RFS office hours for first week of May
RFS staff voted unanimously to work on Tuesday 3 and Wednesday 4 May and to have the office closed in exchange on Thursday 5 and Friday 6 May. Clients are requested to take note of this arrangement and to make early arrangements with their administrator or client manager where necessary.
Quarterly SIH report now only due 15 May 2016
All funds need to note that the quarterly SIH report is due to be submitted to NAMFISA in the prescribed Excel format. The due date has been extended to 15 May.
Housing loan interest rate increases and payroll runs
With the increase of the repo rate from 6.75% to 7% by Bank of Namibia on 13 April, the housing loan interest rate in respect of loans granted to members by a fund will increase to 11% as from 1 May 2016. This means that the repayments of members who were granted loans will increase and payrolls will have to take this into account with the May payroll runs.
In this newsletter we continue our support to trustees with a generic risk management policy which should be further adapted to meet the needs of a particular fund. Find it below.
We also draw attention to the risk transfers of retirement capital from a pension fund to a member owned annuity presents to the retiree, we examine another death benefit prickly pear, namely lump sums payable in the event of a pensioner, we also examine the role of a principal officer and how to avoid conflicts with other service providers and we remind you of a 2011 Income Tax Act amendment that no longer allows proceeds from employer owned insurance policies to be paid to an employee's beneficiary tax free.
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 03.2016
In March the average prudential balanced portfolio returned 2.76% (Feb: 0.50%). Top performer is Namibia Asset Management (4.96%); while Allan Gray (0.78%) takes the bottom spot. For the 3 month period Allan Gray, for the 8th consecutive month takes top spot, outperforming the 'average' by roughly 1.3%. On the other end of the scale EMH Prescient underperformed the 'average' by 1.8%.
Read part 6 of the Benchtest 03.2016 newsletter to find out what our investment views are. Download it here...
Pension fund governance - a generic risk management policy
In this newsletter we present a generic risk management policy to assist trustees to avoid being sucked into NAMFISA's enforcement process because of a perceived lack of governance. The aim of this policy document is to embed risk management at a fund into the business of the board of trustees of overseeing the operations of the fund. The policy document should form the basis to implement an effective risk management process.
Risk can be defined as: "The threat that an event or action will adversely affect the Fund's ability to achieve its objectives, perform its duties or meet the expectations of its stakeholders". As most Namibian funds outsource their operating activities to their service providers, the approach of boards of trustees towards risk is different from what operating entities would follow. In the case of retirement funds the trustees will have to rely to a large extent on the fund's service providers to maintain sound standards of governance and to convey comfort to the trustess that such standards are indeed in place.
In this regard one approach is to request service providers to execute and submit an annual self-assessment.
The following documents can be further adapted with the assistance of RFS.
Download the generic risk management policy here...
Download the generic service provider self-assessment here...
Download the generic conflict-of-interest policy here...
Download the generic trustee performance appraisal form here…
Download the generic investment policy here...
Download the generic trustee code of conduct here...
In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:
Fund does not have a communication policy;
Fund rules do not set out how unclaimed benefits will be disposed of;
Fund rules do not provide for a term of office of the trustees; and
Service provider agreements are not in place.
The risk of a member-owned annuity
In previous newsletters we have reflected on this topic. We believe that the answer to the question whether pension fund capital at retirement can be used to purchase a member owned annuity for a retiring member from an insurer, as opposed to purchasing a fund owned annuity for the benefit of the member from another approved fund, lies squarely in the domain of NAMFISA. NAMFISA has recently informed us that the issue has proved rather complex. It has consulted on several occasions internally, with the insurance regulators, with the tax authorities and with insurance providers. It was pointed out that blurred lines exist between insurance providers and pension funds internationally, also with regulators from around the world.
After all these consultations NAMFISA still finds very diverging views amongst affected parties. Due to the implications that this will have on two industries, it does not want to rush the process but rather to ensure that is has interrogated all eventualities before arriving at its position. As such, NAMFISA is looking into engaging external legal counsel to advise on this matter.
