The debate between Umbrella and stand-alone retirement funds has raised a number of varying opinions in the retirement fund industry. However the current trend in South Africa is definitely heading in favour of umbrella funds. There is no right or wrong when deciding which platform to use as an employer.

The key and most obvious difference between an umbrella and stand-alone fund is that an umbrella fund is a fund whereby multiple employers contribute towards one fund, while the latter serves a single employer. Each fund carries its own advantages and disadvantages and each employer needs to carefully consider the advantages and disadvantages of each platform when considering the retirement planning for its employees.

Umbrella Funds usually have lower fixed and variable costs per member, owing to their size. The fund often has the power to negotiate competitive administration, investment and other fees from their service providers, leading to a higher net return on investment for the members. A further advantage is that the employers’ obligation of structuring and governing the fund is waived to a degree. Umbrella funds are generally governed by an independent and industry experienced board of trustees, providing the members more assurance in terms of good governance of their life investment.

Umbrella Funds may however not be the appropriate  option as they have a more standard platform which may not be customised for certain entities’ needs. Employers and members might feel that they are losing a certain degree of control over their investments and the management thereof and prefer more involvement in the management of their assets.

Control over your fund can provide advantages such as the ability to appoint trustees on the board, selection of preferred service providers (administrators, consultants, auditors etc) as well as control over the members’ investment strategies. Stand-alone funds may be an appropriate option to an employer with unique operational characteristics. For example, where non-profit organisations cannot guarantee consistent employee salaries as it is dependent on donations, the fund rules can be adjusted to accommodate inconsistent contributions in this unique situation. It is however important that the employer has the necessary resources and members to justify the setup of a stand-alone fund.

This article only highlights a few differences between the two retirement fund platforms and all factors need to be considered when deciding which retirement fund platform will be the most suitable fit for your entity and its members.

In conclusion, there is no right or wrong answer as to which platform is superior. Umbrella funds have become the simple retirement fund solution for small to medium sized entities that do not have the resources to govern their own stand-alone fund, while stand-alone funds to be more suited for larger entities or those with specific needs.

Eckard Bergh

Audit Manager, Johannesburg