In this newsletter:
Benchtest 06.2013, layman trustees to be replaced by professionals? Guidance on how to the apply rules where these are ambiguous, RFS staff movements and more...

Dear reader

Will laymen trustees survive the onslaught?

The SA regulator appears to have taken the position that all the evils of the pensions industry will be eliminated once all funds have been moved to an umbrella fund and all trustees have become professional trustees. In this newsletter a number of articles and a commentary deal with this topic.

We discuss the dilemma where rules provide for alternative benefits but give no guidance which alternative is to apply under what circumstances.

We also provide links to articles that appeared in the media. These are usually selected because they either cover topical developments or address pension fund issues that trustees and retirees are regularly faced with and should thus be of value and provide guidance to trustees, and to fund members approaching retirement.

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 06.2013

Those who kept an eye on global financial markets, will have taken note of the severe impact a ‘casual remark’ by the governor of the Federal Reserve Bank had on these markets in June, when shares took a knock of around 6%, while interest rates responded with an immediate increase, albeit a fairly modest increase. Was this vicious response not foreseen by the governor to have tried to put his comment in a more rosy perspective shortly afterwards?In any event, this ‘oral refurbishment’ again impacted

strongly on global equity markets in July, this time with a strong upward movement. So where does this leave the investor, more particularly trustees who are charged with the responsibility of overseeing the investments of their funds?

It seems that the US Fed is in quite a predicament as shown by the recent violent swings in global financial markets. Equity investors and borrowers are praying that the Fed, in particular may not withdraw its bond buying programme while fixed interest investors are hoping that it will, so that they once again may earn positive real interest rates.

Most probably global investors are more and more coming to expect that the Fed will taper off its bond buying programme in the foreseeable future and are starting to adjust their investment strategy on the basis of this expectation.

It is also likely that the Fed will not splash their intentions across the media in future after the recent scare effect. Listening to statements made since, there are now more ‘ifs’ and ‘buts’ that seem to be designed to be less dogmatic about what steps to take when. These can be interpreted to be ‘cautionary announcements’ for investors not to place too much reliance on the Fed keeping up its programme unchanged.

What appears to happen as far as local financial markets are concerned is that foreign portfolio flows are declining. As the result, interest rates are on the increase, consistent with a more cautious stance of global investors and the general expectation that the Fed’s bond buying programme will start tapering off in the foreseeable future.

An article on the same topic, ‘Investing after Bernanke’, that our reader may find of interest appeared in Moneyweb of 2 July 2013. If the topic interests you, click here...

To find out how these and other developments impact on our investment views, download Benchtest 2013-06, here...

Trustees put under ever increasing pressure

The article ‘Trustees better shape up’ under interesting media snippets below, comments on the latest discussion paper issued by SA’s FSB, the Namfisa equivalent. FSB’s focus is on reduction of costs, through standardisation and consolidation of the industry and on improving the level of competency of trustees.

More and more pressure is put on trustees and it is only a question of time when the last unpaid, volunteer trustee elected by fellow employees or appointed ex officio by the employer will disappear and will be replaced by professional trustees.

Professional trustees will have to be compensated, and compensated well for the personal risk they are exposed to and for the level of expertise they will be expected to apply to the business of funds.

As a matter of course, only very large employer sponsored funds will still be able to exist while the bulk of funds will be forced into umbrella funds that can afford to employ professional trustees.

Will this really achieve the desired objective of reducing costs and improving efficiencies in the long run? We expect this will not be the case but that rather the opposite will happen and that we will see a resurrection of the employer sponsored fund, managed by unpaid employer and employee trustees in the next 20 to 30 years.

It remains to be hoped that Namibia will not follow the SA route and going by past experience, employer sponsored funds in Namibia have been run efficiently and without a single instance of fraud that we are aware of.

What should trustees do if the rules provide for alternative benefits

To say that a pension must be managed strictly in accordance with its rules is stating the obvious. It is probably sometimes not obvious to trustees though, that they cannot make decisions that are not provided for by the rules, either explicitly in terms of specific provisions, or implicitly in terms of general provisions. If neither exists in the rules, trustees would act ultra vires and may be held accountable for any loss the fund or its members may suffer as the result of such action, even in their personal capacity.

But what do trustees stand to do where the rules provide for alternative benefits without giving guidance under what conditions to employ the one as opposed to the other alternative? An example we have recently had to deal with is where the rules in the event of death of the member or pensioner, provide for a member’s or a pensioner’s remaining capital to be paid as a lump sum in terms of Section 37C of the Pension Funds Act, alternatively in the form of a pension to a dependant or dependants of the member or pensioner. No indication is given on any particular priority or preference.

In such instance the rules provide discretion and it is the trustees that need to apply this discretion being the party charged with managing the affairs of the fund. This means that they have to apply their mind before they take a decision they believe to be in the best interest of the beneficiary/ies. To be able to apply their mind with due care, they need to get as much information as possible on dependants and nominated beneficiaries as  they would do in the event of being required to decide on the distribution of a lump sum death benefit.

Consulting the dependants and beneficiaries becomes an essential element of the information the trustees need to obtain. When they come to the point of deciding whether to pay the capital in a lump sum or as an income to a beneficiary/ies, Section 37C must first be ignored and must be ‘replaced’ with their discretion that will lead to a rational and defensible decision. However, if the decision is taken that payment as a lump sum is in the best interests of the beneficiary/ies, the requirements of Section 37C now have to be observed.

RFS staff movements

At RFS we are extremely proud of the low staff turnover the company has experienced over the past 14 years. This is no coincidence, but is the result of conscious efforts to retain staff as our staff is the corporate memory of our pension fund clients.

