|In this newsletter:
Benchtest 03.2018, trustee term of office, RF.S.5.12 and RF.S.5.13 analysed and more...
Important notes and reminders
The following regulations and standards were issued and covered in the process:
The above regulations were covered in the Benchtest 2018-02 newsletter issued in February.
In the Benchtest 2018-03 newsletter we addressed RF.S.5.11.
The conditions pursuant to which a fund may be exempted from Chapter 5 or from any provisions of Chapter 5
A fund may, subject to certain conditions, apply to NAMFISA for exemption from certain sections of Chapter 5 (Retirement Funds) of the FIM Act. Note that the section references below reflect the sections in the Final version of the FIM Bill issued in 2017 while the standard itself still contains references to the 2o13 version of the Bill.
Requirements for a communication strategy
This statement applies to –
The strategy must be in clear, simple, non-technical language and must
A communication strategy must provide –
A communication strategy must offer access by members, unpaid beneficiaries, deferred pensioners and pensions to the latest auditors and valuator’s report
Requirements for preservation product providers and retirement income providers:
The following documents can be further adapted with the assistance of RFS.
News from RFS
Lilia Cabatana, Senior Manager: Systems, Training and Development, initially joined us in 2003, fulfilling duty outside RFS for a period of about 2 years but returning again after the two brief service interruptions. Lilia started her career with auditors KPMG in 1995 in the bookkeeping department. She then moved into auditing completing her articles and gathering 6 years’ experience, amongst other audits, also in pension fund audits, where she developed her interest in the pensions industry. Lilia is our core resource on the MIP project overseeing the development of MIP for RFS requirements, testing, implementation, conversion from Com_Pen, procedures and staff training.
News from Namfisa
Stakeholder engagement session – directors and trustees
NAMFISA hosted a stakeholder engagement session for boards of trustees and directors of fund sponsors and financial institutions, providing an overview of:
Trustees ordered to obtain information from executors and another fund and to then review allocation of death benefit (case ref PFA/GP/00025441/2016/MD)
In the case of AWL Kew and another as complainants vs Allan Gray RAF and it administrator as the respondents, an amount of R 5.7 million was available for distribution by the trustees of respondent from the deceased’s retirement annuity fund with Allan Gray. In a preliminary allocation communicated to all parties concerned, the respondents proposed to allocate a significantly smaller portion to the life partner and minor son of deceased. To this proposed allocation the life partner objected in response to which respondents requested and obtained additional information from the major son and the complainants. As the result of the additional information, the respondents resolved to significantly increase the allocation to around one-third each to the deceased’s life partner and his minor son, to essentially retain the allocation to his major son, while the allocation to deceased’s mother and his sister (the complainants) was reduced significantly.
Respondents argued that they had applied a calculator to arrive at the allocation. The calculator uses a real discount rate of 3%, a standard SA mortality table and it assumes that the deceased member’s income would have dropped after retirement to 66.7% of his pre-retirement income. With these assumptions a gross need was calculated and the net need, after deducting the amount of other cash benefits received as the result of the member’s death.
Respondents provided a very detailed calculation of the respective net needs of the beneficiaries showing the term of dependency of each one, the cash benefits each one received as the result of the death of the member. Respondents acknowledged that the deceased’s estate appears to have assets of around R 20 million and were informed that the winding up of the estate was far from complete due to on-going litigation/ mediation. Respondents acknowledged that in the final allocation they had not taken into account the value of any inheritance as this would have reduced the life partner’s needs to zero
Respondents’ arguments submitted to the adjudicator were that they took into account the age of the dependants, their relationship with the deceased, the extent of their dependency and the wishes of the deceased, pointing out that the deceased had not nominated the complainants as beneficiaries. They argued that the trustees had considered only relevant factors and ignored irrelevant factors, that their decision was justified, was not taken in an arbitrary manner and that they did not fetter their discretion. They pointed out to the adjudicator that the adjudicator’s role is not to decide what the fairest and most generous distribution is but rather, the test in law is, to determine whether the trustees acted rationally and arrived at a proper and lawful decision.
Between the complainants and the life partner various arguments were raised against their respective claim that they were in fact dependants, the life partner making reference to the complainants owning significant assets, and the complainants making reference to the deceased having ended his relationship with the life partner 4 years prior to his demise, removed her as a beneficiary in his life policies and ceased paying for her car instalments, not being married, and having kept separate bank accounts. The fact of the matter was though that both continued to live under the same roof and shared their household, they have a minor son, had joint businesses and the life partner remained a beneficiary of his estate. The complainants further averred that the trustees failed to consider that other dependants may be allocated a death benefit amount to R 1.8 million from another fund.
The adjudicator accepted that the all parties were factual dependants of the deceased. With regard to the status of the life partner it was pointed out that “the test of dependency was... whether the parties lived in a relationship of mutual dependence and ran and shared a common household. A relationship of mutual dependency involves, amongst other things, an emotional and intimate bond.” It did not express a view on whether the life partner was a legal dependant.
The adjudicator found fault with the fact that the respondents had not taken into account an amount of R 4 million the life partner was due to receive from deceased’s estate nor had they taken into account the benefits arising from another fund. The respondents were thus ordered to obtain information from the other fund of which deceased was a member and from the executors of deceased’s estate to determine who was paid how much from those sources for the purpose of reviewing the allocation of the death benefit from the respondent fund.
Our comment: The adjudicator instruction to respondents, to obtain information from the other fund before distributing the benefit from the fund in case creates quite a dilemma for trustees. It presents a ‘chicken and egg’ situation. The other fund should thus also wait for the distribution of the fund in case before it distributes the benefit – who is to be first and who last?
