Dear reader

In this newsletter we comment on the global investment markets; we review the negative impact that remuneration packages may have on pension benefits; RFS insurance safety net; section 14 transfer to SA and the tax implication; SIH reporting and unlisted investments update and we provide a number of links to interesting and relevant articles in various news media.

Our mobile site

For the convenience of readers using smart phones with small screens we have developed a brand new mobile website. Try it out on your mobile at www.rfsol.com.na and let us know if you like it – and also if there is additional functionality that you want.

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

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 12.2014

In December the average prudential balanced portfolio returned 0.94% (Nov: 1.46%). Top performer is EMH Prescient (1.36%); while Momentum (0.41%) takes the bottom spot. For the 3 month period Investec takes top spot, outperforming the 'average' by roughly 1.5%. On the other end of the scale Allan Gray underperformed the 'average' by 3.4%.

Oil and its impact on the local economy and the local investor

In our December 2014 Newsletter we deliberated on the possible reasons and the implications of the oil price on global financial markets. We noted a close correlation between longer term trends in the oil price and the FTSE/JSE Allshare index, given that the SA Allshare Index is heavily resources weighted. Of course, oil being a major import component of SA's trade balance, its price changes will also impact on the Rand everything else being equal.

Oil will have a major impact on local equities and the Rand

The graph below shows a surprisingly high correlation between the Allshare index and the spot oil price in Rand barring the times when there was a rapid change in the oil price, such as over the last few months, where the Allshare index responds more cautiously.

One may thus rationally conclude that what is happening to the oil price will have a major impact on local equities and the Rand if it becomes a longer term trend. The question is - will it become a longer term trend? An indicator for this becoming a longer term trend is the demand/ supply situation. It would not become a longer term trend if the previous price levels were driven by the demand/ supply situation rather than speculative trading.

What can one expect the oil price to be?

The graph below reflecting oil prices shows a long term increasing trend in the oil price and a few steep and rather rapid changes where we believe these were the result of speculative trading rather than any fundamentals. Without speculative trading the peaks would be reflective realistic price levels, else one would expect a more slowly increasing line that will be somewhere between the peaks and the troughs.

Source: vox.com

The graph below provides an interesting picture of the demand/supply balance of oil. At first sight one might conclude the gap between demand and supply is rapidly opening up. However looking more closely at the demand line one notices that an annual peak demand occurs in the 4th quarter where after the demand drops off significantly for 2 quarters only to move up again in a pretty consistent fashion. If one were to extend a straight line from the latest 3 demand peaks, one will conclude that demand should be pretty close to supply again by the end of 2015 assuming no drastic increase in supply, which cannot be foreseen, certainly not at today's price. In other words it appears unlikely that supply will significantly outpace demand even in the short term and that the current price level is unsustainable over a longer period.

Source: vox.com

The question then is, what is a realistic price of oil? Read our full commentary in part 6 of the latest Benchtest newsletter (above).

Read our full commentary in part 6 of the Benchtest 12.2014 newsletter, find out how these and other developments impact on our investment views and download Benchtest 12.2014, here...

The implication of remuneration packages for employees' well-being

The evolution of remuneration packages in the more recent past has undermined and diluted the implicit goals of retirement fund benefit and contribution structures in the last few decades. This is a much discussed shortcoming of remuneration structures nowadays. It is important that employers understand the implication of this for their retirement fund members and that they consider their position carefully. Staff generally do not understand or appreciate the implicit goals of their retirement fund while they are young, healthy and mobile, job-wise, and often only realise their folly when it is too late! This is where the employer has to take a more paternalistic, long term view to ascertain that the short-term view of staff does not prevail, to their own detriment. We all know of course that employees have a tendency to point a finger at others when they realise their own follies.

We suggest the principle should be that the guaranteed package is used as the basis for determining your members' retirement fund contribution, rather than basic salary or wage. The typical retirement fund structure, as it evolved over the past 100 years, which may be referred to as the ‘norm in the market’, aims to provide members with a reasonable income replacement in the event of death, disablement and eventual retirement. The ‘norm in the market’ for retirement, broadly speaking, is about 2% of final income, times years of service and requires a total contribution accumulation of around 15% of income, while employed. To this contribution accumulation towards retirement has to be added the cost of death and disability as well as fund management. We suggest the ‘norm in the market’ for a total contribution rate is between 10% and 11% by employer and around 7% by employee.

