As commented in the preceding article it is not only the Namibia Competition Commission that has taken up the cause of competition in the retirement funds market, but so has NAMFISA it seems, and established service providers have become the proverbial ‘sausage in the bread roll’. Being a sausage in a bread roll of course is never a good place to be in. The likelihood is that you will be eaten. So instead of just minding your business of being a sausage peacefully, you are now squeezed from two sides that want to ensure that you can and will be eaten and will not be a sausage in due course anymore.
 
In this endeavour NAMFISA recently issued offsite inspection reports to a number of retirement funds. Besides a few factual findings that funds need to attend to, the common thread in these reports is that service providers have been serving the fund for very long periods. It is alleged that this fact poses a ‘familiarity’ risk to funds and the relevant funds are directed to explain their risk management policy in this regard.

I certainly never heard of ‘familiarity’ as posing a risk to the operational activities of a retirement fund. In fact, we have always been very proud of our long association with most of our clients and believe that our understanding of the business of the participating employer and the fund, our familiarity with the business, has actually mitigated operational risks. First and foremost, our experience and our qualifications have contributed largely to us and our clients appreciating the operational risks of pension fund administration and we make a point of managing these risks based on our familiarity of the risk, and assisting our clients to be appraised of how these risks are managed. Since RFS commenced business, fund structures have become exponentially more complex. The risks this complexity presents to a fund every time it changes its service providers are enormous and probably much greater than the perceived risk of trustees having become familiar with their service providers on a personal level. It appears that this is how NAMFISA interprets ‘familiarity’ – i.e. the trustees know their service providers on a personal level and hence they are less inclined to objectively assess the service provided by the service provider, or am I missing the true risk that NAMFISA has identified?

Familiarity on a personal, rather than operational level is typically dealt with in trustees’ code of conduct. To remain objective and avoid having their objectivity fettered as the result of personal or family relationships, most codes of conduct require a trustee to recognise such relationship and to avoid this fettering his or her decisions. Up to now, this was the thrust of codes of conduct and the general understanding of a fiduciary’s independence. In fact I am not aware of any official pronouncement by NAMFISA or any other pensions regulator that aims to encourage service provider rotation for the sake of avoiding too close personal relationships developing over time. The closest pronouncement by NAMFISA is draft General Statement 9.8  to be issued under the FIM Act once this become law. This statement however, deals with ‘independence’ and mainly applies to trustees and statutory appointments by pension funds such as auditors and actuaries. These appointments have a statutory purpose that goes beyond the requirements of the client fund that requires independence of the party they are reporting on. However, even as far as statutory appointments go, it has only quite recently become  a topical issue in the audit profession whether or not there should be compulsory rotation of firms that provide such statutory service.

Of course the typical layman trustee will be intimidated by NAMFISA’s directive to review the manner in which this new version of ‘familiarity risk’ is managed and mitigated, and may just take the easy way out by firing their long standing service providers for the sake of being able to tell NAMFISA – “yes we fired the service providers as you required!” – without due consideration of the genuine risks of doing so!

Is this what NAMFISA wants to achieve? I do not believe so but, this will be the reality and NAMFISA will not take the blame for any ill-considered decision that may prove to have been very costly to the fund and its members!

So trustees be cautioned. Before you take a decision on the basis of the recent NAMFISA off-site inspection feedback, make sure that you obtain professional and independent advice by someone who is not in the industry but understands the industry! Personally I am not sure there is someone like this around because the moment you are out of our industry you lose insight and expertise very, very rapidly! And, trustees please take note – I do not have a hidden agenda, I do have a very personal interest in this matter!

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.