Important notes and reminders
Pension fund governance - a toolbox for trustees
Increase in local asset allocation from 1 January 2018
NAMFISA issued a circular in June 2017, referring to a proposed staggered increase in the domestic asset requirement from 35% to 40% from 1 January 2018. The next increase will be to 42.5% effective 1 April 2018. This requires an amendment of Regulation 28 to become effective. To date no amendment to Regulation 28 has been promulgated yet. As a result the increase effective 1 January 2018 is not a legal obligation yet and it remains to be seen whether Regulation will be amended in time for the next proposed increment.
In this newsletter we examine whether it is better to invest yourself than investing through traditional investment institutions; we examine whether or not SSC benefits need to be declared on your tax return; we caution on the effect of pensioners having sources of income other than their pension; in the Benchmark column we explain why the Fund has discontinued providing pension backed housing loans; we give a brief insight into RFS’ corporate governance processes. We report on developments at RFS and in our business environment, and in our Benchmark Monthly Performance Review of 31 December 2017, we take a look at what 2018 may hold in store for us and the possible implications of this for investment markets and currencies.
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 31 December 2017
In December 2017 the average prudential balanced portfolio returned (-1.49%) (November: 0.40%). Top performer is Metropolitan (-0.60%); while Investec (-2.73%) takes the bottom spot. For the 3 month period, Stanlib takes top spot, outperforming the ‘average’ by roughly 1.13%. On the other end of the scale Allan Gray underperformed the ‘average’ by 1.34%.
What will 2018 hold in store?
The US tax code revision, the backlash against unfettered globalization, Bitcoin, the prospective withdrawal of quantitative easing by the ECB, the steep increase in crude oil prices, the possible return to a gold standard and the Korean crisis currently are probably the hottest topics that may impact financial and investment markets in 2018 and beyond.
The backlash against unfettered globalization has already led to the election of Donald Trump as president of the US in 2015 true to the adage that the wheel keeps turning. When the largest global economy is moving towards more protectionism and less globalization, other smaller economies will have to move towards more protectionism as a matter of course. Whatever one may think or say about president Trump’s lack of diplomacy and finesse, he is a businessman and not a diplomat unlike his predecessor, and he is starting to make an impact on the US economy that will reverberate on the global economy, with his America first credo. In its December 2017 approval of the most extensive tax-code revisions since 1986, the US Congress scrapped the previous international tax system for corporations - an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore and many were criticized for the moves.
Read part 6 of the Monthly Review of Portfolio Performance to 31 December 2017 to find out what our investment views are. Download it here...
Are Social Security benefits taxable?
The fact that SSC may not have deducted PAYE from any benefits paid to you, does not necessarily mean that they are not taxable. Whether or not a person is required to determine and withhold PAYE from any amounts it pays to another person is set out in Schedule 2 of the Income Tax Act. Schedule 2 of the Income Tax Act only requires a person to determine and withhold PAYE, if the amounts it pays meet the definition of ‘remuneration’ in the schedule.
In respect of social benefits, this schedule specifically excludes from this definition ‘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…’. Evidently this does not refer to the Social Security Act, Act 34 of 1994.
Remuneration as per the definition ‘means any amount of income which is paid or is payable by any person by way of any salary, leave pay, allowance, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend…’ Without going into too much detail, in our opinion all these terms relate to an employer – employee relationship. There is clearly no employer – employee relationship between a recipient of maternity or sick leave benefits and the SSC.
But hold it, the definition now specifically includes any amount received or accrued by way of annuity, certain other amounts arising out of employment and certain amounts arising from membership of approved funds. Considering that amounts from employment are the responsibility of the employer while amounts from an approved fund are the responsibility of the fund administrator, the only remaining possible obligation for SSC to withhold PAYE can arise if the benefits would fall under the definition of ‘annuity’. The term ‘annuity’ is not defined in the Income Tax Act so one needs to refer to the common understanding of this term. The Oxford English dictionary defines an annuity as ‘fixed sum of money paid to somebody yearly, usually for the remaining part of his/her lifetime…’ Inland Revenue in fact has established the principle that an annuity requires a minimum payment period of 5 years. It is clear to me that neither any maternity –, nor any sick leave benefit falls into this definition as they are only paid for a limited period of less than 5 years. I therefore conclude that SSC is under no obligation to withhold PAYE.
