Dear reader

The trustee of a private pension fund has a complex set of administrative factors to consider, in terms of fiduciary responsibility. By our count there are 37 considerations in 9 categories which need to be taken into account. Failure to adequately account for and manage these factors can lead to a breach of fiduciary responsibility, and to unhappy fund members.

In this newsletter we shine a light on these considerations.

We also look at investment markets and how this impacts on local investors, common conflicts between fund rules and conditions of employments that may impact the employer, the fund and the member, consider the implications of cheques no longer being legal tender and we provide links to some interesting articles in various media.

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 10.2015

In October the average prudential balanced portfolio returned 5.29% (Sep: -0.39%). Top performer is Investec (5.79%); while EMH Prescient 4.21%) takes the bottom spot. For  the 3 month period Allan Gray takes top spot, outperforming the ‘average’ by roughly 3.2%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 1.2%.

Will this cloud have a silver lining?

Bad news both on the economic as well as the political front are currently unfortunately dominating our media and this also manifests in our financial markets of late. Investors are clamouring for good news and each time there is some good news, financial markets also respond positively to these. Where we have seen the FTSE/ JSE Allshare Index increasing steadily since the end of the financial crisis from its low of 21,000 in October 2008 to around 49,000 at the end of April this year, it has been see-sawing since then between 49,000 and 54,000.

We read of South Africa’s economic woes; Namibia ran a trade deficit of N$ 10 billion in the latest reported month, there are reports that our government is running out of cash and has recently had to issue a Eurobond, exposing Namibia to a significant currency risk while at the same time the Rand has depreciated by 26% from 10.5 at the end of April this year to currently around 14.2. Global commodity markets are in the doldrums, which is particularly bad news for commodity based economies such as South Africa and also Namibia. But wait – on the positive side of lower commodity prices is the low oil price which has declined by 65% from just short of US$ 133 per barrel in July 2008 to its current level of around US$ 47 per barrel only which should be good for your pocket and mine.

But is this true? In fact for you and me diesel for example only declined by 4% from N$ 11.31 per litre in July 2008 to N$ 10.85 currently. In Rand terms, one barrel cost R 976, or roughly N$ 6.14 per litre in July 2008, as opposed to R 643 per barrel, or roughly N$ 4.04 per litre the end of October this year, a reduction of 34%. Does this sound as strange to you as it does to me? What this implies is that besides the taxes already built into fuel prices in July 2008 someone is currently cashing in at the rate of N$ 2.1 per litre consumed in Namibia.

Read part 6 of the Benchtest 10.2015 newsletter to find out what our investment views are. Download it here...

The essence of the administrator's job

The administrator of a fund is the custodian of the financial records of each member of the fund and of the fund as a whole. It is the financial manager and the accounting department in one person. Defective execution of the administrator’s responsibilities can expose the trustees individually and severally to the risk of liability for any losses incurred by a member or by the fund. In SA trustees were already held personally liable for not taking their fiduciary duties seriously. Besides this risk, any doubt that employees may develop about the reliability of information maintained by the fund administrator can lead, and has in the past led to industrial action by employees. This is when it can really become expensive for an employer.

In Namibia, there are currently no legal impediments for offering services as fund administrator. How can a board of trustees then be comfortable with the credentials offered by their administrator and how can trustees weigh up the cost of administering their fund against the risk mitigation factors their administrator offers?

Justifying their decision based purely on costs, a board of trustees recently expressed its view that the fund does not need to drive an expensive car but can also drive a cheap car. But is this an appropriate logic when you are dealing with trust money that represents the retirement nest egg of hundreds of members? We certainly believe this argument will not stand any board of trustees in good stead should their judgement ever be placed on a test bench.

Good governance comes at a cost but should at the same time serve to mitigate the risk a board of trustees faces. Applying proper risk management principles a board of trustees should really determine the net cost of the service provider, which is the cost charged to the fund minus the quantified benefit of any additional risk mitigation offered. Comprehensive and transparent reporting is the most important tool trustees can rely on to monitor the state of administration of their fund.

