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In this newsletter:
Benchtest 10.2016, NAMFISA on transfer to insurance policy, tax on retirement from preservation fund, first month-end done on MIP and more...

Important announcements

Vacancy: Audit, Risk & Compliance Manager

We have a vacancy for a senior manager on our team. If you know of someone who may fit the bill, please take a look at the advertisement for the position, here...

New telephone number - 061 446 000

Our new switchboard number is 061 446 000. Please amend your phone list accordingly. Download the new extensions, here...

New MIP administration system goes live


Please read more about this topic under RFS company news below.


Newsletter

Dear reader

In this newsletter we report on NAMFISA’s latest position on the transfer from approved an fund to a member owned annuity, we report on a new twist with regard to the tax implications of retiring from a provident preservation fund, news on the implementation of MIP admin system, NAMFISA’s project to establish a common chart of accounts for all financial institutions and other news from NAMFISA and the market.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals.

In our commentary on global investment markets we look at the potential impact of the US President-Elect's policy statements, and the (un)likelihood of a revolution in the coming years.

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 10.2016


In October the average prudential balanced portfolio returned -1.95% (September: -1.59%). Top performer is Metropolitan (-1.35%); while Namibia Asset Management   (-2.80%) takes the bottom spot. For the 3 month period Allan Gray, takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.9%.

How will the new US president impact global financial markets?

The US elections during October were undoubtedly the most important news event of the last quarter of 2016. Hillary Clinton was credited with a handsome lead over Donald Trump until the day before the elections by the main stream media. Was this based on objective opinion polls or was it just a premeditated campaign against a candidate that is not part of the political establishment in the US? Hillary Clinton of course is firmly entrenched in the political establishment as wife of a former president and as former Secretary of State during President Obama’s first term of office. So these media have clearly betrayed their own bias for the political establishment and cannot lay any claim to independent reporting. I guess these media will quickly sweep this under the carpet and will want the public to quickly forget about their biased reporting.

The fact that president elect Trump is ostensibly not part of the political establishment has raised the hopes, and fears, of many that the US will experience nothing short of a political and economic revolution under his leadership, hopes of those who want to see a change from the past, fears of those who prefer to have the status quo maintained.

Uncertainty of course is not good for financial markets and causes volatility. Analysts are trying to forecast what the consequences might be of the policies they think the new president will adopt or he promoted during the course of the election campaign. If the new presidency proves to be a political and economic revolution, there will be winners and losers and you will not want to be betting on the wrong horse in terms of your investment decisions. So how should you respond to this situation?

Read part 6 of the Benchtest 10.2016 newsletter to find out what our investment views are. Download it here...


Transfer of retirement capital to a member- owned annuity policy

The good news is that NAMFISA has at long last responded to the question whether a retiree can apply his retirement capital to arrange a member owned annuity policy with an insurance company, after it took advice from an advocate. The bad news is that we are none the wiser from the response we received.

  1. The position of NAMFISA

    1.1. In its response NAMFISA makes the following two statements that we question:“I am of the considered view that Circular no 25/1/1/p should not be withdrawn.”


    The ‘circular’ referred to is an unofficial memo addressed to Mr Zamuee. It does not reflect the format in which circulars are normally issued by the Registrar and is not referenced in the typical fashion of the Registrar’s referencing of circulars. In our understanding it is therefore not a circular and has no relevance to any other person.

    1.2. “Accordingly, the status quo regarding the Authority’s interpretation of the words ‘including an annuity purchased or to be purchased by the said fund from an insurer for a member’ [our underscoring]…”.


    The words we have underscored are as ambiguous as the memo 25/1/1/p is, that has led to us questioning the intention of this ‘memo’. The underscored statement above, ‘for a member’ could mean the annuity when purchased from the insurer must be issued to the fund from where the capital derives or it must be issued to and in the name of the retiree.

    We are none the wiser and the matter remains as clear as mud! It would be good if the advocate’s opinion could be shared to dissolve the continuing ambiguity.

     
  2. The position of Inland Revenue

    2.1. From an Income Tax Act perspective, Inland Revenue laid down the following conditions for arranging a member owned annuity:

    2.2. The annuity purchased by the fund must be compulsory, non-commutable, payable for and based on the lifetime of the retiring member.

