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Background

You will be fully aware of the requirement in terms of regulation 28 of the Pension Funds Act, that a pension fund must invest in unlisted investments a minimum of 1.75% of the market value of it’s investments by 31 December 2014, but unlisted investments may in aggregate  not exceed 3.5% of the market value of it’s investments.

The Unit Trust Control Act  and Unlisted Investments

Funds making use of unit trust portfolios are also subject to the Unit Trust Control Act 1981. Unit trust management companies have thus far been able to offer investment portfolios that complied with regulation 28 of the Pension Funds Act.
The Unit Trust Control Act currently defines an unlisted investment as “securities other than stock exchange securities and such other securities determined by the registrar by notice in the Gazette.” Section 6(1) of the Act directs that “The registrar in concurrence with the Minister, by notice in the Gazette, may determine securities and other assets which may be included in a unit portfolio of a unit trust scheme and the minimum or maximum or both minimum and maximum restrictions and conditions subject to which such securities, classes of securities, or other assets may be included in a unit portfolio.

The Unit Trust Control Act and the Pension Funds Act are incompatible

With the introduction of unlisted investments as an obligatory asset class in terms of regulation 28 and 29, the provisions of the Unit Trust Control Act would only allow a unit trust to comply with the prescriptions of regulation 28 and 29 of the Pension Funds Act if the registrar of  unit trust companies in concurrence with the Minister by notice in the Gazette directed that the provisions of regulation 28 and 29 of the Pension Funds Act would equally apply to unit trust companies. This is currently not the case and it is highly unlikely that anything will be changed by Namfisa and the Minister by 31 December 2014. In fact, we have been made aware of a draft gazette that requires a unit trust holding any unlisted investment, to convert such investment to a listed investment within 12 months, as the result of which unit trust management companies will not be able to offer regulation 28 compliant portfolios as far as the unlisted investment requirement goes.

The challenge for smaller pension funds investing in unit trusts

Smaller pension funds mostly invest either in a policy wrapped investment vehicle offered by insurance companies or in unit trusts. Unit trust management companies devised prudential balanced unit trusts specifically to cater for the needs of smaller pension funds. For one because the pooling of investments in a unit trust offers substantially reduced management fees through economies of scale and secondly because trustees require no in depth technical knowledge about investments.

Trustees of smaller funds will now be obliged to invest directly in one or more SPV’s for the reasons set out above. Each fund will now have to select 1 or more SPV without possessing the required technical knowledge. Besides the absence of the technical knowledge to take an informed decision, small funds will each have to enter into an agreement with an SPV, in many cases for quite small amounts. These small funds will also experience the constraints resulting from the illiquidity of unlisted investments more severely than large funds as individual member benefits tend to represent a much larger proportion of total fund investments, while the benefit of higher liquidity and economies of scale through pooling via a unit trust is currently not a viable avenue. These funds may not be able to realise the proportionate share of a retiree in its unlisted investments. This may result in the remaining members effectively being ‘loaded’ with the unrealisable value of the retiree’s unlisted investment and it may even lead to the fund now exceeding the 3.5% exposure limit.

Parameters for considering exemptions from investing in unlisted investments  should be defined by Namfisa soonest

We are aware that as the result of growing regulatory pressures being exerted on pension funds, some smaller employers have already resolved to move to an umbrella fund. At this stage, there appears to be no intention on the part of Namfisa to consider exempting funds from the requirement to invest in unlisted investments, as became evident from discussions with senior officials of this regulator.

Since unlisted investments are illiquid and will not easily be transportable to an umbrella fund, it becomes more pressing that Namfisa needs to identify exceptional situations for granting  exemption from the provisions of regulation 28 to the extent that such fund would have to invest in unlisted investments.

The time frame for concluding on unlisted investments by 31 December 2014 becomes unrealistic and Namfisa should acknowledge this now

Currently all funds, whether or not they invest in unit trusts are faced with the problem that no SPV and no unlisted investment manager has yet been approved by Namfisa, and we have now nearly reached the end of August.

Funds that invest via unit trusts, must at this stage assume that their unit trust management companies will not be able to comply with regulation 28 by 31 December 2014.

This means that all funds will have to have prospective unlisted investment managers present their unlisted investment capabilities to the trustees so that trustees are placed into a position to take a decision on a preferred unlisted investment manager/s and to finalise the contractual documentation with the chosen SPV’s and UIM’s. This process can of course only commence once Namfisa has registered any Special Purpose Vehicles and Unlisted Investment Managers. Since most funds typically only meet once a quarter or even less frequently, it should become very difficult to conclude this process between the time the first SPV’s and UIM’s have been registered by Namfisa and 31 December 2014, given also that funds are unlikely to want to settle with the ‘first best’ UIM that may present to them.

Conclusion and Recommendation

We advise that funds should assume that unit trust managers will not be able to comply with regulation 28 by 31 December 2014.

This means that all funds will have to make their own arrangements as far as the required investment in unlisted investments is concerned. Furthermore trustees will have to have prospective unlisted investment managers present their unlisted investment capabilities to the trustees so that trustees are placed into a position to take a decision on a preferred unlisted investment manager/s, once Namfisa has registered one or more Special Purpose Vehicle and its Unlisted Investment Manager.

We suggest that once an unlisted investment manager/s has/have been selected by the trustees, that the trustees should negotiate an investment of more than 1.75% in order to make provision for future growth of fund assets, possibly considering an investment close to the maximum of 3.5%. This topic should now be put on the agenda as a standing item so that appropriate attention is given to this obligation of the trustees.

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.

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