In this newsletter, we question whether increasing complexities in pension funds have really benefited the members, we express concern about the spirit prevailing between Namfisa and industry stakeholders, we update you on changes to the Employees Compensation and Social Security Acts and there are a few links to very interesting articles that recently appeared in various media.
Please feel free to comment: tell us what you value and how we can improve the content.
Tilman Friedrich's Industry Forum
Benchtest Monthly 03.2012
In March our average prudential balanced portfolio returned 0.86% (February 1.12%). Top performer is Allan Gray (1.43%), while Momentum/ Metropolitan (0.44%) takes bottom spot.
Taking a longer term view, the SA Allshare Index has grown by 12.6% p.a. since March 1997, not taking into account dividends of somewhere between 2% and 4% p.a. Namibian inflation over this period was 7.2% p.a. Evidently, the SA Allshare Index has grown in real terms over this nearly 15 year period by around 5.4% excluding dividends and by between 7% and 9% p.a. including dividends, which is representative of the long term real return of around 8% p.a. For a local investor this indicates that the SA Allshare Index is currently around its long-term trend line which is not a particularly compelling case for investing in this index but promises long-term returns equal to what the market is expected to deliver.
For further analyses and our views download the report, here...
Has the pensions industry been led astray
by its advisers?
A commentary by Tilman Friedrich
Over the past 20 years, our industry has undergone tremendous changes. Until Namibia’s independence, Namibian funds were underwritten by a single insurance company with no choice and no flexibility regarding risk reassurance, investments and specialist service providers. Funds did not need to be audited or to prepare annual financial statements and were not managed by a board of trustees. Funds were defined benefit funds where the member did not care about returns or investment managers. That risk was carried by the employer who typically had little or no insight other than being informed every three years whether the fund had a deficit to be made good by the employer.
Those were the good old days for insurers who had the market wrapped up. Namibia’s impending independence provided a convincing argument to advisers to have the insurers’ shackles broken. Most funds were liquidated, members were allowed to take their money or transfer it to what was perceived to be a ‘safer haven’. A new dawn broke, new funds being established as defined contribution arrangement instead of the prior defined benefit arrangement. Boards of trustees were established and placed in charge. Funds had to prepare audited annual financial statements and were free to choose their service providers. The risk of poor investment returns was transferred from the sponsoring employer to the member.
But were the trustees really in charge and were they actually capable to manage the affairs of their fund? I venture to say that very few were indeed and even today very few are. Being burdened with other responsibilities concerning their businesses it is hard to point a finger at trustees. What actually happened was that advisers quietly took control of the pension fund business of their clients.
Advisers have since done a great job in continuously developing and inventing new products and services, in many cases not unselfishly at all, but rather often with the intention to broaden their product offering and build their own business. This created an environment prone to conflicts of interest producing excesses such as bulking and other dubious practices. Does anyone believe that the integrity of the industry has improved since?
What makes things worse in my view is that even the regulator is chasing shadows, not understanding the technicalities of many of these products and services and the hidden interests of their sponsors, and just following what are made out to be trends instead of critically probing with the view to assess whether it is in the interests of service providers or of members.
Its typical response is to impose more and more onerous requirements on funds and the industry, accelerating a move away from free standing funds into umbrella funds, where they will once again be under the total control of the product provider.
Clearly some of the product providers’ main interests will be to grow their revenue and margins in contrast with a free standing fund where the employer as sponsor and its employees typically take a very personal interest in the business of the fund exclusively for the sake of its members. In South Africa the regulator has decided in a rather haphazard way that the number of free standing funds must be reduced and that any fund of less than 3,000 members should be accommodated in an umbrella fund.
The premise of a pension fund is that it is a compulsory group arrangement. By definition it is not intended to and does not meet the full spectrum of members' widely diverging needs.
With active interest and participation of the employer in a fund, it is likely a fund will meet the needs of the majority of members, and at a reasonable cost.