As pointed out above this does not necessarily mean that these benefits meet the definition of ‘gross income’ and are therefore taxable. Looking at this definition it broadly includes anything derived from a source in Namibia, but specifically excludes amounts of a capital nature, and then goes on to include a whole list of specific amounts.
In short, I do not find any clause specifically including the SSC benefits. It then remains to consider whether it falls under the broad inclusions or the exclusion of amounts of a capital nature. The list of specific inclusions appears to implicitly exclude the SSC benefits as they do not derive from anything otherwise considered to constitute gross income. Generally receipts will only constitute gross income if they are the consequence of a deliberate effort to generate an income or to make a profit.
The flip side of this argument would be that the contributions by the employee towards these benefits are not made in the production of income and should thus not be tax deductible as required by section 17 of the Act. There is also no other specific deduction for these contributions in the Income Tax Act.
Having studied the SSC Act, it does not contain any overriding clause impacting the prescriptions of the Income Tax Act.
I thus do not believe SSC benefits fall into this category and am hence of the opinion that they do not constitute gross income and are not taxable.
Other income can result in tax surprises for pensioners
As administrator of a number of pensioner payrolls, RFS is deemed by Inland Revenue to be the employer of the pensioner. For income tax purposes pensioners are treated in the same manner as employees. The employer (RFS) is required to determine the monthly income tax to be deducted, from the PAYE 10 tables issued by Inland Revenue from time to time. These tables are based on the official tax scales that require progressively higher tax percentages to be applied as the taxable income increases from one level to the next. These tables assume that the only income of the pensioner is the pension/ annuity paid by RFS to the pensioner. Very often however, pensioners earn other income that will be added to the total pensions paid by RFS, when the pensioner needs to submit his/her tax return for a tax year. RFS as pension payroll administrator is obliged by the Income Tax Act, to only take into account the pension it pays and no other income.
In the Benchtest 09.2017 newsletter we pointed out that the social old age pension of N$ 1,200 per month is taxable. Since RFS does not take this into account, a pensioner paying tax at the minimum tax rate of 18% will be required to pay up an additional amount of N$ 2,800 on or before 28 February of any year, if he/she wants to avoid paying interest and penalties. At the maximum tax rate of 37% this surprise amounts to an additional tax of N$ 5,800.
Other income that may be the reason for such a ‘tax surprise’ at the end of a tax year is any business income, rental income or any interest earned that is not subject to withholding tax. Fortunately interest earned that is subject to withholding tax can be ignored as the 10% withholding tax is a final tax.
Other income in the form of ‘remuneration’ as defined in the Income Tax Act, e.g. trustee fees or directors’ fees, is subject to PAYE. However the person paying this ‘remuneration’ is also obliged to only deduct PAYE as if this was the pensioner’s only income. When this income is added to the pension the pensioner’s total income might be in a higher tax bracket and thus means that both RFS and the other person have deducted too little tax resulting in a ‘tax surprise’ for the pensioner at tax year end.
Any pensioner who earns other taxable income may request RFS in writing to deduct PAYE at a higher rate in order to avoid a ‘tax surprise’ at the end of the tax year.
Should the converse apply to a pensioner, i.e. a pensioner incurs losses in respect of another business run by him/her, RFS will require a tax directive from Inland Revenue instructing it to deduct at a lower rate than the PAYE 10 table prescribes or to deduct no tax at all.
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
...many, many thanks for your trouble, it is sincerely appreciated. Nowadays you do not get such service anymore. Owe you a big beer.” (translated from German)
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
The problem with pension backed housing loans
The trustees of the Benchmark Retirement Fund recently resolved to no longer grant pension backed housing loans as these pose a risk to the Fund.
