As Namfisa adds regulatory requirements for the administration of pension funds, so the administration of funds becomes more complex and labour intensive. This will also require more decisions and time from trustees. I have explained the matter in greater detail below in the section on Namfisa. If trustees still have difficulty understanding their additional obligations, please contact Retirement Fund Solutions as soon as possible.
In the section on the strategy of the company, we make announcements on Thomas Kaber's role, as well as Mark Gustafsson's future role. Organisations evolve over time, and their strategies need to recognise changes in the environment. Please fell free to contact us if you have any additional questions.
Also, please feel free to comment on this newsletter: tell us what you value and how we can improve the content.
Tilman Friedrich's Industry Forum
Benchtest Monthly 10.2012
In October our average prudential balanced portfolio returned 2.79% (September 1.13%). Top performer is Namibia Asset Management/Coronation (3.49%), Investec (2.38%) takes bottom spot.
On the basis of fundamentals and the prevailing economic environment, foreign equities should outperform foreign bonds and property and in addition, a number of foreign bourses offer high discounts on fair value for political reasons that should fade away. In the face of a depreciating Rand, such investments would of course experience that benefit as well. Locally we would expect equity to remain the top performing asset class, followed by property, bonds and cash over the next one to two years. Bonds and cash face the real prospect of negative returns should interest rates be raised over the next 1 to 2 years.
For further analyses and our views download Benchtest 2012-10, here...
Where is our industry heading?
In our March 2012 newsletter, we posed the question “Has the pensions industry been led astray by their advisers?” We suggested that the increasing complexity introduced into funds has in many instances been motivated by the self-interests of advisers rather than the interests of fund members, at the cost of fund members though, more often than not.
National Treasury in SA has released a number of discussion papers on its vision of the future of the retirement funds industry in SA. A primary concern of National Treasury is the high cost of services provided to retirement funds that result in funds eventually providing insufficient means for retirees to survive in retirement. Concern is also expressed about the fact that employers nowadays often distance themselves from their members upon retirement where members are left stranded and are left to the devices of brokers who once again may not necessarily have the interests of the retiree at heart. Such persons are often sold an inappropriate retirement product that may leave the pensioner destitute with no means to do anything about his financial position at that stage anymore
The key aims of the envisaged retirement reform is to reduce costs, to restructure the annuities market, to improve the portability of benefits and to strengthen fund governance. Suggestions being made in the pursuit of these goals are that funds are to present preservation as the default option upon resignation. The default retirement option for retirees should be a guaranteed pension rather than a living annuity while a lot of emphasis is placed on funds ascertaining that members’ capital is appropriately invested. For those that are interested in gaining a deeper insight of what national Treasury has in mind, please click here to download this discussion paper.
Evidently, the wheel is slowly turning back 180 degrees, the position funds have been in up until in some 20 years ago, when service providers caught onto the opportunity to sell ever more complex and expensive products to emerging boards of trustees, who were generally ill-prepared and defenceless against this onslaught.
At the time funds used to be run with an investment reserve that cushioned the impact of market volatility at little direct cost to the member but with the added benefit that the fund was able to be fully invested in the market. Today, volatility has generally been outsourced to 3rd parties (be it via asset allocation or risk pooling), of course at a significant additional cost to cover the direct operational costs and to provide for a risk premium of the product provider.
At the time, most funds maintained its own pensioner pool which was equally protected against market volatility via the fund’s reserve. Pensioners did not have to buy an expensive product outside the fund, nor did they require to be advised by a broker and pay a commission for this advice.
Fund members and retirees in those days did not have to make any investment decision as they were not directly exposed to the market as the result of the fund maintaining an investment reserve. Yet they still benefited from the fund’s full market exposure over the medium- and long-term. Today, members and pensioners have to consider their position relative to their risk tolerance and the status of financial markets and market developments and investment horizon and prevailing inflation and inflation risks and the amount of pension they need or want to draw, and…and…and, and all of this as background to decide on where they should invest. Not such a good scenario for the member, but fertile ground for the adviser to propose all sorts of complexity and ‘bells and whistles’ such as life stage, life style, investment channels with default channel, opt-out channel, own choice channel and all at the expense of the member or retiree.
