In this newsletter we ask the question whether Namibia has the right approach to attracting foreign investors, we examine the tax implications of a pension fund benefit due to an estate and on the same topic we examine whether or not a pension fund death benefit must be paid in the form of an annuity, we look at disability benefits and the implication of over insurance, we examine whether or not fund service providers should be rotated, we report on proposed changes to investment regulations addressed at a recent industry meeting and in our Benchmark Monthly Performance Review of 30 June 2017 we comment on your investment portfolio choices and in the light of historic developments.
The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals...
...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!
As always, your comment is welcome, so open a new mail and drop us a note!
Tilman Friedrich's Industry Forum
Monthly Review of Portfolio Performance
to 30 June 2017
In June the average prudential balanced portfolio returned -1.21% (May: 0.21%). Top performer is Momentum (-0.72%); while Namibia Asset Management (-2.12%) takes the bottom spot. For the 3 month period, Momentum takes top spot, outperforming the ‘average’ by roughly 1.17%. On the other end of the scale Prudential underperformed the ‘average’ by 0.55%.
Money market, smooth bonus or prudential balanced?
Looking at investment returns over the past the time of reckoning has finally arrived and will shadow us for some time to come, as we have expected and written on in many previous columns.
Annualised returns of the typical prudential balanced portfolio over the past 3 years just managed to match the money market returns over this period. Over shorter periods, although quite volatile, the average prudential balanced portfolio has mostly underperformed the money market portfolio.
Since the beginning of 2009 I commented that bourses are likely to perform sluggishly in the face of rising interest rates. If I had then acted by moving out of a typical prudential managed portfolio, where should I have shifted my money to and what does that experience tell me about the alternatives I should consider now?
Read part 6 of the Monthly Review of Portfolio Performance to 30 June 2017 to find out what our investment views are. Download it here...
If Namibia was serious about attracting foreign investment...
In Ministry of Finance PS Erica Shafudah’s introduction to the proposed amendments to local investment regulations at a recent NAMFISA industry consultation meeting, she was not clear whether government is driving a social agenda or a free market agenda in the pursuit of its economic objectives and the measures it is introducing are contradictory at times where a free market agenda would encourage economic behaviour that supports and advances government objectives whereas a social agenda would direct economic behaviour to achieve this goal. Different agenda’s as a matter of course drive different policies and it will be futile to argue on these.
On the one hand, we are desperately trying to attract foreign investment but on the other hand we are imposing restrictions on the free flow of capital. ‘Captive capital’ of pension fund members is now to be redirected yet more by the amendment of regulation 28, from a minimum of currently 35% being invested inside the country to a minimum of 45% as from 1 October 2018, without reference to the impact this is likely to have on the prospective pension of the pension fund member or the availability of any appropriate investible assets in Namibia. At the same time it seems government is not willing to make some of its prime assets available for acquisition by pension funds but seems to rather prefer to coerce funds into buying government debt, for a lack of better alternatives, thereby hoping to reduce the cost of debt to government – of course at the cost of lower returns to pension fund members.
On the one hand pension fund members are urged to save up for their retirement in order to relieve government of the burden of having to support people in retirement, on the other hand we do not blink an eye when future investment returns of pension fund members are trimmed noticeably as the result of policy measures taken by government.
As a pension fund member, I should be concerned about surviving in retirement. My pension investments should be free to be invested where they will secure the best outcome for my retirement. As has been concluded by a report of experts to government on the proposed amendments to the investment regulations, the pension fund member is likely to lose 0.7% per year or more in investment returns or around 17% of his prospective retirement benefit, or more. This effectively is a tax of 17% on pension fund members’ life time savings over and above all other direct and indirect taxes and levies, too many to mention.
As a personal financial adviser, I will have a moral dilemma still advising anyone to keep investing in a pension fund for a better life in retirement when there are better investment return prospects for investing my free cash flow globally.
An ardent observer may be forgiven for asking whether prospective foreign investors are beguiled until they are here to then be called to account, if one just looks at one point in case. Bidvest took the plunge and invested in the Namibian economy through various acquisitions, primarily in the fishing sector. It was listed on the NSX in 2009 at a price of N$7.10. It realised government’s visions as framed in the NEEEF with an effective broad based Namibian shareholding of 48% in Bidvest Group. Pension funds grabbed the opportunity to invest in this diversified group as a sound investment, being under pressure to meet the local asset requirement. Initially Bidvest did very well, its share price rising to N$13.25, representing a market capitalisation of N$2.8bn. This was until its fishing quota was cut. Today Bidvest’s share price is N$7.87 and its market capitalisation has declined to N$1.7bn. In the process some 340,000 Namibians lost N$1.1bn! A matter of ‘killing the goose that lays the golden eggs’? Could this debacle have been avoided and what is the impact of it on the resolve of other prospective foreign investors?
