Important notes and reminders
Namibia changes its standard time
Take note that Namibian Time Act, Act 9 of 2017, repeals its predecessor Act 3 of 1994 and sets the standard time for Namibia at 2 hours in advance of Greenwich mean time with effect from 6 October 2017.
Download the government gazette, here...
In this newsletter we look at the taxability of the state old age pension, we examine the pros and cons of the alternatives for providing death benefits within a pension fund, we investigate whether trustees should rotate the fund’s service providers, we report on a change in the composition of the Benchmark default portfolio and in our Benchmark Monthly Performance Review of 30 September 2017 we contemplate whether there is any room for investment markets to move up further.
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 September 2017
In September the average prudential balanced portfolio returned 1.35% (August: 0.85%). Top performer is Investec (2.26%); while Momentum (0.59%) takes the bottom spot. For the 3 month period, Investec takes top spot, outperforming the ‘average’ by roughly 1.30%. On the other end of the scale Momentum underperformed the ‘average’ by 1.69%.
Do markets have any room to rise further?
The price of equities is a function of earnings and the rating investors attach to the earnings stream, or in short the price: earnings ratio. So let us investigate earnings and the price: earnings ratio to get a better feel for future growth prospects of the equity markets. Since the US equity market has by far the largest market capitalization, representing 40% of global market capitalization, let’s look at the US equity market, more specifically the S&P 500 as its proxy and the SA equity market, as the one closest to home.
The graph above reveals a few facts about the US equity market. Firstly, earnings in real terms over the past 30 years have generally been moving between 500 and 1,000, on average they were around 750. Secondly the graph shows that real earnings moved sideways with some volatility until 2004 to then rise steeply from 500 at the start of that period to just over 1,000 by 2008. Thirdly it shows that earnings have reached a peak of just over 1,000 and have been moving sideways with a slight declining trend since the beginning of 2008 with a brief slump following the global financial crisis. Real earnings on 1,000 are thus currently around 25% above their 30 year average. This indicates that the US equity market is more likely to decline to its average earnings than growing further.
Read part 6 of the Monthly Review of Portfolio Performance to 30 September 2017 to find out what our investment views are. Download it here...
Is the state old age grant / pension taxable?
This is a question that must have gone through the mind of many people who have registered and have been receiving the state old age grant/ pension upon having turned 60.
The answer is fairly simple – yes it is taxable. In terms of the definition of ‘gross income’ in sub-section (a) of section 1 of the Income Tax Act, “any amount received or accrued by way of annuity” is gross income and anything that meets the definition of gross income is taxable in the first instance, unless the Act provides for an exemption or a deduction of an amount that is gross income in the first instance. The Act contains no provision that exempts or allows as a deduction the amount received by way of the state old age grant/pension.
The fact that no income tax is deducted and that the taxpayer is not issued a PAYE 5 certificate for the pension received in any year of assessment has no bearing on the taxability of the pension. The obligation to deduct income tax and to issue PAYE 5 certificates in respect of tax deducted is contained in Schedule 2 to the Act. Here the definition of “remuneration” is instructive as to when income tax has to be deducted, namely only in respect of “remuneration” as defined. Sub section (b) (iii) of this definition specifically excludes “any pension or allowance under the Social Pensions Act, 1973…or any grant or contribution under the provisions of section 89 of the Children’s Act, 1960…”
The state old age grant/ pension should thus be reflected as income in the taxpayer’s annual income tax return and will be subject to income tax provided the taxpayer’s total taxable income for the year of assessment exceeds the threshold of currently N$ 50,000.
Death benefits – does it make sense to remove it from the fund’s rules?
Some funds have removed the reassured death benefit from their rules and provide these via a separate group scheme, while others are channelling their death benefits through a ‘benefit fund’.
In our opinion, where the purpose of the ‘benefit fund’ is to offer benefits upon death similar to those typically offered by a pension fund in the event of death of a member, the ‘benefit fund’ would most probably meet the definition of ‘pension fund’ and would then be required to register under the Pension Funds Act. Certainly in terms of the FIM Act, a beneficiary fund that administers, invests and pays benefits on the death of a member is covered by the definition of “fund” and every “fund” as defined has to be registered under the FIM Act.