Strictly speaking, the ‘norm in the market’ should be set at 100% of remuneration package. In the case of an employer whose total fund contribution rate exceeds the above ‘norm in the market’, this norm of 100% can be tempered due to the above average contribution rate towards the fund, that in itself should secure benefits above the ‘norm in the market’, presumably at the expense of employees’ take home pay. If your total fund contribution rate for example totals 20%, which is above the ‘norm in the market’ alluded to above of around 17%, we would suggest that the desired minimum contribution rate should be set at 85% of remuneration package, to still achieve the implicit goals of retirement funds.

This is an important topic that trustees should discuss with their employers and their fund consultant.

Our Safety Net

In accordance with sound business practice we confirm that we have just renewed following covers through our brokers. Details were forwarded to all clients under separate cover.

• Fidelity cover of N$ 4,5 million, excess of N$ 250,000.
• Professional Indemnity cover of N$ 45 million, excess of N$ 250,000.
• Directors' personal liability cover of N$ 5 million per director, no excess.

Section 14 Transfer to SA Fund

How will a transfer from a Namibian to a South African fund be treated for income tax purposes? Here is the response we received from Inland Revenue:

"Please be informed that a transfer from an approved Namibian fund to a South African fund does not imply a receipt or accrual in terms of the definition of "gross income" in the Income Tax Act. There is also no accrual of any benefit to any member of the fund.

The Namibian pension fund administrator should obtain clarity from Namfisa, their counterpart in South Africa and SARS whether such transfer can be done and the requirements to do such transfer."

Meet the team that will lead RFS into the future

On the occasion of our 15 year anniversary function the company's management team was introduced to the public. In the next few newsletters we will introduce the team. In this issue, meet Kai Friedrich, Director Fund Administration.



Kai joined us on 1 March 2013 from PricewaterhouseCoopers. Kai is a born and bred Windhoeker and matriculated at Delta Senior Secondary School. He then enrolled at University of Stellenbosch where he obtained a Bachelors of Accounting (Honours) in 2008. He served his articles with PricewaterhouseCoopers, qualified as Chartered Accountant (Namibia) at the beginning of 2012 and advanced to the level of audit manager. Closer to home he enrolled at University of Free State where he obtained the Post Graduate and the Higher Post Graduate Diploma  in Financial Planning and is a Certified Financial Planner® practitioner. He holds certificates for a variety of short courses completed over the past few years. After having been responsible for our retail clients and investment reporting, Kai has recently taken over executive management responsibility of private fund administration from Marthinuz Fabianus and for private fund accounting from Günter Pfeifer.

News from Namfisa

Statement of investment holdings - December update

Certain pension funds have requested RFS to assist with compiling of the consolidated reports while other funds will be assisted by their asset consultants. As at 16 January 2015, all managers are still in the process of compiling these reports. Where funds have approached RFS to assist, we advise that our target dates to the investment managers have not been met. We are also currently not in a position to confirm that the information and the format in which we may receive the information will allow us to simply transfer the information into the consolidated report. We will only be able to assess the situation once we have received all reports from all managers for all portfolios employed by our client funds. Whilst we are committed to do our utmost to compile the consolidated reports for those funds that requested us to do so, funds need to understand that we cannot commit to submitting these reports to the principal officer is good time for them to still review, sign and submit the report to Namfisa before the end of February 2015.

We will provide the information required to complete the Internal Asset Allocation sheet of the report in good time to all client funds though.

Unlisted investments - December update

Principal officers will have received a circular letter from Namfisa on 16 January 2015 with regard to the responsibility of pension funds to invest in unlisted investments. This circular now confirms our earlier warnings that pension funds will have to invest directly in unlisted investments via one or more Special Purpose Vehicles.

Funds will have to comply with the requirement to invest a minimum of 1.75% and a maximum of 3.5% of the market value of their investments in unlisted investments by 30 June 2015. Requests for longer extension were also limited to 30 June.

We are not aware of any approved Special Purpose Vehicle that funds other than the GIPF, can invest in. It is therefore practically not possible to comply with the law at this stage. However, we have requested Namfisa to provide us with contact details of all approved SPV's and will inform our clients as soon as we receive such information.

Trustees need to be aware of their fund's obligation to invest directly in one or more SPV and need to prepare for this. Funds that employ an investment consultant should approach their investment consultant soonest for guidance, else their employee benefits consultant should be approached.

