|In this newsletter:
Benchtest 09.2017, tax and the state old age pension, death benefits outside a fund, service provider rotation and more...
Important notes and reminders
In last month’s newsletter, we made reference to the ‘familiarity risk’ that NAMFISA discovered as the result of off-site inspections on a number of pension funds. NAMFISA directed these funds to consider this risk and to report back.
Unfortunately the risk was not defined nor are we aware of any official guidelines. However in the relevant correspondence with funds, this risk is linked to the period for which service providers have been providing services to the fund.
The correspondence insinuates that service provider rotation mitigates this risk.
Let’s speculate and look at what this could possibly refer to and investigate each scenario.
Service provider rotation will result in ‘short-termism’. ‘Short-termism’ has been shown to produce undesirable consequences in many walks of life. It can lead to a laissez fare attitude by employer and employee, fund and service provider, particularly when it comes to intangible or unquantifiable elements of service delivery and it can lead to arbitrage where the quantifiable elements are misused to divert the focus and measurement of intangible and unquantifiable elements.
In the case of pension fund administration, loss of information and of fund and member history normally occurs when a new administrator is appointed as the fund and member history is usually too extensive to be moved to the new administrator. Loss of fund history and information is also a serious risk when changing other service providers but mostly not as acute as in the case of the administrator. This risk is a lot more serious than changing your bank, car mechanic or your doctor as a fund has an infinite life and entails the history of many people. In all cases history and information will be lost and this could be very costly and even deadly, for an individual as much as for an organisation!
Dependence of one person on another person may well restrain the dependent person in freely expressing an opinion on the other person. The audit profession is the profession where the discussion on familiarity and the possible threat this may pose to the auditor’s judgement has become topical internationally. In the narrow sense of the word, an auditor is not a service provider as it is a statutory appointment with a public attestation function that a business is obliged to make. Internationally however, there is no consensus yet whether auditor rotation should be enforced. Some countries such as Australia and China have introduced obligatory auditor rotation. Others, we believe, like the US and England have stopped efforts to introduce obligatory auditor rotation while yet others like the Czech Republic who had introduced auditor rotation have removed this obligation. There has to our knowledge not been any discussion of the rotation of an audit firm where is serves a company in an advisory capacity only, serving a similar role to that of the consultant on a pension fund.
Finally, King IV, the ultimate measure of good corporate governance makes no reference to service provider rotation in the sector supplements for retirement funds.
Although we evidently have a personal interest as a service provider to pension funds, we are convinced that service provider rotation with regard to non-statutory appointments of pension funds is ill-conceived. These appointments are not required to express an opinion on the fund they are servicing. Rotation will add no value, in fact it will add to the direct costs and indirect cost through loss of knowledge, information and history. It goes without saying that the application of good corporate governance principles by trustees must be the core of managing their funds. As long as these are observed in the course of appointing and reviewing service providers, the trustees have done their job and need not fear any intervention by the regulator.bbb
Pension fund governance - a toolbox for trustees
The following documents can be further adapted with the assistance of RFS.
The Benchmark Retirement Fund
The re-balancing of the investment portfolio was done in mid-October 2017.
News from RFS
Letters from our readers
A reader wrote...
Thanks, the latest issue of Benchtest is once again well written and covers a number of relevant topics. I also do appreciate your comments re familiarity & that trustees spend less time on your administration reports. Just to let you know that I do, at least on a quarterly basis, read through the monthly administration report to get that “comfort feeling” that all is still OK. I, however, can’t vouch for the rest of the trustees and I will talk to this at the next trustee meeting.”
Another reader comments on “If government was serious about promoting economic development”...
“Thanks a very good article.”
Thank you for your feedback – always good to read how readers receive our newsletters.
News from NAMFISA
New NAMFISA levies to be introduced
A revised structure of levies payable to NAMFISA by regulated financial services industries were announced in government notice 265, to become effective 1 November 2017.
This notice provides for the following levies that are to be borne by pension fund members directly and indirectly:
Read the gist of the changes, here...
The FIM Bill - an overview
NAMFISA presented an overview of the FIM Bill at the RFIN conference that took place in Swakopmund during September.
Download the presentation here...
