Converting a standalone fund to an umbrella fund

Transcription

1 Cnverting a standalne fund t an umbrella fund September 2016 What is an umbrella fund? Simply put, an umbrella fund is either a pensin r prvident fund, which multiple and unrelated emplyers may jin (as ppsed t a single fund established nly fr ne emplyer, i.e. a standalne fund). On this basis, the participants in an umbrella fund will benefit frm ecnmies f scale and risk pling, which ptentially translates t significant reductins in verall csts. Many umbrella funds are spnsred by and have the financial backing f a large, reputable financial institutin. What is the purpse f this dcument? T detail sme f the issues a Bard f Trustees/emplyer shuld cnsider when deciding t cnvert a standalne fund t an umbrella fund T prvide a basic cmparisn between standalne funds versus umbrella funds T highlight the ptential cst savings f an umbrella fund T utline the prcess invlved in transferring frm a standalne fund t an umbrella fund Sme industry backgrund The mst recent infrmatin frm Gvernment upn the likely shape f the future industry was cntained in the 2010 Budget Review: The basic scial security arrangement culd be a cmmn, pled fund t which all emplyed persns cntribute. Hwever, allwing accredited private funds t perate alngside a statutry default arrangement wuld grant wrkers access t affrdable and secure savings arrangements, while allwing existing prvident and pensin funds time t adapt t mre stringent minimum standards. Accreditatin f private funds wuld cver standards f prper gvernance, benefit prtectin and cst efficiency, allwing betterrun, mre efficient retirement funds t cntinue t perate. This implies nly the better run and mre efficient retirement funds will be permitted t perate int the future. It is becming increasingly clear that mst standalne funds and even smaller umbrella funds have n future in the prpsed structure. Certain accredited funds may hwever be allwed t pt ut f the natinal arrangement. As the cnditins are still unclear at this stage it is difficult t predict minimum requirements that wuld be set fr pting ut. There is hwever a high prbability that large umbrella funds, which are managed with integrity, transparency and high service levels at a fee that ffers gd value fr mney, wuld qualify t pt ut. We believe that the Sanlam Umbrella Fund will satisfy the pt-ut requirements f any future dispensatin. This has been ur visin ver the past 3 years since Gvernment first annunced the Natinal Scial Security System prpsals.

2 Key issues t cnsider befre mving t an umbrella fund TIME Standalne retirement fund Intensive management time required with nerus duties fr trustees and Principal Officer. Management time significantly reduced, allwing management time t fcus n cre business. LIABILITY Standalne retirement fund The cmpany-appinted trustees have fiduciary respnsibilities and duties. Each trustee can incur liability and damage claims in persnal capacity. Emplyers must cmply with certain duties but will incur n liability relating t the management f the fund. Jint Frum members d nt have fiduciary duties but are accuntable t their membership. FLEXIBILITY Standalne retirement fund Ttal flexibility f benefit structure (subject t cst cnstraints). Investment strategy designed by the cmpanyappinted trustees (subject t minimums impsed by sme asset managers and prtflis). Tp umbrella funds can accmmdate almst all benefit structures. (Less flexible umbrella funds will limit flexibility t keep csts dwn). Investment strategy designed by emplyer/jint Frum (limited by the menu f prtflis ffered by the fund). The fund carries the emplyer s (cmpany s) wn branding. The umbrella fund carries the Spnsr s branding. COSTS Standalne retirement fund Generally has higher csts than umbrella funds. Csts are n average 20% t 40% lwer than standalne funds (as per results f Sanlam Benchmark 2010 survey).