And then came the time when trustees were advised by their dynamic, state-of-the-art advisers, that the dismantling of the fund’s investment reserve and its allocation to the members is such a great idea. Of course these reserves would have been built up over a long time and many of those who contributed to their build up would already have left and would therefore not have benefited anymore.
If this is where we got to, why doesn’t the employer just pay it all to the employee and let the employee take his own decisions at his own pace and in his own time, rather than the employer’s, and we don’t actually need a group arrangement anymore? In an employer sponsored arrangement, the fund and indirectly the employer carries all the risk on top of it. It’s all so easy and so great because the admin platform can handle it, but what if… an error crept into the programming and is only picked up by a totally disgruntled member a few years down the line? Why should an employer voluntarily own up to such risk rather than passing these to his employees?
We definitely prefer simple, solid and reliable fund administration that is focused on the needs of the average fund member with a benefit structure that can withstand market volatility, demographic and other changes without constantly having to be adapted and without piling up costs for the member.
RFS company news
RFS moves on its strategies - November 2012 update
Our strategy to improve service levels to individual investors in our Benchmark Retirement Fund either as living annuity pensioners or as preservation members, is slowly starting to crystalize. Previously we reported on the appointment of Thomas Kaber whose investments expertise should stand him in good stead to advise on available investment options and to guide and assist members in setting, implementing and monitoring their personal investment strategy and realising their investment objectives.
In another development, our colleague Mark Gustafsson, will move his focus to improving service levels to our individual Benchmark investors. Mark will move out of the tightly regulated corporate environment to pursue these objectives outside the realm of Retirement Fund Solutions. He envisages his withdrawal from the company to occur towards in the first half of next year. In accordance with these plans, Mark has in the meantime laid down his mandate as a director of the company. He will continue to serve his pension fund and individual clients as before. Any impact these developments may have on clients will be addressed with our clients in good time. Clients should rest assured that there is absolutely no cause for concern and that Mark’s interests and those of the company remain aligned.
Compliment from a broker
"Hi Salome, I must say this is the fastest that I have ever had pension benefits paid out to a client! Thank you very much for your prompt, friendly and sufficient service. Can you kindly forward this email to your supervisor, because I think you deserve recognition." (Dated 6 November 2012.)
News from the market
Jacques Malan Consultants & Actuaries to merge with NMG Benefits
Jacques Malan Consultants and Actuaries will merge effective 1 January 2013, with SA based NMG Benefits who are offering consulting, actuarial and administration services.
IMN Africa Cup of Investments conference
This annual conference focusing on institutional and retail investments, took place in Cape Town on 6 and 7 September. In the previous issue we reported on some of the more interesting observations, trends and discussions presented at this conference. Here is the final part:
Trends and developments that will impact the industry:
High indebtedness of the developed world;
Low economic growth that will lead to lower market returns;
A move to invest for income (dividends, interest), e.g. property, government bonds, corporate debt, unlisted investments;
Move from active to passive investment management to save on costs without sacrificing performance, on a ‘core-satellite’ basis;
Development of new market indices base on alternative weightings, that recognise the shortcomings of traditional market cap weightings;
Reducing portfolio risk through alternative investment strategies such as hedge funds, ETF’s, listed preference shares etc.;
Momentum investing that capitalises on behavioral economics and anomalies in the efficient market theory;
Consolidation of smaller funds;
Increasing specialisation of trustees;
Financial advisers moving commission based product selling to fee based financial advice;
Emergence of black millionaires that require financial advice.
Future trends as presented by PWC:
Wars for natural resources;
Rise of ‘state directed capitalism’;
Social and behavioral changes through internet, social media etc.