In the light of the fact that the matter is not resolved yet, we caution pension fund members and insurance company intermediaries on the risk that the purchase of a member owned annuity from pension fund capital at retirement may pose to the retiree. Should NAMFISA conclude that such transactions are not consistent with the Pension Funds Act, all persons who have entered into such a transaction are facing the prospect of being presented a tax bill for tax that was to have been paid at the time of retirement. Should this realise, the member is furthermore facing penalties and late payment interest.
Lump sum benefits upon death of a pensioner - another prickly pear
The principle of defined contribution retirement funds is that members build up their individual retirement capital from their own contributions and from a portion of the employer's contributions, together with investment returns. In contrast with defined benefit funds where the pension benefit is pre-defined and the employer carries the risk of under contributions and poor investment returns, a member of a defined contribution fund carries these two risks and is dependent on the capital that has built up to retirement to provide income in retirement. The member is the owner of the capital and many defined contribution funds reinforce this ownership principle by offering a refund of the balance of a pensioner's retirement capital in the event of the pensioner's early death following retirement.
Two questions arise. Firstly, does the Income Tax Act make provision for this type of benefit? Secondly, what does this benefit represent and how should this type of benefit consequently be taxed?
Turning to the first question, the Income Tax Act, in the definition of preservation fund states categorically that "...if a person dies after he or she has become entitled to an annuity, no further benefit other than an annuity or annuities shall be payable to such person's spouse, children, dependants or nominees..." This does make sense as a retiree had the option of having one third of the retirement benefit paid out in cash tax-free, as a once-off concession.
Although the definition of 'pension fund' in the Income Tax Act does not contain the same provision, this is probably not the intention of the legislator. This intention is also reinforced in Practice Note 1 of 1986 that deals with flexible annuities. In this practice note it is categorically stated that no further commutation of capital may be made upon the death of the pensioner. Any remaining capital must be paid out as an annuity over a minimum term of 5 years.
Turning to the second question, it appears logical that even if the Income Tax Act does not prohibit a further commutation of any amount upon death of the pensioner for a lump sum payment, such lump sum in effect represents an accelerated payment of what would have been paid in the form of annuities had the pensioner not passed away. Such lump sum payment would thus be fully taxable. Presumably Inland Revenue would not object to receiving its tax dues immediately and calculated on a higher taxable amount as opposed to receiving its tax dues on smaller monthly annuities over a period of time.
The principal officer - a need for demarcating boundaries
The position of principal officer is a statutory designation. It is the equivalent of the public officer companies were required to have in terms of the old Companies Act. The principal officer is essentially the physical embodiment of the intangible legal person, the pension fund. As such the principal officer has a limited number of statutory duties:
Signing of certain documents, together with a trustee/ chairperson of the board of trustees, furnished to or required by the Registrar;
Furnishing of additional particulars required by the Registrar in relation to a rule amendment;
Submission of rule amendments and consolidated rules to the Registrar;
Sign the prescribed certification of the valuator's report together with the trustees and that the report was sent to every employer participating in the fund;
Submit to the Registrar under cover of a letter signed by him, the annual financial return of the fund;
Sign any appeal to the Minister against a decision by the Registrar and lodge with the Registrar;
Be the correspondent of the Registrar with regard to matters relating to the fund;
Execute any function assigned to him in terms of the rules of the fund;
NAMFISA requires the principal officer to sign off the SIH and ERS returns funds are required to submit on a quarterly basis.
In terms of the definitions to the regulations of the Pension Funds Act, "principal officer means the principal executive officer referred to in section eight of the Act who may be a member of the body administering the fund." There is a separate definition of 'person managing the business of the fund', in the Namibian context this is typically the board of trustees and not the principal officer.
And that's it as far as the duties and responsibilities of the principal officer go. Unless the engagement of a person to serve as principal officer requires the person to provide other specialist services, a principal officer does not need to be a specialist.
From our experience, employers are increasingly moving the administrative burden of their pension fund to the fund itself as the result of increasing regulatory demands on funds. It is thus the administration of the pension fund business not attended to by the fund administrator and other service providers for which funds nowadays require additional resources. This covers liaison between the employer, the fund and service providers on administrative matters. The technical matters requiring expertise that funds would normally require are generally covered by the mandate of one or the other fund service provider.
Where a fund employs an independent principal officer, it must ascertain that there is neither a gap nor an overlap between the mandate of the principal officer and that of the consultant and this is not an easy task as both functions are not well defined in our industry and differ from one service provider to the next.