Nowadays there is an unfortunate trend to introduce more and more individual choice and complexity into these group arrangements, as if they were retail arrangements. All of these features however increase member costs, often primarily for the benefit of the product or service provider rather than the member. In this scenario the free market mechanism is ineffective, as the member is left to the devices of the fund’s particular service or product provider. Individual or retail retirement funding arrangements offer those few members with exceptional needs a wide choice of alternatives, at significantly higher costs, while the market mechanism should serve to promote the interests of the individual. Since these arrangements are only exploited by a minority, they can only serve to complement compulsory pension fund arrangements and should be considered for the exceptional needs rather than adding to the complexity of the pension fund.
It is often rather amusing to read articles by so-called financial experts where it is so obvious that they merely pretend to provide expert opinion, yet too blatantly promote their service or product instead.
It is futile to question how developments of our industry over the past 20 years have impacted on members’ benefits. I suspect that members today in many instances are significantly worse off in terms of benefits received for every dollar invested in the system, as the result of the self-interests of their advisers.
Can one at least say that members are on average more satisfied with their retirement arrangement than they were 20 years ago? Again I venture to say that despite all the options and choices that were introduced into many pension funds, these have not really led to a positive improvement of members’ perceptions.
News from Namfisa
Commentary on recent developments concerning new reporting requirements
It would appear that the communication between retirement funds and RFIN on the one side and Namfisa on the other has so far not been conducive to fostering an atmosphere and a spirit of cooperation which is essential in promoting the interests of the stakeholders of the industry, primarily the members but significantly too, employer, Government and its regulator.
The regulator has displayed an apparent lack of appreciation of the interests and the important role of employers in securing the wellbeing of the nation through retirement provision. It is common cause, that retirement provision by employers for their employees presents a very important social pillar for our nation. Although there is no legal obligation on employers to offer retirement provision, most employers have proven their social responsibility and conscience through establishing retirement funds for their employees. It may be stated without fear of contradiction that employers generally have shown their good faith, in the effective way they, together with their service providers, have looked after these institutions even before our regulator was in any position to effectively regulate the industry.
In Namibia, there are very few funds that do not depend totally or largely on the employer, who takes an active interest and provides all the support and resources to manage and maintain the fund and to protect and promote the interests of its members. Without the employer most funds would not exist. Principal Officers and other persons actively engaged in the management of the pension fund are mostly full time employees of the employer, or are paid by the employer. What interest should an employer have in the continuation of its retirement fund if it becomes an excessive burden and an ongoing frustration?
It is very conceivable that an atmosphere of confrontation between Namfisa and the employers, acting in, what they would undoubtedly believe, the best interests of its pension fund members, may lead to the demise of many retirement funds. Where would this leave the regulator and would this be what the regulator prefers to achieve in an effort to direct and to enforce its views, above the recognition of employers’ real concerns, constraints and frustrations?
The responses given by funds to new reporting requirements of Namfisa, can largely be considered to reflect the position of the employer. Employers have expressed serious and valid concerns that should be given due recognition by the regulator rather than be seen by it as an affront and as questioning the regulator’s authority. We are aware of a number of very constructive and positive responses and it is unfortunate that the regulator appears to have a perception of a generally obstructive industry.
The spirit of the regulator’s informal response to RFIN’s formal letter of concern appears rather unfortunate and is hopefully not representative of the official position of Namfisa, where the Chief Executive Officer in his opening address to consultative meetings on the FIM Bill formulated a few principles of regulation for financial sector regulators, of relevance in this discussion being the following:
Adequate resources (note that the regulator made the point at the last industry meeting that it does not have the resources to extract the now required information from statutory reports and returns, provided by the industry at its expense, that are in the regulator’s possession).
Transparency and avoidance of conflict.
Cooperation and information sharing.
Of concern too, is the fact that RFIN, the body most representative of the industry and established at the instigation of the regulator, has been totally overlooked before and after this new requirement was presented to the industry, and has not been engaged even to this day, in an effort to avoid conflict, foster cooperation and promote the sharing of information.
RFS company news
Namcol top learners receive awards
Retirement Fund Solutions and Benchmark Retirement Fund support education as a key component of Namibia's future. Recently the company gave awards, to the value of N$ 10,000, to the best achievers at Namcol.
