In this newsletter we comment on the global investment markets; we address certain concerns about RFS management structure and it’s social responsibility philosophy; status of annual and quarterly reporting to Namfisa; update on unlisted investments; comments on the Financial Services Adjudicator Bill, on a Namfisa directive, on rule amendments and on draft FIM Bill standards/ regulations; another increase in the repo rate to effect housing loans from 1 March 2015 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!
Tilman Friedrich's Industry Forum
Benchtest Monthly 01.2015
In January the average prudential balanced portfolio returned 1.69% (Dec: 0.94%). Top performer is Investec (2.75%); while Stanlib (0.41%) takes the bottom spot. For the 3 month period Investec takes top spot, outperforming the ‘average’ by roughly 2.5%. On the other end of the scale Allan Gray underperformed the ‘average’, for the third consecutive month, by 4.7%.
In our previous newsletter we expressed our opinion that the dramatic decline in the oil prices from its peak of close to US$ 140 in June 2008, to currently around US$ 60, is unlikely to have been the result of a decline in demand and a simultaneous increase in production primarily through fracking in the US. We further pointed out that from a starting point of US$ 16 at the beginning of 1987, inflation adjusted the oil price should now be in the region of US$ 35. At its current level, the oil price is realistic in the context of production cost and, probably provides for some premium for the steady increase in demand and production costs over this period. We therefore believe that without a renewed speculative bubble being blown up we should see current oil prices representing the new normal.
We have concluded that the rapid swings we have seen are the result of speculative trading on a massive scale. In this context it is interesting that the value of derivative financial instruments represent approximately the 10 fold of global GDP at over US$ 700 trillion at the end of 2013, certainly large enough to make an impact on the price of any commodity or exchange rate. In contrast the total value of these financial instruments only amounted to US$ 95 trillion at the end of 2000.
The question is what could be the purpose of such large scale market intervention? 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'. Are these seemingly inexplicable developments perhaps part of this ‘asymmetric warfare’ rather than random market events?
Is there indeed a close linkage between politics and economic interests that one must be cognisant of when trying to interpret and understand economic events?
Read our full commentary in part 6 of the Benchtest 01.2015 newsletter, find out how these and other developments impact on our investment views and download Benchtest 01.2015, here...
Handy FIA reference
Download RFS' point form guide to the Financial Intelligence Act here...
RFS scoops PMR award for best in category
As in the previous 2 years, RFS once again scooped the top Diamond Arrow award for best in its category! This is a wonderful public recognition to the individual effort of each team member and the collective team effort of all together working very hard to keep our clients satisfied!
National priorities and legislation are not ‘in synch’
Housing is a national priority. Unfortunately national policies and national laws often are not supportive of each other. In the past pension funds were a popular avenue for member’s obtaining funding for the purchase or expansion or alteration of their dwelling. Recently the Pension Funds Act was amended as referred to in Benchtest 09.2014. This amendment read together with the Income Tax Act, presents a significant risk to funds that do still offer loans or loan guarantees to its members, of not being able to recover the full outstanding amount from a member’s benefit.
Unfortunately, banks who still finance loans secured by a pension fund guarantee, and who were approached to assist their pension fund clients in mitigating the risk created by our laws and referred to in the first paragraph, simply refused to affect any changes to their contracts and documentation for this purpose.
As the result funds are reconsidering their involvement in affording members access to financing for housing loans and many will no doubt phase out housing loans as a benefit for members. We foresee that pension funds will no longer offer housing loan benefits in the medium term and funds are in fact well advised not to grant housing loans any longer.
One may ask, why does the Pension Funds Act create an avenue for members accessing their benefits for housing purposes while this would result in funds shouldering a significant risk of being unable to recover an outstanding housing loan balance?
The conundrum of ‘tied’ versus ‘untied’ annuities
Insurance companies are offering members of pension funds to move their retirement capital from their retirement fund into an ‘untied’ annuity – i.e. an annuity offered by an insurance company to the applicant who will be the owner of the insurance policy issued in respect of this annuity. Insurance companies are relying on a circular and an unofficial ‘memorandum’ once issued by Namfisa on this topic, both of which in our opinion are ambiguous. They have also approached Inland Revenue who issued a ruling to them in this context. All three communications that were issued make it clear that the capital must retain the protection it would enjoy under the Pension Funds Act. We believe this mechanism does not afford such protection. The consequence of our opinion is that the member who used this mechanism may be taxed at any time in future should Inland Revenue conclude that the capital that was moved to an ‘untied’ annuity should have been taxed, with interest being raised on top of it.