Trustees are often not clear about their expectations and the roles of the principal officer and the other service providers. These funds end up either with another cost layer and confused roles of their service providers, or with a principal officer that assumes the function of the consultant.
The approach should thus be for funds to clearly demarcate up front the boundaries between the role of the principal officer the consultant and the administrator to avoid gaps and overlaps that draw the trustees into arguments and mediation between different service providers and make it difficult to place responsibility.
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 a financial planner
“E, jy's 'n absolute ster, dis hoekom ek so mal is oor RFS, professioneel en effektiewe diens, verskriklik dankie!”
Read more comments from our clients, here...
Kai Friedrich's Administration Forum
Employer funded insurance policies - is your house in order?
A number of retirement arrangements have been set up in the past capitalizing on a 'loop hole' in the Act. This allowed employers to deduct premiums paid in respect of life policies taken out on the lives of employees (e.g. funeral policies, key man policies, group life schemes outside an approved fund etc.). The 'loop hole' allowed the policy proceeds due in the event of death of any employee to be paid to the employee's dependents or nominees tax free. Income Tax Amendment Act 15 of 2011 effectively closed this loop hole.
Policy proceeds upon the death of an employee are now taxable in the hands of the employer, if the employer claimed any premiums in respect of the relevant policy for tax purposes, in the past. An employer who maintains such a life assurance scheme needs to introduce a new employment policy to define its intention regarding the impact of tax on the gross proceeds. i.e. will the employer carry the cost or will the cost be passed on to the beneficiary/ies? If the tax is to be recovered from the gross proceeds before affecting payment to any beneficiary/ies, procedures and controls need to be introduced to ensure that the gross proceeds are reduced by the tax effect before paying a benefit.
If the employer recovers the premium from the employee, the employee and his/her beneficiary/ies will not be taxed on the policy proceeds, the flip side of course is that the employee will not have been able to claim the premiums as an expense against his/her taxable income.
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
A donation of life
In April, members of the RFS team donated 25 units of blood, wich are expected to save 75 lives.
RFS executive committee
Günter Pfeifer, Director: Operations, is responsible for the operations of the Benchmark Retirement Fund and the Retirement Fund for Local Authorities and Utility Companies, our largest client. He joined us from De Beers Marine where he held the position of financial manager. Günter distinguished himself with a cum laude in his final year of Bachelor of Commerce (Accountancy) studies, after which he qualified as a chartered accountant. He completed his articles with Deloittes where he was seconded to the Stuttgart office in Germany for 1 year. He left the audit profession in August 1999 having attained the level of audit manager, to join Fedsure as portfolio manager. He left Fedsure's successor Channel Life in the position of financial manager early 2003 to join De Beers Marine. Through Beers Marine he completed the De Beers Program for Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. Günter offers a wealth of experience and expertise and is spending much of his time improving the functionality and product range of the Benchmark Retirement Fund for the benefit of all its stakeholders.
News from NAMFISA
Quarterly SIH reports to be submitted within 45 days
In a notice to stakeholders NAMFISA advised that the period for submission of SIH reports, of 30 days after the end of each calendar quarter, has now been extended to 45 days after the end of each calendar quarter. This concession has been granted for the ensuing year and this will be reviewed after the end of the year, i.e. after the quarter ended 31 March 2017.
News from the market
BON repo rate increases once again
Bank of Namibia once again raised its repo rate from 6.75% to 7% with effect from 13 April.
Allan Gray appoints Nhlanhla Nene to its board
Allan Gray has appointed former finance minister Nhlanhla Nene as a non-executive director of the firm.
The company said in a statement on Monday that its shareholders approved his appointment to the boards of the holding and operating company.
Read more here...
(for stakeholders of the retirement funds industry)
Beneficiary fraud, a headache for trustees
The disposition of death benefits from a retirement fund is the statutory responsibility of the trustees and cannot be delegated. Where most of our trustees have a full-time occupation and trusteeship is just one of the additional honorary duties assigned to them, they find it hard to apply enough time and attention to death claims, yet this is one of the high risk areas in the management of retirement funds. As the article below sounds - beneficiary fraud is a headache for trustees and can produce losses to funds for which the trustees may be held liable at the end of the day.