3 Cmparisn between standalne funds and umbrella funds 1. Legal structure Standalne retirement fund Registered with the Registrar f Pensin funds. Registered with the Registrar f Pensin funds. One set f Fund Rules registered with the Financial Services Bard. General Rules (applicable t the entire umbrella fund) Special Rules fr each participating emplyer (applicable nly t that specific emplyer) Registered with the Financial Services Bard Subject t bth the Pensin Funds Act and Incme Tax Act. Subject t bth the Pensin Funds Act and Incme Tax Act. The tw basic structures are Pensin- and Prvident funds. The tw basic structures are Pensin- and Prvident funds. 2. Management f the fund Standalne retirement fund Managed by a Bard f Trustees Managed by a Bard f Trustees - Cnsisting f cmpany appinted and member elected trustees (typically lay trustees). - Cnsisting f Prfessinal trustees and Principal Officer. Members have the right t elect 50% f the trustees. The emplyer appints 50% f the trustees. Tp funds allw the Spnsr t appint 50% f the trustees and the members t elect the remaining 50% frm a list f industry prfessinals that are independent f the Spnsr. (This is dne t help manage ptential cnflicts f interest between the Spnsr and the Bard f Trustees.) In sme cases the Spnsr appints all the trustees (including the ne independent trustee required by the Act). The Bard f Trustees gverns the fund and has fiduciary respnsibilities and duties t: Manage the fund in accrdance with the applicable legislatin. Adhere t the latest PF130 Fund Gvernance principles. Cmply with King III Cde. In mst standalne funds, the trustees are als members f the fund. The trustees are in a psitin t determine the benefit structure and the service prviders. The trustees f the umbrella fund have the same fiduciary respnsibilities and duties as the standalne fund. Members f the Jint Frum are nt trustees f the fund and therefre d nt have the fiduciary duties and respnsibilities that trustees have. In tp umbrella funds, members f each Jint Frum are als members f the fund. The Jint Frum determines/amends the benefit structure and selects the service prviders, including the umbrella fund they belng t.

4 The emplyees f the emplyer in their capacity as trustees are required t underg frmal training, are ptentially liable in their persnal capacities and must meet regularly. The emplyees f the emplyer in their capacity as Jint Frum members d nt have t underg training and are nt ptentially liable in their persnal capacities and are required t attend nly ne meeting per annum. Member cmmunicatin: trustees are required t assume respnsibility fr all member cmmunicatin. Member cmmunicatin is prepared and designed by the umbrella fund. Jint Frum f each emplyer may be required t assist with the distributin f member cmmunicatin and with member supprt initiatives. 3. Benefit structure Standalne retirement fund The trustees are respnsible fr designing the fund s benefit structure with a chice f: - death, disability and funeral benefits. The trustees are respnsible fr the appintment f service prviders. The trustees have t manage the service prviders cntinuusly thrugh service level agreements. Participating emplyers can design their wn benefit structure within the umbrella fund s parameters, with a chice f: - death, disability and funeral benefits. Mst umbrella funds ffer a large degree f flexibility. The umbrella fund trustees are respnsible fr the selectin and appintment f service prviders. Typically the Spnsr s prducts are n ffer. Mre and mre umbrella funds (like the Sanlam Umbrella Fund) are creating pen architect envirnments, where ther service prviders can be selected. The Jint Frum will manage the service level f the umbrella fund and can review the perfrmance f the fund. 4. Investments Standalne retirement fund The trustees are respnsible fr the fund s investment strategy. The trustees are respnsible fr the umbrella fund s investment strategy and the menu f investment prtflis f the fund. The Jint Frum is respnsible fr the selectin f the mst apprpriate default investment plan fr its members within the trustee apprved strategy (n participating emplyer level). Trustees may appint specialist investment cnsultants t assist with the strategy. The Jint Frum may require a cntracted benefit cnsultant t assist with the selectin f an investment strategy and select the apprpriate prtflis.