    2.3. The annuity may not be transferred, assigned, reduced, hypothecated or attached by creditors as contemplated by the provisions of section 37A and 37B of the Pension Funds Act No 24 of 1956.

    2.4. The member should not be able to have access or withdraw any portion of his/her two thirds of the pension fund benefit.

    2.5. No fund may purchase a member owned annuity unless its rules specifically provide for the purchase of a untied annuity in the name of the fund or in the name of the member from a registered insurer.

Conclusion

  1. We believe that our question to NAMFISA was clear. The fact that NAMFISA’s official response has not answered our question can only mean that NAMFISA has not taken a view on this matter knowing full well what the concerns are. In the light of this state of affairs, NAMFISA implicitly approves of the common practice of retirees arranging a member owned annuity policy with an insurer.
  2. As administrator of funds, RFS will assure that Inland Revenue condition 2.5 above is met. We are in no position though to assure that conditions 2.2 to 2.4 are met. This has to be assured by the insurer that issues the relevant policy.
  3. We advise brokers and retirees to ascertain that all 4 conditions set by Inland Revenue will be met before entering into a transaction involving the purchase of a member owned annuity from an insurer for the retiree.

Can you retire from a provident preservation fund?

Background

In the latest development, Inland Revenue has concluded that a person cannot retire from a provident fund! O.K. of course you can retire if you understand this to mean that you have your retirement capital paid out to you in cash. This the Receiver cannot prevent. However the Receiver can tax you as if it were a normal resignation benefit and this is the conclusion Inland Revenue now seems to have come to in its interpretation of section 16(1)(z)(aa) read together with the definition of ‘preservation fund’.

We have studied the Income Tax Act again and conclude that any benefit derived from a provident preservation fund must be taxed in the same manner as the equivalent benefit from a provident fund. The Income Tax Act does not distinguish between a benefit derived from these two types of fund. Note that in the below deliberation text in brackets [ ] reflects our comments.


Deliberation

Our conclusion is based on the following:

1. Definition of ‘gross income’ –

“gross income”, in relation to any year of assessment means … -

(dD) any amount received or accrued under the rules of a preservation fund [meaning both, a provident preservation fund and a pension preservation fund but excluding a pension fund and a provident fund] upon

(i) the withdrawal of a member’s benefit or any portion of a member’s benefit [meaning either a provident preservation fund or a pension preservation fund, but not a pension fund which is taxable per section (d), or a provident fund which is taxable per sub-section (dB)(ii)]; or
(ii) the retirement or death of a member of the provident preservation fund [meaning not a pension fund which is tax exempt per section (d)(i), (d)(ii) and (d)(iii), or a pension preservation fund which is tax exempt per section (d)(i), (d)(ii) and (d)(iii), or a provident fund which is taxable per sub-section (dB)(i)]; or
(iii) the cessation of the preservation fund [meaning either a provident preservation fund or a pension preservation fund, but not a pension fund, tax free, or a provident fund, taxable per sub-section taxable per section (dB)(ii)];”

The above definitions thus effectively render all benefits from a provident fund and a provident preservation fund taxable in the same manner.

It is to be noted that ‘benefit’ as referred to in the Income Tax Act in the context of approved funds, refers to a benefit as provided for in terms of the rules of an approved fund. To establish the type of benefit accruing to a member, one must refer to the rules of the fund. A retirement benefit per rules of a fund therefore cannot be converted to and taxed as a withdrawal benefit by the Income Tax Act. The Income Tax Act does not define any benefit from an approved fund and does not deem a retirement benefit in terms of a fund’s rules a withdrawal benefit under any circumstances.


2. Exemptions – section 16(1)((z)(aa)

“There shall be exempt from the tax …-

(z)(aa) an amount equal to one-third of any amount derived from a provident fund, except where such amount is so derived as a consequence of the termination of the taxpayer’s office or employment due to dismissal or resignation or upon the dissolution of such provident fund or a provident preservation fund due to the retirement or death of the member of such fund;”

This section in our opinion misses a comma for enabling the correct interpretation. As we will show below, Inland Revenue’s latest interpretation would imply a comma that would lead to a meaningless statement if one attempts to determine what the section states about a provident as opposed to a provident preservation fund. For this purpose we put in brackets the part that deals with “…dismissal, or resignation or upon dissolution…” where the definition of ‘gross income’ already renders these benefits taxable in the same manner whether it is from a provident fund or a provident preservation fund. Evidently there cannot be any argument that a benefit derived upon early termination of membership is taxable.

