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As we wade through the quagmire washed ashore by the FIMA, every other day one comes across a provision the repercussions of which one never realised.

One of these repercussions is that, for all intents and purposes, a retirement fund in Namibia, other than the GIPF, can only offer its members benefits derived from the contributions the employer and the member paid to the fund. So if you pass away, or if you become disabled  in the month you joined the fund, your retirement fund will pay you a benefit of close to nil, or nil if it happened the day after you joined the fund.

Now, NAMFISA will probably say that this is not true. Funds may offer death benefits and disability benefits of more than the contributions received by and on behalf of the member. The problem is that the fund cannot make such benefits subject to any typical insurance terms and conditions, limitations and exclusions. The fund would have to manage its risk presented by the benefit it is obliged to pay in terms of the rules and the benefit it was able to reinsure. Exact reinsurance is no longer possible and the funds will end up in situations where it is under-recovering and has to stand in for the shortfall. A fund may try to mitigate this risk through building up and maintaining a ‘risk reserve’.

Unfortunately, as I understand the FIMA, a defined contribution fund may only maintain an expense reserve. Even if a defined benefit fund is allowed to maintain a risk reserve, it is not any consolation as the risk remains very high, particularly in respect of top management with high salaries and death- and disability risk benefits. I can relate my experience with a fairly small fund (about 200 members) that only insured its risk on an ‘approximate basis’. It lost two of its senior staff in one year and its reserves were hopelessly inadequate to cover the shortfall. For many years after, this fund had to withhold investment returns from its members to rebuild its risk reserve. If for any reason, the fund were to have terminated, it would not have paid members there termination benefit in terms of the rules.

Therefore, I repeat my earlier statement, that for all intents and purposes Namibian retirement funds cannot offer risk benefits under the FIMA anymore. This will probably present challenges to the employer in terms of the Labour Act. From 1 October 2022, most funds in Namibia cannot offer their members the same death and disability benefits at the same cost as before anymore. Death benefits will not enjoy the same protection as they did under the Pension Funds Act anymore. How does an employer sell this to his employees? NAMFISA is usually very wary of employees’ employment conditions being affected by any rule change, now the law obliges the employer to change his conditions of employment to the disadvantage of his employees!

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

 

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