In terms of the Income Tax Act, a ‘benefit fund’ is recognised as such if it has obtained tax approval. A benefit fund is an approved fund other than a pension fund, a provident fund or a retirement annuity fund as defined in the Income Tax Act, if it provides benefits for spouses, children, dependants or nominees of deceased members. From the Pension Funds Act perspective a benefit fund, in our opinion, is a pension fund and has to register under the Pension Funds Act. Unlike pension funds, provident funds and retirement annuity funds, the application for tax approval of a ‘benefit fund’ does not require the fund to be registered under the Pension Funds Act. This in our opinion represents a tax loop-hole that will be closed sooner or later.
The benefit fund - pros and cons
Firstly, a ‘benefit fund’ is a concept that exists in the Income Tax Act but not in the Pension Funds Act. In terms of the Income Tax Act it enjoys preferential tax treatment similar to that of a pension fund or provident fund.
- The fund is not taxable (s 16(1)(d)) – same as pension and provident funds.
- Contributions by the employer are tax deductible (s 17(1)(0)) – same as pension and provident funds.
- Member contributions are not tax deductible (no provision to deduct) – tax deductible up to N$ 40,000 p.a. in case of pension or provident fund.
- Annuity/ pension benefits are taxable in the hands of the beneficiary (definition of gross income, sub-section (c)) – same as pension fund, provident fund does not pay any annuities.
- Lump sum benefits are tax free (definition of gross income, sub-section (c )) – 67% tax free in case of pension fund, 33% tax free in case of provident fund.
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.
The definition of ‘benefit fund’ in the Income Tax Act is very similar to the definition of ‘pension fund organisation’ in the Pension Funds Act. We are consequently of the opinion that a ‘benefit fund’ as contemplated in the Income Tax Act is in fact a pension fund organisation as contemplated in the Pension Funds Act. It must therefore register as a pension fund under the Pension Funds Act and is then also subject to the Act.
This means that the principles of section 37 C have to be observed in distributing a death benefit. It should also comply with all other requirements of the Pension Funds Act such as having a board of trustees, appointing an auditor and actuary, submitting annual financial statements, statutory reporting etcetera. Where the benefit fund operates as an umbrella fund, participating employers are of course not impacted by the statutory requirements other than section s 37A, 37B, 37C, and perhaps 37D.
The employer owned group life policy – the worst alternative
Some funds have removed the death benefit from the rules to replace it with an employer owned group life policy that would pay directly to nominated beneficiaries. Either the reinsurance premium in respect of the death benefit is deductible by the employer but the benefit is fully taxable in the hands of the employer (section 17(1)(w) read together with the definition of gross income, sub-section (m)). Alternatively, the premium is not deductible by the employer if the benefit accrues to the employee or a person who was dependant on the employee (section 17(1)(w)(v)).
The problem in this scenario is that the employer’s pension or provident fund is still sitting with the member’s fund credit that is subject to income tax and to section 37C of the Pension Funds Act. Furthermore the benefit is not subject to the protection of the Pension Funds Act and could be lost should the employer be insolvent or be liquidated, or should the beneficiary or his estate be insolvent.
The disposition of the reinsurance policy benefit is not subject to the Pension Funds Act which may make it easier to dispose of but this may not necessarily be in the interests of the deceased member.
Whereas a benefit fund thus offers a tax advantage on death benefit capital greater than N$ 98,000 per beneficiary over a pension fund and certainly over any provident fund death benefit, it does entail two administrative structures and the consequent duplication of costs, as the result of the reinsured death benefit being administered in the benefit fund while the benefit arising from the member’s accumulated capital is administered in the pension fund. Two boards of trustees need to apply their mind and allocate the two available capital amounts in their discretion in terms of section 37C of the Pension Funds Act. This could obviously present its own frustrations to beneficiaries and employers.
Arranging an employer owned group life policy renders the full benefit taxable and removes the protection of death capital offered by the Pension Funds Act that would apply to a pension- and a benefit fund benefit. From the tax point of view it is the least beneficial alternative but it is likely to be a cheaper alternative than the benefit fund while the distribution can be done more efficiently not being bound by the Pension Funds Act.
Service provider rotation – an ill-considered notion!
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.
Having dwelled on the possible risks of ‘familiarity’, every coin has two sides. So while ‘familiarity’ may present certain threats to the independence of judgement and could lead to leniency, complacency, loss of objectivity and lack of innovation that need to be considered in perspective, service provider rotation entails serious risks that also need to be considered.