A clear economic philosophy realised through a robust economic model paired with predictable and consistent policies should obviate a lot of argument when one is dealing with policy interventions and should create certainty for any prospective foreign investors.
The tax implications of a pension fund benefit due to an estate
The Pension Funds Act is very specific as to how a death benefit is to be disposed of. The principle is that the benefit must be allocated to dependants and nominated beneficiaries. Where there are no dependants or beneficiaries the benefit must be paid into the estate of the deceased. Where there are no dependants but only nominated beneficiaries and a beneficiary has passed away the benefit must be paid into the estate of the deceased beneficiary. In accordance with current Inland Revenue interpretation the greater portion of the benefit must be paid as an annuity where it is payable to “…employees on retirement from employment or for widows, children, dependants or nominees of deceased employees...”.
I would argue that the interpretation of the definition of ‘pension fund’ would allow a death benefit payable to an estate of a deceased employee to not fall under the ‘34% minimum annuity’ rule (i.e. 51% as annuity of which one-third may be commuted), and is thus capable of being paid in a lump sum. This is on the basis of the estate not being covered by “…annuities for employees on retirement from employment or for widows, children, dependants or nominees of deceased employees…” but would rather fall under the extension of the clause where it refers to “…and also for the purpose of providing benefits other than annuities for the persons aforesaid;” The reference to “…persons aforesaid…” should in this context also be read to refer to the deceased employee. This lump sum would not be taxable in terms of paragraph (d) of the definition of ‘gross income’.
I would further argue that the definition of ‘pension fund’ as referred to above also cannot intend to prevent payment of a benefit due to a deceased beneficiary (i.e. widow, child, dependant or nominee of deceased employees) in terms of the Pension Funds Act. This is perhaps an omission in the IT Act and hence the taxablility of the benefit would have to be determined in accordance with the general principles of the IT Act. In the case of such a benefit it can only fall under paragraph (d) of the definition of ‘gross income’ and is thus also tax exempt.
A pension fund death benefit due to an estate need not be an annuity
Paragraph (iv)(aa) of the definition of ‘pension fund’ in the Income Tax Act provides that if “…the total value of the annuity or annuities which an employee or other person referred to in paragraph (a) becomes entitled to exceeds N$ 50,000, not more than one-third of such annuity or annuities may be commuted for a single payment.
Paragraph (a) refers to “…employees on retirement from employment or for widows, children, dependants or nominees of deceased employees…”. In the previous article I argue that this does not refer to the estate of any of these persons and the commutation provision thus does not apply to such amount payable to an estate.
Clearly the provision on commutation applies when a person becomes entitled to an annuity. Therefore if another annuity becomes payable to a dependant or nominee of an annuitant upon the death of the annuitant, the dependant or nominee of the deceased annuitant only then become entitled to an annuity and may once again commute.
Note that the aforegoing also applies to a preservation pension fund as the definition of ‘preservation fund’ mirrors that of ‘pension fund’.
Note further that in case of a retirement annuity fund, its definition in paragraph (b)(vii) categorically states “…where a member dies after he or she has become entitled to an annuity no further benefit shall be payable other than an annuity or annuities to his or her spouse, children, dependants or nominees.” In the case of this type of fund the successor of an annuitant must be paid an annuity. Should the successor of an annuity have passed away before the annuity becomes payable, the annuity must continue to be paid to the successor’s estate. This means that the estate must be kept open until the past annuity payment has been made, with obvious implications for the administration of the estate.
Can a fund member receive more than one disability benefit from different policies?
Most retirement funds offer disability benefits to their members. Typically this would be an income replacement benefit in the event of the member experiencing a reduction or loss of income as the result of injury or illness which will be paid for as long as the member experiences such reduction or loss of income and until the member passes away or retires, whichever occurs first. Sometimes funds also offer a once-off lump sum that will be paid when a member becomes totally and permanent incapable of pursuing any occupation for gain anymore for the remainder of his life.
Over and above the disability benefits a fund may offer its members, many members also have disability cover in their own capacity, either as an add-on to their life insurance policy or as a stand-alone policy such as PPS.
What will happen in the event of disablement – will you be able to put in a claim against each policy and if you are insured well will you be better off after disablement than you were before? One thing is for sure, if it would have been possible to ensure yourself to a level where you would be better off after disablement than before, we would see many more people claiming to be disabled. Insurance companies still experience a significant increase in claims in tough economic times and this is despite all the means at their disposal to verify the legitimacy of the claims.
