In this newsletter we comment on the challenges funds that invest in unit trusts will face in an effort to comply with the requirement to invest in unlisted investments by 31 December 2014. We make a short note that the increase in the repo rate will again raise the housing loan interest rate from 1 September. We also note that Namfisa reporting on investments for 4 quarters of 2014 is now due by 28 February 2015. We address the question whether the collapse of Abil negatively impacted our pension funds’ market value. We also provide the usual extract of our commentary on investment markets and links to a few interesting articles that appeared in various media, one of which deals with the interesting question: when can or must death benefits be paid?
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Tilman Friedrich's Industry Forum
Benchtest Monthly 07.2014
In July the average prudential balanced portfolio returned 0.69% (June: 1.81%). Top performer for the second consecutive month is Metropolitan (1.13%); Stanlib (0.29%) takes the bottom spot. For the 3 month period Namibia Asset Management is top performer outperforming the ‘average’ by roughly 1.5%. On the other end of the scale Sanlam underperformed the ‘average’ by 1.1%.
The US economy appears to be out of the doldrums having had only two quarters of negative GDP growth since the beginning of 2011, year-on-year GPD recording 2.4% at the end of quarter 2 of 2014. The following graph, from Efficient Select newsletter of 18 August, provides this interesting review of the change in US GDP since 2005:
The Fed’s large scale asset purchase program has been reduced steadily from its high of US$ 90 bn per month, and will probably fade out by the end the end of the year or early in 2015.
Developing economies such as South Africa are still disappointing. These countries depend on the export of commodities to a significant extent and China has been one of, if not the biggest export market for their commodities. The restructuring of the Chinese economy will no doubt impact negatively on China’s demand for commodities and therefore on the South African and Namibian economies. Our economies are thus likely to grow sluggishly over the next year or two. South Africa is expected to grow at only 3% or less over the next 5 years, while the Namibian economy is expected to average around 4.5%.
Read our full commentary, find out how these and other developments impact on our investment views and download Benchtest 07.2014, here...
Unlisted investments via unit trusts
You will be fully aware of the requirement in terms of regulation 28 of the Pension Funds Act, that a pension fund must invest in unlisted investments a minimum of 1.75% of the market value of it’s investments by 31 December 2014, but unlisted investments may in aggregate not exceed 3.5% of the market value of it’s investments.
The Unit Trust Control Act and Unlisted Investments
Funds making use of unit trust portfolios are also subject to the Unit Trust Control Act 1981. Unit trust management companies have thus far been able to offer investment portfolios that complied with regulation 28 of the Pension Funds Act.
The Unit Trust Control Act currently defines an unlisted investment as “securities other than stock exchange securities and such other securities determined by the registrar by notice in the Gazette.” Section 6(1) of the Act directs that “The registrar in concurrence with the Minister, by notice in the Gazette, may determine securities and other assets which may be included in a unit portfolio of a unit trust scheme and the minimum or maximum or both minimum and maximum restrictions and conditions subject to which such securities, classes of securities, or other assets may be included in a unit portfolio.
The Unit Trust Control Act and the Pension Funds Act are incompatible
With the introduction of unlisted investments as an obligatory asset class in terms of regulation 28 and 29, the provisions of the Unit Trust Control Act would only allow a unit trust to comply with the prescriptions of regulation 28 and 29 of the Pension Funds Act if the registrar of unit trust companies in concurrence with the Minister by notice in the Gazette directed that the provisions of regulation 28 and 29 of the Pension Funds Act would equally apply to unit trust companies. This is currently not the case and it is highly unlikely that anything will be changed by Namfisa and the Minister by 31 December 2014. In fact, we have been made aware of a draft gazette that requires a unit trust holding any unlisted investment, to convert such investment to a listed investment within 12 months, as the result of which unit trust management companies will not be able to offer regulation 28 compliant portfolios as far as the unlisted investment requirement goes.
The challenge for smaller pension funds investing in unit trusts
Smaller pension funds mostly invest either in a policy wrapped investment vehicle offered by insurance companies or in unit trusts. Unit trust management companies devised prudential balanced unit trusts specifically to cater for the needs of smaller pension funds. For one because the pooling of investments in a unit trust offers substantially reduced management fees through economies of scale and secondly because trustees require no in depth technical knowledge about investments.
