In this newsletter:
Benchtest 03.2013, the Cyprus crisis, the NTA skills levy and how they impact pension funds, and more...

Dear reader

The problem with growth

The impact of the various financial crises and ongoing austerity and uncertainty has taught the global financial markets that growth should not be taken as a given. Every curve has its 'ups and downs'.

Growth is a function of productivity and consumption. When these are called into question, trades that foresee growth become questionable themselves.

The current uncertainty has far reaching implications, which we touch on in the item on Cyprus, below.

Avenues of growth still exist, and economists believe that recession is cyclical, so growth will resume. However we must not take it for granted, and we must understand, that as capacity for consumption diminishes, growth will be hard-won.

In this newsletter, we provide thoughts on the topical subjects of:

  • The Cyprus crisis and the need to rethink investment strategy;
  • RFS once again sponsors youth soccer;
  • The NTA skills levy and its impact on pension funds;
  • RFIN office reinvigorated.

As always, your comment is welcome, so open a new mail and drop us a note!


Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 02.2013

In March our average prudential balanced portfolio returned 2.15% (February minus 0.44%). Top performer is Allan Gray (3.78%), Sanlam (1.53%) takes bottom spot.

Comment: Foreign Investment – a time to reassess your risk

Politicians, particularly those of the western world, would want to make us believe we live in an open global economy. However, where international trade is concluded in a single currency, where fiscal and monetary authorities intervene massively in financial markets, more will have to be done by the politicians to make the public believe.

The law of economics, of demand and supply, has no bearing on the behaviour of markets today. Savers are paying off the debt of borrowers through artificially low interest rates that are set by monetary authorities. So-called ‘safe haven’ investments are earning negative real interest rates and the investor is now conditioned to accepting that he will have to work until he drops dead, instead of realising his dream of retiring at an age where one might still be able to enjoy life for a while. Retirement ages are extended while pension entitlements are at best being questioned already, and even reduced in some countries.

With negative real interest rates seemingly having become the ‘new norm’, asset valuation models are now being questioned. Why should this be of concern to a pension fund member? Well the point is that pension fund contribution structures were established over the course of the past century or more based on the assumption of cash returning around 2% above inflation, bonds around 4% above inflation, property around 5% above inflation and equity around 8% above inflation. A typical balanced portfolio comprising of a mix of these assets based on conventional investment theory was expected to return roughly 5% above inflation, net of fees. Pension theory then arrived at a net retirement funding contribution rate of 11%+, to produce an income replacement ratio of 2% per year of membership.

Indications based on the ‘new norm’ are that one is now only looking at a net return of between 2% and 3% p.a. If this were to be true, the retirement funding contribution rate would have to be raised from 11% to at least 16%. Add to this a typical cost element of 6% for risk benefits and management costs, the ‘new norm’ for a total retirement fund contribution rate is now at least 22% instead of the 17% before the advent of the ‘new norm’. Alternatively the retiree would now have to settle on an income replacement ratio of only around 40% after 30 years of service, instead of his expected 60%! No wonder the mortals are being conditioned by politicians to be prepared to work until they drop dead.

We are certainly living in a different world today to what it was 30 years ago. What we expected of the future will be materially different and we will have to find ways and means to deal with the impact these changes have on our lives and on our retirement planning. One can only find some comfort in the fact that we are all ‘in the same boat’, the answers have not been found and a lot of energy and time will be spent all across the globe to find answers how to still have time in retirement to enjoy.

For local pension fund investors, one probably needs to take a different view of the risks of investing offshore. In the past, developing countries and Africa in particular was loaded with a political risk premium. The Cyprus experience has shown that the political risk in developed countries has manifested. Add to this huge demographic risks for a more callous view on investment in developed countries. In contrast the demographic risks Africa is facing appear to be receding going by general population growth rates.

Given this environment, where can a pension fund still invest? Fixed interest assets are evidently too risky being too exposed to monetary and fiscal manipulation. Even if we here at the southern tip of Africa are living in a much more sheltered environment, our financial markets are shackled by global developments. This essentially leaves real business as the asset class to invest in. We all have to live, eat, drink, dress, get to work, nurture our health, go on holiday, learn, find shelter and so on. The ‘real economy’ will continue and is best represented by commerce and industry, in short, investment in equity appears to be really the most appropriate asset class for the normal investor who shies away from the more exotic asset classes such as gold, works of art etc.