Inland Revenue’s latest interpretation reads the exclusion after the comma as a single statement and links the reference to “…due to the retirement or death..” only to “…provident preservation fund…”, as it is part of the exclusion. It would then read as follows:

“There shall be exempt from the tax …-

(z)(aa) an amount equal to one-third of any amount derived from a provident fund, {except where such amount is so derived as a consequence of the termination of the taxpayer’s office or employment due to dismissal or resignation or upon the dissolution of such provident fund or a provident preservation fund due to the retirement or death of the member of such fund};” The part “…due to retirement or death of the member of such fund” can then not refer to ‘provident fund’ but only to ‘provident preservation fund’. Clearly, if the exception covers the remainder of this subsection as struck out above as Inland Revenue’s interpretation would require, this interpretation cannot be correct as the statement with regard to provident fund would be incomplete and would not make sense.

Our interpretation requires the comma after the words ‘preservation fund’ where it appears last in this section and then would read as follows:

“There shall be exempt from the tax …-

(z)(aa) an amount equal to one-third of any amount derived from a provident fund, {except where such amount is so derived as a consequence of the termination of the taxpayer’s office or employment due to dismissal or resignation or upon the dissolution of such provident fund} or [from] a provident preservation fund, due to the retirement or death of the member of such fund;”


Conclusion

We have taken this matter up with Inland Revenue and have requested a review of its latest interpretation. Until such time as Inland Revenue has changed its position, persons contemplating the transfer to a provident preservation fund upon resignation from another fund must be made aware of Inland Revenue’s latest position. Brokers involved in such transactions should take cognisance of the possible consequences for clients who have or still intend to transfer retirement capital to a provident preservation fund.

Until this matter is resolved, prospective provident preservation members have two options. Firstly they can challenge Inland Revenue. Alternatively they can transfer their benefit to a pension preservation fund.


Pension fund governance - a toolbox for trustees

The following documents can be further adapted with the assistance of RFS.

  • Download the privacy policy here...
  • Download a draft rule dealing with the appointment of the board of trustees here...
  • Download the code of ethics policy here...
  • Download the generic communication policy here...
  • 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...
  • Download the unclaimed benefits policy here...
Tilman FriedrichTilman 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 the CEO of an SOE

It has been a pleasure working with RFS for the past few years. I must admit that the association has enriched my views on governance as for the first time I had to reflect on governance of an entity that is essentially owner-managed.

Read more comments from our clients, here...

News from RFS

New MIP administration system goes live

After a long and arduous journey we have finally reached the point of going live on MIP with our first fund, after a parallel on both systems gave us the necessary comfort.

We are appealing to all stakeholders to bear with us during this challenging period of running parallel and converting funds one-by-one. We are convinced that when you and we look back in a year’s time, it will have been worth our effort and your patience!


RFS re-appointed by Namwater

We were delighted to receive the great news of our reappointment as fund administrators to the Namwater Retirement Fund effective 1 November 2016. We sincerely appreciate this gesture of confidence of the Fund’s board of trustees, after a tenure of 8 years with a flawless record! We believe that our expertise is unrivalled in the Namibian market and that the trustees’ decision will prove to have been in the best interest of their Fund, its members and the employer. We look forward to be at the service of the Fund for our forthcoming tenure.

News from NAMFISA


Harmonisation of chart of accounts of regulated industries

NAMFISA has set up a work team tasked with the harmonisation of the chart of accounts to be used by all financial institutions regulated by it. RFS has designated Kai Friedrich to assist the team with this task.

In principle the idea of a standard chart of accounts being introduced for all regulated entities is very sound. This should make reporting much easier for both parties, the entity and NAMFISA and it should make it easier for NAMFISA to analyse and evaluate the data it receives.

In practice we foresee some difficulties particularly as far as the income statement of the different entity types are concerned, where each type of entity will have a significant number of income and expense categories that are unique to that industry but are not appropriate to the other industries.

In addition, NAMFISA intends to collect not only financial information drawn from entities’ general ledgers, but it will also require extensive financial and non-financial personal information of the entities’ clients that will have to be drawn from the entities’ client data base.