Draft Financial Services Adjudicator Bill 2014 released for comment - reminder

Namfisa just released the draft Financial Services Adjudicator Bill 2014 for comment. If you work through this Bill, (download below), and have any comments or suggestions, please submit these in the format as per Namfisa's memorandum(download below). Comments should be submitted by not later than 30 January 2015.

• Download the Financial Services Adjudicator Bill...
• Download the Namfisa Financial Services Adjudicator Bill memorandum...
• Download the required format for comments on the bill...

Draft Industry Regulations

Namfisa circulated a number of draft industry regulations for comment.

• Download the industry standard regulations here...
• Download the required format for comments on the regulations...

Media snippets
(for stakeholders of the retirement funds industry)

Amendment to a rule must be approved before it can be applied

In this case SA Municipal Employees Pension Fund amended the rule relating to the withdrawal benefit and paid out benefits prior to the registration of the amendment by the FSB. SA Pension Funds Adjudicator stated that "... at the time of the termination of the complainant's employment, Rule amendment 5 had not yet been approved by the Registrar and was thus not valid at the time, she said. The first respondent acted unlawfully in calculating the complainant's benefit as his contributions multiplied by one comma five instead of it being multiplied by three."  As a punitive measure, the Adjudicator also ruled that interest at the rate of 15.5% per annum must be added to the outstanding amount.

Read the article here...

Retirement funds risk being used for money laundering

Many private sector retirement funds allow members to make additional voluntary contributions to the fund in order to secure greater benefits, with no questions asked.

According to Deirdre Phillips, Senior Associate at pan-African corporate law firm Bowman Gilfillan, this practice exposes funds, including retirement annuity (RA) funds, to being exploited for money laundering purposes.

"This is especially if no questions are asked by the retirement fund as to the 'source' of the deposit. The boards of retirement funds should act appropriately to prevent their funds from being used for money-laundering purposes, and also to ensure that they comply with their obligations under the Financial Intelligence Act 38 of 2001," said Ms Phillips.

Interestingly, a fund established under the Pension Funds Act 24 of 1956 is not an accountable institution for the purposes of the FIC Act and is not subject to the majority of its obligations, for example, verifying the identities of its 'clients', the fund members.

However, this does not mean that retirement funds are exempt from complying with the FIC Act. Section 29 of the Act imposes a broader reporting of "suspicious and unusual transactions" obligation on any "person who carries on a business or is in charge of a business or who is employed by a business", which would include the business of a retirement fund, to file a prescribed report with the FIC.

Although this article refers to the SA environment, Namibian legislation is very similar in this context and the conclusion of the author is equally relevant to Namibian retirement funds. Read the article by Deidre Phillips of Bowman Gilfillan in FA News of 10 December 2014 here...

The trustee's code of ethics

A code of ethics is something that the dedicated trustee considers on a day-to-day basis, Find a concise article from June 2008 Pensions World to remind trustees of their duties and responsibilities here...

Media snippets
(for investors and business)

11 Predictions for the next 10 years

James Rickards an American lawyer,  regular commentator on finance, and  the author of The New York Times bestseller Currency Wars first acquainted the editor of this newsletter to the concept of financial war games, defined by James as a branch of 'asymmetric or unrestricted warfare'. This created the realisation that there is a close linkage between politics and economic interests that should never be under estimated or ignored when trying to interpret and understand economic events.

David Murrin, globally acclaimed scientist, asset manager, historian, lecturer and author ('Breaking the Code of History') has recently made 11 predictions for the next 10 years that are very interesting  in the context of politics and economic trends. Here are the first of his 11 predictions, the rest will follow in our next newsletter:

1. The Chinese will challenge for global super power status.
2. The decline of America and failure of Western financial system.
3. Inflation will be negative, then inflation will bite.
4. Britain to increasingly lead the Western world.
5. The Middle East is in a state of regional civil war.
6. Africa - continued growth; regionalisation; expansion of Islam.
7. New alliances to contain China.

To read more on this, access David's website, here...

And justice for all

Some of you may have followed the Fidentia case, one of SA's largest financial scandals, and may be interesting to read the final chapter in this saga. Fidentia boss J Arthur Brown was arrested in 2007 for fraud involving R1.4billion, most of which was working class pension money. Last year Brown was sentenced to a R150 000 fine or a 36 month jail term. Everyone was shocked at the lenient sentence and the FSB rightfully appealed. The Supreme Court of Appeal has now overturned that first sentence and slapped a much more appropriate sentence of 15 years on Brown, for each of the two counts of fraud to which he pleaded guilty.

And finally...

"Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment." ~Buddha

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.