|In this newsletter:
Benchtest 05.2017, Sanlam Benchmark survey, sharing annuity with a child, the future of provident funds and more...
Here are some of the more interesting findings of this survey in respect of union and stand-alone funds:
Can you request that your children share in your annuity?
Is there a future for provident funds in Namibia?
Kai Friedrich's Administration Forum
Implications of SA staff participating in a Namibian fund
Namibian employers often overlook the implications of starting up a branch or a subsidiary in SA as far as pension fund membership of the SA staff is concerned. Generally it is not a good idea to have SA employees be members of the Namibian fund, primarily because these employees could be subject to both SA and Namibian income tax on any benefit payable.
In as much as the Namibian Pension Funds Act prohibits any person to undertake pension fund business in Namibia that is not registered in terms of the Pension Funds Act, the same principles apply in SA and employers who allow their SA employees to participate in their Namibian fund without registering the Namibian fund in SA as a foreign fund are contravening the SA Pension Funds Act and expose themselves to statutory sanctions.
Members of a Namibian pension fund who are employed by an SA entity would not be allowed to deduct their contributions to a Namibian fund. Of course, SA revenue authorities may not always realize that these contributions were made to a Namibian fund and may have erroneously allowed these to be deducted. SARS may at any time it becomes aware of this error re-open previous tax assessments, disallow such contributions with arrears effect and may go as far as adding penalties and interest.
Where any benefit becomes payable to any of the SA members, it would be taxable both in SA and in Namibia in the first instance.
The Double Taxation Agreement between SA and Namibia would avoid double taxation only in respect of a pension payable and/or the one-third pension commutation. SA legislation provides for a deduction from a taxable benefit, any contributions made that were not tax deductible, or were never deducted for tax purposes in SA. This allowance would not apply to these members where the contributions were indeed deducted for tax purposes in SA. The Namibian Income Tax Act does not have a similar provision as the result of which any taxable benefit would be fully taxed in Namibia, whether or not the member concerned ever deducted any contributions to the fund for Namibian tax purposes.
If the fund credit of the SA members were to be transferred from the Namibian Fund to any other fund approved for tax purposes in Namibia at the instance of the member, such transfer would not be taxed in Namibia based on the concession granted in terms of section 16(1)(z) of the Namibian act. Such transfer, however, would in the first instance be taxable in SA, as a benefit has accrued to the member and as SA taxpayers are taxed on the basis of residence rather than source, as is the case in Namibia.
The fund credit of the member could also be transferred to an SA pension fund approved for tax purposes in SA, or to another person such as an SA insurance company, at the instance of the Namibian fund, by means of a 'section 14 transfer'.
In terms of the general principles of the Namibian Income Tax Act, such transfer should not be taxable in Namibia in the hands of the member as no benefit has accrued to the member. By the same principles, the Namibian tax authority could argue that an income accrues to the SA person from a Namibian source and that the amount is subject to income tax in Namibia. In the instances where such transfers have been affected by us in the past, however, Inland Revenue has never issued a directive to deduct tax. Where neither the members concerned nor their employer ever had the benefit of deducting their contributions for income tax purposes in Namibia, our tax authority should also find it difficult to argue that the amount to be transferred should be taxed in Namibia.
Where an employer intends to transfer the SA members of the Namibian fund to SA, the employer and the members concerned need to settle the arrangement concerning the disposal of the members' fund credit in the Namibian fund either, by transfer to an insurance policy in SA, or by transfer to an approved pension fund in SA, or by payment in the form of a cash benefit subject to income tax in Namibia. If the benefit is N$ 40,000 or less the provisional tax rate will be 18% and will be applied by the administrator without being required to obtain a tax directive.
If the benefit is larger than N$ 40,000, Inland Revenue should theoretically also issue a tax directive applying a provisional rate of 18%, since these members were never registered for tax purposes in Namibia. To avoid unnecessary delays in obtaining a tax directive in Namibia, the employer should issue a letter to Inland Revenue confirming that these members were never registered for tax purposes in Namibia as these members never earned any taxable income in Namibia. This letter should then be submitted together with the request for a tax directive to Inland Revenue. The benefit should be reflected by these members on their SA tax returns and will then be subject to SA income tax as well, to the extent that they are not covered by the Double Taxation Agreement between SA and Namibia.
News from RFS
Transition to MIP
We have now been running 3 funds parallel for close to a year in the process of adapting the MIP system to our requirements and the Namibian environment. We have approached the point where we believe that we should be able to run these funds on MIP only. The target date is 1 July and 1 October, respectively. From there on we will continue the process of transitioning our other clients in a controlled fashion and envisage that this process should take around 2 years, provided that we are comfortable that all complexities offered by our various clients can be managed by the MIP system to our satisfaction.
Unfortunately the process is taking a lot longer and our development costs are consequently significantly higher than what we anticipated. However, we are utterly convinced that the future of retirement fund administration lies in web-based administration and are therefore comfortable to invest heavily in this transition for the benefit of our clients.
Staff donate to charity
RFS staff recently showed warmth in the middle of winter, with a donation from staff to three charities. The charities were Hugs 4 Christ, Prayer House Ministries Orphanage and Hospice of Hope
Our staff – the recipe for our success!
A pension fund has a life much, much longer than a human being. As service provider to a pension fund, corporate memory of a service provider vis-à-vis the fund can make an important contribution to the management of the fund. RFS appreciates the importance of this differentiator and therefor makes a point of building and maintaining corporate memory on behalf of our pension fund clients. In this regard a conducive office atmosphere and environment and conducive policies support our effort to retain our staff which is essential in this endeavour.
In addition RFS differentiates itself by the depth of its staff with pension fund relevant qualifications and experience.
