Cape Town: The massive growth of commercial umbrella funds, new entrants into this market, potentially far-reaching regulatory reforms, significant changes in benefit design and member communication, and an unusually high number of disability claims are all having a marked impact on South Africa’s employee benefits industry. Dawie de Villiers, CEO of Sanlam Employee Benefits, unpacks these and other trends currently shaping this fast-changing landscape.
Phenomenal growth of umbrella funds
The key trend over the past decade has been retirement fund consolidation – with massive growth of the umbrella fund market as employers continue to transfer to these funds from stand-alone arrangements. In fact, with a 17% market share (measured a year ago) and growing, multi-employer commercial umbrella funds now constitute the fastest growing segment of the South African retirement fund market.
According to a 2016 report by Credit Suisse, between 2011 and 2015, commercial umbrella funds grew assets under administration by 25% per year, eclipsing growth in stand-alone fund assets (10.5%) and retirement annuity (RA) and preservation fund assets (16.9%) over the same period.
Stand-alone funds are making the move to umbrella funds for the following reasons: cost savings, better administration, improved governance and better investment expertise. We believe a lot of the remaining stand-alone funds will move to umbrella funds over the next few years – we’re likely to see only a few hundred funds remain in the market eventually.
On the regulatory front
National Treasury has acknowledged the rapid growth of the umbrella fund market – in his Budget Review in February this year, Finance Minister Pravin Gordhan stated that during 2017, amendments to the Pension Funds Act will be considered to include provision for umbrella funds. While we don’t believe any radical changes will result anytime soon, we do hope to see the following in time:
Clearly defined roles of institutional sponsors, with clients having the right to vote with their feet if they are dissatisfied with an offering. This will encourage sponsors to invest in better offerings, thus promoting greater competition to the ultimate benefit of members.
Detail on the role of management committees. We believe these should be made mandatory, although they may not be the most cost-effective model for smaller employers. We recommend a threshold (for example, 50 members) below which management committees won’t be mandatory at employer level.
Detail on trustee board composition, restrictions on sponsor-appointed trustees, and clarity on the definition of independent trustees.
New-generation product options
In response to Government pressures to reform the South African retirement fund industry, as well as emerging employee benefits industry trends and challenges, umbrella funds, in particular, have had to take a long, hard look at certain aspects of their benefit design. Factors which have been cast into the spotlight include simpler ways to charge fees that make product comparability easier, and elimination of unnecessary bells and whistles for ordinary members where cost efficiency is vital, while allowing greater customisation for members prepared to pay for such additional features.
The second draft of Government’s default regulations was released for public comment in December 2016, and the final regulations are expected to be published later this year. In a defined contribution environment where the investment risk has shifted from the employer to the employee, default strategies will certainly go a long way towards ensuring that fund member savings are protected, and ultimately better outcomes achieved.
Several of the major funds – led by the Sanlam Umbrella Fund – have been pro-active in this regard and introduced default solutions for members ahead of regulation. Some of these new-generation products combine the best of both institutional and retail offerings, offering a cost-effective default investment strategy for ordinary members, whereas a small percentage of more affluent members can enjoy greater flexibility and access to bespoke personal investment portfolios, at appropriate prices.
Other include phased retirement options, preservation options for members who resign, and options to buy a pension from the umbrella fund instead of from an outside provider upon retirement.
New kids on the block
All the activity within the umbrella fund space of late has led to new entrants wanting a piece of the pie. Just recently three large institutional sponsors announced their intentions of launching commercial umbrella funds. We welcome these new entrants – they will hopefully push the market towards greater efficiency and cost-effectiveness, which can only be to the benefit of fund members.
The new umbrella fund players might bring about further disruption in the employee benefits market, with innovative ideas, ground-breaking digital systems, and new ways of defining the market. This, in turn, will push the existing industry players to evolve further to address the changing needs of their members and improve their retirement outcomes.
Focusing on changing member needs
Another important trend in the employee benefits space is the changing way in which funds communicate to and engage with members. Digital technology is rapidly changing ways of interaction, both on a business and social level. The industry will need to keep abreast of such developments – from robo-advice to the sharing of real-time information and data between the insurer, fund administrator, employer, intermediary and member.
Millennials interact with brands and products differently from the preceding generations – they need to be engaged on the digital platforms they are familiar with, such as social media and mobile apps. They also need to be provided with clear, complete, and up-to-date information about their benefits and investments.
With the days of remaining in the employ of a single company for lifelong gone – millennials tend to job-hop in two-year intervals or less – individualisation of a member’s fund experience has become crucial. Retirement solutions focusing on customisation and allowing for the new generation’s ‘nomadic’ attitude towards employment is imperative if these fund members are to be retained over the long term.
Skyrocketing disability claims
On a more sobering note, another key trend impacting the employee benefits industry, in particular, is the sustained rise in the number of people claiming disability benefits over especially the past two years. This is of course directly linked to the current low economic growth cycle, in which businesses are struggling and employees are finding it hard to make ends meet. Issues related to mental health such as depression and anxiety, and chronic back pain top the list of causes of disability.
Insurers in the industry are feeling the brunt, with some industry players incurring losses running into hundreds of millions of rands. In our present economic climate, it becomes a vicious cycle, with companies not employing more people resulting in longer periods of disability, at considerable cost to the industry – which, in turn, pushes up monthly premiums. The fact that the economic environment is likely to remain volatile means insurers are going to have to weather this storm.
The last word
The annual Sanlam Benchmark Survey is an excellent source of empirical data, valuable feedback and credible insights on the challenges faced by retirement fund members. However, no-one can peer into a crystal ball and predict what will happen next in the employee benefits industry. What is clear is that players in this fast-transforming market are realising that returning to the ‘business as usual’ of years gone by is no longer an option. In the face of increasing competition, economic uncertainty and changing customer needs, they will have to continue to adapt to the current trends and challenges if they wish to remain competitive and seek opportunities for new growth.
Source: Atmosphere Communications