In terms of the Income Tax Act, the Receiver of Revenue has a first right to claim against any pay-out from any approved retirement fund. Where an employer entered into an agreement with the Fund and a Bank to offer pension backed housing loans to its employees the employer and the fund are contractually bound to redeem any outstanding housing loan balance in the event of the termination of fund membership of a person who had taken up a pension backed housing loan from the Bank. In such an instance, the administrator of the Fund is required to obtain a tax directive from Inland Revenue prior to paying out any portion of the member’s benefit if the total benefit is more than N$ 40,000. Any amount to be paid to the Bank constitutes a termination benefit and therefore requires the administrator to obtain a tax directive. Where the member owes Inland Revenue tax, the tax in excess of the net after tax benefit payable to the member, remains due to the Bank in terms of the agreement between Fund, Bank and employer. Attempts would now have to be made to recover this money from the former member, between the Fund and the employer.
The situation with direct housing loans is quite different. In such cases the member borrows against his own interest in the fund. The maximum amount that is available to cover any tax debt of the member is the net after tax benefit of the member after the outstanding loan balance has been ‘offset’. Neither the Fund nor the employer faces any risk of recovering any remaining loan balance from the member.
The Fund will in future only grant direct housing loans where the member borrows against his own benefit in the fund. In the next newsletter I will expand on the conditions for granting direct housing loans.
|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
RFS in action
Compliance management aims to ascertain that all employees or RFS adhere to the requirements of laws, industry and organisational standards and codes, principles of good governance and accepted community and ethical standards. This process entails the establishment of compliance procedures, the identification of laws of relevance to RFS’ operations, the execution of regular compliance reviews and the maintenance of a compliance register. These laws prominently include the Pension Funds Act, the Income Tax Act, the Financial Intelligence Act, the NAMFISA Act as well as a number of other laws. Each law is assigned to an executive director for the purpose of monitoring on-going compliance by RFS.
News from RFS
Hannes van Tonder heads up our Benchmark Retirement Fund administration services, systems and procedures and in-house umbrella fund administration training. He can call on 20 years pension fund administration experience. He holds a B Com degree from Unam and an honours degree from Unisa. Furthermore, he obtained an IISA Licentiate (Retirement Fund Management) conferred by the Insurance Institute of South Africa.
New staff join our permanent staff complement
Riduwone Farmer joined our permanent staff complement on 1 January 2018. He was born at Walvis Bay and matriculated at Jan Mohr Secondary School. Riduwone is well-known in the retirement funds industry. He started his career at UPA in 1998 which was later acquired by Alexander Forbes. He gained experience in almost all administration related fields over a period of 15 years with Alexander Forbes. He resigned from AFFS in May 2013 to join his wife who had accepted a diplomatic posting to Lusaka. Riduwone enrolled for a Bachelor Degree in Business Administration and wrote his last exams at the end of last year, currently awaiting the results.
We extend a hearty welcome to Riduwone and his family to the RFS family and look forward to him serving his Benchmark client with passion, diligence and conviction for many years to come.
Information and correspondence to take note of
Duplication of NAMFISA levies on certain investments
In a previous newsletter, we pointed out that the regulation in terms of which a new NAMFISA levy structure was to be introduced with effect from 1 November 2017, has resulted in a questionable layering of levies on the same assets and has created uneven playing fields depending on what investment vehicles are employed to invest a fund’s assets. The most inequitable layering appears to be where a fund invests in an insurance policy. These assets are levied in the fund. The monthly cash flows into the investment policy are then levied as an insurance policy premium. The insurer who manages these assets is then once again levied on the same assets. If these assets were managed either in a unit trust or in a segregated portfolio, they would ‘only’ be subjected to the fund levy and the levy applicable to asset managers or to unit trust management companies as the case may be.
We have taken this up with all insurers and enquired what they intend to do about this patently inequitable treatment of assets invested through an insurance company.