A due diligence questionnaire for fund administrators that trustees are duty bound to employ before appointing an administrator, should cover the following key areas:

1. General Firm Information
   a)    Any business interests unrelated to fund administration?
   b)    Any historic payment or business defaults of the business?
   c)    Ownership continuity?
   d)    Ability to manage the fund?
   e)    Competitive advantages?
   f)    Client monitoring policies?
   g)    Fraud and corruption protection mechanisms?
2. Team
   a)    Any known conditions (health, financial, litigation, personal, etc.) of any of the Firm’s Principals that might influence their ability to execute their duties to the Firm?
   b)    Has a “Key-Person” event occurred in the Firm’s history?
   c)    Any significant past or prospective staff departures (partner or director-level employee (or higher) with more than five years of history with the Firm)?
   d)    Shared work history of team?
   e)    Recruitment plans and procedures?
   f)    Staff retention and training, including historical experience and internal promotions?
   g)    Qualifications and experience of staff?
3. Alignment of Interests
   a)    Any of the Firm’s Principals not invested in firm?
   b)    Compensation structure?
4. Market Environment
   a)    Business opportunities?
   b)    Competitors?
   c)    Impact of changes in environment?
5. Governance
   a)    What structures in place?
   b)    Monitoring and enforcement of policies?
   c)    Historic, current and potential conflicts of interest in firm?
6. Risk/Compliance/ESG
   a)    ESG risks identified and monitored?
   b)    Compliance requirements defined and monitored?
   c)    ESG policies in place and monitored?
7. Track Record
   a)    Any past failures?
   b)    Track record?
   c)    Reputation?
   d)    Expert references on state of data (e.g. actuary)?
8. Accounting/Valuation/Reporting
   a)    Internal audits executed?
   b)    Standard of reporting package?
9. Legal/Administration
   a)    Past criminal or administrative proceedings or investigations?
   b)    On-going or pending litigation?
   c)    Counter party risk management?
   d)    Business software?
   e)    Disaster recovery procedures and facilities?
   f)    Indemnity insurance?

How does absence from work affect the employer, the fund and the member?

In the normal course of business, if often happens that an employee is absent from work for various reasons. Such absence can carry the employer’s consent, e.g. maternity leave, sabbatical absence, suspension with immediate departure from office, dismissal or ill-health. In other instances it can be unauthorised absence, e.g. ill-health, disablement, absconding etc. Until such time as employment ends contractually or legally, employees are entitled to their contractually agreed remuneration and benefits. This includes employer contributions towards the member’s retirement as well as death and disability benefits typically offered by pension funds. It is critical, however, that the rules of the fund and the relevant insurance policies are complied with in order to ascertain that an employee remains covered by the fund for these benefits. In this regard, the employer plays an important role and should carefully consider the following exposition.

Introduction – rules vs contract of employment

The rules of the fund typically set out the rights and obligations of the employer and the member and determine how the administrator is required to administer the fund. Since an employee’s membership of the fund arises from his employment with the employer, the contract of employment may have a key bearing on the employer’s and the employee’s contribution obligations towards the fund.

Commencement and termination of membership

Typically rules would state that membership commences on the first day of the month coincident with or following his becoming and employee.

Membership typically ceases upon termination of service. Service can thus terminate at any time in terms of the rules. Service is usually defined as full-time permanent employment with any of the employers. One will now have to refer to the contract of employment to determine when the service of an employee actually terminates. The employer would have to advise the fund administrator of the correct date of termination of service in terms of a member’s employment contract.

Commencement and termination of contributions payable

Contributions to the fund by the member and by the employer are typically payable at the specified rate of the monthly equivalent of the member’s annual pensionable emoluments. Pensionable emoluments’ are then usually defined as the member’s basic annual salary or wage and any other amounts that are regarded as pensionable by the trustees at the request of the employer. This formulation provides considerable latitude to the employer to have different classes of membership where the fund contributions are based on different proportions of the employee’s cost to company.

