Shining a spotlight on Umbrella Funds’ default performance and fees

Investec Asset Management recently commissioned NMG Consulting to conduct a study of umbrella fund default options and their investment performance. Read the complete findings here, however the five key highlights of the study include:

  1. The decision to move to an umbrella fund is an easy one for smaller retirement funds. Companies are able to reduce their administrative burden, governance requirements and fiduciary responsibility all at a cheaper overall cost-to-company. As a result, umbrella funds are growing 2.5x faster than standalone corporate schemes.
  2. From the corporate’s point of view, overall cost-to-company is the key factor when selecting an umbrella provider, specifically the costs that are borne directly by the sponsor/employer.
  3. This can introduce a mis-alignment of interests between the sponsor/employer and the members/employees. Under the most common arrangement, advice and admin costs are borne by the sponsor/employer, and are expressed as a percentage of monthly payroll. The asset management fees, on the other hand, are paid out of the member/employee’s accumulated pension pot.
  4. In a world where regulation will no longer permit exit penalties, it is not clear if “smooth-bonus” funds can remain relevant.
  5. The growth of umbrella funds will ultimately shift the key question for Trustees away from the current “Why Umbrella?” to “Which Umbrella?”. This is because there is a wide variation amongst umbrella funds, both in terms of asset management fees (variation or dispersion can be as wide as 1% per annum) and in terms of investment performance (variation or dispersion has been as wide as 5% per annum).
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