If you are an employee, you may belong to one of a number of different funds during your working life: knowing the differences will help you understand your benefits and what will happen at retirement.
For many years, employees were members of either an occupation-based pension or provident fund. Some provident funds cater for employees from different employers within an industry or service sector and are known as umbrella funds.
Increasingly employees are now being signed up for membership of umbrella funds set up by financial institutions – known as commercial umbrella funds.
An umbrella fund has a set of basic rules for all the employees who are members, but each participating employer can choose their own contribution levels, investment portfolio or portfolios, life assurance cover and possibly even the life and disability insurer.
Employers may also enter into arrangements with a retirement annuity (RA) provider to contribute to such a fund on your behalf. This is known as a group RA.
Pension funds
An occupation-based or employer-sponsored pension fund is one set up by your employer and will most likely bear the name of your employer or employer group. Your employer’s senior managers will most likely be members of the board, but members will also have the opportunity to elect 50% of the members to the board. There must be at least four trustees.
Membership of the fund may be a condition of employment and the retirement age will be in line with the retirement age for employees of the company.
An employer-sponsored fund may be either:
1. A defined contribution fund
Most employer-sponsored funds are defined contribution funds which set a defined level of contribution for both the employee and the employer, but do not define the benefits you will receive at retirement.
The fund guarantees only that you will receive the fund value made up of all your contributions and all those made by your employer plus the investment growth on those contributions, minus expenses paid on your behalf.
You are responsible for investing in your own pension when you retire.
The value of the benefit you will receive at retirement will depend on:
2. A defined benefit fund
If your employer offers a defined benefit fund, the rules of the fund will set out not only the contributions you and the employer need to make but also the retirement benefit you will enjoy if you retire, or the withdrawal benefit you will be entitled to if you leave the fund.
The benefit is typically an ongoing pension that is a percentage of your salary calculated by way of a formula that takes into account your salary at retirement and the number of years you have been a member of the fund.
Defined benefit funds may also pay a surviving spouse a pension.
South Africa has very few defined benefit funds left, but there are some very big ones like the Government Employees Pension Fund.
Provident funds
Occupation-based provident funds may also bear the name of the sponsoring employer or they may have been set up by a bargaining council or union for an industry, such as the motor or security industry.
Provident funds have differed from pension funds for many years in two material ways:
However, since March 1 2016 provident fund members have enjoyed a tax deduction for contributions to their funds.
And since March 1 2021 retiring provident fund members are obliged to purchase a pension with at least two thirds of the value accumulated from any contributions made after this date, subject to some exceptions. Read more: What are my choices at retirement?
These changes have effectively removed the distinction between the two funds. However, provident fund members’ rights to withdraw in full what they contributed before March 2021 are protected and for that reason provident funds are likely to continue for a few years.
Provident funds’ rules define how much you and your employer must contribute and the retirement benefits you enjoy at retirement are those of a defined contribution pension fund influenced by:
Umbrella funds
Umbrella funds are funds that cater to more than one employer not necessarily from the same business group or holding company. Some of these funds serve employers operating in a bargaining council while others – known as commercial umbrella funds – are set up and sponsored by financial institutions involved in retirement fund administration or consulting.
Umbrella funds can be either pension or provident funds.
There has been rapid growth in the number of umbrella funds in South Africa as these funds are attractive to employers who do not want the burden of sponsoring a standalone fund and, particularly to smaller employers, for whom the pooling of employee savings with that of employees from other employers reduces the cost of administration and investment.
Commercial umbrella funds are typically managed by professional trustees, including employees of the sponsoring company. Administration services, investment and group risk benefits are typically bought from the sponsoring company.
The potential conflicts of interest that trustees may face and the need to have independent trustees of umbrella fund boards have been identified by the Financial Sector Conduct Authority as issues that need to be addressed. It is expected that Conduct Standards for these funds will be introduced in future when retirement funds are subject to the Conduct of Financial Institutions Act.
Group RAs
Group retirement annuities are no different to RAs taken out in your own name. A group RA is set up when an employer makes an arrangement with an RA provider to allow the employer to pay contributions in bulk to an RA in your name and in the name of every other employee on behalf of whom the employer is contributing.
If you leave your employer, the RA remains yours to continue contributing to as you wish.
Read more: How do retirement annuities allow me to create my own retirement savings?