To determine the employer’s and the employee’s obligation concerning the contributions to the fund, the employer would have to first calculate the annual pensionable remuneration, divide this amount by twelve and multiply the result by the relevant contribution percentage. It appears logical that the basis for determining the annual pensionable remuneration has to be the employee’s current rate of pay per pay period, times number of pay periods per year. This means that if rules are formulated as set out above, they do not provide for any pro-rata payment in the last month even though the employee’s service may have terminated in the course of the month.

Whether or not any contributions are payable for the last month if it was a broken period will have to be established from the contract of employment. The rules link the contribution to the member’s remuneration. Again the employer would have to advise the administrator of the correct end date of the member’s last monthly contribution in terms of a member’s employment contract.

Commencement and termination of risk cover – what does the insurance policy say?

As far as ‘risk benefits’ are concerned, the reassurance policies link a member’s cover to his membership in terms of the rules of the fund, which in turn, link membership of the fund to his or her service in terms of his employment contract. Typically the policy read together with the rules, would imply that cover always commences on the 1st day of a month but ceases as soon as the service of the employee ceases in terms of his contract of employment.

Temporary absence – what do the rules say?

The rules normally make provision for ‘temporary absence’. Typically, this rule provides for continuation of benefits and contributions while the member is in receipt of his or her full normal remuneration. When a Member is granted leave of absence with less than full normal remuneration, the rules would typically provide that his or her member’s share will be credited with any contributions actually paid by the member and/or the employer during such period of absence. Commencement and termination date for this purpose would then be irrelevant.

As far as ‘risk cover’ is concerned the rules typically provide that the member will continue to be covered for the insured benefits in the event of death or disability, for the period specified in the assurance policy issued to the fund by the relevant insurer (normally between 1 and 2 years). After expiry of said period, such cover shall terminate unless the member returns to active service. Any benefit that may become payable during such period of absence will be based on the member’s pensionable emoluments as specified in the assurance policy issued to the fund by the relevant insurer (normally based on the employee’s full normal remuneration).

Temporary absence – disability reassurance policy

Although every insurer has slightly different formulations in their insurance policies, typically, for ‘leave of absence’, the disability reassurance policy normally provides that no claim for the benefit is admitted if the disability arises during a period in which the member concerned is deliberately absent from the employer’s service without permission, unless the fund and the insurer agree otherwise in a particular case. By implication, in the case of temporary absence approved by the employer the member will continue to be covered.

Temporary absence – death reassurance policy

Although every insurer has slightly different formulations in their insurance policies, typically, for ‘leave of absence’ the group life reassurance policy normally provides that if a member is absent from the service of the employer with the employer’s consent, it is deemed that the member’s membership continues, subject to the following:
1. During the period of absence the member’s remuneration is deemed to be equal to the remuneration he/she received immediately before the commencement of absence….”

For ‘absence without the employer’s consent’, these policies typically state that a member’s membership lapses and the member’s service with the employer is regarded as terminated if and as soon as he/she is absent from the employer’s service without the employer’s consent.”

Summary

The following conclusions can be drawn from the above deliberations:

1. Contributions by both employer and employee have to be made for full months, except in the case of approved temporary absence.
2. The date of termination of service is to be determined in accordance with the contract of employment.
3. Death and disability benefits cease upon date of termination of service in accordance with the contract of employment.
4. Whether or not contributions by the employee and the employer are payable for the last month in which service terminates is to be determined in accordance with the contract of employment.
5. In the case of temporary absence, contributions by employer and employee are determined in the normal manner, where the employee receives his full remuneration.
6. In the case of temporary absence, the rules do not detail how contributions by employer and employee are to be determined, where the employee’s remuneration is less than his full remuneration and the administrator simply updates what it receives.
7. In the case of approved temporary absence, the employee’s death and disability benefits will continue based on the employee’s remuneration prior to the approved temporary absence.
8. In the case of unapproved temporary absence, the fund and the insurer can agree to keep a specific member covered for disability benefits, else cover will lapse.

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.

