|In this newsletter:
Benchtest 08.2018, a special edition devoted to the FIM Bill and other developments threatening the survival of the pensions industry
Important notes and reminders
Monthly Review of Portfolio Performance
to 31 August 2018
In August 2018 the average prudential balanced portfolio returned 3.75% (July 2018: 0.15%). Top performer is Investec (4.86%); while Hangala Prescient (2.31%) takes the bottom spot. For the 3-month period, Investec takes top spot, outperforming the ‘average’ by roughly 0.94%. On the other end of the scale Hangala Prescient underperformed the ‘average’ by 2.07%.
Prudential balanced or smooth growth portfolio – what should you expect the difference to be?
Smooth growth portfolios are notorious for the lack of transparency. For the employer or individual investor it is really difficult to ‘get a feel’ for the characteristics of these portfolios vis-à-vis financial markets. Most of us have ‘a feel’ for and follow financial markets to the extent that one would know whether financial markets are flying, diving or limping along. An investor would understand his portfolio doing badly when markets have tanked. An investor would start getting disorientated and concerned when his portfolio is doing poorly despite flying markets.
Some investors at times believe there are investment products around that defy the ‘laws of gravity’. Typically the smooth growth portfolios sometimes portray themselves and are seen as being such type of product. Of course thinking rationally about it, no one would really believe anything on earth can defy the laws of gravity. What goes up will come down again! The fundamental principle of every pension fund investment portfolio is that it invests in mostly conventional and publicly priced asset classes, i.e. equity, property, bonds and cash. The parameters are defined in sections 12 and 13 of part 7 of the schedule of regulations, recently promulgated under the Pension Funds Act (previously referred to as regulation 28).
Read part 6 of the Monthly Review of Portfolio Performance to 31 August 2018 to find out what our investment views are. Download it here...
Pension funds quo vadis?
In this newsletter we will focus on the severe onslaught on pension funds. At the risk of being accused of exaggerating and being alarmist and at the risk of undermining our own business interests we will call a spade a spade. We sound a serious warning that Namibia is about to kill the goose that lays the golden eggs!
With everything in the pipeline for pension funds one gets the clear impression that government for some inexplicable reason considers this pot of gold a national resource and its property. Fact of the matter is that pension funds were created and up to now carried and underwritten in all respects by employers. Government merely created a favourable tax regime and a secure savings regime. We are now about to dismantle just about every reason for having a pension fund as we will explain further on.
This is not only about your pension fund and your employees’ retirement nest-egg. It is about your business and the Namibian economy at large!
Trustees, employers and employees must act now!
Regulator levies in perspective
In previous newsletters we expressed our concern about possible over-regulation that will substantially raise the cost of regulatory supervision and its consequence for retirement savings of pension fund members.
We believe in a free market economy it is important that regulators must make every effort to benchmark their costs in an effort to ascertain that they are fair and justifiable. We recently came across a report in this link setting out the latest levies introduced by the Financial Sector Conduct Authority (FSCA), the SA NAMFISA equivalent. Levies on pension funds are set at R 1,206 per fund plus 14.27 per member with an absolute maximum levy per fund of R 2,764,018.
The NAMFISA levy on pension funds is calculated at 0.008% of total fund assets. There is no minimum or maximum levy. In our opinion regulatory effort is not linked to fund investments at all. It is rather linked to two main cost drivers. Firstly, every fund requires regulatory effort independent of its size. Secondly, regulatory effort is linked to fund membership as membership size will determine the number of complaints the regulator will receive and the transaction volumes the regulator will have to subject to audit. The SA levy structure in our opinions more appropriately recognises these two main cost drivers, incorporating a fixed levy applicable to every fund, independent of size and a variable levy that is membership based. NAMFISA however argues that the asset based levy is more equitable, because members on the higher end of the income spectrum with higher retirement savings will pay a higher levy than members on the lower end of the income spectrum with lower retirement savings. I guess this is a philosophical question that those affected may not necessarily agree with. NAMFISA also justifies this levy with its ease of administration. Simpler administration will mean lower cost of administration, something I believe most fund members would support. It should nevertheless fairly reflect regulatory effort as corroborate by the fee recovery policy of the Australian regulator, referred to below.
