The trustee's duties are complex, governing decision processes as well as administration. RFS forms a working partnership to ensure that all of the regulator's legal requirements are satisfied, and that the legal obligations of the trustee are fulfilled.
In this newsletter we continue our support to trustees with a generic trustee code of conduct which can be further adapted with the assistance of RFS. Find it below.
In this newsletter we provide a template for a ‘trustee code of conduct’, we report on the on-going difficulties with Inland Revenue taxation practice with regard to pension fund death benefits, we caution against unintended consequences of transferring retirement capital from an approved fund to an insurance product, we comment on study policies and the risks an employer may face in this regard and we draw attention to the ‘cash4lovedones’ benefit that Old Mutual added to its disability income product and the potential pitfalls. We also have a link to the New Equitable Economic Empowerment Bill that will impact on most businesses.
Of course as usual we also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.
As always, your comment is welcome, so open a new mail and drop us a note!
Tilman Friedrich's Industry Forum
Benchtest Monthly 01.2016
In January the average prudential balanced portfolio returned -2.08% (Dec: 0.57%). Top performer is Allan Gray (-0.12%); while Namibia Asset Management (-4.03%) takes the bottom spot. For the 3 month period Allan Gray, for the 6th consecutive month takes top spot, outperforming the ‘average’ by roughly 5.4%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.9%.
The winds have changed
For many years Namibia’s big brother SA, and with it Namibia too, has experienced a tidal lift of its entire financial system. It started off with the commodity run that led to SA ALSI growing by a nominal 15.8% per annum from August 1998 to its peak in April 2015, equivalent to a real growth of 8.3%, excluding dividends. And this period includes the financial crisis that saw the index declining from its October 2007 peak of 28,400 to a trough of 16,500 in February 2009.
Foreigners piled into local equities at an annualised rate of between R 60 billion and R 80 billion. For a long time the Rand held up well on an exchange rate to the US Dollar of between 5 and 8 up until the first quarter of 2012. Interest rates were very low as the result of the US Fed’s stabilization of its financial system post financial crisis with its large scale asset purchase programme that had money flowing freely across the globe and in particular into commodity based economies like SA.
These good times have come to an end now, even though much later than we had anticipated where we expected the Fed to start raising interest rates in 2012. As we know now, this only happened in December 2015. The fact that the Fed stopped its large scale asset purchase programme was largely negated by a virtually simultaneous entry by the ECB with a similar programme.
The anticipated increase of the Fed repo rate in 2015 was the turning point for our financial markets and the tail winds our markets experienced have now turned into head winds.
Read part 6 of the Benchtest 01.2016 newsletter to find out what our investment views are. Download it here...
Pension fund governance - a generic trustee code of conduct
To avoid being sucked further into the Regulator’s enforcement processes, trustees should ascertain that their fund has certain documents in place as we have and will present in the next few newsletters.
The Trustee Code of Conduct governs management of trustees and the principal officer, management of the business of the fund, and management of stakeholder relationships.
These documents should be adapted to meet the fund’s specific objectives. If you do not have any of the documents in place yet, please have your consultant assist you to adapt these documents to your circumstances and objectives.
Download the generic trustee code of conduct here...
Download the generic trustee performance appraisal form here…
Download the generic investment policy here...
Taxation of death benefits - Inland Revenue to get its house in order
Over the last few issues of this newsletter we have been commenting on the status of Practice Note 5 of 2003 and how this impacts on the taxation of death benefits.
At this stage, Inland Revenue issues tax directives on death benefits payable to survivors of deceased pension fund member that are inconsistent from one Revenue office to the other and at times even within one Revenue office.
The past practice of allowing the full lump sum death benefit to be paid in cash but then being subjected to PAYE is still followed by various Revenue officers and offices in many instances. In other instances Revenue officers and offices indicate that a maximum of the smaller of N$ 50,000 and 66% of the total capital available for benefits may be paid as a lump sum while the balance of 34% if larger than N$ 50,000 must be paid in the form of an annuity.
Survivors of course can be adults or minors. Problem is that no insurer in Namibia offers an annuity for a minor. Where a minor is a beneficiary of a portion of a pension fund death benefit, latest Inland Revenue practice means that a significant portion of the capital available to provide benefits to a minor cannot be paid out at all.
