Dear reader

In this newsletter, we provide the Benchtest for November 2010. We make some comments on housing loans for property outside Namibia, what to look out for when an employee is absent from service and we attach a few very relevant, topical and interesting media snippets and in-house notes that should contain something for everyone who has an interest in the world of finance.

Please feel free to comment: tell us what you value and how we can improve the content.

This will be the last you hear from us in this medium for 2010. May you be blessed with a peaceful and joyous Christmas and with health and happiness in 2011!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

BENCHTEST MONTHLY 11.2010

In November the average prudential balanced portfolio returned minus 0.17% (October 1.99%). Top performer is Allan Gray (0.64%), last month’s log trailer, while Prudential (- 0.72%) and RMB (- 0.86%) take bottom spots. In very broad terms, Allan Gray had around 9% lower exposure to onshore equities and a 5% lower exposure to bonds, with a compensating 9% higher exposure to offshore assets and a 5% higher exposure to cash, relative to the average manager. This only explains roughly 0.1% of it’s out performance, the remainder of around 0.7% requiring a more detailed investigation.

A lack of sparkling local investment opportunities and the current Rand strength suggests that one should be overweight offshore assets and moving the focus to equities in Europe and the US, in particular.

For pension funds, an assertive balanced portfolio with a fair spread across equities, bonds and property and a high foreign equity exposure is our call for 2011.

For further analyses and our views, click here...

HOUSING LOANS FOR PROPERTY OUTSIDE NAMIBIA

Many funds grant housing loans to members which are secured by a first mortgage or by a pledge by the member of his or her benefits in the fund. How would your board of trustees deal with an application in respect of a property situated outside Namibia?

Unfortunately, neither the Pension Funds Act nor the Namfisa guideline (Circular PI PF 03 2003) on the granting of housing loans, provide any clear guidance on the matter. Before a fund grants any loan for such property, trustees are well advised to consider the implications, as the granting of such a loan will create a precedent, where future applications may be difficult to be turned down.

Section 19(5)(c)(i) provides that a loan secured by a first mortgage may not exceed 90% of the market value of the property concerned. Section 19(5)(c)(ii) provides that a loan secured by a pledge of the member’s benefits may not exceed the market value of the property concerned. Market value is thus an important point of reference. Clearly, for property situated outside Namibia, trustees will find it difficult to formulate a policy how market value will be determined.

PF Circular 03 of 2003 suggests that a housing loan must be treated and managed by the trustees with the same care and diligence as any other investment of the fund is to be treated. Once again, if a property is situated outside Namibia, it should be substantially more difficult for trustees to comply with their fiduciary duty to protect the investment of the fund in a loan for such a property.

We therefore suggest that trustees should first formulate a policy that addresses the practical difficulties posed by loans in respect of property situated outside Namibia, before granting any loan lightly and then being confronted with a precedent.

HOW DOES ABSENCE FROM WORK EFFECT THE EMPLOYER, THE FUND AND THE MEMBER?

In the normal course of business, if often happens that an employee is absent from work for various reasons. Such absence can carry the employer’s consent, e.g. maternity leave, sabattical absence, suspension with immediate departure from office, dismissal or ill-health. In other instances it can be unathorised absence, e.g. ill-health, disablement, absconding etc. Until such time as employment ends contractually or legally, employees are entitled to their contractually agreed remuneration and benefits. This includes employer contributions towards the member’s retirement as well as death and disability benefits typically offered by pension funds. It is critical, however, that the rules of the fund and the relvant insurance policies are complied with in order to ascertain that an employee remains covered for these benefits by the fund. In this regard, the employer plays an important role and should carefully consider the following exposition.

Introduction – rules vs contract of employment

The rules of the fund typically set out the rights and obligations of the employer and the member and determine how the administrator is required to administer the fund. Since an employee’s membership of the fund arises from his employment with the employer, the contract of employment may have a key bearing on the employer’s and the employee’s contribution obligations towards the fund.

Commencement and termination of membership

Typically rules would state that membership commences on the first day of the month coincident with or following his becoming and employee. Membership typically ceases upon termination of service. Service can thus terminate at any time in terms of the rules. Service is usually defined as full-time permanent employment with any of the employers. One will now have to refer to the contract of employment to determine when the service of an employee actually terminates. The employer would have to advise the fund administrator of the correct date of termination of service in terms of a member’s employment contract.

Commencement an termination of contributions payable

Contributions to the fund by the member and by the employer are typically payable at the specified rate of the monthly equivalent of the member’s annual pensionable emoluments. Pensionable emoluments’ are then usually defined as the member’s basic annual salary or wage and any other amounts that are regarded as pensionable by the trustees at the request of the employer. This formulation provides considerable latitude to the employer to have different classes of membership where the fund contributions are based on different proportions of the employee’s cost to company.