In this regard NAMFISA must recognise that the client data base administration and accounting systems are written to serve the business purpose of the entity rather than to provide for the supervisory purposes of the regulator. NAMFISA should not require the entities to do any data analysis or evaluation in accordance with its requirements but should ascertain that its own systems are set up to do this. Regulated entities should only be required to provide raw data. An interface must be developed by NAMFISA to import raw data from regulated entities who should be geared to export this data in a predefined format.

We also would like to impress upon NAMFISA, instead of heading off into a massive data collection exercise from the start that may throttle its processes, for yet to be defined purposes, initially only key data be collected that is required for defined purposes. It should start off with an annual exercise and only consider quarterly reporting once the annual exercise has been in place for a while and has shown to add value for the resources it will consume.  The data NAMFISA has indicated it would require is likely to require a system with a processing and storage capacity equal to the aggregate of the processing and storage capacity of the system of each regulated entity.

Finally it is important that NAMFISA gives due recognition to IFRS as applicable to each regulated industry. It will be totally counter-productive should the end product of the harmonisation project be incompatible with IFRS. In the final analysis this would mean that regulated entities would have to maintain dual accounting records and reporting functionality, one for the purposes of NAMFISA and one for IFRS purpose.


Staff changes

NAMFISA announced the appointment of Ms Erna Motinga as Assistant CEO: Supervision and Ms Lovisa Indongo-Namandje as Acting GM: Provident Institutions. We congratulate Erna and Lovisa on their appointments and look forward to working with them in promoting the interests of the pensions industry.

News from the market


Red flags raised over governments tax propositions

“Economic analysts and tax experts have raised red flags over the Government’s proposition to introduce a raft of taxes while revising others including abolishing of tax exemptions for foreign investors saying the move could backfire for treasury.”

Read the full brief in The Villager, here…


Hollard rated AA(ZA)

Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to The Hollard Insurance Company Limited of AA(ZA), with the outlook accorded as Stable.

Read the full report in Cover of 18 November 2016, here…


Media snippets
(for stakeholders of the retirement funds industry)

Understanding employee benefits – the role of a trustee

“The role of a trustee can be broken down into these functions:

  1. Manage retirement funds and compliance with the requirements that apply to these funds.
  2. Acting in the best interest of the members of a fund at all times.
  3. Make sure that members are aware of the roles of trustees.
  4. Behave in a responsible and prudent manner that benefits the member of a fund, not for personal gain.
  5. Governance and stakeholder relationships – Making sure that the fund is managed in a transparent and fair manner.
  6. Research, explore and execute different investment strategies and policies that will deliver the best returns for members of a fund.”

Read the full article in FA News, here...

Pension funds wrongly withheld pay-outs

Here are 2 cases where SA Pension Funds Adjudicator (‘PFA’) ruled that the fund wrongly withheld the pay-out and was ordered to pay out the complainant’s benefit without delay, in some cases with punitive damages to be paid to the complainant. In both cases the funds argued that the Pension Funds Act allowed them to withhold or deduct.

  1. Ms M owed Akani fund administrators money relating to a study loan and another loan. Akani also said it was investigating a number of suspicious transactions performed by Ms M over weekends, when its offices were closed.

    Akani said it had confronted Ms M about the transactions and she had subsequently resigned. It was awaiting completed forms from Ms M to finalise her pay-out from her Akani sponsored retirement fund, from which it would subtract any deductions for study loans and advance payments made to her.

    In her determination, PFA said the tribunal could find no lawful or reasonable grounds for Ms M’s benefit to be withheld. She also ruled that the deductions could be made from Ms M’s remuneration, not her withdrawal benefit.

     
  2. Mrs K complained that Akani told her she would not receive a benefit from her Akani sponsored retirement fund, because Akani had trained her and paid her a bonus subject to her working for one year.

    Akani told the adjudicator it regarded Ms K as “absent without leave”, because she had not returned to work after it re-opened in January 2016. It said Ms K had not served out her notice period, and it was entitled to make any necessary deductions in lieu of this. It also submitted that Ms K had been granted an advance payment provided she remained employed for a year.

    In her determination, PFA said it was noted that Ms K had breached her employment contract by failing to serve her notice period and by not honouring the conditions for the advance payment. However, she again found that the deductions Akani wanted to make from Ms K’s withdrawal benefit were not permissible under the Pension Funds Act.