The following table presents these key differentiators in figures:
We are proud of this record and extend our sincerest gratitude to those staff members who have faithfully served the company and its clients over more than 10 and more than 15 years and express our sincere gratitude to each one of them for their dedication and commitment to our cause:
Staff with 10-years of service
Industry meeting of 13 March 2017
For trustees and principal officer who have missed the NAMFISA circular distributing its presentation at the industry meeting of 13 March, you can download the presentation here...
And if you missed the minutes of that meeting click here...
NAMFISA quarterly report Q 4 2016
NAMFISA released its latest quarterly report for quarter 4 of 2016.
Here is a summary, values given in N$ millions:
If you are interested in key information and statistics on the non-banking financial services industry, click here...
News from the market
The price of fuel – do you know what you pay for?
The latest fuel levy was set in Government Gazette 6325 of 7 June 2017 and reflects an interesting composition of the price of fuel as per below table. The total for Namibia is based on an estimated annual consumption of 1 billion litres of fuel in Namibia.
(for stakeholders of the retirement funds industry)
The pension problem – too many complexities leave members with poorer outcomes
The products themselves have also grown very complex, which isn’t necessarily to the benefit of members.
Talking as a product provider, it’s very easy to put bells and whistles on everything to make it look sexy and smart, but is that always in the best interests of the member?...I think we need to go back to simplicity, and standardisation so that at the point of retirement members know what they are getting.
Read the full article by Patrick Cairns in Moneyweb of 9 June 2017, here...
Median p:e and forward 10 year returns
In last month’s newsletter we presented an article headed ‘The p/e explained’ with two graphs. The first reflected the growth of the S&P 500 from around 80 in 1965 to its historic high of 2,363 by the end of December 2016. That’s a nominal growth of around 7% per annum. The second graph S&P 500 median price: earnings ratio which stood at 24.1 at December 2016 compared to the median of 17, and thus being currently in expensive territory. So what can this tell us about the US market?
“Median P/E can help us predict what future 10-year annualized returns are likely to be for the S&P 500 Index. Will your future burgers be pricey or cheap? The price at which you initially buy matters.
Here is how you read the following chart. (Data is from 1926 through 2014.):
With a current median P/E for the S&P of 24, we find ourselves firmly in quintile 5.That tells us to expect low returns over the coming 10 years. Though it appears that most investors are expecting 10% from equities, history tells us that the market as a whole will have a hard time growing much faster than our country’s GDP does.
Note that 4.3% returns are the average of what happens when stocks are purchased in the top 20% of valuations. That forward return number goes down considerably if we are in the top 10% or top 5%, which is where we are today.”
Read the article in Thoughts from the Frontline by John Mauldin, here...
The everything bubble
And following from the previous article, here is another article that should make every reader concerned about his or her investments.
“It wasn’t always this way. We never used to get a giant, speculative bubble every 7-8 years. We really didn’t.
In 2000, we had the dot-com bubble.
In 2007, we had the housing bubble.
In 2017, we have the everything bubble.
I did not coin the term “the everything bubble.” I do not know who did. Apologies (and much respect) to the person I stole it from.
Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously, like:
(for investors and business)
7 Timeless lessons from Vanguard founder John Bogle
Bogle neatly distills his life's work into seven timeless lessons:
The Gini Coefficient – what does it mean?
Namibia is pilloried regularly for its poor Gini Coefficient. But do we know what this is actually all about?
Here is a definition: “Gini index measures the degree of inequality in the distribution of family income in a country. The more nearly equal a country's income distribution, the lower its Gini index, e.g., a Scandinavian country with an index of 25. The more unequal a country's income distribution, the higher its Gini index, e.g., a Sub-Saharan country with an index of 50. If income were distributed with perfect equality the index would be zero; if income were distributed with perfect inequality, the index would be 100.”
For interest sake the below table puts the Namibian Gini Coefficient into a bit broader perspective:
Evidently Namibia has a high Gini Coefficient relative to Norway (and many European countries for that matter). However, relative to our neighbouring countries (and many other African and developing countries for that matter), we actually have a better Gini Coefficient than most.
Why you might want to disinherit your kids
“How would you react if I told you that your children would never speak to each other again because you left your three kids your house? What if the son you designated as your executor or trustee seized control of your assets and was sued by his brothers and sisters? What if the family business you built during your life dismantles the family after you depart?
But you say, “No! Not my family!” To the contrary. In my 35 years of managing wealthy families every day, the incident of permanent damage occurring to a family is most of the time.”
Read the interesting short article by Richard Watts in Marketwatch of 14 June, here...
Preserve your retirement savings
Most people choose the cash option and have their retirement savings paid out when they leave their employer.
“Like Bob, they ask for the value of the fund. In Bob’s case, it is R100,000. He may compare that to the potential R3,100,000 that he could have had after 40 years and think that R100,000 is worth nothing in comparison to the potential end value. He may think that if he takes the R100,000 after the first ten-year period it won’t make much difference, as he plans to carry on saving R500 per month for the next few decades.
But Bob is missing an important point. He will in fact not continue saving at the same rate the next few decades as he has to repeat the first ten-year period. This means that he is not cutting the first ten years of compounding off his money, he will be cutting off the last ten years. In those last ten years the value of his money grows from R1,100,000 to over R3,100,000. This is a difference of R2,000,000. By spending the R100,000 after ten years, he is fact not losing R100,000 – he is losing the R2,000,000’s worth of growth that he could have had.”
The lesson from this is example is that whenever Bob changes jobs, he should do what he can to preserve his retirement savings.
Read the insightful article by Paul Leonard, Citadel, in Cover magazine, June 2, 2017, here...
“I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
~ Maya Angelou