Kai Friedrich's Administration Forum

Phasing out of cheques by December 2017

The Payment Association of Namibia (“PAN”) is an association responsible for managing the national payment system in Namibia and is recognised and licensed by Bank of Namibia, in terms of the Payment System Management Act, 2003 (Act No. 18 of 2003), as amended.

PAN has recently issued a public notice to inform the public of the reduction of the item limit for cheque payments within the National Payment System from the current N$500,000 (five hundred thousand Namibia Dollars) to N$100,000 (hundred thousand Namibia Dollars) effective 1st of February 2016. Phasing out of cheques altogether, is anticipated by the 31st of December 2017.

This decision will no doubt still present a number of challenges to funds, fund members and the administrator.

• This presupposes that all former pension fund members will operate a bank account that accepts electronic fund transfers, beyond withdrawal from a fund and possibly being unemployed;
• This presupposes that all non-member beneficiaries and their guardians will operate a bank account that accepts electronic fund transfers;
• Benefit payment by cheque could have still reached a beneficiary via mail and could have still been cashed if it was issued not negotiable or without any crossing. If there is no bank account that accepts electronic fund transfers, the benefit due will simply not reach the beneficiary (particularly those most in need) and will eventually have to be paid to the Guardian’s Fund;
• The beneficiary could have been positively identified by an ID number reflected on the cheque without the need to undertake any errant to the administrator’s offices. In future the beneficiary will have to obtain a bank verification form from the administrator, deliver the form to the bank, get it signed and deliver the original form to the administrator. Particularly for smaller benefits that are payable to persons on the lower end of the income scale will find it relatively much more costly to obtain payment than those on the higher end of the scale;
• Some banks will have to upgrade their systems to offer electronic housing loan settlement payments;
• Members will no longer be able to make over their benefit payment to their former employer by endorsing the cheque to the employer, even if they wanted to.
• This presupposes that Namibian utilities will keep up to date with the processing of EFT receipts, such as happened with Telecom that is sitting with a backlog of over 200,000 payments to be updated and is cutting off users because its records do not reflect payments actually made.

Inland Revenue no longer accepts cheques

Inland Revenue will no longer accept cheques that are not bank guaranteed with effect from 1 December 2015. Note that this has nothing to do with above notification of phasing out of cheques. In other words, as from 1 February 2016, you can no longer pay even with a bank guaranteed cheque if the amount exceeds N$ 100,000.

All tax payments will thus have to be made via EFT such as:

• VAT on the odd importation of goods or services;
• Withholding tax on services rendered by a non-Namibian;
• PAYE on all benefit payments including pensions;
• Arrears tax claimed by Inland Revenue

Let’s hope Inland Revenue will be able to keep its systems up-to-date throughout so that taxpayers do not get hammered with penalties and arrears for payments made but not reflected on their account due to processing delays.

Read the press release here...

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

RFS executive committee


Frieda Venter attained her grade 12 in 1983 at Voortrekkerhoogte High School, Pretoria. After school she joined the Reserve Bank, later Bank of Namibia in Windhoek and obtained the LIB (SA) diploma in banking in 1990. In 1990 she entered the pensions industry as fund accountant and financial manager of United Pension Administrators as key member of the team that introduced fund administration in Namibia. Frieda is very active in the community as a member of InBalance that focuses on problems in the 5 areas of life in the community. On behalf of RFS Frieda has been coordinating our Oude Rust flower project. Frieda’s message to clients and prospective clients is that “we are trustworthy and reliable, always trying to be the best - we are always eager to learn from our mistakes”. Working for RFS she considers a privilege as RFS is one big happy family with its normal ups and downs that makes one feel “at home”.

RFS welcomes new staff

We extend a warm welcome to Elaine Blom who joined us at the beginning of May 2015 from Sanlam as a Fund Administrator. She grew-up in the Maltahöhe area on a farm and matriculated at Windhoek Technical School in 2008. She was the head girl in her matric year. She joined Sanlam in 2009 as a Risk Administrator and was promoted to Manager in that department in 2014. Elaine studied since 2010 on a part-time basis at the Polytechnic of Namibia and obtained a B.TECH Degree in 2014. She obtained distinctions in most of her subjects and was also top student in her first year. Elaine is assigned to the Benchmark team where she is responsible for Benchmark small groups and a few other Benchmark funds.

