Dear reader

In this newsletter we continue our support to trustees with a generic conflict of interest policy statement which should be further adapted to meet the needs of a particular fund. Find it below.

In this newsletter we provide a template for a ‘conflict of interest policy statement’, we dwell on crisis responses in the pensions industry to Inland Revenue’s changed tax practice with regard to pension fund death benefits that may yet haunt funds that go that route, we draw attention to the urgent need to update the Income Tax Act to reflect changes in the market environment since the 1980’s, we urge NAMFISA to establish a practical framework for correcting regulation 28 breaches and we draw attention to more regulatory reporting looming.

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!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 02.2016

In February the average prudential balanced portfolio returned 0.50% (Jan: -2.08%). Top performer is Allan Gray (1.76%); while Prudential (-0.29%) takes the bottom spot. For the 3 month period Allan Gray, for the 7th consecutive month takes top spot, outperforming the ‘average’ by roughly 6.4%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.3%.

Beware of stepping on the wrong toes

In the years after the financial crisis, when the Fed introduced its large scale asset purchase programme and reduced its repo to 0.25%, when commodities and the oil price were running hot things were going extremely well with many resource driven emerging economies and with oil producing countries. Their interest rates were low, their currencies and bourses appreciated substantially driven by foreign investors looking for yield. Those were the days when many of these countries started to think about how to break the shackles of the global hegemon. There were moves to trade crude in currencies other than the US Dollar in an effort to break the US Dollar monopoly. We read about the BRICS countries having resolved to establish a BRICS Bank in order to break the shackles of the IMF and World Bank.

A number of oil exporting countries that became more outspoken on their anti US sentiments experienced civil uprisings, some experienced regime changes and with the dramatic fall of the oil price, those regimes that survived are at last also experiencing severe economic problems.

Read part 6 of the Benchtest 02.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a generic conflict-of-interest policy

The purpose of a conflict-of-interest policy is to protect an organization’s interest when it is contemplating entering into a transaction of arrangement that might benefit the private interest of one of its officers or directors, or might result in a possible excess benefit transaction.

Establishing a strong conflict-of-interest policy is particularly important for nonprofits. Conflicts of interest have the potential to jeopardize a nonprofit’s tax-exempt status and damage its reputation with donors. Because of the crucial role many nonprofits play in protecting the public interest, any erosion in public confidence is particularly harmful to these organizations.

The generic conflict-of-interest policy can be further adapted with the assistance of RFS

• Download the generic conflict-of-interest policy here...

AND

• Download the generic trustee performance appraisal form here…
• Download the generic investment policy here...
• Download the generic trustee code of conduct here...

Death benefits – does it make sense to remove it from the fund’s rules?

How to circumvent the current stalemate with regard to pension fund death benefits

To circumvent the stalemate currently experienced with regard to the disposition of death benefits, that has been caused by Inland Revenue’s extremely narrow interpretation of paragraph (a) of the definition of ‘pension fund’, some funds have now removed the reassured death benefit from their rules while others are channelling their death benefits through a ‘benefit fund’. Following either route applies the same rationale as tax evasion does, i.e. following a route that is solely aimed at achieving the circumvention of legal constraints rather than achieving the underlying intention within the framework of the law. We would certainly never advise clients to revert to such measures in order to overcome existing frustrations with the Income Tax Act.

The benefit fund

Firstly, a ‘benefit fund’ is a concept that exists in the Income Tax Act but not in the Pension Funds Act. In terms of the Income Tax Act it enjoys preferential tax treatment similar to that of a pension fund. However, its definition in the Income Tax Act is very similar to the definition of ‘pension fund organisation’ in the Pension Funds Act. We are consequently of the opinion that a ‘benefit fund’ as contemplated in the Income Tax Act is in fact a pension fund organisation as contemplated in the Pension Funds Act. It must therefore register as a pension fund under the Pension Funds Act and is then also subject to the Act. This means that the principles of section 37 C have to be observed in distributing a death benefit. From an income tax perspective, any benefit paid by the benefit fund is not taxed as a pension or provident fund benefit, but would be subject to the general principles of the Income Tax Act as the Act does not contain any specific sections dealing with such benefits. This means that the employer can deduct the premiums but the benefit is taxable in the hands of the beneficiary.