- A family or personal relationship exists between one or more trustees and one or more employees of the service provider.
Firstly, personal relationships are not necessarily linked to the period over which the service provider has been engaged. Such relationships can develop over time and they can already exist upon the appointment of a service provider.
Secondly where one is dealing with a board of trustees on the fund side and a company rather than an individual on the service provider side it becomes virtually impossible to avoid such familiarity either existing, arising or ending at any time.
Thirdly, a relationship between a person on the fund side and a person on the service provider side will undoubtedly be diluted by the fact that it is a board of trustees dealing with a service provider organisation rather than two role players dealing with each other only.
Fourthly, people come and go and are replaced by other people. So a relationship that has existed may end as the result of staff turnover but may also arise as the result of staff turnover.
Fifthly, a family relationship does not necessarily constitute a personal relationship.
Clearly, rotating the service provider will make no meaningful contribution towards mitigating the ‘familiarity risk’. Requiring role players to declare family relationships and maintaining a register is based on objective criteria, if narrowly defined, and should be a more effective mechanism to monitor and probe any decision. Other personal relationships would be based on subjective criteria that will essentially be impossible to define and would have to rely on the discretion of the person concerned. This in turn is better addressed in a code of conduct.
- The processes, procedures, policies etcetera of service provider and the fund have over the years become so entrenched and routine that built in deficiencies are not uncovered by either party.
Again deficiencies in processes, procedures, policies etcetera can develop over time or they can exist at the time of appointment.
It is common cause that deficiencies in processes, procedures, policies etcetera are most likely to occur at the outset while they become ever more refined and better as time lapses. Track record is a very good indicator to what extent these have been improved over time.
Clearly, service provider rotation will make no meaningful contribution towards mitigating any familiarity risk that may arise from this scenario. The more effective oversight and control is put in place by the Pension Funds Act by requiring the engagement of an actuary and an auditor and also by requiring a fund to be managed by a board of trustees equally representing employer and employees. Further effective mitigation can be achieved by unbundling the non-statutory day-to-day services to pension funds such as administration, risk re-assurance, asset management, asset consulting and employee benefits consulting.
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.
- 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 pension fund member
Please find attached as discussed telephonically yesterday. Thank you indeed for your proper feedback and help all the time. I wish that there could be more of your kind. Let me know if everything is in order.
Read more comments from our clients, here...
The Benchmark Retirement Fund
Flagship of umbrella funds in Namibia
By Paul-Gordon, /Guidao-Oab, Benchmark Product Manager
Default Portfolio Change
The Board of Trustees of Benchmark Retirement Fund instructed the Fund’s investment consultant, NMG Consultants and Actuaries (Namibia) (Pty) Ltd, to determine whether the Fund’s default portfolio was still suitably constructed as a moderate-low risk portfolio. After extensive analysis and consultation the Board of Trustees resolved to change the default investment portfolio to a combination of the Allan Gray Namibia Balanced portfolio, Prudential Namibia Inflation Plus and Sanlam Namibia Inflation Linked from the previous combination of Allan Gray Namibia Balanced and Prudential Namibia Inflation Plus.
The reasoning for the change in the default investment portfolio was that:
- the Sanlam Inflation Linked Fund showed to better protect capital in market down-turns compared to Prudential Namibia Inflation Plus,
- the 3 portfolios produce a more appropriate risk/return profile and therefore the member should experience less volatility and fewer negative periods also referred to as portfolio drawdown, and
- the portfolio has been re-aligned to the objective of the portfolio.
The re-balancing of the investment portfolio was done in mid-October 2017.
|Paul-Gordon /Guidao-Oab joined RFS as Manager: Audit and Compliance in May 2016 and has then moved into the position of Benchmark Product Manager. Paul holds a B Compt degree from Unisa and has completed his articles with SGA
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:
Where a pension fund has placed its investments in a unit trust, the same assets will be levied through levies 1 to 3 above that add up to 0.065% of assets. For every N$ 100,000 invested in a pension fund, the member will pay to NAMFISA an annual levy of N$65!
- Levy on pension funds
- Levy on unit trust managers
- Levy on unlisted investment managers
- Levy on investment managers
- Levy on LISPS
- Levy on long-term insurance policies
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?