For the fund such outcome could at best present a significant reputational risk, potentially even a pecuniary risk. A further risk for the member is the potential demise of the insurance company that could mean the loss of the member’s entire retirement capital. Again, for the fund such outcome could at best present a significant reputational risk but potentially even a pecuniary risk.
Unfortunately we earn much scorn as the ‘odd one out’ and are at times even discredited by brokers who ‘smell’ the hidden agenda of the Benchmark Retirement Fund offering a pension arrangement to members upon retirement from another fund which is fully compliant with both the Income Tax Act and the Pension Funds Act. This mechanism is referred to a ‘tied’ annuity – i.e. an annuity offered by an approved retirement fund to its members.
We consider it our obligation to assess the potential implications of the payment of a benefit for the beneficiary and the fund from a legal point of view. Where we are of the opinion that such payment presents a risk to either the fund or the member, or both, we would not affect payment without having pointed out the possible consequences to the member and/ or the fund. As fund administrator, we cannot be expected to assume responsibility for such risk and will not allow the member to be exposed to this risk. Where the fund is prepared to assume liability for the risk we will proceed as directed by the fund.
The law unfortunately is not always clear and has to be interpreted if no reliance can be placed on a legal precedent, as is mostly the case. Interpreting laws is a matter of opinion, sometimes well qualified, but at times also unqualified. Even if such interpretation is given by the best legal expert it will only be proven right or wrong once a court has pronounced itself on such a matter. A fund struggling with this matter is well advised to distinguish between qualified and unqualified advice when confronted with different opinions.
While the uncertainty prevails on the matter of ‘tied’ versus ‘untied’ annuities, the procedure we have instituted transfers the tax risk to Inland Revenue by requesting a tax directive with a form which clearly spells out that the retirement fund member intends to move the retirement capital to such an ‘untied’ annuity. After all correspondence with Inland Revenue, Inland Revenue will find it very difficult to ever argue that RFS has not clearly communicated its opinion and the substance of such transactions.
As far the risk of the demise of the underwriting insurance company is concerned, RFS similarly has repeatedly pointed out its opinion to Namfisa and has expressed its concern to Namfisa on the two communications Namfisa issued in this context, that are being interpreted by insurance companies to justify such transactions. RFS clients have of course also been made aware via circulars and the Benchtest newsletters of the risks presented by the mechanism of providing ‘untied’ annuities with retirement capital from a retirement fund.
Is RFS management structure still appropriate for the Namibian environment?
Clients, friends supporters and sympathisers who have been following the history of our company will be aware that the ‘founding generation’ is rapidly approaching the age where people would normally proceed into retirement. No doubt many may even be concerned about the future of this company whose progress and success has to be ascribed to this founding generation. This highly qualified generation would not have been as successful if it had not been for the expertise and experience it was able to offer to the retirement funds market and a commitment, that required much sacrifice, but instilled that overly important comfort and peace of mind in our clients that their retirement savings are in good hands!
Charlotte Drayer, without any doubt the greatest authority in fund administration in Namibia has officially retired, yet she remains in full-time employment now transferring her expertise to the next generation.
Tilman Friedrich who no doubt has a reputation in this industry will follow the same route as soon as his successor, Marthinuz Fabianus, has geared himself for his new role and is comfortable to shoulder his new responsibilities of managing director. Marthinuz will also hopefully be afforded the opportunity to transfer his expertise to the next generation over the next 20 years.
Louis Theron, who is responsible to keep the gears of the company oiled and its wheels turning has a mere 10 years left to find an heir for his position and to hand over his burden to the next generation.
Günter Pfeifer, Mr Benchmark, has built an umbrella fund for SMEs and the retail market that is in the top 10 of Namibian retirement funds in terms of membership and assets under management – this with hardly any marketing, purely through his reputation, the reputation of the other members of the ‘founding generation’ and the good name of the company. Günter still has 15 years to go but having indicated that he would love to retire a bit earlier, this would of course mean that he too only has around 10 years left to hand over his baton to a properly trained successor.
Frieda Venter, one of Günter’s right hands in keeping the financial strings together in this unique and extremely complex umbrella fund, needs to also hurry to transfer her skills over the course of the next ten years.