The employer owned group life policy

Secondly, where funds have removed the death benefit from the rules to replace it with an employer owned group life policy that would pay directly to nominated beneficiaries, the income tax implication will be the same as for a death benefit derived from a ‘benefit fund’. The premium is deductible by the employer but the benefit is taxable in the hands of the beneficiary. The problem is that the fund is still sitting with the member’s fund credit that is subject to the stalemate referred to above. So the fund really has only achieved its goal to circumvent this stalemate with regard to the reinsured benefit but not with regard to the fund credit. Furthermore the benefit is not subject to the protection of the Pension Funds Act and could be lost should the employer be insolvent or be liquidated, or should the beneficiary or his estate be insolvent. The disposition of the benefit is not subject to the Pension Funds Act either which may make it easier to dispose of but this may not necessarily be in the interests of the deceased member.

Conclusion

Using a benefit fund will circumvent the current difficulties experienced with the payment of death benefits from a pension fund. At the same time it would however render the benefit fully taxable unlike the case of a pension fund where only the annuity is taxable but the commutation of up to 66% of the capital is tax free. Arranging an employer owned group life policy renders the full benefit taxable and removes the protection of death capital offered by the Pension Funds Act. The more appropriate route to follow to achieve the objective of avoiding the pension fund death benefit stalemate is to convert the fund to a provident fund. This in turn would render two-thirds of the death benefit taxable which is still better than what would apply to an employer owned policy benefit or a benefit fund benefit.

The way forward

Having said this, the current stalemate situation with regard to death benefits payable to minor beneficiaries of a pension fund is very unsatisfactory and the industry has to find a solution until such time as the Income Tax Act has been amended. RFS is working on a solution and should soon be able to offer a solution that meets the intention of the Income Tax Act rather than only trying to circumvent the Act. This would require an amendment of the rules of the fund to direct that no less than 34% of the capital available upon death of a member is to be paid in the form of an annuity.

The Income Tax Act must be amended

When the Income Tax Act was proclaimed in 1981, the pensions industry did not cater for defined contribution pension funds that only evolved about 10 years later. With defined benefit pension funds of which there are only 2 left in Namibia, life from an income tax point of view was simple. Retirement benefits, disablement and death benefits were defined in terms of a salary linked annuity. A portion of the annuity could be commuted for a cash lump sum. As per today’s definitions in the Income Tax Act, this portion was not to be more than one-third in the case of retirement or 66% in case of death. The actuary would have converted the commutable portion of the annuity to an equivalent lump sum to determine how much was to be paid out in cash. There was no direct relationship between the actual capital contributed in respect of the member and the benefit payable, unlike in defined contribution funds.

The old defined benefit funds were based on the principle of cross subsidisation. So while two members under exactly the same circumstances would have contributed the same capital, the actual cost of providing benefits could vary vastly between these members based on age, marital status and dependants’ status. Despite the fact that the capital applied towards lump-sums and towards annuities may have differed vastly, it was invisible to Inland Revenue, which was then happy to exempt all lump sum benefits paid by such defined benefit funds.

In defined contribution funds, all contributions made in respect of a member are now ring fenced and are only available to this member and his dependants. Death benefits are sometimes funded by the member’s accumulated capital, sometimes an insured lump sum is added to the accumulated capital and sometimes the fund offers survivors’ pensions that, that are usual reinsured with an insurer. In these type of funds it now becomes visible that the capital applied towards different benefits may actually be different between two members in respect of whom the same amount of contributions were contributed.

Now Inland Revenue taxes a beneficiary of a fund who receives the greater portion of a death benefit in the form of a lump sum and exempts the other beneficiary of the same fund who receives the greater portion in the form of an annuity, despite the fact that between the two the greater portion of the capital may still be paid in the form of an annuity. We do not believe this is correct or fair towards the different types of fund or the beneficiaries of different deceased members. Inland Revenue must catch up to these changes in the market place and amend the Income Tax Act to deal with the defined contribution environment appropriately and fairly. In as much as Inland Revenue in the past relied on the actuary to set up the defined benefit pension fund rules to meet the requirement of paying benefits mainly in the form of annuities, it should recognise that funds nowadays offer different benefits to different member categories and that funds often offer a combination of salary linked annuity benefits and capital linked lump sum benefits. It should accept a certificate by an actuary confirming the portion of the capital a fund applies overall toward beneficiary annuities in the event of death.