(for stakeholders of the retirement funds industry)
It’s a crime for employers not to pay your pension fund
“If your employer fails to pay your retirement fund contributions into your fund, it is a common law crime and you have a right to know and to expect the fund's trustees to do all they can to recover the money.
But, while this theft is common, there are no reported cases of company directors, members of closed corporations or those in charge at companies being held personally liable for the failure to pay contributions.
The issue of outstanding contributions is bigger than the one of unclaimed retirement benefits, Muvhango Lukhaimane, the Pension Funds Adjudicator, said...”
In South Africa the Pension Funds Act was amended in 2014, adding provisions that make controlling shareholders, members of close corporations, company managing directors, trustees and partners personally liable for an employer's failure to pay contributions. They can be fined up to R10-million or imprisoned for up to 10 years. In Namibia, section 270 (10) of the FIM Bill contains similar sanctions holding personally liable every director and the person regularly involved in the overall management of the financial affairs of a corporate body, or where the employer is not a corporate body, every trustee or partner who directs or instructs the governing body of the employer. Any unpaid contributions will constitute a first charge against the estate of the employer. In Namibia the fine for failing to pay over the contributions will be up to N$ 2.5 million or 5 years imprisonment or both.
Read the full article by Laura du Preez in Sowetan of 8 March, here...
Once invincible Tencent joins ranks of internet mortals
“Tencent Holdings may not be a superhero after all. Revenue at the Chinese social media company missed estimates by the largest margin in more than three years, user growth slowed and margins are under pressure. It’s about to get worse...By stripping out the entire “other gains” category — which I think should be reported under non-operating items anyway — I found that rather than climbing, operating margin slid from 29.4% a year ago to 26.8% in the most recent period. When revenue jumps 51% but operating margin slides, you start to realise that economies of scale aren’t quite what you imagined. Investors should be concerned.”
Tencent of course has been the driving force behind Naspers and Naspers has been the driving force of the JSE making up around 20% of its market capitalisation. Some asset managers have benefited greatly by this stellar performance of Naspers. For interest sake, here are the holdings in Naspers of some of the main asset managers’ prudential managed portfolios:
Allan Gray– 5.1%
Investec – 5.2%
NAM Cor Bal Plus – 3.9%
Old Mutual Prof Pinnacle – 9.7%
Prudential – 5.3%
Read the full article by Tim Culpan in Moneyweb of 12 April 2017, here...
(for investors and business)
Do investors care about governance when there is money to be made?
“While investors tend to pay lip-service to environmental, social and governance (ESG) factors at the firms they invest in as long as returns are favourable, recent corporate scandals at Steinhoff and Tiger Brands have highlighted how serious the damage can be when safeguards fail.
Research conducted by Bank of America Merrill Lynch shows that companies that are well-run from an ESG perspective, typically have much lower drawdowns than companies that are not.
Alex Tedder, head of global equities at UK-based asset manager Schroders, says it seems obvious that a well-run business would pay attention to ESG factors, but it is not the way a lot of companies or investors think yet.
“I think they will do, but it is [at a] very early stage. In the United States for example ESG is not really a factor right now. A lot of the investors don’t really look at it... Tedder says ESG considerations can’t protect investors against corporate failures such as Steinhoff as these events are very difficult to predict.
“If a manager is lying, it is very difficult to assess that and you’ll always have situations that you get wrong – every investor has that, but our view is simply that you have got to be systematic about it... It [ESG considerations] has to be integrated into your process and there has to be a trade-off between risk and return...”
Read the full article by Ingé Lamprecht in Moneyweb of 18 April 2018, here...
There is more to diversification than not having all eggs in one basket
“The old cliché is don’t have all your eggs in one basket, but you also need to understand that you can’t only have eggs, Philip Bradford, head of investments at Sasfin Wealth, says. What Bradford is referring to is the importance of understanding the interplay between various asset classes in a multi-asset portfolio. Although investors ideally want to ensure that all the building blocks in their portfolio do well in the long run, they don’t want to be in a position where all assets are struggling at the same time... In the local market, if you can currently get inflation plus 4% or 5% out of bonds – which are actually going to protect you when the equity market falls – what it does allow you to do is to dynamically move between those asset classes when equities underperform.
Bonds are essentially like an insurance policy that instead pays you a premium... When you are looking at equities I think you do need to look at things with very much a global mind set and be aware that the vagaries and movements of currency markets will impact those returns, but over time I do believe there are opportunities out there that you can’t get on your doorstep in South Africa... The argument for going offshore and investing in cash or bonds for me is a very weak one, particularly at these sorts of levels and the kind of yields that are available... However, other local asset classes like fixed income and local property offer very high yields compared to the global market. Local property offers a very high rental yield because the escalations in leases are linked to inflation and are much higher than in developed markets. ”
Read the full article in Moneyweb of 17 April 2018, here...
These 7 disruptive technologies could be worth trillions of Dollars
“Scientists, technologists, engineers, and visionaries are building the future. Amazing things are in the pipeline. It’s a big deal. But you already knew all that. Such speculation is common. What’s less common? Scale. How big is big?...”
Here are these 7 technologies:
From Capricorn Asset Management Daily Brief of 18 April 2018.
Blackboard wisdom at a filling station
A filling station has become quite a landmark in Gauteng, South Africa, with its daily #PetrolPumpWisdom, which are uplifting quotes written on a chalkboard. Some motorists say they deliberately travel this road just to read the quote which brightens their day. Here's one: