Different types of investments available to employers who wish to offer their staff retirement benefits
What are employee benefits?
Employee benefits are optional, non-financial compensation employers offer to staff in addition to their normal wages or salaries. These types of benefits may include group insurance (health, life, funeral etc.), disability income protection, retirement benefits, day-care, tuition reimbursement, funding of education, as well as flexible and alternative work arrangements.
Why do companies offer benefits to their staff?
Although expensive, there are many intrinsic benefits to providing your employees with a comprehensive benefit plan. Some of the advantages of an employee benefits programme for employers include:
- Attracting and retaining qualified employees – especially in a skills-starved economy and competitive business sectors;
- With the needs of the workforce changing, employers can use their benefit programmes to show its progressive nature in meeting the needs of different generations in the workforce, which improves the organisation’s professional image and credibility;
- Managing high-risk coverage at low costs and easing the company’s financial burden;
- Improving productivity because employees who are assured of security for themselves and their families are more effective;
- Premiums are tax deductible as corporation expense, which means savings for the organisation.
Preparing employees for retirement
In its discussion paper issued on 11 July 2013 entitled “Charges in South African retirement funds” (commonly known as “the Cost-paper”), National Treasury recommends that the workplace should be the primary place where retirement savings products are distributed. Both the employer and its employees should be encouraged to save for retirement.
South African employers wishing to support this recommendation, generally must choose between umbrella funds, standalone funds and group retirement annuity funds. Each of these options has unique attributes, with specific pros and cons. However, these three alternatives, with some customisation, offer a range of options that will enable employers of all sizes to find exactly the right type of plan for their organisation.
Floris Slabbert, Director at Ecsponent Financial Services, a wholly-owned subsidiary of Ecsponent Limited, says: “It may require a little bit of research, but employers will easily identify they and their employees will benefit from the different fund options.”
“Umbrella funds are ideal for smaller companies. An umbrella fund pools the investments of many employers. This pool of funds offers employers economy of scale and gives them the critical mass to negotiate lower costs. The average cost per member in an umbrella fund is lower than other types of funds,” says Slabbert.
Cost is one of the most important factors to smaller companies and anyone investing in umbrella funds. By pooling funds and sharing costs, the cost per member is reduced and as result, earnings are increased. For example, a saving of 1% on fees, means a 1% upside benefit accrues to the member.
Members are usually assured of robust governance, as most umbrella funds are administered by an independent board of trustees. However, there are disadvantages too. “Umbrella funds offer very little opportunity for customisation and investment oversight,” says Slabbert. “Umbrella funds are therefore ideal for employers seeking a cost-effective option. Or those who do not want to have full control over the investment and governance decisions, but rather outsource them to professional trustees.”
“A standalone fund serves one employer,” explains Slabbert. It is generally accepted that very large companies benefit most from standalone funds. Usually, bigger companies don’t need to pool funds to achieve lower costs.”
The main advantage of a standalone fund is control over the selection of the board of trustees. Additionally, the selection of service providers and the members’ investment strategies. The biggest disadvantage of standalone funds is that it may not make sense for medium and small companies without the numbers to set up a new, unique fund.
Group retirement annuity funds
“A group retirement annuity is, in essence, the same as an individual retirement annuity. The only difference is that the employer facilitates the process. Mainly by channelling contributions to the fund through the company’s payroll,” explains Slabbert.
In other words, each employee enters into an individual contract with the fund administrator. Unlike the umbrella fund, their contributions are not pooled in one large fund with other members. “One of the big advantages here is that when an employee leaves a company, there is no need to transfer ownership of the fund, as the retirement annuity belongs to the individual, not the employer. The employer merely pays the premiums on behalf of employees,” says Slabbert.
“Group retirement annuities may suit small employers who would still like to encourage financial prudence by offering benefits, without the administration requirements of the other options. There are also unique situations where it is more suitable for employees to contract directly with the fund,” explains Slabbert. However, the member foregoes the economies of scale of an umbrella fund or a large standalone fund. Therefore, it is necessary to perform a cost-benefit analysis to choose the most appropriate option.
Choosing the right retirement benefits option
There is no simple right or wrong answer when it comes to deciding which platform is best for a particular context. Umbrella funds are popular with smaller companies that can’t afford to administer their own fund, while large companies prefer standalone funds.
“When you approach a financial advisor such as Ecsponent, there will be a host of factors to consider,” says Slabbert. “How big is your organisation, which industry do you operate in, and to what extent do you want to have influence over the investment strategy? This becomes important when the choice of investments can influence the type of returns possible.
“Also, fund selections must revolve around thorough financial advice and education, preservation strategies and providing members with the best value. The aim is to extract as much value as possible and enjoy the best returns over the course of a member’s working life. That way, a valued employee may be a step closer to a comfortable retirement. A fitting reward after years of faithful service, says Slabbert.