But it goes further than just amending the Act in respect of death benefits. Government wants to encourage employees to provide for their old age so that they will not depend on government when they reach retirement. However the current tax deductible contribution to an approved fund is limited to N$ 40,000. At a typical member contribution rate of 7%, it means that as from a salary of N$ 571,000 an employee does not benefit from this concession any longer. However when a benefit becomes payable by the fund, the Income Tax Act ignores the fact that the employee may have made significant  contributions that he was not able to deduct for tax purposes and taxes the benefit as if all contributions were deducted all along.

Benefit preservation upon resignation from an employer is another sore point that requires attention although not necessarily through an Income Tax Act amendment. Members of funds are currently allowed to cash in their total capital upon resignation from employment. This represents a significant leakage to the pensions system and results in such delinquents not being able to survive on their remaining capital upon reaching retirement. It is interesting to note that SA will now introduce limits and conditions for withdrawing capital upon termination of employment.

And of course the concept of a provident fund runs diametrically opposite to government’s intention to have citizens retire on adequate retirement capital. Again SA will be doing away with provident funds and Namibia needs to seriously reconsider whether we will achieve vision 2030 without extensive updating of the Income Tax Act.

The way forward

As we suggested in last month’s newsletter there is a need for a forum to be established between the pensions industry and Inland Revenue that will advise the Minister on proposed or required changes to the Income Tax Act with regard to approved funds, including benefit funds and the benefits offered by these funds.

We have approached the Retirement Funds Institute officially with this suggestion and have suggested to expand this idea to the Pension Funds Act and of the FIM Act. Pension funds are advised to also prompt the Institute to pursue this thought with vigour.

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

Regulation 28 - breaches must be managed in the interests of fund members

As the result of the sudden severe depreciation of the Rand in December of last year (8% against the US Dollar and 10% against the Euro), a number of asset managers with more assertive offshore exposure, suddenly found that their client portfolios were in breach of regulation 28 which caps offshore exposure to 35%. Clients will be aware that their fund had to submit the SIH report as at 31 December 2015.

Such breaches can also be caused by significant portfolio flows, both into and out of an asset manager’s or a fund’s investment portfolios.

As regulation 28 now stands and seems to be applied by NAMFISA, such breach would immediately be subject to a penalty of N$ 1,000 per day. To avoid incurring a penalty being imposed on their client funds, the asset manager should thus immediately, reduce the offshore exposure, i.e. the same day. Selling and repatriating foreign assets cannot be done within a day or two. It would incur costs that might still prove futile should market movement be in the opposite direction soon thereafter. Funds would be out of the market for a few days, incurring lost investment opportunity for the pension fund and its members and it is always a cumbersome process to move asset offshore again afterwards.

There is clearly a need for NAMFISA to formulate a meaningful framework on how regulation 28 breaches as the result of market movements and significant portfolio flows are to be managed in the interests of the members of pension funds in accordance with its declared intent to protect the interests of the fund member.

The asset management industry has already formally approached NAMFISA in this regard and it is to be hoped that the matter will receive due attention.

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


Charlotte Drayer officially retired from our board of directors and as an employee at the end of June 2014. However a person with her knowledge, her skills, her drive and her passion for the pensions industry flourishes best in the work environment. Not seeing herself sitting at home all day, she signed up a new contract of employment and continues to share her knowledge with staff in general and her successors and continues on our executive committee for the benefit of our staff, the company, our clients and indeed the pensions industry at large. Having introduced pension fund administration to Namibia in 1987, she built up a name even beyond the borders of Namibia and is without any doubt the most experienced and one of best qualified fund administration experts in Namibia.

News from NAMFISA

Industry meeting held on 14 March 2016

The following topics were addressed during this industry meeting:

• Complaints lodged - mostly on benefit payments;
• Status of FIM Bill, standards and regulations – out of NAMFISA’s hand, time schedule uncertain;
• Feedback on statutory submissions – certain information reflected incorrectly and a number of other questions addressed e.g. exemptions based on good reason;
• Future quarterly ERS reporting – funds to be requested to do testing;
• Registered SPV’s and UIM’s, status of number registered, 2 in the pipeline;
• Implementation of ERS based forms;
• NAMFISA engagement plan to be communicated soon – no feedback received from industry;
• Regulation 28 and 29 – Ministry of Finance considering proposed changes;
• Fund inspections – on-site inspections scheduled for 2nd half of year;
• Late and non-payment of contributions – delinquent employers may be publicly named and shamed by NAMFISA and will be referred to prosecutor general;
• Risk based supervision – being attended to.

