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Trustees need to manage their fund’s risks

Namibian funds generally are too small to manage their own affairs and outsource all operational matters to service providers. The trustees however remain ultimately responsible for the proper management of its business and carry a fiduciary duty towards the fund’s members to exercise their responsibility with due care and skill. What do trustees do to monitor and manage their fund’s risk with regard to its various service providers?

As service provider to many prominent funds in Namibia, we have been grappling with the problem of assisting trustees in managing governance of their funds vis-à-vis their service providers.

Will Namibian subsidiaries be backed by their holding company?

Most Namibian service providers are subsidiaries of large South African or international companies. In all cases, however, the Namibian company is a separate legal entity and very often not a wholly-owned subsidiary of its parent company. How much comfort does this give the trustees. Will the foreign holding company always assume full responsibility for its Namibian off-shoot, whatever happens? We do not know and can surely not rely on such an assumption.

Namibian entities are too small for international rating

Some very large financial institutions may be rated by a recognized rating agency. Unfortunately no Namibian financial institution falls in that category to our knowledge and this avenue is therefore not available to trustees of Namibian funds.

What can you read from the financial statements of the holding company?

A next avenue would be to study the financial statements of the service provider in order to ascertain that the entity is in a sound financial position. This would be particularly instructive for institutions managing client assets in their own name such as insurance companies, banks and unit trust management companies. For Namibian subsidiaries of foreign companies, we have experienced it a challenge to obtain such financials. Group statements are usually made available but these hardly make any reference to the Namibian businesses and certainly not to any extent that would offer any comfort to trustees of Namibia funds.

Review financial statements of pooled investment vehicles

We do request copies of audited annual financial statements for all pooled investment vehicles our clients are employing and review these with the view to identify any possible cause for concern, which we would then bring to the attention of our clients. We will report back to our clients on our findings in due course.

Request proof of PI and FI cover

In addition, we request proof of professional indemnity and fidelity insurance cover from all service providers employed by our clients. We have recently informed our clients of the outcome of this exercise. Unfortunately, we have found that it is impossible to obtain any comfort on the level of cover held by the service providers as these are mostly not prepared to divulge the basis for setting their cover levels and there appears to be no generally accepted standard.

Request status of registration from Namfisa

As another avenue, we have made enquiry with Namfisa regarding the status of registration of relevant financial institutions and their compliance with the relevant statutory requirements.

Namfisa has provided us with a list of all relevant, registered financial institutions and persons. This list is available to our clients and we encourage clients to ascertain that all relevant institutions and persons serving their fund are indeed registered by Namfisa.

Namfisa ensures that registered institutions comply with the regulatory framework.

For this purpose, its Short-term Insurance Department and its Investment Institutions Department conduct off-site and on-site inspections.

The offsite inspection is conducted by analyzing quarterly returns and audited annual financial statements. The annual financial statements are analyzed by the analysts in these departments to assess compliance matters as prescribed in the relevant Acts and Regulations issued under these Acts.

The on-site inspections are conducted annually to verify information submitted to Namfisa in the form of audited annual financial statements, and to ascertain other operational matters which might not comply with the Act.

When an inspected institution does not comply with these Acts, Namfisa informs such particular institution to rectify the non-compliance and in the event of failure to rectify the matter, Namfisa has the right to cancel the registration and/or impose penalties as prescribed in these Acts.

What comfort can an administrator offer its clients?

Besides the risks that counter parties pose to a fund, the operations of each service provider, pose a number of unique risks that trustees need to be aware of and need to obtain comfort on that sufficient, acceptable mitigating processes are in place to manage these risks. Following are some of the key risks relating to fund administration:

  • Payment of a benefit to a person other than the person entitled to the benefit.
  • Incorrect calculation of a benefit as the result of:
  • Incorrect benefit structure set-up;
  • Failure to update benefit structure set-up on administration system;
    • incorrect interest rate set up;
    • incorrect costs set up;
    • incorrect contributions loaded;
    • incorrect loading of bonus allocations.
  • Failure to record and implement changes to a member’s group life category choice.
  • Failure to record and implement changes to a member’s investment portfolio choice.
  • Failure to pay reassurance premiums to the underwriter.
  • Failure to match assets to liabilities in respect of the member choice investment portfolios.
  • Failure to invest monthly cash surplus.
  • Failure to submit statutory annual report to Namfisa.
  • Administrator earns undisclosed remuneration.
  • Data manipulation by staff member.
  • Misappropriation of fund cheques.
  • Fraudulent payments via EFT.
  • Misappropriation of fund assets.
  • Loss of key staff.
  • Loss or destruction of client data.
  • Failure of the administrator’s business.

Being aware of such risks, trustees can institute governance conventions to manage risk at fund level. Some of such conventions relate to:

  • Reporting by service provider;
  • Banking mandates;
  • Engagement of independent professional services;
  • Service level agreements;
  • Ownership of assets;
  • PI insurance cover.

What should your administrator’s cover level be?

In Namibia there are no statutory requirements regarding levels of insurance cover to be maintained by an administrator or regarding the registration of an administrator.

An administrator is required to register with Namfisa only if it offers insurance intermediation services, and such registration requires the submission of a bank guarantee of N$ 25,000, fidelity and indemnity cover of N$ 500,000 and registration with a recognised Namibia insurance brokers association (NIBA or NIA).

The Financial Services Board of South Africa (FSB) issued a “NOTICE ON REQUIREMENTS FOR PROFESSIONAL INDEMNITY AND FIDELITY INSURANCE COVER FOR PROVIDERS, 2009”. This notice requires an intermediary, holding funds on behalf of their members, to maintain indemnity cover of N$ 5 million. For administrators the auditor is required to express an opinion on the adequacy of indemnity cover in consultation with the FSB. It requires the administrator to hold liquid assets equal to 8/52 times total annual expenditure.

We have extracted information from website of the FSA in the UK, which is the Namfisa/FSB equivalent. It appears that the topic of adequate professional indemnity cover is being discussed with stakeholders right now. The discussion document makes reference to the following proposed parameters:

  • Minimum cover € 1 million per claim (i.e. +/- N$ 10 million);
  • Aggregate annual cover € 1.5 million per claim i.e. +/- N$ 15 million);
  • Basis to be used is 10% of annual income;
  • Excess to be based on 1.5% of annual income.

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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