Shapua Monica's hard work put her at the top of the class with recognition for being the top pre-entry tertiary education (PETE) student from student body of over 31,000. Pictured above are Mathinuz Fabianus of RFS who presented the awards, Dr David Namwandi (Deputy Minister of Education, Shapua Monica and Heroldt Murangi (Director of Namcol). Awards were also given to Khaibeb Johny and Shaenda Lawson. Our sincere congratulations to all of them for their achievements.
Law and legal snippets
Benefits in terms of Employees Compensation Act
and in terms of Social Security Act are updated
The Minister of Labour and Social Welfare has amended certain benefits and thresholds of these two Acts on 14 March 2012 as published in Government Gazette 4919 of 2 April 2012.
Employees Compensation Act
The maximum earnings of an employee for participation, and for deriving the maximum income benefit has been set at N$ 66,000 p.a.
Previous maximum monthly benefit set at N$ 5,000, now N$ 5,500 per month (temporary disablement, permanent disablement).
Previous maximum lump sum factor set at N$ 3,000 now N$ 3,300 (permanent disablement).
Previous factor for spouse’s lump sum benefit set at N$ 3,750 now N$ 4,500 (death).
Previous lump sum factor for benefit without dependents set at N$ 2,500 now N$ 4,000 (death).
Previous Minister’s discretionary allowance set at N$ 3,120 now N$ 3,450 per month (death caused by 3rd party).
Social Security Act
Maternity leave benefits now 100% of basic wage up to an amount of N$ 10,500 (was N$ 10,000) per month (regulation 9).
Sick leave benefit now equal to 75% of basic wage up to an amount of N$ 7,875 (was N$ 9,000) per month for 1st 12 months, 65% for next 12 months up to an amount of N$ 6,825 (was N$ 9,000) per month (regulation 10).
Death benefit now equal to N$ 5,515 (was N$ 5,000) per month (regulation 11).
When may an employer request its fund to withhold a benefit from a member upon termination of membership?
The requirements for a deduction by the employer from a benefit due to the member from his retirement fund are:
An amount must be due by a member of a fund to his or her employer.
The amount must be due at the date of retirement or the date on which the member ceases to be a member of the fund.
The amount must be in respect of compensation payable.
The compensation must be in respect of any damage caused to the employer.
The damage caused to the employer must be by reason of theft, dishonesty, fraud or misconduct by the member.
The member must have furnished a written admission of liability to the employer in respect of the compensation in respect of the delictual damages caused to the employer or
Alternatively, the employer ought to have obtained a judgment in a court in respect of the compensation.
Interesting media snippets
Seven deadly sins of investing
In this article by Harvey Jones in Sydney Morning Herald, the author concludes that the investor is his own biggest enemy, because he is a sinner, he is too easily lead into temptation. Measure yourself up against these sins and try to do it better next time you invest.
Pensioners not immune to poorly performing global economy
Alan Wood of Investment Solutions cautions that pensioners face a bleak future as they see their incomes being eaten away by inflation. Unlike active employees, pensioners don’t have free cash flow. As such, their only remedy is to reduce expenditure and increase investment. And the only way to do this is to find the fat in the monthly budget and use it to create future income.
Retirement fund trustees and consultants are accountable for decisions...
...argues Johan Henn of Novare Actuaries and Consultants in this article.
Several emerging trends in the retirement fund industry will have a marked impact on asset and investment consultants who make their living by advising trustees on how to invest. The most important of the new trends is the increase in fiduciary requirements. In terms of Regulation 28 of the Pension Funds Act, for example, trustees must ensure their fund’s assets are appropriate given its liabilities. Investment should promote long-term sustainability and be properly defined according to asset class types and limits. Other considerations include trustee training and regulatory compliance at fund and member level.
Although based on SA legislation, it will no doubt also serve as precedent for measuring compliance with fiduciary duties of Namibian trustees.
Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner® practitioner, specialising in the pensions field. He is a member of the marketing committee of ICAN and a member of the legal and technical committee of RFIN. Tilman is co-founder, shareholder and managing director of RFS.