To determine the employer’s and the employee’s obligation concerning the contributions to the fund, the employer would have to first calculate the annual pensionable remuneration, divide this amount by twelve and mulitply the result by the relevant contribution percentage. It appears logical that the basis for determining the annual pensionable remuneration has to be the employee’s current rate of pay per pay period, times number of pay periods per year. This means that if rules are formulated as set out above, they do not provide for any pro-rata payment in the last month even though the employee’s service may have terminated in the course of the month.

Whether or not any contributions are payable for the last month if it was a broken period will have to be established from the contract of employment. The rules link the contribution to the member’s remuneration. Again the employer would have to advise the administrator of the correct end date of the member’s last monthly contribution in terms of a member’s employment contract.

Commencement and termination of risk cover – what does the insurance policy say?

As far as ‘risk benefits’ are concerned, the reassurance policies link a member’s cover to his membership in terms of the rules of the fund, which in turn, link membership of the fund to his or her service in terms of his employment contract. Typically the policy read together with the rules, would imply that cover always commences on the 1st day of a month but ceases as soon as the service of the employee ceases in terms of his contract of employment.

Temporary absence – what do the rules say?

The rules normally make provision for ‘temporary absence’. Typically, this rule provides for continuation of benefits and contributions while the member is in receipt of his or her full normal remuneration. When a Member is granted leave of absence with less than full normal remuneration, the rules would typically provide that his or her member’s share will be credited with any contributions actually paid by the member and/or the employer during such period of absence. Commencement and termination date for this purpose would then be irrelevant.

As far as ‘risk cover’ is concerned the rules typically provide that the member will continue to be covered for the insured benefits in the event of death or disability, for the period specified in the assurance policy issued to the fund by the relevant insurer (normally between 1 and 2 years). After expiry of said period, such cover shall terminate unless the member returns to active service. Any benefit that may become payable during such period of absence will be based on the member’s pensionable emoluments as specified in the assurance policy issued to the fund by the relevant insurer (normally based on the employee’s full normal remuneration).

Temporary absence – disability reassurance policy

Although every insurer has slighlty different formulations in their insurance policies, typically, for ‘leave of absence’, the disability reassurance policy normally provides that no claim for the benefit is admitted if the disability arises during a period in which the member concerned is deliberately absent from the employer’s service without permission, unless the fund and the insurer agree otherwise in a particular case. By implication, in the case of temporary absence approved by the employer the member will continue to be covered.

Temporary absence – death reassurance policy

Although every insurer has slighlty different formulations in their insurance policies, typically, for ‘leave of absence’ the group life reassurance policy normally provides that if a member is absent from the service of the employer with the employer’s consent, it is deemed that the member’s membership continues, subject to the following

1. During the period of absence the member’s remuneration is deemed to be equal to the remuneration he/she received immediately before the commencement of absence….”

For ‘absence without the employer’s consent’, these policies typically state that a member’s membership lapses and the member’s service with the employer is regarded as terminated if and as soon as he/she is absent form the employer’s service without the employer’s consent.”

Summary

The following conclusions can be drawn from the above deliberations:

1. Contributions by both employer and employee have to be made for full months, except in the case of approved temporary absence.

2. The date of termination of service is to be determined in accordance with the contract of employment.

3. Death and disability benefits cease upon date of termination of service in accordance with the contract of employment.

4. Whether or not contributions by the employee and the employer are payable for the last month in which service terminates is to be determined in accordance with the contract of employment.

5. In the case of temporary absence, contributions by employer and employee are determined in the normal manner, where the employee receives his full remuneration.

6. In the case of temporary absence, the rules do not detail how contributions by employer and employee are to be determined, where the employee’s remuneration is less than his full remuneration and the administrator simply updates what it receives.

7. In the case of approved temporary absence, the employee’s death and disability benefits will continue based on the employee’s remuneration prior to the approved temporary absence.

8. In the case of unapproved temporary absence, the fund and the insurer can agree to keep a specific member covered for disability benefits.

INTERESTING MEDIA SNIPPETS

Policies with Nominated Beneficiaries and Ceded Policies

In this article from Financial Planner August/September 2010, Berry Botha, Chief Executive of Sanlam Trust provides a comparison of the advantages and disadvantages of nominating a beneficiary to a policy and ceding a policy. This a must read for any policy owner.

Proposed Code of Conduct for Boards of Management

Here is an outline for trustees who would like to formulate their own code of conduct.

SARB Relaxes Exchange Controls

South African Reserve Bank recently announced further steps in the liberalization of exchange controls that will effect Namibians as well.

New Namibian Companies Act (Act 28 of 2004) came into Effect on 1 November 2010

In this articlethere are some ‘closer to home’ implications of changes brought about by the new Companies Act (Act 28 of 2004) that may be of interest to other companies as well.