Download our internal notes from the meeting here…

New quarterly reporting requirements looming

NAMFISA recently approached a number of pension funds with the request to assist in testing the new ERS based quarterly report that is to replace the SIH report and that will require much more extensive reporting. NAMFISA indicated that testing should be finalised within 30 to 45 days. The intention is that the report will be released on 1 July for full implementation.

With the annual and quarterly SIH report for end of December 2015 due by end of January 2016, our experience has been that our fund accounting team had to fully focus on the submission of these reports during January at the cost of focus on our service commitments to our clients.

We believe it is inevitable that additional capacity will have to be created by fund administrators to cater for the new quarterly reporting. This will undoubtedly also impact administration fees.

New regulatory requirements for the asset management industry

In accordance with NAMFISA’s stated intention to move from compliance to risk based supervision, Oshili Nashi Popiwe reports that asset managers will have to comply with numerous new requirements such as:

• Fit and proper requirements for shareholders, directors, managers, portfolio managers and compliance officer;
• Manager approval requirements;
• Compliance officer requirements;
• Duties of managers;
• Requirements for record keeping;
• Requirements for appointment and duties of auditors;
• Requirements for appointment and duties of portfolio managers;
• Client reporting requirements;
• Requirements for professional indemnity and fidelity insurance cover;
• Minimum start-up capital required is N$ 250,000;
• Sufficient liquidity to cover 13 weeks of annual budgeted expenditure;

It will be interesting to see whether and if so, how asset managers will respond to the increasing cost pressures these requirements will bring about without any doubt.

Read the full article here…

News from the market

Social Security Commission improves MSD benefits

Benefits under the maternity leave, sick leave and death benefits fund are improved as follows as from 1 January 2016:

• Sick leave benefit: first 12 months - 75%, maximum increases to N$ 9,750 from N$ 9,000; next 12 months 65%, unchanged,  maximum benefit increases to N$ 8,450 from N$ 6,275;
• Maternity benefit: 100% of basic wage, maximum benefit increases to N$ 13,000 p.m. from N$ 10,500 p.m., now for maximum period of 12 months;
• Death/retirement benefit increases to N$8,475 from N$ 5,510.

Old Mutual PLC announces break up of group into four separate businesses

Old Mutual PLC has announced, following a strategic review of the Group that it intends to implement over time a managed separation of the Group into four separate businesses, including a standalone Old Mutual Emerging Markets entity. Read more here...

Financial giants accused along with FSB

Financial giants Liberty, Alexander Forbes and others are accused of colluding with the Financial Services Board (FSB) to close thousands of pension funds illegally, to the detriment of savers and their families, many of them working class and poor. Read more here...

Namibia’s trade deficit reaches a record N$ 39bn

Media recently lamented last year’s record trade deficit. We are all aware that government spent massively on construction and infrastructure, including costly projects like the Neckartal dam, the expansion of the port of Walvis Bay etc.

Could our trade deficit be explained by the fact that just about every one of these projects was awarded to foreign contractors? To what extent do the new government tender regulations duly weight such negative consequences in scoring competitive bids?

Fund members take fund on for reckless investments

Momentum's Red Eye Weekly reporths that a group of government pensioners has taken the SA Public Investment Corporation (PIC) and the SA Government Employees Pension Fund to the public protector for the "reckless" handling of their money. They have listed investment in two companies — Lonmin and African Bank — as examples of bad and reckless investments, arguing that it was apparent at the time of the transactions that the companies were facing bankruptcy. The PIC manages more than R1.5-trillion in assets on behalf of the Government Employees Pension Fund. This is the second high profile complaint so far this year concerning the use of government employees’ funds.

Media snippets
(for stakeholders of the retirement funds industry)
 
Pension fund trustees: personal liability kicks in

The principal officer and trustees of the SA Local Authorities Pension Fund have been thrashed by a decision of the FSB Appeal Board. Not only has the appeal been struck from the roll, and dismissed with costs on the punitive attorney/client scale, but it was ordered that these costs be paid jointly and severally by the fund, its principal officer and the trustees who’d authorised the appeal. Moreover, the fund must fully recover these costs from the principal officer and relevant trustees in their personal capacities.