5 Standalne funds that ffer individual investment chice t members will prepare a pre-selected list f prtflis that members can chse frm. The trustees f umbrella funds that ffer member chice will als prepare a list f pre-selected prtflis that members can chse frm. Mst funds that ffer investment chice will have a default prtfli. That is the prtfli int which all net cntributins will be paid unless therwise directed. Tp umbrella funds allw participating emplyers t chse between mre than ne default prtfli. 5. Csts Standalne retirement fund Fidelity Insurance Fidelity Insurance must be in place t prtect the fund against theft and fraud, and errrs and missins. The fund bears the cst f the insurance. The umbrella fund must have Fidelity Insurance in place, but ecnmies f scale are achieved because the csts are shared amngst thusands f members. Financial Statements Funds are bliged t cmpile and submit annual financial statements. The fund bears the cst f these statements. The cst f annual audits and financial statements are shared amngst thusands f members. Administratin csts Are based n the fund s data, n crss subsidies with ther funds. The cst is based n the umbrella fund s ttal membership, thus better ecnmies f scale are btained. Since each pay pint generates additinal csts, members f smaller emplyer will pay mre. The cst fr a 100-member emplyer in an umbrella fund shuld be cheaper than a 100- member standalne fund. The csts and fees incurred in running the fund (Financial Services Bard levies, insurance, auditrs, bankers, Principal Officer and trustee csts) are carried by the members, ver and abve the administratin fee. The csts and fees i.e. (Financial Services Bard levies, insurance, auditrs, bankers, Principal Officer and trustee csts) are shared by thusands f members and are included in the administratin fee r as a cntingency reserve levy (r may als be debited as they arise). Increased csts due t member trustee electins and trustee training. Prfessinal trustees require significantly less trustee training (if at all). Electins shuld still be dne fr member representatives (insignificant csts). Cmmunicatin is usually an additinal cst t fund. The csts are included in the administratin fee (althugh certain printing cst may be excluded).

6 Indirect csts The indirect csts ntably pprtunity csts when management time is diverted t fund management issues e.g. attending meetings, underging training etc. is carried by the emplyer. It is difficult t determine the actual cst cmpanies incur but these indirect csts shuld nt be underestimated. The Jint Frum has much less respnsibility and fewer meetings resulting in much lwer indirect csts. In summary Once these issues have been cnsidered, a mve t an umbrella fund is very cmpelling. The fllwing issues are f particular imprtance: The nerus respnsibilities and ptential liability assciated with being a trustee The dynamic nature f the retirement fund industry and legislatin gverning retirement funds and the need fr nging mnitring and change The increasing need fr, and csts f, member cmmunicatin and educatin within the retirement fund industry The ecnmies f scale achieved by adpting the umbrella fund apprach that allws a greater allcatin f net cntributins twards members retirement savings The prcess t fllw Phase 1 Once a client has decided t mve their existing standalne fund t an umbrella fund, there is a prcess that needs t be fllwed and cmpleted. Checklist phase 1: Transfer t the Sanlam Umbrella Fund 1 The decisin t jin an umbrella fund 2 Prepare cmmunicatin t members f existing fund 3 Sign acceptance t jin the umbrella fund The trustees f the existing standalne fund need t minute their decisin (fllwing the agreement with the emplyer) and agree n the effective date f transfer t the umbrella fund. The trustees shuld prepare a cmmunicatin t members utlining their decisin and allw 60 days fr any bjectins. If an bjectin is received, the trustees will be required t respnd in writing addressing any issues that may arise. See als pint 6 belw. It is imprtant t nte that the cntract will be between the emplyer and the umbrella fund. On jining the Sanlam Umbrella Fund, an installatin guide will be issued that utlines all the prcesses and timelines that will be fllwed.