Having proudly announced the appointment of Thomas Kaber a while ago, we sincerely regret to now announce that Thomas will be leaving us at the end of August, heading for a new challenge with KPMG in Frankfurt, Germany. Most of us probably had the notion earlier on in our careers to gain some overseas experience, but never had the opportunity to pull this through. So with some envy we grant it to him to grasp this opportunity and wish him all the best in his new career and hope that this will take him further on the road of his dreams!

RFS sponsors Delta Secondary School football tournament

RFS once again sponsored the recent and popula soccer tournament organised by Delta Senior Secondary School in Olympia.

St Pauls Girls
The St. Pauls team (pictured with RFS Director Kai Friedrich on the right) won the Under 17 Girls category.

The SKW team (pictured with RFS Director Kai Friedrich on the right) won the Under 17 boys category.

Compliment from the chairperson of a retirement fund client of RFS

"Many thanks for your patience with the member and excellent service."

Read more comments from our clients, here...

News from Namfisa

The latest quarterly reporting template

In our next newsletter we will provide a summary of the requirements of the latest template for future quarterly reporting which will essentially be an update of the summary on the previous template in the January 2013 newsletter. Watch this space…

Media snippets
(for pension fund trustees and service providers)

Trustees better shape up

SA Financial Services Board in its latest discussion paper tackles the full ambit of inefficiencies and bottlenecks in the sector with the goal being that funds must “fulfil their objectives cost-effectively” to “assist South Africans in getting the best possible value for the retirement savings they make”.

Read the article, by Sasha Planting, in Moneyweb of 22 July 2013, here…

Provident funds to be phased out

Provident funds were introduced to the SA pension industry at the insistence of trade unions during the apartheid era when they saw pension funds as being the preserve of the ‘oppressors’ and reflective of their ‘witchcraft’. This trend also spilled over to Namibia not necessarily with the same arguments. From the government policy maker’s point of view, this has never been a desirable practice and in SA these funds never enjoyed the same tax recognition. In Namibia there has never been the same focus of policy makers on its objectives for retirement funds and therefore the tax treatment of provident funds has been largely the same as for pension funds, except for death benefits where provident fund death benefits are taxed significantly more severely.

SA treasury is now ‘on a mission’ to phase out provident funds. Will our policy makers wake up one day to the same realisation? Follow this link  to latest developments in this regard in SA.

Death benefits: trustees must probe dependence carefully

An interesting determination on a death claim made by SA’s deputy pension funds adjudicator appeared in Personal Finance of 5 May 2013 and can be found here... (Note to Pierre: Link to Website ).

Some of the key lessons to us, that are as relevant to our pensions industry, are:

  • The Pension Funds Act restricts deceased members’ freedom of testation in the event of fund benefits payable in the event of death;
  • Pension fund assets do not form part of a member’s estate;
  • Death benefits must be distributed on a basis that gives preference to the dependants’ needs;
  • The board of trustees has the discretion to decide on the proportions in which the death benefit is to be distributed, trustees should not follow a rigid policy and should take into account:
    • The personal circumstances of each beneficiary,
    • The age of dependants,
    • The dependant’s relationship with the deceased member,
    • The extent to which they depended on the member,
    • The deceased member’s beneficiary nomination to the fund, and or a last will,
    • Financial circumstances of the dependants, including their future earnings potential.

Media snippets
(for investors and employers)

Wealth versus income

There is an inverse correlation between higher education and wealth. In other words: amongst the population of high income earners the higher your education the lower your wealth is likely to be. This is according to research by Thomas Stanley who has been studying the wealthy for three decades. The important distinction is made between being ‘Balance sheet affluent’ and being 'Income Affluent'.  Income is not wealth. Wealth is what you accumulate not what you earn.

Read the article in Moneymarketing of 18 July here…

To be or not to be offshore

Given the Rand’s recent wobble, the question most investors are asking is whether to invest offshore or not, if so, how much of their portfolio should be invested in other countries. Unfortunately for those who want a simple answer, there isn’t one: much will depend on the investor’s specific circumstances.

Download this article by Geoff Blunt of BoE Private Bank that appeared in Sanlam’s Funds on Friday newsletter here…

Sanlam Investment Management’s investment strategy summed up

The US central bank knocked financial markets off their highs during the second quarter when they announced they would begin withdrawing their massive liquidity support - possibly within a couple of months.

The latest sim.strategy newsletter looks into:

  • The impact this had on different asset classes
  • How this affected our long-term investment view
  • How we repositioned our portfolios to take advantage of these market moves.

Read the article on Sanlam Investment Management’s Over and Underweight strategy with regard to the various asset classes here…

Do your employees appreciate their compensation and benefits?

In an article that appeared in FA news on 16 July, Jonathan Faurie makes the point that “Open communication is an important aspect of any job market, but in particular the South African job market where the Commission for Conciliation, Mediation and Arbitration is often called in to settle worker disputes. The value of employee benefits remains untapped in terms of engagement, and talent acquisition and retention due to poor communication effectiveness.”

Making an effort for your employees will not be duly appreciated unless employees are aware thereof and this they will only be if you communicate your effort effectively.

Read the full article here…

Chris Walker is not South Africa’s only financial magician

In our previous newsletter we had an article on Chris Walker’s Defencex scam that made the headlines in SA recently. Julius Cobbett reported in Moneyweb of 26 June on his special investigation into another ‘Ponzi’ scheme offered by Durban based Zantech trading that offers the shareholder a dividend of 25% per month for a period of 12 months.

Investors need to be wary of any scheme offering impossible returns, particularly if you do no really understand how these returns are generated.

Read the full article here…

And finally...

"I have come to the conclusion that politics is too serious a matter to be left to the politicians.
~ Charles de Gaulle, French general & politician.

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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