What your umbrella fund offers you under the default regulations

MARTIN HESSE | martin.hesse@inl.co.za – 4th June 2019


If your employer belongs to a large commercial umbrella fund, the fund will have aligned its products and services to comply with the default retirement fund regulations, which came into effect March 1.

If you belong to a stand-alone employer fund, on the other hand, the fund may not yet be compliant with the new regulations and may have applied for a temporary exemption from the Financial Services Conduct Authority (FSCA).

According to statistics presented at last week’s workshop of the South African Independent Financial Advisers’ Association (Saifaa) in Cape Town, of the about 1700 active retirement funds registered with the FSCA, about a third of them (541) have applied for exemptions.

In a nutshell, the regulations require that a retirement fund offers its members pre-retirement, preservation, and post-retirement investment strategies, of which some must be “default” options – in other words, the option into which you “default” if you do not actively choose a different strategy – and they may be “in-fund” or “out-of-fund” depending on whether your savings are retained in the fund or transferred into another vehicle.

The regulations also require that you have access to counselling at crucial points, such as when you join a fund, resign or retire.

The umbrella funds featured at the Saifaa workshop appear genuinely committed to improving members’ outcomes by improving communication and, on the whole, keeping their default investment options simple, easy to understand and cost-effective. Much of the progress has been in pursuit of a competitive advantage in this lucrative market.

The five biggest umbrella funds – those of Old Mutual (not present at the workshop), Alexander Forbes, Momentum, Liberty and Sanlam – service about 1.8 million members and administer retirement assets of over R300 billion.

Most members are relatively low earners and have low levels of financial literacy. They have saved relatively little, on average, and are inclined to take cash lump-sums when they leave a fund or retire.

So what are umbrella funds offering members under the default regulations?

Pre-retirement investment options

The big providers have traditionally offered a range of investment strategies on their platforms.

They cover a range of risk-return profiles, with some, such as Sanlam and Momentum, including a lifestage strategy. They may include low-cost index-tracker products in the mix, but none rely solely on such investments. Default strategies are generally relatively simple and easy to understand. For example, Liberty offers a choice between a smoothed-bonus fund for risk-averse or shorter-term investors, and a goals-based strategy for long-term investors.

The new kid on the block in the retirement space, Discovery, offers financial incentives to stay invested, though these only apply if you belong to its Vitality rewards programme and are of real benefit only if you use Discovery’s other products.

Preservation options

When you resign or change jobs, preserving your savings is the default, and you will have to opt out if you want to take your savings in cash. The umbrella funds will let you remain where you are or invest in a different product, becoming a “paid-up” member. Preservation may involve a small additional administration fee (see below).

Post-retirement annuity options

It is here where the umbrella funds differ fairly widely in their default offerings, from guaranteed annuities, with-profit annuities and other hybrids to the highly popular (but “dangerous”, according to Discovery) living annuities.

  • Alexander Forbes offers a flexible hybrid annuity with living and guaranteed components.
  • Discovery has only a guaranteed annuity as its default, though members can opt for its non-default living annuity.
  • Liberty offers a simple low-cost living annuity with four default portfolios and a with-profit annuity.
  • Momentum has a with-profit annuity as its default, and a living annuity as a non-default option.
  • Sanlam offers two in-fund living annuities and an out-of-fund guaranteed annuity. Its trustee-endorsed living annuity is in a smoothed bonus fund.

Note that default and trustee-endorsed living annuities offered by the umbrella funds may have relatively conservative drawdown limits. For example, on its trustee-endorsed living annuity, Sanlam restricts its drawdown rate to 5% for men aged 60.

The providers also differ in their restrictions on switching products or on allocating savings to more than one product.

For example, with Sanlam, if you want to switch from its in-fund living annuity to its out-of-fund guaranteed annuity, you need to transfer the full benefit; you can’t transfer part of it.


The default regulations require that costs are kept to a minimum on default strategies, and the providers at the Saifaa workshop showed they are generally aiming to do this.

A bonus is that asset-management fees on underlying portfolios are at the lower institutional rate, instead of the higher rate you’d pay if you transferred to an external retail product.

The new retirement cost disclosure for umbrella funds, which they must have implemented by September, will make it easier for fund members to see exactly what they are paying in costs.

Space does not allow for a detailed breakdown of all fees across providers’ products.

For preservation, they charge the following in addition to the underlying asset-management fees (fees exclude VAT, and advice fees are negotiable):

  • Alexander Forbes: no upfront or compulsory advice fees. The annual administration fee is 0.2% of assets (capped at R2 million), with a minimum of R20 per member per month.
  • Liberty: R30 a month administration fee. If you appoint an adviser, he or she can charge up to 0.5%
  • Sanlam: annual administration fee of 0.1% to a maximum of R125 a month, plus a contingency account reserve levy of R3 a month. You can appoint your own adviser, who can charge an initial fee of up to 0.5% and an ongoing advice fee of up to 0.75% a year.
  • Momentum members retain the same asset-management fee after preservation, and there are no administration fees. If you appoint an adviser, he or she can earn an initial fee of up to 2% and an ongoing annual fee of up to 1%.

Member communication and benefits counselling

The big commercial funds have sophisticated apps that will show your fund balance, calculate to what extent you are on track with your savings goals, and answer most questions you may have on pre- and post-retirement products.

Retirement benefits counsellors are on call in most cases to provide further information. However, counsellors are not allowed to recommend a particular product or course of action. If you need advice, the counsellor must refer you to your own adviser or one recommended by the fund.

In other words, you can:

* Choose an option based on factual information you receive digitally or in print;

* Opt for telephonic counselling on default options (this service would normally be free of charge), and based on this information make a choice; or

* Be referred to an adviser, whereupon advice fees will be applicable.

Your fund may offer a proactive telephonic service, whereby a counsellor will call you at crucial points in your retirement journey.

Momentum uniquely hosts an annual conference for its umbrella fund members in Johannesburg, Durban and Cape Town, in order to educate them on their options.


Lifestage investment strategy: Throughout most of your working life, you are invested in higher risk, high-growth assets, but as you approach retirement your savings are transferred into safer, lower-growth assets.

Guaranteed annuity: A pension bought from a life insurance company that pays for life. It may be level, inflation-linked or escalate by a set percentage annually. Capital is typically only guaranteed if you die prematurely, within five or 10 years.

With-profit annuity: A pension that pays for life, but annual increases are linked to market returns.

Hybrid annuity: A blend of guaranteed and living annuities.

Living annuity: An investment-based product dependent on market returns, from which you draw an income within certain limits, with any remaining capital being available to your beneficiaries.

Drawdown rate: The percentage of your investment you withdraw annually from your living annuity.

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