We have applied the latest FSCA levies set out above to all Namibian pension funds, excluding underwritten retirement annuity funds. The FSCA would collect a total levy on pension funds of roughly N$ 4 million per annum. The pension fund levy currently paid by all Namibian pension funds amounts to approximately N$ 11 million. NAMFISA in this regard pointed out that the mandates of the different regulators vary and that the levies are consequently difficult to compare. In the case of Namibia the levy makes provision for the cost of the pension fund adjudicator and of supervising administrators, while in SA a separate levy is raised for these purposes. Adding the separate levies for the adjudicator (R6.05 per member p.a.) and on administrators (R 600.29 per fund and R 0.73 per member p.a.), NAMFISA arrives at total Namibia equivalent levy in SA of N$ 7 million or N$ 1.82 per member per month in SA versus N$ 2.85 per member per month in Namibia. NAMFISA points out that in this comparison it needs to be borne in mind that Namibia does no offer the economies of scale as SA does.
We coincidentally came across a publication by the Australian equivalent of NAMFISA, the Australian Prudential Regulation Authority, that explains in great detail the rationale and methodology for setting its levy. In contrast to NAMFISA, it also regulates deposit taking institutions, in Namibia the domain of Bank of Namibia. Australia has a separate complaints tribunal that raises separate funding of its activities.
Interestingly, the Australian Prudential Regulation Authority Act (APRA Act) permits APRA, by legislative instrument, to fix [such] charges. The APRA Act provides that a charge fixed under subsection 51(1) must be reasonably related to the costs and expenses incurred or to be incurred in relation to the matters to which the charge relates, and must not be such as to amount to taxation. I suggest that here in Namibia similar parameters should be legislated.
APRA has developed a sophisticated model for determining levies it is to raise to recover its operating expenses. Although it appears that APRA has a similar mandate to that of NAMFISA and also has a very similar supervisory approach. I found that comparing levies will not be very meaningful due to not only different mandates but also due to different levy structures. It is nevertheless interesting to compare supervisory and regulatory costs. In the following table I am taking a different approach in looking at the total expenditure budgets of the two regulators and relating these to a few key indicators. Adjustments were made for apparent difference in mandates where in Australia the mandate includes deposit taking institutions but excludes the cost recovery of the complaints adjudicator.
Given the likelihood that NAMFISA levies will increase further with the introduction of the FIM Act, the concern is warranted, firstly, that the Namibian industry may be overregulated and secondly, that the high cost of regulation may have a negative impact on the competitiveness of the Namibian economy and adds to the number of nails in the coffin of our pensions industry.
Anyone interested in the ‘Industry Fees and Levies’ publication produced by the Australian Prudential Regulation Authority can access it here...
The FIM Bill - born to die with the pensions industry?
It has taken more than 10 years and an investment of probably many millions to get to a new era with the impending implementation of the FIM Bill and of course, once effective, many more million will be spent between the regulator, funds and service providers at the cost of pension fund members, to raise the new statutory and regulatory regime to the level the Pension Funds Act regime once had reached.
In the meantime, the GIPF is rumoured to clamour for exclusion from the new retirement funds regime and be established under its own law. That is half the industry in membership and 70% the industry in assets. In essence this implies that the service provider industry and with it NAMFISA, would have to shrink by more than 50%!
A prospective nail in the coffin of the industry, the FIM Bill and its regulator too, is a notion by senior government authority to establish a fund for all state owned enterprise sponsored pension funds. This represents another 20,000 members and N$ 13 billion investments. If government is happy to set up the GIPF under its own law, it makes absolute sense to do the same with this umbrella fund, alternatively, why should government not do this to get full and unfettered control of its retirement savings pool? This represents another substantial portion to be severed from the industry, the auspices of the FIM Bill and its regulator.
Another nail in the coffin will be the National Pension Fund that will have its own law and will thus fall outside the industry the FIM Bill and its regulator. Although it is very difficult to quantify the possible impact on the NPF on the existing industry we have estimated the impact. The following tables show the impact of these 3 nails in the coffin:
1. Current status
2. GIPF and SOE’s severed
3. Compulsory National Pension Fund (rough estimate of 50% membership and 30% asset loss)
Clearly, the remnants of the ‘private retirement funds industry’, after the government initiatives will hardly be worth any economic interest! The largest umbrella fund currently administers more members than are likely to be left over in the existing umbrella funds market segment. On the private funds side there will be hardly room for one administrator and there will be no room left for competition. The table assumes that the Retirement for Local Authorities will be part of the SOE net, but should this not be the case indeed, the result will be marginally better for the ‘private retirement funds industry’.