Tilman had the good fortune that his son Kai chose to follow in his footsteps, has joined the company and should together with Marthinuz as MD, give our clients the peace of mind that continuity will be assured when the next generation is in the saddle. How many small private companies in Namibia can offer longevity beyond the life of the founders, and continuity of a business style and philosophy that has proven successful and comforting to all who deal with this exceptional team?
In our previous newsletters we introduced to our readers what is essentially our founding generation. In our following newsletter we will be introducing you to the team from which the next generation leadership will be drawn.
RFS – a unique approach to our social responsibility
In this financial year we budget to spend close to 1.3% of total revenue on what is generally referred to as ‘social responsibility’. This is in line with what we have been doing since the company was established and exceeds the 0.5% set in our policy. In fact, RFS has embraced its responsibility in this regard even before it’s was able to pay any remuneration to its founding directors!
As is quite typical for RFS we usually do not do what everybody else does. We are different – we do not spend shareholders money just to meet our obligations. We apply our personal conviction, capacity and time to benefit in a meaningful way the community we serve.
First and foremost, it is our conviction that the foundation for economic progress of the country is an educated youth. We therefore place great emphasis on education and the youth of our country.
Once again in our drive to be unique, our single most costly project is the monthly Benchtest newsletter aimed at educating trustees and business people, that is well appreciated by a wide readership and often praised by our readers. We do make reference to these compliments in the newsletter on a regular basis – refer to the comment below. The cost of producing the technical content of the monthly Benchtest newsletter amounts to roughly 0.4% of total revenue, in relative terms close to or even higher than what many other companies’ total spend in this regard is!
A number of other commitments of our staff that are supported by the company and reflect our unique approach, are:
Active engagement in industry bodies of a number of senior staff.
Active engagement in and support of Projekt Lilie (a project supporting education).
Sponsorship of SKW/RFS Annual Youth Soccer tournament.
Sponsorship of Namcol and Polytechnic bursaries for outstanding performance of students.
Active engagement in and support of the Okanti Foundation (medical support of children with rare diseases).
Active engagement in and support of school hockey.
Support of DSSW/ RFS Annual Secondary Schools Soccer tournament.
Support of numerous sport events where staff is actively engaged.
Compliment from a Principal Officer ,February 2015
“I have no doubt in my mind that you are indeed the best. In your newsletters you do offer much, much more than any trustee can absorb when attending meetings and training sessions or reading newspapers. You are feeding us with a golden spoon! Hence why I do encourage my trustees to read your newsletters, circulars, etc. because they will not get this concise and well thought-out information from any other source or company.”
Read more comments from our clients, here...
News from Namfisa
Statement of investment holdings and unaudited annual return - January update
By the time of ‘going to press’ with this newsletter we ought to have completed our contribution to all SIH reports for the 4 quarters of 2014, as well as to the Annual Unaudited Returns. Late and very late submission of information by a number of asset managers did not exactly make these projects a ‘walk in the park’ for our staff, particularly because the due date for all these reports were set for end of February. Clients generally expressed their concern about the extent of duplication of information between these two reports.
In hindsight we have come to realise that the effort the quarterly reports in particular required on our part, has been substantially higher than what we anticipated and are consequently investigating alternatives for the compilation of these reports in future.
With the extent of replication and duplication of investment information in the quarterly reports, the Annual Unaudited Returns and the regulation 28 reports required to be submitted with funds’ annual financial statements, there would have been an ideal opportunity to rationalise and economise the whole process if Namfisa were to have appointed a single service provider with an appropriate system to gather information from less than 20 asset managers, who have all adapted their systems to standardised reporting to consultants, in respect of more than 100 funds, more than 100 funds now have to obtain the data from less than 20 managers, each fund requires to make its own arrangements.
In the alternative, if these more than 100 funds were to combine their efforts, conceptually through the intermediation of RFIN, a single service provider could be engaged by RFIN to provide the quarterly reporting for all funds, possibly even interfacing and downloading the information directly into Namfisa’s system. Everyone’s life, including that of Namfisa, would be so much easier and it is most likely that significant economies of scale will be achieved for the industry and fund members in particular as they will have to carry these costs in the final analysis!