"...Trustees of pension funds require a certain level of proof regarding beneficiaries, which helps to eliminate fraud. Beneficiaries are required to submit sworn statements confirming their dependency and relationship to the member. Where surviving spouses rely on civil marriages, the marriage certificate will be required. However, in marriages under customary law, claimants will not have certificates and will have to prove the relationship through other means. There are increasing levels of protection against fraud, she says. DNA tests, while not unheard of, are not common..."
Read the full article by Lorraine Kearney in IOL of 26 March 2016 here...
Compliance is no longer about just ticking the box
Trusteeship becomes ever more onerous without any doubt and whilst SA is a few steps ahead of Namibia with regard to the enforcement of new standards of governance, NAMFISA has signalled its resolve to follow suit. The article referred to below deals with the failure of a financial service provider in SA to meet his statutory obligations. The same principles do apply to other persons in a fiduciary capacity such as trustees, so trustees should heed the message conveyed in the below article.
"During November 2015, the Registrar imposed a fine of R150 000 against a FSP for failure to observe section 2 of the Code.
The FSP kept records of advice on some of its clients' files detailing the nature of advice that had been given to its clients. The proper interpretation of this leads one to think that a Needs Analysis had been conducted.
The Registrar's investigations revealed that the same advice had been given to different clients who had totally different circumstances. In fact, the clients on whose files records of advice were recorded had not even been consulted by the FSP, nor were proper needs analyses conducted..."
Read the full article in Insurance Gateway of 3 March 2016 here...
Do I really need dread disease and disability cover
In the Benchtest 11.2015 newsletter we drew attention to the additional peace of mind that is provided to members by funds offering dread disease. In the article in the link below a reader's questions on the need for dread disease and disability cover are answered by an expert. Here is an excerpt:
"Dread disease and disability cover are both lump sum benefits that I think you should have. I recommend dread disease cover for the simple reason that we are all at risk of contracting a severe illness. No one can with certainty assume that it will never happen to them. Dread disease cover is a more expensive benefit than disability cover. It pays out a lump sum on the diagnosis of a severe illness. If you have a proper medical aid, I would not recommend more than R360 000 of cover (1 times annual salary)."
Read the full article by Ingé Lamprecht in Moneyweb of 14 April 2016 here...
(for investors and business)
Why the Rand will continue to appreciate
US data does not give any indication of accelerated inflation and hence no pressure on raising interest rates;
EU stocks increased on confidence that a stronger US economy and better financial stability in EU and Asia would help global growth;
Stronger than anticipated collection of taxes by SARS;
SA trade deficit decreased sharply in February 2016;
SA exports rose sharply while imports only increased marginally;
For the year, SA trade deficit decreased by close to 40% over previous year.
Read the full article by Dr Chris Harmse, chief economist of Rebalance Fund Managers, in Moneyweb of 6 April 2016 here...
The four tiers of engagement: What Silicon Valley taught me about collaboration and time management
"Recently I was talking with the noted surgeon, writer, and public health researcher Atul Gawande about his demanding schedule - and how he tries to manage it for maximum impact...
Specifically, I think in terms of four tiers of potential engagement with a company or any project.
While these different roles help determine how I engage with start-ups, I use them generally too - for projects as well as formal companies.
As a principal you essentially say, "I own this, and it's my responsibility to bring this endeavour to fruition."
As a board member, you engage in a substantive but less immersive fashion than you do as a principal. You've committed to providing on-going strategic governance and assistance to the endeavour.
As an investor - whether you're dealing with a for-profit start-up, a philanthropic project, or any other endeavour, your role as an investor will likely have a literal component - i.e., you will be contributing money to the endeavour.
As a friend, you have a relationship or alliance with one of the endeavour's principals, but no formal or even on-going commitment to the project. You might even put money into a project - but you ultimately exist outside the project's orbit. Your engagement is serendipitous, reactive, and ad hoc."
Read the article by Reid Hoffman in Linkedin of 9 April 2016, here...
Smart-ass answers to smile about
The policeman got out of his car and the teenager he stopped for speeding rolled down his window.
"I've been waiting for you all day," the Cop said.
The kid replied, "Well I got here as fast as I could."