As we usually say, based on fundamentals, equities is our preferred asset class, more specifically value companies offering a high dividend yield. Despite all we have said about the risks presented by offshore markets, sound risk diversification principles still dictate that investments should be spread across the globe, and again with an equity bias. If one can find value in property, it should also be an appropriate asset class, being closely tied into the ‘real economy’. In terms of local equity sectors, fundamentals indicate that consumer goods and consumer services are due to fall out of favour for the benefit of industrials, resources, and financials.

Dear reader, please take note that due to the absence from office of the author of this column, our next newsletter will omit this commentary, but it will return in the newsletter after that.

For further analyses and our views download Benchtest 2013-03, here...

Cyprus and the need to rethink your investment strategy

If you employ an investment strategy to diversify your investments by investing offshore, the Cyprus crisis and how it was dealt with should at the very least raise some questions about your offshore investments.

In his ‘Fontline Thoughts’ newsletter of 29 March, John Mauldin comments: “Capital controls have shattered the monetary unity of EMU. A Cypriot euro is no longer a core euro…. The complicity of EU authorities in the original plan to violate insured bank savings – halted only by the revolt of the Cypriot parliament – leaves the suspicion that they will steal anybody’s money if leaders of the creditor states think it is in their immediate interest to do so. The IMF doesn’t get off easy here, either: The IMF’s Christine Lagarde has given her blessing to the Troika deal, claiming that the package will restore Cyprus to full health, with public debt below 100pc of GDP by 2020.”

This comment crisply defines the risks an investor nowadays faces when investing anywhere because the precedent set by, in this case European  governments, with the complicity of an international multilateral agency, can now without a blink be replicated anywhere else in the world.

Most Namibian pension funds do invest a substantial portion of their assets offshore, either directly or through a pooled portfolio managed by an asset manager. It would be interesting to establish whether any Namibian pension fund has incurred any loss on an investment in Cyprus, or experienced any liquidity issue as the result of the capital controls imposed by Cyprus.

This risk was probably so remote up to now that no fiduciary investor ever took this into account when placing investments. Has the Cyprus crisis opened their eyes?

Given this new risk, where does one ‘hide’? Are our banks any safer than European banks; are US banks or those in other countries typically invested in by Namibian pension funds any safer? What will be the implications for foreign portfolio flows and investment returns in different global investment markets? We are made to believe that our risks are and conceivably they may well be on the basis of employing a very different business model here. Those that follow financial news will have read just the other day that our banks all passed Bank of Namibia’s stress test.

Is the point then that our pension funds should keep their cash in local banks only and only invest in other non-bank assets elsewhere?

Trustees should pertinently pose these question to their investment manager/s.

Should you want to go into greater detail for a better insight into the Cyprus issue, read the following two articles:

  • An interview of Kokkie Kooyman of Sanlam Investment Management by Hilton Tarrant, on this link…
  • OMIGNAMWEEKLY newsletter of 18-23 March on the PDF which you can download here…

RFS company news

RFS sponsors SKW youth soccer tournament

RFS sponsored the SKW youth soccer tournament for the 6th consecutive year. More than 600 youth footballers competed for the top spot right from u/7 to u/17 and the girls leagues, while more than 2000 visitors were entertained during these three days.

SKW Kaizen Football Team
Above: the team of Kaizen Football Association, proud winners of the under 15 gold medal and a trophy.

Kai Friedrich SKW sponsorship
Above: Kai Friedrich handing over the sponsorship cheque on behalf of the company.

Compliment from a CEO on our Billion dollar milestone

"I read the whole article, very inspiring for any young Namibians with an entrepreneurial spirit. We look up to you guys. All the best for the future and wishing you and your colleagues all the success."

To which we say, "A very big, thank you!"

Read more comments from our clients, here...

News from Namfisa

As ‘custodian of the wealth of the nation’, Namfisa informed us that it will carry out another routine inspection of the records of the Benchmark Retirement Fund, the last one having been carried out a few years ago.