It is also our pleasure to announce that Lilia Cabatana has returned to the RFS fold after an absence of one-and-a-half years. For starters, Lilia has been assigned to our project team responsible for the conversion to our new administration platform on a full-time basis providing some relief to Günter and Kai who are running this project alongside their other management responsibilities. We extend a hearty welcome home to Lilia and look forward to having her play a key role in shaping the destiny of RFS until her retirement in the year 2036!

Bank BIC Namibia joins Benchmark

The Benchmark team extends a hearty welcome to Bank BIC Namibia as a new participating employer with effect from 1 November 2015, and to all its employees and looks forward to providing an exceptional experience in client service to this group. We are looking forward to you and us together moving from strength to strength in the years to come!

News from Namfisa

Industry discussions – standards and regulations

NAMFISA conducted public ‘hearings’ at Hotel Fürstenhof on the standards and regulations issued under the FIM Bill and comments received on these from stakeholders:

• Chapter 2: Insurance – 16 November 08h0 to 16h30;
• Chapter 5: Retirement Funds – 18 November 08h30 to 16h30; and
• Chapter 1: Preliminary and Chapter 9: General – 20 November 0830 to 16h30.

NAMFISA’s approach to the face to face meetings would be to:

• Present the industry comments
• How NAMFISA has dealt with it:
  If in agreement with comment an indication would be given to that effect, if not in agreement NAMFISA will provide rationale for that and allow a brief discussion on the particular issue. Reach either consensus by way of discussion or clarify the policy stance.
• The idea is to only discuss contentious issues as written representations have been received and considered already.  

Legal snippets

Employer cannot recover money without compensation order

This article reports on and interesting SA adjudicator ruling that should be taken note of by pension fund trustees and service providers. An employee complained to the Adjudicator that he had not received his withdrawal benefit. The fund administrator was instructed by the employer not to pay out the benefit on the grounds that the complainant was found guilty of theft in a criminal case and sentenced to a suspended 3 year prison term. However the employer failed to obtain a compensation order in the judgement.

The Adjudicator concluded that it is only when an employer who is in possession of a compensation order deemed to be a civil judgement that a fund may deduct a member’s benefit, and ruled that the benefit must be paid to the employee.

Read the full article by Noluthando Lamula itinews of 30 September 2015, here...

VAT on imported services
(A contribution by Chanelle van Wyk, Wealth Manager at RFS)

VAT on imported services is payable by a Namibian resident, when services are rendered by a non-resident of Namibia (within Namibia) to a resident of Namibia; to the extent that these services are used to make non-taxable supplies.

Therefore, imported services that are used to make taxable supplies do not trigger import VAT on services. If the imported services are used to make mixed supplies (exempt, zero-rated, non-supplies or taxable supplies), apportionment will need to be done.

Rate of import VAT on services:
15% (paid by the resident)

Return and payment to be submitted:
30 days after service is rendered.

Withholding tax
(A contribution by Chanelle van Wyk, Wealth Manager at RFS)

Withholding tax on services is payable when any of the below- listed services are rendered by a non-resident person (who has no permanent establishment in Namibia) to a resident person of Namibia:

• Management fees paid
• Consultation fees
• Director's fees
• Entertainment fees

Withholding tax on services is currently payable at a rate of 25% (to be withheld by Namibian resident from payment to the non-resident). However, this rate is due to be reduced to 10% except on directors’ fees and entertainment fees.

The withholding tax is payable by the resident within 20 days of the end of the month during which the amount has been withheld.