Technology changes towards mobile telephony and broadband;
Demographic changes through aging and increasing dependency ratios, also in emerging markets, from currently 5 active to retired, to 13 by 2030;
Rise of the political influence of emerging markets and of global interconnectivity (9 of top 20 countries in terms of total assets are now emerging markets);
Increase in ESG cognisant investment (environment, social, governance);
Developed countries are reducing imports and development aid in order to bring their debt under control, so Africa will have to look for alternative customers;
China’s exports to developed countries will decline, so Africa will have to look for alternative customers.
How can fund credit upon retirement be transferred directly into an annuity without the need to first convert to cash;
Improving knowledge of trustees to become empowered to invest in alternative investments, e.g. infrastructure, ETF’s, hedge funds etc. to improve returns while at the same time reducing risk;
How to generate sustainable income from individual financial advice where only high net worth individuals can afford to pay for advice;
Consultants and advisors need to better understand their clients and the clients’ needs;
Improving risk management in the asset management industry by moving from post-trade risk management to in-time, pre-trade risk surveillance with the assistance of technology;
Investors/shareholders to become more active and make their voice heard.
News from Namfisa
New quarterly reporting requirements – November Update
In our previous newsletter we reported on the latest template Namfisa circulated for comment by pension funds. We provided comments on those parts where the information will best be sourced from the administrator and suggested to funds that they approach the other service providers who are custodians of information required in other parts, to also provide their comments. We understand that only one fund took the trouble to make a submission. We express our appreciation to the fund that took the initiative.
It is unfortunate that some funds appear to be in the belief that this is all the administrator’s problem. Whilst we sympathise with trustees who mostly are engaged as such in an honorary role without compensation and alongside other full time responsibilities and therefore have little capacity to attend to the continually increasing regulatory demands, service providers are only just that, a service provider. The responsibility vests in each fund to comply with the regulatory requirements. Service providers sometimes play a pro-active role and at times prefer to react to any request by their client.
We consider us to fall into the former category and we prefer to be transparent and fair towards all clients. So if new requirements are brought about our clients through the regulator, we would typically try to assess and quantify the implications and costs and share with our clients the basis on which we believe these costs should fairly be recovered from all those that make use of our services in meeting their regulatory obligations.
We certainly do not consider such regulatory requirements as another opportunity to sell another product or service to our clients, but we do need to be compensated for any additional effort we have to undertake in assisting our clients.
Interesting media snippets
Garnishee orders, a headache for every employer
Many employers are no doubt confronted regularly with a ‘garnishee order’ purporting to oblige the employer to henceforth deduct from an employee’s salary an amount to repay the employee’s debt. For the employer it is difficult to know what his rights and legal obligations are and there usually is very little substance to gain any level of comfort that this ‘garnishee order’ is legitimate. This matter recently hit the headlines in SA media with the headline “Top law firm uncovers massive garnishee abuse”. Download the report here...
The American dream – tax rates Namibians can only dream of
Click on this link for an interesting article that could explain the American dream. It sounds “California approves massive tax hike on the wealthy” pushing the top tax rate to 12.3% for tax payers earning more than US$ 500,000 per year (N$ 4 million!) that will see their taxes rise by 1.1% (!) and sales tax rising to 7.5%! No wonder this dream seems to be approaching a horrible awakening.
Glacier publishes consensus view of SA asset managers on investment markets prospects
The Bull & Bear report that is produced from a survey conducted by Sanlam’s Glacier Research, collates the performance expectations of leading South African Asset Managers over the coming 12 months. Asset Managers are asked to comment on expected performance for various asset classes and sectors, currency levels, commodity prices and the performance of selected global markets. These viewpoints are subject to change in line with changes in economic and market conditions. Download the article here...
“What matters is growth relative to expectations, not growth alone. [..] Low prices and high dividend yields [are] the keys to better returns." ~ Jeremy Siegel, author of The Future for Investors
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 legal and technical committee of RFIN. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.