Read the full article by a Staff Reporter in Personal Finance of 20 October 2016, here...

Media snippets

(for investors and business)

Top 5 regrets of midlife professionals

Here are the top 5 regrets from midlife professionals from around the world:

  1. I wish I hadn’t listened to other people about what I should study and pursue. Most typically, they’re living a life their parents told them to live, and engaging in careers their authority figures demanded or strongly encouraged they pursue.
  2. I wish I hadn’t worked so hard and missed out on so much. So many men and women in middle age share that they regret what they’ve missed out on in life, by working so hard. They missed being in the fabric of their children’s lives. Or they missed the chance to have children. They missed the opportunity to build true intimacy and closeness with their spouses, family and friends. They missed experiencing adventure, travel, enjoyment, vitality, learning, spiritual growth – not having the chance to stop and relish life, nature, good health, peace, or relaxation.
  3. I wish I hadn’t let my fears stop me from making change. Mid-career professionals share with me that they have so much fear and resistance around making change, particularly if it means they have to stretch out of their comfort zone, speak up and stand up for themselves.
  4. I wish I had learned how to address toxic situations and people. Toxicity – at work, in relationships, and in our own thoughts — hurts us terribly, but often we don’t see it clearly enough until our bodies break down, or other crises hit that focus us to take brave new action to learn to love, protect, and heal ourselves.
  5. I wish I hadn’t let myself become so trapped around money. Their fears around money, or their slavery to it, generate deep regret. People share that they know they’re not living the life they long to, and they’re sick and depressed about it, but they simply can’t see a way out because they’re trapped about money.

Read the article by Kathy Caprino in Linkedin of 31 October 2016, here…

Garden insurance critical to avoid financial loss

“Research conducted by the Michigan State University’s Department of Horticulture indicated that a good landscape design can increase a home’s value by 5 – 11%. However, many homeowners fail to check whether their homeowners insurance cover extends to protect their garden, placing themselves at an increased risk of financial loss caused by damage to their gardens.”

5 to 11% of the value of your house represents a significant asset that should not be treated differently to any other asset as far as insurance is concerned. And there are many potential risks that this asset is exposed to. Think of flooding, mud slides, hail, falling tree, fire and so on…

Read the post by Christelle Fourie-Colman, Chief Executive Officer of MUA Insurance Acceptances, here…


Three key investment mistakes to avoid

“The current environment is an extremely testing one for fund managers. There is so much uncertainty on so many levels, that selecting appropriate investments takes both a lot of analysis and a lot of courage.

However, Paul Bosman, the co-manager of the PSG Balanced Fund, says that even in times like this it is possible to build robust portfolios that allow both the fund managers and investors to sleep well at night.”

Surely this concern is currently on everybody’s mind, at least if you are approaching retirement or are already retired. Here are the three mistakes to avoid:

  1. Understand the risks. It is possible to manage risk by trying to work out what is already in the price of an asset. And when quality assets sell off, that doesn’t make them more risky, but less so.
  2. Be circumspect. Just because something is down, doesn’t mean that it’s cheap. You still need to look for inherent quality that’s worth paying for.
  3. Do not construct a portfolio around a single outcome.  Nobody can know with 100% certainty that South Africa’s credit rating will be downgraded. So it would be irrational to build 100% of a portfolio around this outcome. But if you think there is a 30% chance that we will be downgraded and you can build 30% of your portfolio accordingly, that’s rational.

Read the full article by Patrick Cairns in Moneyweb of 7 November 2016, here...

How TomorrowToday's Quest Framework predicted Donald Trump's Victory

“On the 20 July 2016, TomorrowToday's futurist Dean van Leeuwen made a bold prediction. He predicted that Donald Trump would win the US Presidential election. Dean didn't make the prediction because he felt Donald Trump was the right person for president because he didn't. His prediction was based on the back of comprehensive research TomorrowToday has been doing on a powerful concept: The power of a leadership quest.”

Read the post by Dean van Leeuwen on ‘Tomorrow Today’ to understand the power of a ‘leadership quest’ here...


And finally...

“Work hard, be dedicated, stay grounded and have a passion for what you do.”
~ David Beckham’s message to the youth

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