7 4 Issue letter f terminatin t existing service prviders 5 Request a fund terminatin qutatin frm existing administratr 6 Frmalise investment strategy 7 Active members transfer t umbrella fund 8 Calculate individual members share f fund (Equitable Share) 9 Submit final Sectin 14 applicatin t the Financial Services Bard The trustees shuld issue a letter f terminatin t the existing service prviders f the standalne fund (preferably nce all members have been cnsulted n the transfer). It is critical that the terminatin date cincides with the inceptin date f the umbrella fund. This applies in particular t the risk prvider/s. Althugh the trustees may terminate supplier agreements n a specific date, the standalne fund may cntinue t exist past this date as the Sectin 14 applicatin may still need t be apprved. Only nce this is apprved will the administratr be able t finalize the terminatin f the standalne fund. In sme cases there might be members that remain in the standalne fund (e.g. pensiners) and the standalne fund might cntinue t perate fr these members. It is useful fr the trustees t request a qutatin frm the administratr detailing the csts assciated t clsing the fund, s that an apprpriate budget can be set. The trustees need t frmalise their investment strategy whilst the Sectin 14 is in prgress in respect ff the transferring members. This strategy must be cmmunicated t members as part f the transfer cmmunicatin exercise (pint 2 abve). The existing standalne fund members will transfer t the umbrella fund via a Sectin 14 prcess. (The Financial Services Bard s apprval is nt required if bth funds are valuatin exempt. Other terms and cnditins apply). The existing fund must calculate each member s value in the fund and the ttal f all these values will be reflected as the ttal members transfer value n the Sectin 14 applicatin. Using the values detailed under item 8 abve, prepare the required Sectin 14 applicatin and submit t the Sanlam Umbrella Fund t finalise their part f the applicatin. The Sanlam Umbrella Fund will then submit the cmpleted and signed applicatin t the Financial Services Bard fr their apprval. Nte that the Financial Services Bard als has certain regulated fees which they charge t prcess such an applicatin. In the case f the Sanlam Umbrella Fund the fees are paid frm the cntingency reserve accunt and are thus nt charged t transferring members. Phase 2 Once the active members have been transferred t the umbrella fund, the existing standalne fund must still be clsed (assuming n members remain, such as pensiners). T clse and de-register a fund, there are a number f administratin functins that need t be cmpleted. The clsure f a fund can take place n ne f tw bases: 1. Via a Sectin 28 Liquidatin (which we d nt recmmend since this is very cstly).

8 In this case a liquidatr is appinted and is required t fllw the legislated prcedure in this regard. 2. In terms f Sectin 27 f the PFA, applicatin t the Financial Services Bard t deregister the fund after cmpletin f the Sectin 14 prcess. This is the ne mst cmmnly used and the mst cst effective methd. The checklist that fllws utlines the prcedure t fllw in this case. Checklist phase 2: Clsure and deregistratin f the standalne fund 1 Handling any queries Queries might arise frm the Financial Services Bard, members, the emplyer r any related parties. 2 Fllw-up n Sectin 14 (if applicable) 3 Cntinuatin f legislative requirements 4 Cntinuatin f administratin functins 5 Transfer f assets nce Sectin 14 is apprved 6 Onging cash flw and accunting functin Onging pursuit and fllw up f the apprval f the Sectin 14 applicatin whilst it is with Financial Services Bard Cmpletin and submissin f the required tax recnciliatins t SARS n a mnthly basis. Onging claim payments in respect f any exits frm the fund during the Sectin 14 applicatin prcess. All administratin tasks including issuing f tax certificates, calculatin f benefits etc. whilst the Sectin 14 is in prgress. On Sectin 14 apprval the assets are t be transferred t the Sanlam Umbrella Fund. The nly assets remaining shuld be t cver the expenses and csts f clsing the fund. The auditrs need t prvide a final set f accunts shwing that the fund has n assets and n liabilities. All membership payments need t be finalised, all claims f debtrs and creditrs must be settled. 7 Finally clsure f the standalne fund. Further ntes The usual practice is fr administratrs t charge a terminatin fee related t the actual cst f perfrming all the required functins t terminate the standalne fund. It is imprtant t nte that the fees nly relate t thse rdinarily charged by an administratr, whse functin it is t versee the entire terminatin prcess n behalf f the fund. In sme cases there culd be additinal csts incurred related t services prvided by ther parties e.g. actuarial calculatins fr defined benefit funds, external auditing services, liquidatr csts etc. Until the fund has been fficially de-registered r liquidated, whereby the Financial Services Bard has issued the apprpriate dcumentatin in this regard, the trustees f the standalne fund remain respnsible fr all matters pertaining t that fund. It is therefre imprtant that they remain invlved as far as pssible and up t date n the prgress f the terminatin. Please nte that this dcument aims t prvide infrmatin as a reference guide and des nt claim t cver every situatin and des nt substitute fr prfessinal expert advice.