The issue gets clouded further by the fact that some pension funds actually require that survivors be paid a portion of the available capital in the form of an annuity. Whether or not the Revenue requirement for a minimum portion to be paid in the form of an annuity will be observed depends on each case and will further depend on whether the survivors’ pensions are quantified in the rules or whether the capital allocation is quantified in the rules, to then be converted to an annuity. Where the survivor’s pension is quantified, a young child or spouse will receive a larger portion of the available in the form of an annuity than what would apply to older survivors. As the result the question arises how Inland Revenue would give due recognition to these individual differences in applying its latest practice based on PN 5 of 2003.
It is our interpretation of the Income Tax Act, that the requirement of a minimum capital amount to be applied to providing annuities, has to be determined and measured at fund level rather than at the level of the individual payments due to be made. We have approached Inland Revenue with concrete examples and requested an opinion 2 months ago but have unfortunately not received any feedback.
Having followed up on this with a senior Inland Revenue official, it is recognised that the Income Tax Act needs to be amended due to its prevailing ambiguities. But when will this happen, considering that the same conclusion on the same topic was already reached in 2004 but nothing has been done yet?
This official suggested that the Retirement Funds Institute should approach the Minister with the request to establish a joint committee to propose changes to the Act. This will no doubt also be a long road. We encourage members of the Institute to raise this with their Institute and to lobby for urgent action in this regard.
Transfer of retirement capital to insurance policy – watch out for unintended consequences
This topic has also been addressed in a number of previous newsletters and remains in murky waters.
The point here is that pension fund rules generally allow, and sometimes even require the retiring member to purchase a pension with the amount of the capital that cannot be commuted for cash (i.e. two-thirds). Mostly the member has the choice to have the one-third that may be commuted for cash, paid out to him/her soonest after retirement and the expectation is that this happens within a few days.
Problem number one is that often the rules of the transferring fund and the rules of the receiving fund do not ‘dovetail’. Receiving funds often do not accept retirement capital unless it represents the full amount before commutation of the one-third. So if the transferring fund has already paid out the one-third the two-thirds cannot be transferred.
Problem number two is that a practice has evolved of brokers selling an insurance product to the retiring member. The Income Tax Act dictates that benefits can only be transferred tax free, if such transfer is made to another ‘approved fund’. Typically these insurance products do not fall into the category of ‘approved fund’ and the administrator of the transferring fund is obliged to determine and deduct tax on the amount transferred to the insurance product. Since annuities then paid by such insurance products are taxed again, the member is effectively taxed twice on the income generated by his/her retirement capital.
Some commentators believe that there is a fine but critical distinction between transferring pension capital to another approved fund and purchasing an annuity with the retiring member becoming the owner of the annuity. We do not agree with this view. Problem is that Inland Revenue has indicated that in one opinion that it agrees with this view. This opinion is addressed to a specific party and is thus null and void with respect to any other person. At the same time this opinion attaches conditions to such purchase that are a given when the capital moves to a fund registered under the Pension Funds Act but cannot be complied with if the money moves to an insurance policy under the Long-term Insurance Act. It furthermore does not indicate who is to ascertain that these conditions will be complied with and how this will be achieved without the Pension Funds Act applying. Is it the insurer receiving the capital or is it the transferor fund, respectively its administrator?
We believe that at the answer to this question must be sought in the Pension Funds Act rather than in the Income Tax Act. Does section 37A of the Pension Funds Act allow pension fund capital to be moved to an insurance policy under the Long-term Insurance Act without the capital losing its treasured protection under section 37A?
This is a question that we have posed to NAMFISA to which we are eagerly awaiting a response for a number of years now. In the most recent communication, NAMFISA indicated that it is consulting senior council due to the complexity of the matter.
So here we are - NAMFISA is not in a position to lay down the rules of the game yet insurance brokers and insurance companies are happily entering into business that may yet prove to be in contravention of the Pension Funds Act, and consequently would be taxable in terms of the Income Tax Act.
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.
Compliment from an HR manager of an employer
Thank you very much for your prompt reply. I am very impressed with your quick service.”