Media snippets
(for stakeholders of the retirement funds industry)

Increasing your RA contribution could be bad news

This article reports on a complaint to SA Adjudicator by a member of a retirement Annuity fund who reduced her RA contribution back to the original monthly premium after a reduction in her income following her return from a foreign posting. Sanlam, the underwriting insurer imposed a ‘penalty’ of 8% of her capital to affect this reduction, mainly to recoup up-front commission Sanlam had advanced to the intermediary when the original premium was increased.

The Adjudicator ruled that the ‘penalty’ was well within what the regulations under the Long-term Insurance Act provided. The adjudicator used the opportunity to impress upon service providers that “costs and charges must not only be disclosed; service providers must ensure that the members actually understand them, and how these charges are calculated, from the inception of the policy”.

Up front commission is standard practice in the insurance industry but is set to end in 2017 in SA. As far as Namibia goes, Prime Minister Amadhila also referred to this practice as something to be terminated in Namibia too.

Read the article by Laura du Preez in IOL of 7 November 2015 here...

Media snippets
(for investors and business)
 
Diversification is the only thing that truly protects you from catastrophe

“You can do anything you like in investments if it seems like a good idea to you, with one rule: don’t put all your eggs in one basket. Make sure you’ve got a diversified portfolio. A very good rule of thumb is put a maximum of – I think it actually should be 5% but most people use 10% – put a maximum of 10% of your wealth at risk on any one idea, any one product, any one investment, any one share. Diversification is the only thing that truly protects you from a catastrophe.”

Read the full interview with investment specialist Craig Gradidge and Wayne McCurrie in Moneyweb of 9 November 2015, here...

How lazy bosses avoid doing their job

“We all overuse certain words and phrases.  That's natural. But if you're a boss hoping to communicate effectively -- or be taken seriously  --that's also a real problem. Platitudes aren't just annoying. Resorting to platitudes shows you don't want to listen, don't want to take action... in short, don't want to buckle down and do your job. Here are some examples.”

• ‘It just wasn’t meant to be’ – this only serves to shift responsibility; rather retain responsibility and figure out how to address the matter next time around;
• ‘That’s probably not what you want to hear’ – this shifts the issue to the other person; don’t shift, rather explain;
• ‘Work smarter not harder’ – it implies the other person is stupid and takes longer than necessary; rather admit you don’t have the answer and try find an answer or assist to get the job done;
• ‘There is no I in a team’ – there are as many I’s as team members; the best team is rather often a blend of members’ individual talents, perspectives and goals;
• ‘Perception is reality’ – its only your version of reality; rather make your reality everyone’s reality;
• ‘I’m always open to feedback’ – this shifts the responsibility to the other person; if you really want it rather go out and get it;
• ‘We’ll do it now and apologise later’ – you are lazy and self-indulgent; rather describe what you want to do and prove it makes sense;
• ‘Failure is not an option’ – this is an attempt to shut down questions; rather justify your decision;
• ‘Let’s not reinvent the wheel’ – some other wheel might actually turn out to be a better wheel;
• ‘It is what it is’ – you are too lazy to try to make it different; rather fix a situation if you don’t like it.

Read the article by Jeff Haden in Linkedin of 17 September 2015, here...

How to be charismatic

“Charisma is like the secret elixir that few understand. Here's the definition that comes up on Google:

1. compelling attractiveness or charm that can inspire devotion in others.
2. a divinely conferred power or talent.

In almost every situation I can imagine - short of an all-out crisis - a bit of playfulness makes a person more charismatic.”

In his analysis, the author makes reference to a number of prominent persons, such as George Clooney, Angelina Jolie and Pope Francis to conclude - “Just ease up a bit. Open yourself up to possibilities, be a bit spontaneous when circumstances allow it, and every now and then... surprise the people around you.”

Read the article by Bruce Kasanoff in LinkedIn of 16 September 2015, here...

The perfect storm

In this thought provoking article, Clem Sunter contemplates the state of the world we live in, a must read!

Read the full article here...

And finally...

"To give real service you must add something which cannot be bought or measured with money, and that is sincerity and integrity. The quality is remembered long after the price is forgotten." "
~ Don Alden Adams