Trustees of smaller funds will now be obliged to invest directly in one or more SPV’s for the reasons set out above. Each fund will now have to select 1 or more SPV without possessing the required technical knowledge. Besides the absence of the technical knowledge to take an informed decision, small funds will each have to enter into an agreement with an SPV, in many cases for quite small amounts. These small funds will also experience the constraints resulting from the illiquidity of unlisted investments more severely than large funds as individual member benefits tend to represent a much larger proportion of total fund investments, while the benefit of higher liquidity and economies of scale through pooling via a unit trust is currently not a viable avenue. These funds may not be able to realise the proportionate share of a retiree in its unlisted investments. This may result in the remaining members effectively being ‘loaded’ with the unrealisable value of the retiree’s unlisted investment and it may even lead to the fund now exceeding the 3.5% exposure limit.
Parameters for considering exemptions from investing in unlisted investments should be defined by Namfisa soonest
We are aware that as the result of growing regulatory pressures being exerted on pension funds, some smaller employers have already resolved to move to an umbrella fund. At this stage, there appears to be no intention on the part of Namfisa to consider exempting funds from the requirement to invest in unlisted investments, as became evident from discussions with senior officials of this regulator.
Since unlisted investments are illiquid and will not easily be transportable to an umbrella fund, it becomes more pressing that Namfisa needs to identify exceptional situations for granting exemption from the provisions of regulation 28 to the extent that such fund would have to invest in unlisted investments.
The time frame for concluding on unlisted investments by 31 December 2014 becomes unrealistic and Namfisa should acknowledge this now
Currently all funds, whether or not they invest in unit trusts are faced with the problem that no SPV and no unlisted investment manager has yet been approved by Namfisa, and we have now nearly reached the end of August.
Funds that invest via unit trusts, must at this stage assume that their unit trust management companies will not be able to comply with regulation 28 by 31 December 2014.
This means that all funds will have to have prospective unlisted investment managers present their unlisted investment capabilities to the trustees so that trustees are placed into a position to take a decision on a preferred unlisted investment manager/s and to finalise the contractual documentation with the chosen SPV’s and UIM’s. This process can of course only commence once Namfisa has registered any Special Purpose Vehicles and Unlisted Investment Managers. Since most funds typically only meet once a quarter or even less frequently, it should become very difficult to conclude this process between the time the first SPV’s and UIM’s have been registered by Namfisa and 31 December 2014, given also that funds are unlikely to want to settle with the ‘first best’ UIM that may present to them.
Conclusion and Recommendation
We advise that funds should assume that unit trust managers will not be able to comply with regulation 28 by 31 December 2014.
This means that all funds will have to make their own arrangements as far as the required investment in unlisted investments is concerned. Furthermore trustees will have to have prospective unlisted investment managers present their unlisted investment capabilities to the trustees so that trustees are placed into a position to take a decision on a preferred unlisted investment manager/s, once Namfisa has registered one or more Special Purpose Vehicle and its Unlisted Investment Manager.
We suggest that once an unlisted investment manager/s has/have been selected by the trustees, that the trustees should negotiate an investment of more than 1.75% in order to make provision for future growth of fund assets, possibly considering an investment close to the maximum of 3.5%. This topic should now be put on the agenda as a standing item so that appropriate attention is given to this obligation of the trustees.
RFS sponsors DSSW soccer tournament
RFS sponsored the annual DSSW soccer tournament for the 5th year running. The under 15 and under 17 groups were both won by Ramblers, while the under 19 group was won by Invincible FC. We congratulate the winners on their hard-won and well-deserved achievement.
Pictured above, RFS director Kai Friedrich with the Invincible F.C. U19 side.
Pictured above, RFS director Kai Friedrich with the Ramblers F.C. U17 side.
Compliment from an accountant
of a municipality dated 21 August 2014
“Thank you once again for your continuous assistance and support. I really appreciate what you are doing for our employees. It is very rare that you will find a dedicated team like yours.”
Read more comments from our clients, here...
RFS Staff movements
We welcome Anandi Britz and Janine de Vries who joined us form Alexander Forbes at the beginning of March. Anandi has taken up a portfolio of participating employers in the Benchmark division while Janine has assumed responsibility for one of our large private funds. We hope that both will be around for many years, and will enjoy every day at the office! We know that the two ladies will go out of their way to extend service excellence to their clients!
