Umbrella funds have been growing in popularity over the last couple of years and are especially valued by employers who prefer a lighter touch approach to their employee benefit arrangements. There will always be a place for large, credible free standing funds with a reasonable governance budget, but commercial umbrella funds are a good alternative for employers who want a more commoditised, outsourced solution.
In general, umbrella funds do a reasonable job of providing an efficient retirement vehicle for members. Although umbrella funds seem similar at first glance, there are some important differences. These differences may be material depending on what you need and what is best for your members.
Not all umbrella funds are equal
All of the large commercial umbrella arrangements have reasonable administration capabilities and largely comply with legislation, but that’s where the similarities end. Depending on the sponsor of the umbrella fund, each umbrella fund can have quite different profit drivers, and this impacts on the design of the arrangement, the options available, the pricing and the member experience. It is important to understand what these profit drivers are, so that you know what to look for when assessing different umbrella arrangements, the selected options within the umbrella funds, and what you are ultimately comfortable with. Most sponsors to umbrella funds are large financial services providers with a raft of financial services and products in their arsenal. These are ‘for profit’ funds and the sponsor needs to make money out of the umbrella arrangement as a whole. As a consequence, the sponsor products and services are woven into the fabric of the umbrella fund. The best value for money umbrella offering is when you select all of the umbrella fund trustee default options. This option generally uses only the sponsor’s products and services. Options providing flexibility and more choice in relation to products and services comes at a cost. The sponsor product tier may be the only option available for a very small employer, but medium and larger employers need to carefully weigh up the option of having some flexibility in relation to the selection of providers into the future, as some level of choice over the provider, and flexibility in relation to benefits may over time prove invaluable. The financial services industry provides the best offering to those that regularly compare their umbrella fund to that of the market, both in terms of service and price.
Most umbrella funds have an administration capability, but the explicit administration fee charged only covers the basic cost of administration at best. Just looking at the administration fee in isolation isn’t going to prove much of a differentiator, even when you add in governance levies or employer levies or other small operational costs levied by the providers. These costs are generally negligible and are not profit generators for the sponsor. Administration is generally seen as an enabler, for the sale of other products and services that are more lucrative.
The profit drivers for umbrella funds are usually the investment products packaged into the umbrella fund. Most providers have built their own investment offering into the umbrella fund’s default investment strategy but will also make other investment portfolios available to appeal to as many diverse employers as possible. These investment strategies range from inhouse investment managers, investments with guarantees, active managers, passive managers, targeted return strategies, and a diverse set of multi manager products. Although there is a wide range of investment fees charged, there may also be additional investment administration fees levied by the umbrella fund depending on the investment range you choose. Understanding the umbrella fund fee structure can be complicated. There may be more bespoke investment options available, but you need to pay very careful attention to the fees, and how they are levied. All umbrella investment offerings and fees are definitely not equal, and neither is their performance. Net returns over a 5 year period will be a useful comparison, and looking at the Total investment Cost (TIC) is also important.
Another common profit driver for umbrella funds are risk benefits, and many umbrella funds have fund approved risk providers. Smaller employers are constrained in relation to the risk providers that they can select. Below a certain membership size, small employers may be limited to the risk offering of the umbrella sponsor. Without regular risk rebrokes by an expert independent consultant, these costs can tick up quickly, so definitely something to look out for. You ideally need an offering that gives you some choice as to your risk provider, even if its limited. The alternative would be to have unapproved risk benefits so that you are not limited to the fund’s approved list of insurers, but this introduces additional complexities as most umbrella funds will not include the unapproved risk in benefits statements, or member communication.
Selling retail investment and risk products to members is another common profit driver. Recent legislative changes like the two-pot system have resulted in most umbrella funds interacting directly with fund members. This can be via communication exercises or the fund appointed benefit counsellors, which are generally employed by the fund or the fund’s sponsor. The benefit counsellors provide members with information at different points in their retirement savings journey. For example, when a member joins the fund they will be provided with information about the fund and its benefits. When the member nears retirement, they will be provided with information about the different annuity and pension options offered by the fund. Two-pot legislation has also resulted in more members approaching their funds directly than ever before, as they try to understand the different pots, and access the monies in their savings pot. This trend is expected to increase into the future. There is no doubt that members need factual information about their retirement benefits and that they need financial support and assistance about important decisions that they make regarding their savings. The large umbrella funds cater well to these needs. In addition, most umbrella sponsors have a strong financial planning service offering, a comprehensive range of retail products and deep retail investment capabilities, both in terms of advice and products. This is seen as an important profit driver by umbrella sponsors into the future. Default annuity strategies typically make use of the sponsor’s annuity products, as well as their financial planners. Umbrella funds aim to provide a cradle to grave solution for fund members.
The overall member experience with the umbrella fund is also important, with many providers making this a focus area providing an impressive array of digital engagements and financial tools via online member portals. Depending on your needs, the member experience is also an important differentiator in terms of member (and thus employee) satisfaction, and acts as a channel, linking the umbrella fund to the sponsor’s retail world.
Should you want a level of flexibility and choice of the provider that you use as part of your umbrella fund solution, you need to carefully assess the options available to you. Be warned, there are generally additional costs levied, and these can be hard to identify, and quantify. Understanding the different umbrella funds’ profit drivers is important, as over time, you can expect to see less flexibility around those levers required for the sponsor to increase their margins. If flexibility is important to you, choose wisely, and watch out for rules that change in favour of the sponsor’s products and services.
Commercial umbrella funds are essentially financial products, that are continually developing and evolving. Each provider wants to increase its slice of the market and is working hard to make themselves more attractive relative to their competitors. This is great news for employers and members, but it’s important to remember that ultimately, there is a profit motive baked into the umbrella offering. You need to be comfortable with the umbrella product that you have bought, the outcome that you get and the overall price that you pay.
It is important to understand what the different umbrella funds provide, and what best suits your immediate needs and into the future. It is best to partner with an expert independent consultant to assist you in reviewing the umbrella fund universe on a regular basis. Much like all financial products, you need to review them regularly to make sure that you are getting the best value for your money and that you are happy with the offering.