Insurance companies have realised that it would be unethical to collectively insure a person to a level where a person would earn more after disablement than before disablement. A basic premise of any insurance is also that the insured must have an interest in the insured event not happening – an insurable interest. Clearly, the prospect of earning more after disablement than before disablement would be contrary to this principle.
Insurance companies therefore have a mutual arrangement that an insured cannot be better off after disablement than before disablement and for that purpose information on claims is exchanged between insurers. Where a claim for disablement arises and the disabled enjoys cover under different policies, the insurers would in aggregate never pay the claimant a benefit that exceeds his income prior to disablement. So if you have two policies both covering you against any loss of income and you experience a total loss of income, each insurance company would only pay you 50% of your loss of income.
The inference of this arrangement between insurers is – do not over-insure yourself as you will not reap the ‘benefit’!
Pension fund governance - a toolbox for trustees
The following documents can be further adapted with the assistance of RFS.
- Download a draft rule dealing with the appointment of the board of trustees here...
- Download the code of ethics policy here...
- Download the generic communication policy here...
- Download the generic risk management policy here...
- Download the generic service provider self-assessment here...
- Download the generic conflict-of-interest policy here...
- Download the generic trustee performance appraisal form here…
- Download the generic investment policy here...
- Download the generic trustee code of conduct here...
- Download the unclaimed benefits policy here...
- Download the list of fund service providers duly registered by NAMFISA here...
|Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.
|Compliment from a principal officer
“I call myself lucky to work with such an experienced and customer service oriented team. I really appreciate your service!”
Read more comments from our clients, here...
Kai Friedrich's Administration Forum
Should you rotate your service providers on a regular basis?
Pension funds typically employ a whole array of different services from 3rd party providers. Certain service providers offer composite services while others are focusing on a limited range of closely related services.
Good corporate governance requires the regular review of service providers, does it not? In essence good corporate governance aims to manage risks and compliance. Rotating service providers for the sake of rotation certainly cannot be at the core of good corporate governance.
Assuming one is satisfied with the services provided by a service provider one would have to determine whether rotation reduces risk and/or strengthens compliance management, before this question can be answered conclusively.
What are the typical risks a fund faces vis-à-vis its service providers? Here are some that spring to mind immediately:
- The service provider overcharges, i.e. its costs are excessive relative to the value of the service provided. Costs can be benchmarked to the market, but to value the service provided is typically left to judgement.
- The service provider does not meet required standards of diligence such as inferior controls that lead to errors and omissions, loss or corruption of data and compliance failures; unqualified or inexperienced staff; high staff turnover and loss of corporate memory; insufficient indemnity and fidelity cover; inadequate succession planning; late, poor or defective reporting and potential of business failure due to defective or unsustainable business philosophy and policies.
- The service provider is not adequately supervised by another independent expert, particularly relevant to composite service providers.
Considering these key risks a service provider presents to a fund, it is quite evident that the risks referred to will not be addressed through rotation of service providers.
There are industries and situations where the rotation of service providers makes sense as it mitigates important risks. Rotation is typically employed in the security and asset protection industry or where highest standards of independence between client and service provider are required, such as in the audit profession.
In other industries rotation could in fact present additional risks. Personal services dependent on an acquired knowledge of the client or administration services relying on historic data going back over many years, such as typically relevant to the pensions industry are a point in case where rotation may present bigger risks than it might mitigate.
|Kai Friedrich, Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.
News from RFS
Our staff – the recipe for our success!
One of our ardent readers noticed that this article omitted our managing director designate from the list of long serving staff. Thank you for that Wessel!
Marthinuz Fabianus commenced service on 1 November 2001 and will celebrate his 16th anniversary at RFS this year! Apologies to Marthinuz for this oversight and thank you for 16 years of commitment and dedication to the cause of the company!
RFS sponsors beach volley ball tournament
Pictured above: Ladies teams in action at the RFS Winter Classic.
Pictured above: RFS hands over the sponsorship. From left to right: James Verrinder, Coach, Timeout Beach Volleyball Academy, Kyara Leuschner, Mirko Kriess and Günter Pfeifer, representing RFS.
Omnitel joins the Benchmark Retirement Fund
We are proud to announce that Omnitel Namibia has decided to join the Benchmark Retirement Fund as from 1 October and will transfer its business from the Orion Pension Fund.
We extend a hearty welcome to Omnitel and its staff and look forward to serving you beyond expectation in the years to come.