Read more comments from our clients, here...
Kai Friedrich's Administration Forum
Education Policies and the Income Tax Act – employers watch out
‘Educational policy’ is defined as - “An insurance policy taken out by a tax payer for the exclusive and sole purpose of making provision for future education or training of a child or step-child of the taxpayer contemplated by section 16(1)(ab)(ii).”
Furthermore paragraph 11A of schedule 2 of the Act regulates employees’ tax and the employer’s administrative responsibilities. In terms of this section:
“1. An employer must issue a declaration to the Minister in the prescribed form within 30 days following the month in which any amount received by or accrued to a taxpayer under or upon the maturity, payment, surrender or disposal of an education policy to which paragraph (dC) of the definition of “gross income” applies.
2. If an employer fails to submit a declaration in terms of subparagraph (1), he or she is liable to pay a penalty equal to 10 percent of the amount received or accrued to the taxpayer under or upon the maturity, payment, surrender or disposal of the policy.
3. Where good cause is shown in writing by the employer liable for the payment of a penalty under subparagraph (2), the Minister may remit a penalty in whole or in part.”
In order for an employer to avoid being penalised as the result of a policy benefit having accrued or having been paid to an employee, where one of your staff members claims premiums towards an education policy against the taxable income administered by your company, we suggest that you consider the following:
the employee should provide a copy of the policy to prove that the policy complies with the definition per above;
your HR/payroll department should diarise the maturity date of the policy and to introduce a strict routine to follow up on maturity date;
the employee should sign an undertaking, to inform HR/payroll department immediately upon cashing in the policy proceeds and to indemnify your company against any penalty as contemplated in section 11A of schedule 2, should he/she fail to inform your company immediately upon having cashed in the policy proceeds.
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.
News from RFS
RFS executive committee
Marthinuz Fabianus, deputy managing director and managing director designate, joined United Pension Administrators, then headed by Tilman Friedrich and Charlotte Drayer, fresh from school. He literally worked himself up through the ranks at UPA with lots of drive and a clear goal in sight. He left UPA at the end of 2000 to join RFS at the end of 2001 when RFS was in its infancy. He made no small contribution to growing the company to where it is today. Over the years he improved his academic qualifications and completed various courses and qualifications ending up with a Diploma in Commerce and a B Admin degree, both obtained from Polytechnic of Namibia. He obtained the Senior Management Development Programme diploma from the University of Stellenbosch. Marthinuz served as president of the Retirement Funds Institute of Namibia from 2005 to 2006. Besides his rock solid foundation built in our industry over the past 20 years, Marthinuz offers unique 'soft skills' that should stand him in good stead in leading the company into the future!
RFS reaches quarter finals at Volleyball for All
RFS recently took part in the Volleyball for All competition at DTS in Windhoek. The First Team made it to the quarter finals with the help of Coach Deon, despite being half as strong as expected due to injuries. We enjoyed the competition very much, and expect to do even better next year. Congratulations to all who took part and all who cheered us on!
News from the market
New Equitable Economic Empowerment Framework
The former ‘framework has now become a Bill. The Bill can be downloaded here…
Download the Namibia Employers Federation notes of a consultative meeting that took place with industry bodies here...
Old Mutual’s ‘cash4lovedones’ benefit
Old Mutual introduced the ‘cash4lovedones’ benefit to their client fund’s disability income benefit policy a few years ago at no additional cost to these funds.
This is a lump sum payable to the person nominated by the disabled member in the event of his/her death. This benefit would be paid directly to the nominee by Old Mutual. The consequence of the disabled member having failed to submit the relevant Old Mutual nomination form is that the nominee foregoes a ‘free’ benefit in the event of the death of the disabled member. Funds should investigate who of their disabled members is entitled to this benefit and should ensure that Old Mutual is in possession of a completed Old Mutual nomination form.
(for stakeholders of the retirement funds industry)
RFIN board – change of leadership announced
Melki Uupindi steps down as chairperson of RFIN. His position will be taken over by Gerson V Kamatuka deputised by Ms Bonita de Silva.
