The principles of good governance prescribe that trustees must manage their fund’s risks. It entails their identification, rating regarding probability and impact and any action the trustees will take to manage the risks. Trustees would either accept, reduce, avoid or transfer the risk. Because the majority of funds in Namibia are small, they cannot ‘self-insure’ any risk and must transfer it to a service or product provider or an insurance company. In the final analysis, the fund will bear the cost of the risk either in the fees the service or product provider would charge or through an insurance premium. Transferring a risk means the fund smoothes its cost and avoids facing an unexpected, costly, and unaffordable incident in a particular year.  

Unfortunately, for most funds in Namibia, NAMFISA adopted a position on the Pension Funds Act ridiculing a 30-year industry practice of restricting risk benefits to the amount the insurer pays. This practice transferred the risk of the insurance company restricting the payment, from the fund to the member who presents the risk. Independent of their size, funds must now remove all terms and conditions concerning their risk benefits from their rules. As a result, where an insurance company would limit or not admit a claim because of its terms, conditions and restrictions, the fund has to stand in for any shortfall between what the rules offer and what the insurer pays.

To avoid exposure to such unforeseeable risks over which they have no control, funds are now transferring the risk to the employer. Because the employer’s employment terms and conditions fall outside NAMFISA’s jurisdiction, it can re-impose the insurer’s terms, conditions and exclusions by mirroring them in its employment contract. Of course, in real life, employers might have a moral challenge not paying out an unlimited benefit to its employee.

Because death benefits are typically of high value and the insured portion comprises a significant component, they are probably the most important single consideration for setting indemnity cover levels. A typical formula for determining the cover level required suggests it should be calculated as the greater of:

1. Two times the largest death benefit and
2. 2% of assets plus 10% of annual contributions to the fund.

Rationally, suppose the insured death benefit is transferred from a fund to its sponsoring employer as the new NAMFISA requirements dictate. In that case, the insured portion of the largest potential death benefit can be removed from the calculation, which would result in a lower cover requirement. Consider this practical application of the principle.

Assumptions:

1. Highest salary is N$1.4 million p.a. The member is entitled to a death benefit of 5 times annual salary, i.e., N$7 million. The member’s share is N$ 7 million. His death benefit is thus N$14 million.
2. The funds assets are N$250 million; 2% is N$5 million. The annual payroll is N$ 120 million; 10% is N$12 million and the total of these two amounts is N$17 million.

The insured benefit of N$7 million in 1 represents about 40% of the N$17 million in 2 (the greater of 1 and 2). Consequently, the indemnity cover level can be reduced by 40%.

 Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS 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 RFS.