News from NAMFISA
Proposed amendment to regulation 28
NAMFISA laid on a meeting for 11 July to discuss proposed amendments to various regulations, but more importantly to the investment regulations under the Pension Funds Act (regulations 28 and 29), the Long-term Insurance Act, the Short-term Insurance Act and the Medical Schemes Act and to discuss feedback received from industry participants on practical difficulties experienced with the application of these regulations.
A very well attended congregation was first introduced to the objectives of government with regard to the financial sector in particular and the development of the economy in general, by Mrs Erica Shafudah from the Ministry of Finance. Various NAMFISA officials then dealt with different areas on which comments were received from industry participants and NAMIFISA’s responses to these.
As committed stakeholders of the industry we have always been making our contributions and providing our comments when invited to do so by NAMFISA. However more often than not the responses have been a lapidary ‘do not agree…’. The question that has crossed our minds regularly was whether NAMFISA was sincere about wishing to consult. That perception was also mirrored in the comments of some participants of the consultation meeting. And yes, there was quite lively debate on various issues, but such a forum is simply inappropriate as a consultation forum.
Sincere consultation requires a different approach and it may mean that the time frames NAMFISA sets itself may not always be achievable, but what is more important – a solution that meets the expectations of all or a solution that meets NAMFISA’s time frame?
The comments by industry participants and NAMFISA’s responses can be accessed here…
The following recommendations were accepted by NAMIFSA and should end up in the regulation: -
The following matters will be deliberated upon further: -
- Investment plans under regulation 29 may be amended without approval by NAMFISA;
- A ‘notional cash’ sub category will be added once a definition has been agreed upon;
- Different limits will be set for different institutions, in respect of corporate bonds;
- Provision will be made for listed shares on any other foreign exchange and related limits;
News from the market
- The minimum (of 1.75%) and the maximum (of 5%) investment in unlisted investments;
- Breaches as the result of currency fluctuations which must be rectified within 6 months i.r.o. unlisted investments, else within 3 months and subject to penalties for non-disclosure and non-rectification;
- Alternatives structures for SPV’s, other than companies.
Top management changes at Alexander Forbes
It has been confirmed by informed sources that former MD Jan Coetzee has quit his job at Alexander Forbes Financial Services. He has not been replaced officially yet but rumour has it that Dietrich Schrywer is acting in his position.
(for stakeholders of the retirement funds industry)
FSB asked to act against errant fund administrator.
In this complaint to the SA Adjudicator, a former fund member authorised the administrator and the fund to deduct an amount due by the member to his former employer in respect of a performance bonus that the member had to refund to the employer when he resigned.
In her determination, the adjudicator said Section 37A of the Act provided that pension benefits can only be attached if the requirements set out therein have been met, namely; a member must have caused damage to the employer by reason of any theft, dishonesty, fraud or misconduct and in respect of which a member has admitted liability or where judgment has been obtained against the member. She concluded that the fund acted unlawfully in deducting the refund from the benefit and ordered the fund to pay the amount deducted to the former member together with interest.
Read the full article in FA News, here...
PFA dismisses complaint based on greed
In this case the trustees distributed the death benefit to the life partner, two biological children and the mother of the deceased. The life partner of the deceased was unhappy with the allocation to the other beneficiaries and wanted the full benefit to be allocated to her arguing that she was 57 and was approaching retirement.
Following are interesting outflows from this case that can serve as precedent for trustees considering such scenarios when allocating a death benefit.
Read the article in Insurance Gateway, here...
- In reaching their decision the trustees took into account an allocation made to the beneficiaries from another fund to which the deceased belonged as well as the will of the deceased.
- The person alleging to be a factual dependant will have to prove that he was dependent on the deceased, despite the deceased not having a legal duty to maintain the person at the time of the member’s death.
- The trustees ignored the deceased’s nomination of his estate as beneficiary of his death benefit.
- Although it is not specifically stated whether the trustees took the earnings capacity of the life partner into account, the adjudicator was satisfied that the life partner’s current and future earnings capacity was taken care of appropriately vis-à-vis the other beneficiaries.
- The adjudicator said the law recognised three categories of dependants based on the deceased member’s liability to maintain such a person, namely, legal dependants, non-legal dependants and future dependants.
Can you commute an annuity upon emigration
In this article the author refers to the definition of ‘annuity’ in the SA Income Tax Act. This restricts the amount that may be commuted at retirement. Other than this provision in the Income Tax Act, an annuity cannot be commuted upon emigration. The Namibian Income Tax Act contains very similar provisions, meaning that the conclusion is also relevant to Namibia.
Read the article by Lize de la Harpe, legal adviser at Glacier by Sanlam in Insurance Gateway here...