Note that there is no reference to the interests of the employer or fund sponsor who has been the sole driving force behind pension funds and their tremendous growth to date unlike Australia for example that has compulsory contributions by employers and employees and that prides itself of owning the world’s 4th largest pension pot after the US, UK and Japan.
Many of us may very soon become criminals on the basis of the numerous criminal offences the FIM Bill contains for administrative failings. We will then have a criminal record and will be precluded from serving in any fiduciary position. Since many of the trustees and service providers are senior officials of one or other company this may in no time create a serious problem for the Namibian economy. Has anyone spent any thought on what these draconian measures may imply for the Namibian economy?
Now, trustees and principal officers, please see for yourself, follow links below:
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 Benchmark Retirement Fund - Flagship of umbrella funds in Namibia
By Paul-Gordon, /Guidao-Oab, Benchmark Product Manager
Annual member meeting
Members of the Benchmark Retirement Fund were updated on latest developments within the fund, on its financial position and on investment portfolios and returns at the recent annual member meeting. Fund auditor Robert Grant of KPMG presented an overview of the financial position and results for the year ended 31 December 2017. Kai Friedrich, principal officer provided a summary of the actuarial findings of SAPN, actuaries of the fund. Hein Klee of NMG presented on the fund portfolios, returns and the philosophy of the Benchmark Default portfolio as investment consultant to the fund. Finally Günter Pfeifer presented developments within the fund with regard to product and rules. Proceedings were led professionally and efficiently by Master (or should it be Madam?) of Ceremonies, Afra Schimming-Chase who also serves on the board of the fund.
Guest speaker, Brett St Clair spoke on ‘The Era of Digitalism’.
The audience listening attentively to the speakers.
Download the annual report, here...
News from RFS
RFS client function
RFS once again hosted a client function on 5 September at ‘de Kayak’, a very nicely prepared venue that can only be recommended. Catering was exceptional and the evening was certainly a pleasant experience! Guest speaker Sophia Amoo-Chimunda, former head of prudential institutions at NAMFISA spoke on the implications of the FIM Bill and key differences between it and the Pension Funds Act and Brett St Clair speaking on ‘Digital Transformation – the Path to Innovation’.
Going by the feedback below, the audience was generally appreciative and enjoyed the evening. A pity for the relatively large number of confirmations that did not manage to attend. We believe you missed something and trust that we will have the pleasure of your company at our next client function!
A glimpse of the audience.
Our guest speakers, Brett St Clair and Sohpia Amoo-Chimunda being handed tokens of appreciation by Managing Director Marthinuz Fabianus.
And here is some client feedback...
“Thank you for the effort in organising and hosting the event. The presentations done were all very interesting and value adding. The hosting was also done very well, and I can assure you myself and my colleagues enjoyed the evening and the interactions.” (S Pienaar, Pupkewitz group)
“Thank you for the comprehensive feedback from our Fund as well as the very interesting talk by your "Nowist", Brett St Clair who tried to get the old pensioners into the 21st century. It was interesting and thought provoking, if not scary to try to stay ahead. The social function was also a very enjoyable time to meet up with old colleagues and friends from our working lives. Keep up the good work at our own three letter "RFS", which at least speak of Solutions without having to curse to get to the Future.” (W vd Vyver)
“I wish to thank the entire RFS team for the –
“It was a great event, congratulations!” (A Evrard, NUST)
“Baie dankie ook vir die AGM aand. Die aanbieder was briljant maar nogtans raak ‘n mens bekommerd oor die toekoms. Alles elektronies??? Ek weet nie so mooi. ” (H Engling, DELK)
“Trust you are well. The event was very well organized. Unfortunately, the main speaker did not impressed me at all. Thank you for the invite!!!” (D Sem, Namcor)
“Thank you once again for inviting me, it was a really interesting discussion. One bit of advice: for everyone to be at the venue at 17:15 may have been a bit ambitious. This probably led to a delay in the program’s commencement. Apart from that, a really great event.” (A Westraadt, Pupkewitz group)
News from NAMFISA
NAMFISA industry meeting
NAMFISA held a pension funds industry meeting on 17 September. The agenda covered the following topic –
May the registrar refuse to register rules or amendment?
