An employer looking to revamp their company's retirement fund must ensure the fund will continue to serve its purpose effectively. In this article, I will discuss the key objectives of a retirement fund and the principles to observe when restructuring it.

Besides the objectives set out further on, any student of benefit structuring under the Pension Funds Act would have learnt that a retirement fund should meet the needs of a member in the event of a life event in a balanced manner. Life events would refer to death, disability and retirement. Namibia’s educational institutions do not offer curricula for studying retirement fund theory. Students would have to enrol at a South African institution because of the common roots of both countries' pension laws.

In Namibia, NAMFISA applies a different interpretation to the Pension Funds Act. Firstly, the employer’s interests in its retirement funding arrangement supporting the employer’s recruitment and retention objectives are not recognised. Instead, the employer’s role is confined to being responsible for member communication and deducting and paying contributions to the fund. It has resulted in employers losing interest in their retirement funding arrangements and in funds being unable to provide for a member’s needs in the event of death and disablement. Benefit structuring is, therefore, severely constrained by NAMFISA’s interpretation nowadays. Employers must now take the initiative to arrange death and disability cover for their employees, and it will likely be less tax-effective and certainly more burdensome. Unfortunately, because of this interpretation of the law, members cannot rely on NAMFISA to protect their interests regarding an important component of their compensation and well-being.

Given the constraints mentioned earlier, I will discuss how to construct a resilient and versatile pension fund structure.

Key Objectives of a Retirement Fund

A well-designed retirement fund should strive to achieve the following key objectives:

1. Provide Adequate Retirement Income:
   • Replacement Ratio: One of the primary goals is to provide employees with sufficient income to maintain a comfortable standard of living in retirement. This is often measured as a percentage of their pre-retirement income (the "replacement ratio"). A common target is around 70-80%, but this can vary based on individual needs and preferences.
   • Long-Term Financial Security: The fund should aim to provide income that lasts throughout retirement, considering life expectancy.
2. Facilitate Savings and Investment Growth:
   • Encourage Participation: The fund should be attractive enough to encourage employee participation and contributions.
   • Maximise Returns: Investments should be managed to maximise returns within acceptable risk tolerances, allowing for compounding growth over the long term.
   • Tax Efficiency: The fund should be structured to take advantage of any tax benefits associated with retirement savings, both on contributions and withdrawals.
3. Offer Flexibility and Choice:
   • Investment Options: Provide a range of investment options to cater to different risk appetites and time horizons.
   • Contribution Flexibility: Allow for varying contribution levels, perhaps with employer matching, to suit individual circumstances.
   • Withdrawal Options: Offer flexibility in how retirement benefits can be accessed at retirement (e.g., lump sum, phased withdrawals, annuities).
4. Maintain Fiduciary Responsibility:
   • Prudent Management: Ensure the fund is managed prudently and transparently, acting in the best interests of the members.
   • Compliance: Adhere to all relevant legal and regulatory requirements.
   • Cost-Effectiveness: Manage fund costs to maximise returns for members without compromising quality.
5. Improve Employee Engagement and Retention:
   • Attractive Benefit: A good retirement plan can be a powerful tool for attracting and retaining talented employees.
   • Financial Wellbeing: By contributing to employees' financial security, the plan contributes to their overall well-being.

 Principles for Restructuring a Retirement Fund

The membership demographics should play an important role in structuring a fund. One size often does not fit all. Typically, two types of members can be identified based on their demographics. One type is young, educated and highly mobile, like professional firms. The second type is older, less educated and less mobile, like manufacturing or trading businesses.

Professional businesses should offer more flexibility and personal choice, and benefits should emphasise the employees’ medium-term needs and priorities. The likelihood of an employee retiring with the employer is slim, and retirement benefits are not at the top of their priority list. Disability and resignation benefits are more important. Flexibility and choice add to the cost of the arrangement, but also to the perceived value.

In contrast, manufacturers and traders do not need to offer flexibility and personal choice, and benefits should emphasise the employees’ long-term needs and priorities. Their employees are more concerned about provision for their dependants should they pass away, and about retirement rather than resignation benefits. This arrangement can be structured simply and cheaply to add value to the employee.

When restructuring your retirement fund, keep these principles in mind:

1. Member-Centric Approach:
   • Understand Needs: Begin by understanding the demographics, financial literacy levels, and retirement goals of your employees.
   • Communication is Key: Communicate clearly and transparently about plan changes, investment options, and retirement planning.
   • Education and Support: Provide access to resources that educate employees about saving and investing for retirement.
2. Strategic Investment Management:
   • Diversification: Ensure a diversified investment portfolio to mitigate risk.
   • Asset Allocation: Develop an asset allocation strategy that aligns with the fund's objectives and the risk tolerance of members.
   • Regular Monitoring: Regularly monitor investment performance and make adjustments as necessary. Consider professional investment management.
   • Fee Transparency: Be transparent about all fees associated with the fund, seeking to minimise unnecessary costs.
3. Strong Governance and Administration:
   • Establish a Clear Structure: Define the roles and responsibilities of trustees, administrators, and investment managers.
   • Regular Audits: Conduct regular audits of the fund to ensure compliance and identify any potential issues.
   • Efficient Administration: Ensure that administrative processes are efficient and accurate.
   • Compliance and Legal Review: Ensure that the restructured plan remains compliant with all relevant laws and regulations. It is vital to consult with legal and tax professionals specialising in retirement funds.
4. Sustainability and Adaptability:
   • Long-Term Viability: Design the fund to be sustainable over the long term, considering future growth, changing demographics, and market conditions.
   • Flexibility for Future Changes: Build in mechanisms to allow for adjustments to the fund in the future as needed, like updates to the contribution formula or investment options.
   • Regular Review: Commit to periodic review and analysis of the fund's goals, structure and general performance and make adjustments where appropriate.
5. Technology and Accessibility:
   • Online Access: Provide employees with easy online access to their accounts to check balances, make changes, and access educational materials.
   • User-Friendly Platform: The technology platform should be user-friendly and intuitive.
   • Mobile Capabilities: Where appropriate, provide options for members to access their retirement account from their mobile devices.

By understanding these aspects, the trustees, assisted by the employee benefits consultant and the sponsoring employer organisation, can make informed decisions regarding a possible restructuring or establishment of their retirement fund. Potential changes and the desired structure must be evaluated, and a detailed implementation plan created. The fund administrator is a key stakeholder and must be able to handle the proposed changes. Similarly, the asset managers also play a role and must be consulted when implementing the final fund structure..

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS 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 RFS.