One insurance company responded as follows:
“We take note of your concern regarding the implication of fees being levied twice. We have been in discussions with the Regulator for quite some time, and the below concern has been discussed at various forums within the company.
The Regulator is of the opinion that the act is very clear on this matter.
At this point we are seeking for a solution to this problem by either seeking for exemption or by looking at ways to restructure our products, but careful consideration needs to be given at all the different levels to account for the full impact at client level.
Unfortunately this is quite a tedious process as we need to constantly engage with the Regulator on this matter as well. T did meet with them again yesterday and the discussions are being held at the highest level with the Regulator as a matter of urgency.”
Another insurer responded as follows:
“A correspondence on behalf of our company requesting that in instances wherein pension/retirement funds invest through insurance policies, such assets be exempted from the long term insurance policies and it be levied as pension/retirement funds only, thereby negating the double levy impacting upon pension/retirement fund members has been drafted and will be sent to NAMFISA this week.
Our company is of the opinion that failing this, pension funds, provident funds, preservation funds and retirement annuity funds will be double levied, in the first instance as part of gross written premiums in the life company and in the second instance, in their own capacity. Prior to the legislative amendment the life company was permitted to deduct the assets of the pension funds, provident funds, preservation funds and retirement annuity funds, as these assets would already have been levied in their singular capacity.”
News from the market
Establishment of Namibian Revenue Agency
The Namibia Revenue Agency Act, Act 12 of 2017 (“the NRA Act”) was gazetted on 12 December 2017. The NRA Act provides for the establishment of the Namibia Revenue Agency (“NRA”), the powers, functions and management of the NRA. The NRA will be headed by a Commissioner. The Minister of Finance appoints the Commissioner for a period of 5 years. The Commissioner may not be appointed for more than 2 terms.
The NRA Act will only become effective on a date determined by the Minister of Finance by notice in Government Gazette.
Read EY Namibia Tax bulletin 1/2018 here...
(for stakeholders of the retirement funds industry)
A retirement rule of thumb is not for everyone
“A rule of thumb widely used in the retirement industry suggests that you should aim to save enough money to earn a gross retirement income equal to 75% of your final gross income immediately prior to retirement.
While working, a person’s gross income is used for consumption, to save (mostly for retirement) and to pay tax. Targeting an income replacement ratio of 75% in retirement (instead of 100%) is premised on the assumption that a retired individual will stop saving for retirement and pay less tax. However, this is a fairly crude target that may not be appropriate for everyone and may be difficult to understand… Using a consumption replacement ratio (consumption in retirement as a percentage of consumption prior to retirement) is a better measure of financial readiness for retirement. It is individualised for the person, takes into account how much they are actually saving and how much tax they are actually paying instead of crudely assuming that everyone is the same, she says….”
Read the full article by Ingé Lamprecht in Moneyweb of 21 November 2017, here...
Getting the most out of annuities
“Anyone who has saved money in a pension fund or a retirement annuity has to make a decision when they reach retirement age. At least two thirds of the money they have saved has to be used to secure themselves a monthly income.
This must be through a living annuity, or a guaranteed annuity. However, it’s important for investors to understand that they are not restricted to choosing one or the other. It is possible, and even often advisable, to use both.
As an individual, your lowest-risk annuity choice is always buying a guaranteed annuity that starts off providing you with the amount of money you need and escalates every year with inflation. Then, no matter how long you live, you should always meet your income objectives.
But while that is a great idea, some people can’t afford that from day one, because the guaranteed income that they can purchase doesn’t meet their needs…”
Read the full article by Patrick Cairns in Moneyweb of 7 November 2017, here...
The no 1 financial fear of rich people should have you seriously concerned
“Even the richest Americans are worried about having enough for retirement.
51% of affluent investors — defined as those who have total investable assets of $500,000 or more — say they are concerned about being financially secure in retirement.
