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Unit trust managers and pension funds beware

Most trustees will be aware by now that regulation 28 directs that all Namibian pension funds shall invest a minimum of 1.75% of the market value of its investments (note not of its assets) in unlisted investments via a registered Special Purpose Vehicle (SPV) by 31 December 2014. A number of local investment houses have created vehicles they intend to register as such SPV. Stimulus is one of such vehicles and a number of investment houses have place pension fund clients’ moneys is such vehicles. Stimulus for one, has invested these pension fund moneys in local unlisted companies. Pension fund capital will start flowing into such SPV’s and these SPV’s will be looking for investment opportunities in unlisted Namibian companies. Chances are that SPV’s will invest moneys in companies that were partly derived from such companies’ pension funds.

Namfisa is of the opinion that such investments by pension funds are contravening section 19(4) of the Pension Funds Act which states “No registered fund shall invest any of its assets in the business of an employer who participates in the scheme or arrangement whereby the fund has been established or in any subsidiary company… of such employer’s business or lend any of its assets to such employer or subsidiary company….”

Clearly what this section tries to prevent is that a trustee, who controls the participating employer, misuses his/her influence to oblige the fund to invest in the employer thereby exposing the members to the dual risk of losing their job and losing the retirement capital as the result of the employer’s demise. At the time this law was written, unit trusts did not exist yet as pooling vehicle for the investments of smaller pension funds.

In our opinion a fund that invests in a unit trust fund, gives such fund only ownership of a specified number of units and the fund is specifically precluded from title to any of the unit trust’s underlying assets. The unit trust in turn would hold an investment in an SPV that will typically not give the unit trust ownership to the SPV’s underlying investments, being a pooled investment vehicle, in most likelihood. Furthermore, with the new ‘look-through’ principle in regulation 28, the maximum investment that a pension fund will be able to hold in the employer via an SPV is 3.5% of the market value of its investments. And this would require that 100% of the capital of the SPV is invested in the employer. The risk to fund members, referred to above, is thus negligible in such a structure. There can also clearly be no argument that a fund would invest in the employer through this structure.

Namfisa now requires funds to apply for exemption from the provisions of section 19(4). Its current practice is to only grant exemption for a period of 12 months. In our opinion, Namfisa is misguided with the assertion that an investment in a unit trust, which in turn invests in an SPV, which in turn invests in the employer sponsoring the fund is in contravention of section 19(4)..In such a structure the fund clearly does not invest in the employer.

Perhaps it would be more purposeful for Namfisa to rely on section 19(5B)(b) of the Pension Funds Act which directs that “…a fund shall not …directly or indirectly…(b) grant a loan to, or invest in the shares of - (i) a company controlled by an officer or a member of the fund or a director of a company which is an employer participating in the scheme or arrangement whereby the fund has been established; or (ii) a subsidiary company or a controlled company…of such first mentioned company. Section 19(6) does mandate the registrar to grant temporary exemption from section 19(4) and 19(5B)(a) but not from the only relevant section, which is 19(5B)(b).

Regulation 28 intends to encourage investments of pension fund assets in small Namibian businesses. The majority of Namibian pension funds are too small to employ segregated investment mandates where the trustees can take active investment decisions and where the fund takes legal ownership of the investments it holds. The investment management industry has thus created pooled investment vehicles to offer an appropriate structure for these small funds to invest their assets.

The current state of affairs creates a dilemma for particularly smaller funds that invest in unit trust funds, and this dilemma will grow in time as SPV’s attract more and more capital from smaller funds sponsored by unlisted companies, and as they invest in more and more small unlisted companies.

Managers of such pooled investment vehicles will now have to continually monitor whether any unlisted investment it intends to invest in, has any ties to a fund that holds an investment in the pool. It also means that such pooled investment vehicles will now have to continually monitor whether any prospective new pension fund investor has any ties in an unlisted investment the pool holds. This will restrict the universe of pension funds from where pooled vehicles can source capital for investment in unlisted investments. At the same time it restricts the universe of unlisted investments in which pooled investment vehicles can invest. This creates an untenable situation.

Since Namfisa’s position in this regard and the letter of the law defy the purpose of enforcing investment in unlisted companies, Namfisa should take urgent steps to have the Pension Funds Act amended so as to clarify that such a structure does not contravene section 19(4) and/or section 19(5B)(b) of the Act.

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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