Make sure your retirement fund is getting the right answers

A company’s employee benefits play a key role in determining how desirable it is as an employer, and how well it can retain staff. A good benefit’s package also helps keep staff engaged, with a direct impact on the bottom line.

As a result, companies are coming up with all sorts of innovative benefits, but two remain the keystones of any employee benefit scheme: medical aid and retirement funding. When it comes to the latter, employees should take the time to find out whether their company’s retirement fund is being run by an independent employee benefit consultant (EBC) or not.

If it is not, experience shows the retirement fund is likely to be more expensive to run, which will lead to a reduced investment performance. Another big disadvantage: it will not be agile enough to respond to changing circumstances.

A retirement fund is typically made of two separate components, frequently handled by different organisations:  savings and investment on the one hand, and risk benefits on the other. The risk portion of the fund provides cover in the unlikely event that a beneficiary is disabled and cannot continue contributing to their retirement fund, or to protect the heirs of employees who die prematurely.

Each of these entities is managed separately, the former by a fund administrator and the latter by an underwriter. An EBC that is tied to a particular vendor would only be able to use its own administrators and underwriters, and thus would only have access to a limited pool of in-house products and expertise.

The situation is very different when the EBC is independent. In such a case, it is possible to choose an open-architecture administrator (established under section 13(b) of the Pension Fund Act) that can administer any of the investment and savings vehicles offered by a multiplicity of vendors. Similarly, an independent risk administrator can be used for the risk portion and, again, can choose the best products from across the market.

And that’s really the key benefit to independence: the ability to mix and match between products and vendors in order to obtain the best-value benefits, both in terms of price and of “fit” with what the particular fund’s strategic objectives.

This flexibility is particularly important in the risk area because prices can fluctuate over the life of the risk benefit. An independent risk consultant can move the risk accordingly and can place it outside the circle of the usual big insurers – smaller insurers generally have cleaner risk pools, and can thus offer better pricing.

As an example, we were recently able to save a client R500 000 annually by switching insurers, a saving that can be passed onto the fund’s owners or members, depending on the structure of the fund.

In-summary, there is a lot to be said for independent EBCs: they have maximum flexibility within the law to get the best possible deal for their customers, in terms of value, not just of price. Is your fund being managed independently, or is it tied to a specific vendor? This is important, and worth investigating to understand the impact on your eventual retirement.