Regulation 38: creating a silent majority in umbrella funds?

It will be interesting to see how Regulation 38 will impact the profile of umbrella funds. With the new regulations, we will see an increase in “paid up” members in these Funds, but even more than two years later the extent to which this will happen is unclear.

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Regulation 38 effectively required pension and provident funds to amend their Fund Rules by no later than 1 March 2019, to provide that members who terminate service before retirement become paid up in the fund, until the fund is instructed by the member in writing to make payment of or transfer his/her benefit.

A ”paid-up” member can retain their retirement savings assets in the fund but will no longer make monthly contributions to the fund. Normal benefits in terms of withdrawal, death and retirement would apply to such paid up members.

It will be interesting to see how Regulation 38 will impact the profile of umbrella funds.

Historically, most umbrella funds have only had members who are associated with a participating employer. With the new regulations, we will see an increase in “paid up” members in these Funds, but even more than two years later the extent to which this will happen is unclear.

There are two categories of members who will become paid-up members. There are the genuine defaulters, who exit their employment and fail to provide an instruction regarding their retirement savings. Often these are members with small balances and often with tax issues. They are probably unaware of the existence of their benefit and unless they change their approach soon the umbrella fund will lose contact with them. The second are members who consciously decide to leave their savings in the fund.

The second group are interesting as possibly they appreciate that the assets are invested in a lower fee class than is applicable to retail solutions such as many preservation funds. The regulations are clear that the paid-up members cannot be charged a different investment fee to the contributing members. Advisors are persuading members to transfer to preservation funds presumably because the higher asset-based fees are offset by the access to a much wider range of investment portfolios.

I am not convinced that the umbrella funds are doing much to make the option of remaining as a paid-up member an attractive option. Few make provision for the member to appoint an advisor and remunerate them via an asset-based fee deduction. Some umbrella funds seem to default the investor into Trustee default portfolios, which tend to be the sponsored linked portfolios.

I am not convinced that the umbrella funds are doing much to make the option of remaining as a paid-up member an attractive option.

What appears to be happening is that many umbrella funds remain focused on the participating employers and the consultants to these participating employers. However, the paid-up members tend to be “de-linked’ from the participating employer.

They will not receive any communication, which is distributed via participating employers and their consultants. I question who is considering the needs of these paid-up members? Is enough effort going into tracing these members, especially the genuine defaulters, and proper communication with them once they have been traced?

It will be interesting to see how quickly the paid-up members increase as a percentage of the total members of an umbrella fund. The rate of increase will be much quicker once National Treasury implements the two-buckets approach that it recently raised as its vision. The one bucket will have compulsory preservation and will result in a sharp rise in paid-up membership. It is only a matter of time before an umbrella fund could have more paid-up members than active contributing members. Surely, umbrella funds cannot afford to keep ignoring the needs of this silent majority.

It will be interesting to see how quickly the paid-up members increase as a percentage of the total members of an umbrella fund.

I would like to see an umbrella fund embrace their paid-up members, allow them to appoint financial planners and create an offering that competes with the preservation funds and other retail solutions. It should be easier for financial planners to include such paid-up benefits in their total financial planning exercise.

In the meantime, we can expect to see most employee-benefits consultants recommending umbrella funds based on the outcome for active employees. The decision by an employer in selecting an umbrella fund is probably not going to factor in the approach the fund has to paid-up members. We can also expect that financial planners will continue to encourage members to transfer to preservation funds even if the fees are higher.

Does this defeat the aim of the regulator? Probably not. The regulator seeks increased preservation of benefits and to ensure that members’ interests are foremost when trustees make decisions related to fund governance. I am not sure the regulator is too concerned as to whether the preservation is in the umbrella fund or a preservation fund.

For decades, we have had individual life arrangements and employee benefits/group arrangements. In such a historic structure, paid-up members are individuals. But surely, we are in an age when group arrangements can accommodate individuals’ requirements. Flexible risk benefits and member investment choice are examples of this.

Surely umbrella funds can adjust to improve their focus on their paid-up members. Before they do become the silent majority.

By Dave Johnson, Independent Consultant.