That’s according to a survey from Personal Capital in conjunction with ORC International, which asked 1,000 affluent Americans what concerns they have about financial planning…”
Read the full article by Sally French in MarketWatch of 20 December 2017, here…
(for investors and business)
How I paid off my house in under 5 years
First off, however, accept and understand that paying off a mountain of credit card debt or a car or even a house in an aggressive timeframe is not impossible! This has been done before (and there are no penalties for doing it)... To many, the mechanics of how to pay extra are a mystery. This really ought not to be. Simply transfer/pay extra money into your loan accounts as if you were moving money between a current account and a credit card. It is really that simple...
Adjust your lifestyle (downwards!)
When I decided to attempt to be debt-free by age 35, the most important philosophical change I had to make in life was to live below my means. This ought to be the case in all your spending, but is especially true in the two largest purchases you’ll likely ever make: your car and your house. Very simply, buy below what you can afford...
Get a grip on your spending
Budgeting is something I learnt before trying to prove that I could pull this off. But, the detail and discipline had to be taken to another level entirely.
First, track every cent that comes into or leaves your bank accounts every month. Categorise this into useful buckets such as food, fuel/transport, discretionary, etc...
Get rid of ‘bad’ debt
When you’re tackling a large amount of long-term debt, short-term debt gets in the way. It is not logical to try pay off a bond while juggling car repayments, credit card bills and other loans...
Save, save, save
Figure out how much extra you’re able to put into your bond every month, and use this as a minimum target. Don’t stop there. Set an aggressive one as well...
Put any unexpected windfalls (the obvious one is an annual bonus) into your bond and try hard not to adjust ‘into’ your annual increase...
Once it’s done
Here’s the kicker: once your house is paid off – much like your car – forgo the temptation to upgrade thereafter. In fact, make a deliberate decision to not move into something bigger and better once your property is paid off. I’m finding this harder than expected.
Rather, use the runway over the next five to ten years to build some wealth...
Read the full article by Hilton Tarrant in Moneyweb of 24 November 2017, here...
Three powerful public speaking lessons from ‘Dutch directness’
“If you’re someone who struggles with confidence and authority in your speaking, then Dutch directness is your friend. Here are three important lessons to learn that'll turn directness to your advantage.
Be honest… Whether in a board room or on stage giving a talk, instead of cushioning facts and hiding problems, tell them what the problem is, and then show the path and solution ahead. It will earn you tremendous trust.
Embrace giving feedback… Feedback done wrong can be costly for the company- negative relationship with managers is one of the biggest reasons for promising employees leaving their jobs…Be factual, don’t get personal… By being factual and away from personal attacks, you'll be able to establish yourself as a leader whose words command respect.
Be light-hearted… Note- don't go overboard with pulling people's leg and becoming rude, that destroys relationships. Measure your words well...”
Read the full article by Sangbreeta Moitra in LinkedIn of 8 January 2017, here...
The 8 signs of a bad leader
“It's an interesting conundrum. Say you're a manager, a senior-level executive, or a human resources employee; your job is to be a leader, yes, but also to pick out leaders, to select who will be promoted, given extra responsibility, head up a project or team. How do you know who will make a great leader in a given circumstance?
There are loads of articles floating around about attributes that make great leaders great, but what makes a poor leader? We can all pick them out after the fact (hindsight is 20/20 after all), but what traits set these people apart even before they assume a leadership role?
Any one or more of the following traits would be a red flag that a person might not be ready for a leadership position:”
The opposite of course also applies.
- Lack of empathy;
- Fear of change;
- Too willing to compromise;
- Too bossy;
- Poor judge of character;
- Out of balance;
- Lack of humility.
From Marketing Insight.
Did you ever wonder why?
WHY: Why do men's clothes have buttons on the right while women's clothes have buttons on the left?
BECAUSE: When buttons were invented, they were very expensive and worn primarily by the rich. Since most people are right-handed, it is easier to push buttons on the right through holes on the left. Because wealthy women were dressed by maids, dressmakers put the buttons on the maid's right! And that's where women's buttons have remained since.