000 30 - 60 1.05% 200,000 - - -

5000 to 10 000 25 - 60 1.00% 300,000 - - -

> 10 000 20 - 50 1.00% 300,000 - - -


Umbrella vs Stand-alone

(This is for demonstration only (This is for demonstration only –– actual circumstances may differ.)actual circumstances may differ.)

90.00%

100.00%

110.00%

120.00%

% of Stand-alone

Total Cost as a % of Stand-alone Fund Cost

40.00%

50.00%

60.00%

70.00%

80.00%

50

100

250

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

15000

20000

% of Stand

Number of Members

Stand-alone

Umbrella


Doing The Ground WORK

� Calculate the total costs?

� How are the costs charged?

� Calculate the reduction in yield for members


Total costs

� Include everything:

– Administration fees (include transaction driven costs)

– Trustee costs

– Principal officer and secretarial services

– Investment fees

– Consulting and advice charges– Consulting and advice charges

– Audit and legal costs

– FSB levies

– Bank charges

– Actuarial costs

– Professional indemnity insurance

– Communication and member education costs


Fee Structure Matters

� It depends on who you are…

� A demonstration:

–– 12 people contributing R200 per month12 people contributing R200 per month



–– RIY over 5 years RIY over 5 years –– RIY over 5 years RIY over 5 years

–– Investment returns 10% per annum Investment returns 10% per annum

–– Values are intended as a demonstration onlyValues are intended as a demonstration only


Different Fee Impacts On Members


ADMIN FEE(Rand per member per month)

INVESTMENT FEE

R 0

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield

INVESTMENT FEE(% of assets per annum)

TOTAL FEE COLLECTED(R 000’s over 5 Years)

R 108k

5.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY

Monthly Contribution (Rand)





INVESTMENT FEE

R 10

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 108k

4.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 20

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 109k

4.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 30

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 109k

3.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 40

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 109k

3.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 50

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 110k

2.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 60

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 111k

2.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 70

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 111k

1.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 80

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 112k

1.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 90

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 113k

0.5%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY






INVESTMENT FEE

R 100

30.00%

35.00%

40.00%

45.00%

50.00%

Reduction In Yield



R 114k

0.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

200 1000 3000

RIY



Reduction in Yield is the Best comparison

� It is the difference between the Internal Rate of Return (IRR) of the investment balance over the period without charges and with all charges

�Calculating it is not particularly easy

�It depends on:

– Time horizon– Time horizon

– Contribution levels

– Contribution timing

– Asset values

– Returns, inflation and manner in which fees are charged


Calculating RIY

Year 1 2 3 4 5

Actual return 5% 8% 4% 10% 3%

Contribution (at start of period) 1000 1000 1000 1000 1000

Contribution-related Costs 50 50 50 50 50

Asset-related Costs 1.00% 1.00% 1.00% 1.00% 1.00%

Starting balance WITH costs 0 953.11 2036.33 3075.92 4388.25

Ending Balance WITH costs 953.11 2036.33 3075.92 4388.25 5445.02

= (Starting Balance + Contribution - Contribution-related Cost) * ((1 + (Return - Asset-related Cost)) ^ (1 /

12))12))

Starting balance WITHOUT costs 0 1050.00 2214.00 3342.56 4776.82

Ending Balance WITHOUT costs 1050.00 2214.00 3342.56 4776.82 5950.12

= (Starting Balance + Contribution) * ((1 + Return) ^ (1 / 12))

IRR WITH Costs 2.86%= IRR(C17:H17,5%)

Cashflows -1000 -1000 -1000 -1000 -1000 5445.02

IRR WITHOUT Costs 5.86%= IRR(C20:H20,5%)

Cashflows -1000 -1000 -1000 -1000 -1000 5950.12

Reduction in Yield 3.00%= (IRR WITH Costs - IRR WITHOUT Costs)


Other Member needs

� Is the whole group similar in need?

� What is the level of sophistication?

� Do the members need (or want) investment choice?

� Do members need (or want) guarantees?

� What sort of risk benefits are required?


Selecting an Umbrella Fund

� Union and Bargaining Council options

– Generally required if in place

� Simple, packages solutions with little flexibility

– Small employers seeking simplicity and affordability

� Single provider solutions that allow benefit tailoring

– Ideal for mid-sized employers that do not require individual – Ideal for mid-sized employers that do not require individual flexibility

� Member level investment choice solutions

– Suitable for financially sophisticated staff

� Options that include investment consulting

– Suitable for larger employers wishing to make the transition to an umbrella fund but retain a particular investment strategy


Selecting an option

� Don’t just ask for the most complex, feature-rich option!

– If members do not understand these options they could end up paying for features they don’t use!

� Design a tender brief

� Design a scorecard that weights the tenders� Design a scorecard that weights the tenders


Unpacking Umbrella Fund Charges

�Contribution related charges (often charged as a % of salary but may be Rand per member charges)

– Administration fees

– Intermediary fees

– Risk benefit premiums

– These fees are normally the easiest to assess

– Where do you find them? Normally the main tender breakdown



� Charges deducted from investments

� Investment management charges (deducted from the investments and typically disclosed as a percentage per annum)

– May include performance-related manager fees

� Other fees deducted from the investments (often charged as a % of the investments)% of the investments)

– Advice

– Administration

– Management charges

– These charges are often difficult to assess

– Where do you find these? Normally the supporting material



� Other charges (charged from investments or the contributions) and include

– Regulatory charges sometimes not included in other charges

– Transaction fees not included in other charges (e.g. investment switching fees)

– These charges may be very difficult to assess in advance.– These charges may be very difficult to assess in advance.

– Where do you find these? Normally disclosed in the supporting material but you may need to speak to the provider to assist with an estimate of the impact of these charges


Other Provider measures

� Education for members

� Administration system and quality

� Flexibility

� Track record

� Governance

� Is a Member Committee permitted� Is a Member Committee permitted


Making the move

� The Section 14 could take some time

– Separate out active members from other classes of members

– Plan for the existing fund to continue until liquidation and / or deregistration

� Work out a plan for unclaimed benefits� Work out a plan for unclaimed benefits

� Ensure that payroll people are on board and involved from the outset

� Ensure that communication happens early in the process


People you will need to succeed

� Appoint a delivery champion

� Appoint a payroll champion

� Appoint a Member Committee

� Develop a project plan


Questions?


Thank you

Hugh Hacking, CFAHead of Retirement Fund Solutions Old Mutual Corporate

[email protected]@oldmutual.com0824654924021 509-4489

Thank youThank you

Hugh Hacking, CFA

[email protected]

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Umbrella Funds vsStand-alone Debating the Differences …€¦ · Umbrella Funds vsStand-alone Debating the Differences Hugh Hacking, CFA 23 September 2011