We welcome the fact that Namfisa takes the trouble of examining  the status of fund administration on site. As one of the largest and possibly the most complex funds in Namibia, excellent record keeping is of utmost importance and members of the fund, as for every other fund, should be assured that their life savings are properly administered. The Benchmark Retirement Fund certainly goes the extra mile to ensure full transparency through detailed, timely reporting at member-, employer- and at fund level. The fund is exempt from the statutory tri-annual valuation requirement, yet it submits itself to annual valuation voluntarily. Lastly, besides the statutory annual audit the fund also subjects itself to internal auditing by external auditors.

We would certainly prefer regular inspections to extensive reporting as currently contemplated by Namfisa, as a more effective way of regulatory supervision.

Law and legal snippets

NTA Skills Levy due to be introduced

The NTA is due to introduce the new Skills Levy in terms of the Vocational Education and Training Act 2008, as from 1 September 2013. It has announced its intention to introduce this levy and has invited employers to make representations by publication in Government Gazette no 5171, as required by section 36 of the Act.

The levy is payable by every employer at the rate of 1.5% of total remuneration (‘all payments in money or kind’) where total remuneration is equal to or exceeds N$ 350,000 p.a. The levy is payable monthly on or before the 20th of the following month to NTA (National Training Fund). The Act provides for interest and a penalty of 10% of the unpaid amount, including interest (s38 and S39). The Minister may exempt any employer or category or class of employer (s41). Employers must keep records and furnish information (s42). The Act provides for offences and penalties (s46).

For this purpose ‘employee’ ‘means an individual other than an independent contractor, who works for another person and who…receives remuneration for that work…’

‘Employer’ ‘means any person…who employs or provides work for an individual and who remunerates… that individual’.

Interestingly, although the Act specifically includes the State in the definition of employer, it is now proposed to exempt the State. Going by the popular principle of ‘leading by example’, such an exemption does not set the ‘right tone’. Certain charitable and not for gain institutions are also to be exempted.

How does this levy effect pension funds? Few pension funds employ staff, more commonly though funds do employ a principal officer, sometimes an administration officer. Funds need to determine what the total annual remuneration of its ‘employees’ is and gear up to pay the levy. In most cases funds need to extend their administrator’s service agreement to make provision for the administrator to deduct and pay over the levy where the fund is liable to pay.

Funds also employ trustees and sometimes remunerate their trustees. Are trustees ‘employees’ as envisaged? During a workshop conducted recently, an NTA official was of the opinion that a director is an employee, hence a trustee would also be regarded an employee. Funds paying trustee fees need to have this point clarified and make arrangements with their administrator where necessary.

Funds that will not pay the levy may still incur training expenditure. Whereas the Act provides for claiming a refund for training expenditure incurred, such fund obviously will not be able to claim any refund. These funds should consider coming to an arrangement with their sponsoring employer/s to carry the cost of training and to have the fund refund the employer either the full or only the unrecouped expenditure.

News from the market

RFIN activities reinvigorated

The activities of Retirement Funds Institute of Namibia (RFIN) were recently reinvigorated with the appointment of a new operations managers, after the position was vacant for a while. The temporary position of office administrator is now a full-time position and was also filled with a new person. Download the April 2013 newsletter for more information here…

Interesting media snippets

How to beat inflation in a low interest investment environment

Despite expectations of lower returns from traditional assets over the next several years, a combination of active fund management, lower fees and increased exposure to alternative assets can contribute to beating inflation and maintaining the purchasing power of an investor’s capital. Read more here…

Emigrating – can I take my pension money?

For those readers thinking of emigrating, this short article explains the situation in SA. Namibia’s income tax legislation does not recognise emigration as a special cause for allowing the withdrawal of moneys from a retirement annuity fund, so those moneys cannot be withdrawn and taken abroad. The other principles are equally applicable to Namibia. Read more here…

How does the Rand impact your portfolio?

The risk-on risk-off environment has played a role in the rand’s devaluation to a degree but the depreciation of the rand can mainly be attributed to government policy, labour unrest as well as a deterioration of the structural factors of the economy. These include budget deficits, trade balance and debt to GDP levels. A combination of these factors has led to the manifestation of negative sentiment. The chart highlights some of the major factors that have affected the rand’s depreciation recently. Read more here…

And finally...

“We hang petty thieves and appoint the great ones to public office.”
~ Aesop, Greek slave & author of Aesop's Fables

tilman-friedrichTilman 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.
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