27four Investment Managers
2nd October 2020
The shift to umbrella funds – does consolidation support transformation?
Two important strategic objectives of the FSCA are consolidation and transformation. Specifically, the consolidation objective envisages a reduction in the number of registered retirement funds to 2001 from more than 1 4002 active funds at present. The transformation effort aims to create a retirement industry that is financially inclusive and supportive of broadening the participation of black-owned companies in the financial sector.
But can these two objectives co-exist in the current retirement fund environment? Does consolidation support or hinder transformation?
We will look firstly at the consolidation of funds across the industry. Based on the latest active data listing from the FSCA, there are now just over 5 000 (from over 16 000 in 1999) funds actively registered.
These are classified into various statuses in the table below:
Distilling the information and focussing on the funds in the ‘Normal active fund’ status (these are the funds that are running in a business-as-usual mode), the shift from standalone to umbrella fund is quite evident. This change has been happening at an accelerated pace over the past decade resulting in a handful of “super” umbrella funds dominating the market. This becomes clearer when the ‘Normal active fund’ line item is broken down in terms of members and assets, as per the table below.
Currently there are 5 commercial entities that have created “super” umbrella funds, which collectively account for approximately 1.8 million members and have in excess of R315 Billion in AUM.
In the beginning, the move to umbrella fund arrangements was motivated by the following positive arguments:
- economies of scale,
- administration cost reduction, and
- removal of the fiduciary burden on employers running a standalone fund.
Open any umbrella fund brochure and these will be among the first reasons to join their fund, but these arguments are slowly being challenged.
Over the period 2010 to 2019, the differential in average costs of administration between standalone and umbrella funds has been eroded. The table below shows this erosion of differential in the average cost of administration as a percentage of salary between 2010 and 2019:
In view of the ever changing and more complex regulatory environment facing the retirement industry, this shift to commercial funds is understandable and plausibly to the benefit of members and employers. Keeping abreast with these changes can distract employers from core business activities and so an umbrella fund provides the governance structure and the support of the sponsor to help the employer navigate the regulatory changes, relieving them of that burden. The downside, however, becomes starkly clear when one observes that the five ‘super’ funds have a total of just 355 trustees who are responsible for making decisions on more than R315 Billion of assets on behalf of 1.8 million employees!
The transformation objective of the FSCA aims to promote financial inclusion, improve access to financial markets and broaden the participation of black-owned financial services providers across the sector. The latter is stipulated in Section 2c(iii) of Regulation 28 of the Pension Funds Act which states: “A fund and its board must at all times apply the following principles… in contracting services to the fund or its board, consider the need to promote broad-based black economic empowerment of those providing services”.
Retirement funds are a primary source of assets for black-owned asset managers as the retail industry is highly intermediated with high barriers to entry. Public sector and union retirement funds have been supportive of transformation imperatives and were the earliest movers to support black-owned asset managers. However, gaining access to some of the private sector retirement funds has been near impossible due to the intermediation of the “super” umbrella funds where the majority of assets are concentrated directly in the asset portfolios managed by the sponsors themselves. Umbrella funds are a form of asset gathering for such ”super” funds and diversifying to independent asset managers would dilute their AUM and by proxy their income. Hence there is no incentive for them to do so.
Couple this with 60% of consultants4 indicating that they do not consider B-BBEE when recommending service providers to boards of trustees, increasing the proportion of assets managed by black-owned asset managers is going to be an uphill battle. Over the past 5 years, the assets of 3 of the 5 super funds increased by 132%.
Over the period from 2017 to 2019, the total assets managed by black-owned asset managers across the entire savings and investments industry increased by only 39% and off a low base. The proportion of assets managed by black-owned asset managers within umbrella funds is insignificant (refer to section titled “Product distribution”).
So, does consolidation support transformation? The cost argument for moving to umbrella funds has been eroded, the responsibility for a significant portion of the economy’s savings is in the hands of only 35 people, and the rate at which the assets in commercial funds is growing compared to the growth in the proportion of these assets managed by black asset managers, would suggest that consolidation is contrary to transformation. The FSCA needs to ensure that its consolidation policy is implemented in a way that is consistent with its transformation policy.