Unlisted investments – January update
We understand that the following SPV/UIM’s have been registered although Namfisa does not seem to be in the habit of advising the public officially:
Tukuneni Capital Fund/ Omaanda Capital (Pty) Ltd
Stimulus Private Equity Fund/ Stimulus Investments Ltd
We understand that there are another 5 or so applications being considered by Namfisa currently. Of the two SPV’s that were now registered only the Tukuneni Capital Fund will be actively seeking investment capital while, we believe, Stimulus will not be raising investment funds at this stage.
We believe that the regulator cannot reasonably expect a retirement fund to start evaluating the alternatives before having a reasonable choice. With a choice of one, pension funds thus cannot really start the process of evaluating alternatives yet. To go through the process of evaluating unlisted investment vehicles, carrying out due diligence, subjecting the supporting legal documents to expert review etcetera will most likely take 6 months, considering also that most trustees have another full time occupation.
Since there are only 4 months left to the extended due date for compliance of 30 June 2015, we suggest that funds should now apply for extension of 6 months from the date on which at least 3 ‘accessible’ SPV’s and their UIM have been registered.
Trustees will by now be aware of their fund's obligation to invest directly in one or more SPV and need to prepare for this. Funds employing segregated mandates may wish to consider transferring the responsibility for investing in an appropriate SPV to their asset manager. Funds employing unit trusts either have to take the responsibility for the process of investing in an unlisted SPV upon themselves, consider employing a consultant for this purpose or, where feasible, consider transferring the assets to a segregated portfolio and vest the responsibility in the asset manager. Since some unit trust managers have pro-actively invested in unlisted investments they may now no longer require and may be prepared to transfer to the participating fund in proportion to the fund’s holding in the unit trust. Funds may wish to negotiate this with their asset manager to transfer their unlisted investments to the fund.
Draft Financial Services Adjudicator Bill 2014 released for comment - reminder
Namfisa just released the draft Financial Services Adjudicator Bill 2014 for comment. A link to this document was provided in the 2014-12 Benchtest newsletter. In general the Bill creates a nebulous hierarchy of authority as between the adjudicator, the Minister of Finance, Namfisa and Bank of Namibia.
We are concerned that the Financial Services Adjudicator Bill makes the adjudicator subordinate to and creates dependence of the adjudicator on Namfisa and Bank of Namibia in many ways. More specifically the adjudicator has to report to these two regulators, obtain budget approval and obtain funding from these two regulator. In our opinion the adjudicator should be able to function independently of the regulators of the financial services industry.
We are also of the opinion that the adjudicator should not directly benefit from penalties imposed by him as envisaged by the Bill, as this creates a conflict of interest.
We hope that this Bill will still be scrutinized by the Government Attorney and the law maker and that it will not be passed in its current form.
Draft rule amendment directive
Namfisa recently issued a draft rule amendment directive, by virtue of the powers vested in it by section 4(2)(h) of the Namfisa Act. Download the text of the amendment here...
This directive will require funds to consult with employees, and fund officials to submit affidavits, that employees were indeed consulted, every time a rule amendment that may impact member benefits, is submitted for registration.
While fund officials in an employer sponsored fund often, but not always, are employer officials that are ‘close to the action’ and might be able to sign such an affidavit, this does not apply to umbrella funds or multi-employer funds.
This draft directive is concerning from a practical and the legal perspective. Firstly, Namfisa is involving itself in labour issues that in our view fall outside its mandate and that it should not be concerned about. The Labour Act lays down requirements for changing conditions of employment. Unless defined in the employment agreement, pension benefits are not a condition of employment and these can change as provided for in the rules of a fund.
We do not read the Pension Funds Act to afford Namfisa the powers to interfere in managing the business of a fund. To the contrary, a rule amendment does not require Namfisa approval but only has to be registered by it. Furthermore we question whether section 4(2)(h) of the Namfisa Act does indeed empower Namfisa to establish law and to assume powers not afforded to the Registrar in terms of the Pension Funds Act. This remains to be tested by an aggrieved person.
Section 12 of the Pension Funds Act requires that the Registrar shall approve a rule amendment unless it is inconsistent with the Act or is not financially sound. This section also only requires the passing of a resolution and a certificate to the effect that this resolution has been adopted in accordance with the provisions of the rules of the fund, by the person managing the business of the fund.
We urge funds to assess the implications of this draft directive on their operations and to take appropriate action.
Draft Industry Regulations
Namfisa circulated a number of draft industry regulations for comment. A link to these documents was provided in the Benchtest Newsletter of 12.2014.
Draft Standards RF.S.