News from the market
Old Mutual staff movements
We were recently informed that Vaughan Petersen and Melissa Ramsamy-Agapitus will be leaving Old Mutual at the end of the month. Vaughan will join Standard Bank corporate finance team while Melissa will be transferred to Old Mutual Johannesburg office. Warren Kozonguizi will take over from Vaughan while Patricia Olivier will take over from Melissa.
(for stakeholders of the retirement funds industry)
Is your house part of your retirement plan?
“One thing many people in this country have in their favour, however, is that we have a love of physical property. Owning their own home is a priority for a lot of South Africans.
What this means is that upon reaching retirement many people may find that while their pension savings may have fallen short of what they need, they have significant additional value in their homes. In some cases where a house has been owned for many years, the asset they are living in may be worth more than all their other assets combined.
Freeing up this value potentially offers at least a partial solution to their retirement funding problem. However, it is one that has to be very carefully considered, because, of course, they still need somewhere to live.”
Read the full article by Patrick Cairns in Moneyweb of 9 October 2017, here...
Why medical underwriting in retirement is a good idea
“Retirees draw down a higher percentage income from their living annuities because they are struggling to make ends meet, according to the Association of Savings and Investments of South Africa (ASISA).
If however they are medically underwritten at retirement they may qualify for a higher monthly income especially if they suffer from a disease such as breast cancer. During breast cancer awareness month in October, women are reminded to consider the financial implications of the disease, especially in their retirement years when the prevalence of the disease increases. The cost of a mastectomy can be approximately R400 000...”
Read the full article by Justine Wyatt in MoneyMarketing of 11 October 2017, here...
(for investors and business)
Offshore investing: How do I navigate will and tax?
“Are there issues with foreign investments in the event of one’s death regarding separate wills and executors, estate duty, and insurance wrappers?
Whether to have a foreign will or not depends on your individual circumstances and it is a personal decision for many clients. In the event that you only have an offshore investment portfolio and no other immovable assets, like property, a local will would be sufficient for the winding up of your estate. It is also easier for the family to deal with only the local executor, instead of an unknown one, in a foreign country. When there are immovable assets one would need to look at drawing up a global will as well.
The arguments in favour of having separate wills for different jurisdictions include using experts in the jurisdiction where property is situated. This is to apply their expertise to ensure that the will is drawn up according to the laws of that jurisdiction and allowing the administration processes in the different jurisdictions to run independently of one another…”
Read the full article by Suzean Haumann in Moneyweb of 5 October 2017, here...
Truth, lies and Bitcoin
“In the South African asset management industry you would struggle to find three people more experienced and more straight-forward than Louis Stassen, Sandy McGregor and Dave Foord. The three have each spent decades at their respective firms – Coronation, Allan Gray, and Foord Asset Management – and have seen the sector develop from its early years into the significant player in the economy it is today.
Stassen, McGregor and Foord shared a stage at the Morningstar Investment Conference in Cape Town on Thursday, and delivered some fascinating insights into issues facing the asset management world, and their lives in the industry.”
Read the full article by Patrick Cairns in Moneyweb of 13 October 2017, here...
Asset prices are high across the board. Is it time to worry?
“Asset-price booms are a source of cheer, but also anxiety. There are two immediate reasons to worry. First, markets have been steadily rising against a backdrop of extraordinarily loose monetary policy. Central banks have kept short-term interest rates close to zero since the financial crisis of 2007-08 and have helped depress long-term rates by purchasing $11trn-worth of government bonds through quantitative easing. Only now are they starting to unwind these policies. The Federal Reserve has raised rates twice this year and will soon start to sell its bond holdings. Other central banks will eventually follow. If today’s asset prices have been propped up by central-bank largesse, its end could prompt a big correction. Second, signs are appearing that fund managers, desperate for higher yields, are becoming increasingly incautious…”
Read the full article in The Economist of 7 October 2017, here...
Something to smile about
This is from a book called 'Disorder in the American Courts', consisting of things people actually said in court, word for word, taken down and now published by court reporters who had the torment of staying calm while these exchanges were actually taking place.
ATTORNEY: She had three children, right?
ATTORNEY: How many were boys?
ATTORNEY: Were there any girls?
WITNESS: Your Honour, I think I need a different attorney. Can I get a new attorney?