News from Namfisa
Statement of Investment Holdings
After the pension fund industry in unison applied for extension in respect of the due dates for submitting quarterly investment information because of the difficulty managers experienced with the reporting template that Namfisa has provided, Namfisa has at long last granted extension for the 2014 quarterly reports to be provided by 28 February 2015.
Namfisa is aware of the shortcomings of its reporting template and is in discussion with the asset management industry to resolve the problems the industry experienced.
The due dates have thus been fixed while the “tools” have not been provided yet. It remains to be seen whether the “tools” will be provided for managers to compile the reports in time for the due date.
We have informed managers that we expect to receive the returns for the first 3 quarters of 2014 by the end of November and the returns for the last quarter by the end of January 2015, where we are required to compile reports from different managers for a pension fund client.
News from the market
Another increase in the repo rate
On Wednesday 20 August the Bank of Namibia announced yet another increase in the repo rate from 5.75% to 6%. This will affect the interest rate applicable to loans granted by pension funds to their members. The official interest rate on such loans will thus increase to 10% with effect from 1 September 2014 and borrowers’ repayments will have to be increased yet again.
The collapse of Abil
As was reported in the IJG daily of 22 August, “Prudential Namibia and Namibia Asset Management confirmed this week that their investments were exposed to the doomed African Bank (Abil) in South Africa but both confirmed that the investments and losses were minimal.”
Capricorn Asset Management confirmed that its money market had a negligible indirect exposure through two SA money market unit trusts. Its Bank Windhoek Investment Fund had an exposure of 0.008% and the Bank Windhoek Premier Fund had an exposure of 0.000248%.
Pointbreak advised that its money market fund had no direct or indirect exposure to Abil.
It appears that generally Namibian pension fund portfolios got away from this debacle virtually unscathed.
(for stakeholders of the retirement funds industry)
Death benefits and S 37C, the burden of the board of trustees
In this technical guide which we already quoted in our previous newsletter, the author, Liz del la Harpe makes a few important points that are overlooked too easily, regarding the time frames for the payment of death benefits in case of each of the 5 different scenarios envisaged in section 37C:
There are dependants but no nominated beneficiary:
The benefits must be paid to the identified dependants within 12 months from the date of death.
There are no dependants but nominated beneficiaries:
Payment to the beneficiaries may only be made after the expiry of the 12 month period.
There are both dependants and nominated beneficiaries:
The benefits must be paid within 12 months from the date of death.
There are neither dependants nor nominated beneficiaries:
The relevant subsection of section 37C does not set out a time frame and it is argued that the benefit can only be paid to the estate of the deceased after expiry of the 12 month period from date of death.
There are no dependants and the deceased nominated a beneficiary only for a portion of the benefit:
Payment to the estate and the nominee will become due and enforceable on the expiry of the 12 month period form date of death.
Read the full technical guide for trustees by Liz de la Harpe, legal adviser, Glacier by Sanlam in Insurance Gateway, here...
Is offshore equity attractive
While numerous asset managers have indicated that global equities currently offer better longer-term investment opportunities than local stocks, some investors are concerned that the rand could strengthen and dilute their offshore gains. Last year, investors with exposure to specific offshore unit trust funds benefited from gains in international equity markets. The slide in the rand sweetened the deal and added several percentage points to returns during the period in some cases. Right now, the fear seems to be that the situation could reverse. Is there a right time to go offshore?
Read the full article by Ingé Lamprecht in Moneyweb of 21 August 2014, here...
(for investors and business)
Starting and reviewing your financial journey
In this article the following 10 key guidelines are provided by various experts in financial planning:
Be aware of what influences you;
Know – and use your emotions;
Understand the challenge;
Know what you want;
Understand your options;
Make an important decision;
Think about – what if I’m wrong;
The need for and value of help;
The value of a financial planner.
Before you proceed investing, read these short thoughts from the experts that appeared in the Patricia Holburn newsletter of 21 August 2014, here...
What really motivates you?
“So, do we have to quit to chase our “dream job"? Not typically. In most cases, we found this process doesn’t require a major career or job transition. Most people can make small changes in their work lives. As we’ve been writing our new book, "What Motivates Me" over the last few years, many of the happiest people we spoke with said they didn’t find their bliss down a new path; they made course corrections on the path they were already on.”
Read this interesting article by Chester Elton in Linkedin of 18 August 2014, here...
"When we stop taking risks, we stop living life."
~ Robin Sharma
Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.