Funds should provide adequately for retirement
Most trustees would probably know that the purpose of their fund is to provide adequately for retirement, perhaps for disablement and death as well. But, ‘to provide adequately for retirement, or disablement or death’ – what does this actually mean? Why do you actually need a fund for these purposes? We all know that we can individually make our own insurance and savings arrangements according to our own needs and requirements, without being ‘straight jacketed’ into the employer’s retirement fund.
Why have a pension fund?
Let’s revisit the main reasons for setting up a retirement fund to provide for retirement, disablement and death before we examine what ‘provide for’ means. Honing in on the many reasons, one needs to recognize the main stakeholder of retirement provision which are: firstly, the government, secondly the employer and thirdly, the member.
Government is a key stakeholder in retirement provision
Government clearly has an interest in its subjects providing for retirement, disablement and death to relieve the burden on the fiscus to look after those that can no longer provide for themselves and their families due to superannuation, incapacity or death. To encourage its citizens to make their own provision, government offers special tax incentives via the Income Tax Act, not availed to any other savings vehicle. In addition, government has thrown a special protective net over retirement fund savings via the Pension Funds Act that is not availed to any other savings vehicle.
The employer is a key stakeholder in retirement provision
Let’s now turn to the employer as another key stakeholder. Considering that there is currently no legal obligation on an employer to offer a retirement fund arrangement to its staff, the question begs to be asked, why an employer would have any interest in a retirement fund and why is it then that the majority of employers do actually burden themselves with the responsibilities and obligations linked to the introduction and maintenance of a retirement fund? Why does the employer not simply hand over the cash to the employee and let the employee care for himself? After all, they are all mature adults and the employer not their tutelage. Fact of life unfortunately proves these assumptions wrong! So the employer has to think long-term on behalf of his employees, a social responsibility that will allow the employer to sleep in peace. But this is not the only reason. In today’s competitive labour market, an employer who does not offer pension benefits, will be at a distinct disadvantage when it comes to attracting and retaining scarce skills, so market forces pressure the employer into offering pension benefits.
The employee is a key stakeholder in retirement provision
Where does the employee as third key stakeholder stand with regard to pension arrangements? As we just read, employees of course prefer to have the cash in their back pockets, at least while they are young, healthy and in a sound financial position. When any of these parameters change and as the employee gets older, starts thinking about his kids and their future and about his own old age, the perspective starts changing. Trying to make personal arrangements at this point would be either too late or one would be barred for reason of pre-existing conditions that no one in his right mind would be prepared to underwrite anymore.
Government wants the private sector to make provision for retirement
The long and the short of this is that government wants the employer and the employee to make provision for old age and other situations and offers very attractive incentives to the employees in particular. Employers feel a moral and competitive compulsion and employees are probably split equally on the issue.
‘To provide adequately’ – is it in the eyes of the beholder?
Having considered the reasons for retirement funds the next question to answer is what ‘to provide adequately for retirement, disablement and death actually means. Since all of us incur regular monthly costs to live that are related to our income, while we incur ad hoc outlays only infrequently. The main objective of a retirement fund should then be to replace one’s regular income come retirement. For retirement, an accepted international norm is to achieve an income replacement ratio post retirement of 2% per year of service. This means that you would only be able to replace your income before retirement one on one, if you have been employed for 50 years! Most of us won’t be in that category but would look rather at 30 or 40 years of service at best. Considering that the capital available at retirement is a function of contributions made and investment returns earned.
How much do I need to put aside to retire with dignity?
If we assume that when I retire at 60, the pension of 2% per year of service is to provide for my surviving spouse at a reduced pension after my demise and that this pension is to sort of keep up with inflation, I would need capital at retirement of around 7 times my annual cost of living at the time. To get to 7 times my annual cost of living, I would have to put aside a net 14% of my cost of living (or monthly income) earning a net 3% above inflation. If my money earns a net investment return of 5% net above inflation, I only need to set aside 10% net, or if I earn 7% net above inflation, I only need to set aside 7% net of my cost of living (or monthly income). Higher investment returns imply higher risk, but in the reasonable safety offered in the retirement fund environment, a return of 7% net above inflation can be achieved in the most aggressive pension fund portfolios. A note from the market here – in Namibia the average gross contribution towards retirement is in the region of between 10% and 11%, between employee and employer.
What you need to bear in mind in all of these calculations though is that you need to be a member of the fund when you enter employment until you reach retirement. The contribution towards the fund must be based on your total remuneration throughout, rather than perhaps just the cash component. When you change job you must preserve your accumulated capital for retirement. Given this, you should be able to replace your income before retirement at a ratio of 80% if you join the fund at 20, retire at 60 and maintained the appropriate contribution ratio, and achieved the required investment return throughout. Should you have joined the fund only at age 30, the replacement ratio would decline to 60%.
What about death and disablement?
So now you should have an idea what it means to provide adequately for retirement. What we have not looked at yet is what it means to provide adequately for the event of death or disablement. This we will be looking at in the next newsletter. Suffice it to point out here that this has a cost implication that would have to be added to what we have arrived at when considering retirement. And of course nothing comes for free, so on top of all these elements you will eventually also have to add the cost of managing such an arrangement.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.
The Act will commence on a future date to be published by the Minister by notice in the Gazette. It provides for a penalty not exceeding N$ 50,000 or imprisonment not exceeding 10 years or both, for offences relating to abuse, neglect, abandonment or maintenance of a child. It also provides for the state paying a maintenance grant, a child disability grant and a foster parent grant, in an amount and frequency as determined by the Minister by regulation.
The Act aims to:
- give effect to the rights of children;
- set out principles relating to the best interests of children;
- set the age of majority at 18 years;
- provide for the appointment of a Children’s Advocate;
- provide for the establishment of a Children’s Fund;
- make provisions relating to children’s courts;
- provide for residential child care facilities, places of care and shelters;
- provide for proof of parentage and parental responsibilities and rights in respect of children born outside marriage and children of divorced parents;
- provide for custody and guardianship of children on the death of the person having custody or guardianship;
- provide for kinship care of children;
- provide for prevention and early intervention services in relation to children;
- provide for foster care;
- provide for the issuing of contribution orders;
- provide for the domestic adoption and inter-country adoption;
- combat the trafficking of children;
- provide for provisions relating to persons unfit to work with children;
- provide for grants payable in respect of certain children; and
- create new offences relating to children.
Once the Act commences the following laws will, amongst others, be repealed in the whole:
- Children’s Act, 1960,
- Children’s Status Act, 2006 and
- Age of Majority Act, 1957
Once the Act commences the following laws will be amended:
- the Combating of Domestic Violence Act, 2003,
- the Combating of Immoral Practices Act, 1980,
- the Liquor Act, 1998,
- the Administration of Estates Act, 1965,
- the Marriage Act, 1961; and
- the Criminal Procedure Act, 1977
Justine Shipanga joined RFS from Sanlam Investment Management Namibia at the beginning of May 2014. She holds a B Economics and a Post Graduate Diploma in Financial Planning and has completed a programme in investment analysis and portfolio management through Unisa. Justine takes responsibility for the technical services to a portfolio of participating employers in the Benchmark Retirement Fund, as well as a few private funds, and is also responsible for the Benchmark performance review.
Our congratulations go to her, and we are sure that she will make valuable contributions to the retirement fund industry.
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