Download the full news release here…
Ombud finds in favour of Metropolitan in miscalculated RA case
In this case a person whose retirement annuity (RA) value was miscalculated by Metropolitan, submitted a complaint to SA Pension Funds Adjudicator (PFA). A year after being issued with a quote and accepting the retirement value on his policy, the pensioner was told that the company had made a mistake and that he had been given nearly three times what he was actually owed. Metropolitan, and its parent MMI Holdings, further argued that the miscalculation was a “bona fide mistake” and therefore its client could not keep money that was not due to him. The company stated that he should also have been aware that the amount he was offered could not be correct when compared to previous statements.
The PFA produced a 13-page ruling in which it noted that it believed the complainant should have been alerted to the possibility of an error in the amount he was offered. This is because it was over 100% more than the illustrative value of the policy 20 months before.
The PFA also found that the pensioner had not shown that Metropolitan had acted negligently or unlawfully in making the miscalculation. Neither had he proven that he would suffer any financial loss due to the error.
On this basis it ruled that “the complainant is not entitled to the overpayment”.
Read the full report by Partick Cairns in Moneyweb of 1 February 2016 here…
(for investors and business)
Bad mistakes that make good employees leave
“It’s tough to hold on to good employees, but it shouldn’t be. Most of the mistakes that companies make are easily avoided. When you do make mistakes, your best employees are the first to go, because they have the most options. The following practices are the worst offenders, and they must be abolished if you’re going to hang on to good employees.”
They make a lot of stupid rules - Companies need to have rules—that’s a given—but they don’t have to be short-sighted and lazy attempts at creating order.
They treat everyone equally - Treating everyone equally shows your top performers that no matter how high they perform they will be treated the same.
They tolerate poor performance - When you permit weak links to exist without consequence, they drag everyone else down, especially your top performers.
They don’t recognise accomplishments - Rewarding individual accomplishments shows that you’re paying attention.
They don’t care about people - Smart companies make certain that their managers know how to balance being professional with being human.
They don’t show people the big picture - Star performers shoulder heavier loads because they genuinely care about their work, so their work must have a purpose.
They don’t let people pursue their passion - Talented employees are passionate. Providing opportunities for them to pursue their passions improves their productivity and job satisfaction.
They don’t make things fun - People don’t give their all if they aren’t having fun, and fun is a major protector against brownout.
Read the article by Dr Travis Bradberry in Linkedin of 27 January 2016, here...
Four ways to lose money when investing
“When making investments, there are four key risks – irrespective of an investor’s age – to understand and be aware of which if managed correctly should help you to avoid permanent loss of capital..”
Integrity risk: the risk of choosing the wrong partner;
Inflation risk: the risk of your money losing purchasing power;
Credit risk of the partner: the risk that the interest and/ or the capital will not be returned by the partner;
Valuation risk: the risk that the price you pay does not reflect the underlying value of the asset.
Read the article by John Kennedy in Cover of 2 February 2016, here...
Are investors missing the good news?
“One must be careful of letting short-term noise distract from long-term fundamentals. This is a point made by the chief investment officer at PSG Asset Management, Greg Hopkins. “At the moment we think the market is thinking too short-term and reacting to negative news flow,” Hopkins says. “But as asset prices fall, things become less risky, not more risky.” He argues that there is actually better news for investors than there was 12 months ago. If one takes a holistic view of asset prices, there is actually more to take comfort in now.”
Read the article by Patrick Cairns Kennedy in Moneyweb of 4 February 2016, here...
Something to think about...
The United States is one of South Africa’s biggest export partners. Given this, today’s chart looks at how the Rand depreciation might not be as permanently damaging as everyone expects. The positives lie in the fact that exports will play a larger role in boosting the country’s economy - as the rand gets weaker. Imports will also decline in this environment. This is shown clearly in the chart below. If this theory continues to play out, in time exports will outweigh imports - resulting in an improvement in the current account balance. This is one of the key reasons behind why currencies are mean reverting in the long-run.
Author Mbuso Thabete, Efficient Select. Source Factsheet
When insults had class - something to smile about
“Sir, you will either die on the gallows or of some unspeakable disease.”
~ A British parliamentarian to Disraeli
“That depends, Sir, whether I embrace your policies or your mistress.”
~ Disraeli’s response to the parliamentarian