Let this sound a warning to any fund embarking on litigation that’s “vexatious”, as found here by the Appeal Board sitting under retired judge L T C Harms with J Damons and L Makhubela.

“Persons who are in a fiduciary position and litigate in their own interests, in the name of say an estate agent or trust, ought to be held personally liable for the cost of the litigation,” Harms stated. “The (SALA fund’s) board members and the principal officer stand in such relationship to the fund.”

Read the full report by Allan Greenblo in Insurance Gateway of 2 February 2016 here…

Media snippets
(for investors and business)

Critical skills you should learn that pay dividends

“The further along you are in your career, the easier it is to fall back on the mistaken assumption that you’ve made it and have all the skills you need to succeed. The tendency is to focus all your energy on getting the job done, assuming that the rest will take care of itself. Big mistake.”

Here are these skills: -

• Emotional intelligence – It is your ability to recognize and understand emotions in yourself and others and your ability to use this awareness to manage your behaviour and relationships.
• Time management - This refers to the tendency of little things that have to be done right now, to get in the way of what really matters.
• Listening - True listening means focusing solely on what the other person is saying. It’s about understanding, not rebuttal or input.
• Saying no - Saying no to a new commitment honours your existing commitments and gives you the opportunity to successfully fulfil them. When you learn to say no, you free yourself from unnecessary constraints.
• Asking for help - The ability to recognize when you need help, summon up the courage to ask for it, and follow through on that help is an extremely valuable skill.
• Getting high quality sleep - When you don’t get high-quality deep sleep, the toxic proteins remain in your brain cells, wreaking havoc and ultimately impairing your ability to think.
• Knowing when to shut-up - In conflict, unchecked emotion makes you dig your heels in and fight the kind of battle that can leave you and the relationship severely damaged.
• Taking initiative - You have to take risks and push yourself out of your comfort zone, until taking initiative is second nature.
• Staying positive - Maintaining positivity is a daily challenge that requires focus and attention. You must be intentional about staying positive if you're going to overcome the brain's tendency to focus on threats.

Read the article by Dr Travis Bradberry in Linkedin of 2 March 2016, here...

What every start-up CEO should know to not go down

“Much has been made of the recent resignation of Zenefits’ CEO, Parker Conrad – not because the CEO of one of the hottest startups in Silicon Valley was stepping down, but because of compliance. Or more accurately, lack thereof…Companies that have a comprehensive compliance management system (CMS) in place are better equipped to monitor marketing messages across a wide range of customer channels -- everything from digital and TV to print and contact centers. Effective monitoring plans include audit capabilities, a standard operating procedure for remediation of violations, and technology that identifies possible infringements before they become problematic. As we saw with Citigroup Inc's 2015 judgment (the consumer bank was ordered to pay $700 million in relief to borrowers for illegal credit card practices), for even well-established companies the costs can be colossal - for a start-up they can be catastrophic..”

Compliance management is extremely important to financial institutions such as pension funds in Namibia generally and to their financial services providers more specifically where statutory and regulatory requirements are increasing by the day. Engaging a service provider without obtaining comfort on the service provider’s compliance processes is tantamount to reckless management and dereliction of duty by a board of trustee.

Read the article by Alex Baydin in LinkedIn of 29 February 2016, here...

5 ways to make your clients love you

“A positive relationship with a client is beneficial for many reasons, says Hellriegel. From an agency perspective, if a client is happy they are more likely to retain your services. In the event of budget restraints, the client may be more likely to look at readjusting the contract rather than simply cutting the budget entirely. In addition, making your clients happy opens up new business opportunities for the company as the client is more likely to recommend the agency to other businesses.”

1. Build trust: Show your client that you are invested in their success
2. Communication: Keep clients updated
3. Respect: Meeting deadlines
4. Dedication: Going beyond the call of duty
5. Personalisation: Treating clients to lunch once in a while

Read more here...

And finally...

Smart-ass answers to smile about

It was mealtime during a flight on a British Airways plane:
"Would you like dinner?" the flight attendant asked the man seated in the front row.
"What are my choices?" the man asked.
"Yes or no," she replied.