5.3 Payment of contributions - minimum information
5.4 Rules requirements
5.6 Termination & dissolution requirements
Beneficiary nomination form
5.9 Beneficiary nomination form
Draft General Standards GEN.S
9.2 Fit & proper
9.9 Code of conduct
9.11 Investment policy statement
9.12 Investment mandate
These standards appear to have been copied from text books teaching the ideal world. They impose extensive requirements and excessively onerous obligations and responsibilities on funds, their officials and service providers and inhibit the free market mechanism. No distinction is made on the basis of size of fund or the risk a fund poses to the financial system of Namibia. Of course with the extent of detailed obligations and requirements the regulator will also be challenged to supervise the financial services industry and will have to expand its resources substantially.
The standards in our view defeat the declared objective of Namfisa to move from rule based to risk based supervision and will require stakeholders to be totally rule focused. In fact we believe that funds and service providers will never be able to be fully compliant with all these requirements and the consequences of this are not too difficult to foresee.
We expect that this regulatory regime will lead to the demise of most retirement funds as only a handful of large funds will remain viable from a governance point of view.
Is this really what Namibia needs?
(for stakeholders of the retirement funds industry)
Bank of Namibia lifts repo rate once again
Bank of Namibia announced another increase in the repo rate to 6.25% on Wednesday 18 February. Funds offering direct loans will once again have to increase the housing loan interest rate to 10.25% as from 1 March 2015.
NMG appoints a new team to head up its Namibian operations
NMG recently announced its new management team to head up its Namibian operations. Download the news brief here...
Allan Gray performance raises concerns in the market
Retirement fund investors have become used to Allan Gray outperforming at all times and under all circumstances. Is this a realistic expectation? Well going by Allan Gray’s performance over the short and medium term, it seems this is an unrealistic expectation.
We have pro-actively requested Allan Gray to address the justified concerns of its investors who have been spoilt by its outperformance of an extended period of time.
Here are two documents to download that provide some background to Allan Gray’s disappointing performance:
Local manager of Allan Gray Namibia has provided an even more elaborate reasoning for the disappointing performance which we are happy to provide to Allan Gray investors on request.
(for investors and business)
11 Predictions for the next 10 years
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. In our previous newsletters we presented the first number of predictions. Here are the remaining predictions:
Population pressure, food and water – food and water will become a key strategic consideration for all nations.
A return to the cold war paradigm.
Climate change is a reality.
Find more on David's website, here...
International investing – a key part of diversification
“Investors are regularly reminded of the wisdom of having a diversified portfolio. But just how does the principle of diversification work? By combining investments that exhibit different return patterns, large fluctuations seen in individual investments can be smoothed out. This means that the overall portfolio can benefit from the different return sources in aggregate but with lower volatility of returns compared to just holding one of these investments in isolation. By being exposed to a range of assets, markets, sectors and currencies that behave in a similar way, portfolio risk increases. In particular it is critical to manage downside risk….”
Read the article by Jaco van Tonder in Sanlam’s ‘Funds on Friday’, here...
5 things only bad bosses say
In this article the following 5 sayings of a bad boss are highlighted:
· This place falls apart without me.
· This is the way we have always done it.
· If I had my way, things would change.
· You need to think about where your priorities lie.
· You’re lucky to have a job.
Read the article by Pree Sarkar in Linkedin of 5 February 2015, to find out why a boss should not say these 5 things, here...
Do you really have enough to retire?
In this article in Moneyweb of 23 February, Patrick Cairns refers to the 4% rule which was first established by financial planner William Bengen 20 years ago after he ran a number of calculations that lead him to conclude that the 4% rule would in 95% of cases ensure that your retirement capital would last. Read the full article here...
Dear 25-year-old me
“Seven years on, there are some things you should’ve just started doing then (and others you should have not done). Being in your early thirties, it’s still not too late to undo many of these mistakes, but it’s going to take a lot more discipline and effort than it should have if you’d started in the late 20’s. (Good luck catching up on that compounding of savings you missed out on!)”
If you are in the early thirties or younger, there is some good advice for you offered by Hilton Tarrant in Moneyweb of 23 February 2015.
Other advice in the article includes:
Buy a house as soon as practical.
Buy a car below what you can afford.
Get rid of your cell phone contract.
Review your expenses at least once a quarter.
Read the full article here...
"If you want your children to be intelligent, read them stories. If you want them to be more intelligent, read them more stories." ~ Albert Einstein
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.