Fund ordered to review distribution of death benefit
In this case the complainant, who was the mother of a child of the deceased fund member, approached the adjudicator to consider the allocation of the death benefit as well as the payment of the benefit for the dependent child into a pre-determined beneficiary fund.
The deceased’s mother and his daughter were the only nominated beneficiaries in the event of his death. The deceased and his mother passed away in a motor vehicle accident on 7 April 2013.
On 1 August 2014 the trustees resolved to allocate 70% of the benefit to the deceased’s child and 15% each to two brothers of the deceased. The basis for allocating a portion to the two brothers was an affidavit submitted by them to the fund in which they claimed to have been unemployed and partially dependent on the deceased at the time of his death. The benefits were paid on 6 August 2014.
The complainant raised her objection to the allocation to the two brothers in January 2015 as both were employed, one being an admitted attorney, the other a well-known businessman. This information was provided to the fund by the complainant after the fund informed her of the brothers’ affidavits it had received. The complainant also was dissatisfied with the decision that the benefit due to her daughter was to be paid to a beneficiary fund administered by the administrator of the fund of which deceased was a member.
In the course of the arguments by the defendants, the following less commonly known principle was confirmed and trustees should take due cognisance thereof when dealing with the distribution of death benefits:
The adjudicator observed the following:
- The board may not unduly fetter its discretion by favouring legal dependants over factual dependants based on biological relations, without compelling reasons to do so.
The adjudicator set aside the decision of the board and directed that the board re-investigates the allocation, re-allocates the death benefit based on her observations and that the complainant be allowed to select a beneficiary fund of her choice.
- The board failed to investigate the information provided by the complainant further on the status of the two brothers;
- The two brothers failed to submit proof of the level of their dependency on the deceased;
- The trustees’ conduct in accepting the two affidavits without further investigation was quite derelict to the prejudice of the child;
- It is crucial for trustees to determine the level of dependency when dealing with multiple beneficiaries;
- It is the common law right of a guardian to administer the financial affairs of a minor child;
- Only if the board finds that the guardian is incompetent to manage the financial affairs of a minor child there should be grounds for depriving the guardian of that right;
- The complainant should have been allowed to select the beneficiary fund especially where the beneficiary fund is linked to the administrator;
- The board of management cannot force its preferred service provider on the complainant;
Read the full determination in this link…
(for investors and business)
If you permit it, you promote it
“If you permit it, you promote it” is 100 percent appropriate for managers and leaders no matter their rung on the executive ladder….you know that employee who always shows up at least 17 minutes late, completely oblivious that an apology and/or explanation is common courtesy? Yes, that one, the one who answers everything with “no problem,” though in fact there are tons of huge problems created by him and his cavalier attitude.”
Here are some rules that need to be observed in managing unwanted behaviour:
Read the full article by Sara Caputo in Linked in 0f 7 July 2017 here...
- Unwanted behaviors need to be addressed with clear and direct communication. Turning a blind eye does not solve the problem.
- Before engaging in any corrective conversations, be sure your organization has defined rules of conduct and/or standards of behavior in a written document that all employees have received.
- Additionally, as a manager or leader, make sure you are modelling the behavior you want from employees.
5 Key factors for creating a culture of engagement
As a leader, the engagement level of your people often comes down to how you interact with them, and how you support or hinder their development. I have noticed that great leaders, no matter their level in an organization, ensure that 5 key issues are addressed and necessary programs are in place to foster a culture of engagement.
Here are the 5 key elements (‘STAR’) for you to consider as you assess your current performance:
Read the full article by Patrick Leddin in Linkedin of 27 January 2017 here...
- Selection & Orientation:
Be properly prepared for the new employee who shows up for the first day at the office and have a clear plan for the first few days of work.
- Training & Development:
Training and orientation should not be an event but a deliberate process: The organization needs to set and communicate clear goals, encourage employees to connect their daily work to the overarching goals, track progress openly, and ensure that leaders and team members work together to ensure accountability.
- Accountability & Performance Management:
The organization needs to set and communicate clear goals, encourage employees to connect their daily work to the overarching goals, track progress openly, and ensure that leaders and team members work together to ensure accountability.
- Relationships (Coaching & Mentoring):
A good coaching program establishes relationships where the individual employee is able to explore situations, develop options, and ultimately discover for themselves the best route forward. Coaching isn't about telling - it's about allowing the employee to uncover for themselves the way forward. Mentoring programs allow more junior employees the chance to learn from seasoned workers.
- Succession Planning:
Take the time now to map out which positions will turnover in the short- and long-term and create a plan of how you groom people for future success.
“Pleasure in the job puts perfection in the work.”