May the registrar refuse to register an amendment providing for off-setting of housing loan balance in the event of default?
In last month’s newsletter we reported on a South African matter between Securities Employees’ National Provident Fund and the Registrar of Pension Funds and another party heard by the Appeal Board of the Financial Services Board in case A 11/2016. Find the full text of the case, here...
We now experienced a similar situation in Namibia. NAMFISA recently returned rule amendments to the rules of participating employers in an umbrella fund that intended to allow the fund to offset any outstanding housing loan it had granted to the member against the member’s fund credit in the event of default. NAMFISA argued that the member can pledge his benefit or his right to the benefit but it can only be attached once the benefit event happens, i.e. retirement, death or resignation.
In the first instance the main rules of the umbrella fund do make provision for the offsetting of an outstanding balance against fund credit in the event of default. These rules were registered by NAMFISA.
Secondly, Section 37D has sub-clause a and b. Sub-clause b is very specific in terms of the timing when the benefit can be reduced but sub-clause a is not. Sub-clause b refers to a situation where the employer has granted or guaranteed a loan and is calling up the outstanding balance in case of the employee’s default. This makes sense as it is in the employer’s control to continue deducting the monthly repayments thus obviating any need to call up the loan while the employee is still in the employer’s employ. Sub-clause a deals with a loan granted by the fund or any other person, typically a bank. It does not refer to termination of membership as a pre-condition for claiming the outstanding loan balance. This substantiates that the legal drafters have specifically left this open to allow the benefit to be reduced even if the member has not resigned, retired or died yet where the loan was granted by the fund or another person.
The Pension Funds Act in section 12(4) requires that the registrar must register a rule amendment if it is not inconsistent with the Pension Funds Act and is financially sound. This was confirmed by the Appeal Board of the Financial Services Board in case A 11/2016, in the matter between Securities Employees’ National Provident Fund and Registrar of Pension Funds and another party.
(for stakeholders of the retirement funds industry)
Dividends can be sexy
“...In general, investors underestimate just how significant dividends can be. As Paul Stewart, head of fund management at Bridge Fund Managers, points out, over long periods of time earning and reinvesting dividends produces a growing portion of a portfolio’s total return. “For example, if you deconstruct the performance of the Old Mutual Investors Fund, which has the longest track record of any equity fund in the South African market, 60% of its long term total return comes from dividends and growth of dividends over time,” he says. “The longer you invest for, the more important the dividend element becomes. “In the short run, over the first five years of an investment, the capital return will far outweigh the dividend,” he says. “But over very long periods of time, 30 years or more, the dividend you receive plus the growth in that dividend is what drives the total return...”
Read article by Patrick Cairns in Moneyweb of 20 September 2018, here...
A will: the most important document you’ll sign
“...Without a will a person will die intestate and then how an estate devolves is out of their hands and left to legislation. That is the Intestate Succession Act, which may not match all their wishes for their loved ones, who they intended to benefit. A person can also die partly intestate when they do not bequeath all the assets in their will or if part of their will is actually invalid. If you’re a single individual with no children or surviving parents, your entire estate may then go to an estranged blood relative who you barely know, but the well-loved friend or charity then gets nothing from your estate. If you don’t have any blood relatives your assets will be forfeited to the state, without your closest friends or favourite charitable causes benefitting or supported...”
Read the article by Primesha Naidoo in Moneyweb of 20 September 2018, here...
Skyscrapers, art and financial bubbles
“Over the past few decades, Sotheby’s stock price has gone through various cycles of peaks and troughs. Mansharamani says these peaks are “very curious” to someone who studies financial bubbles. Three months after Sotheby’s stock price peaked in 1989, the Nikkei crashed and it has not returned to that level since. Why is that? It turns out that Japanese buyers were paying world record prices for art at that point, he says. “Their confidence in the future of the world indicated a bubble.”... “More recently, we’ve had world record prices paid by Middle Eastern buyers. [It is a] point of caution.” Towards the end of 2017, Leonardo da Vinci’s Salvator Mundi was sold for a record $450 million to a Saudi Arabian buyer, probably the crown prince Mohammed bin Salman. “It is a concern. [We] have to watch it. [It] indicates overconfidence in the world.” Mansharamani says the world’s tallest skyscrapers can also be an indication of a bubble brewing. Around 1929, 40 Wall Street, the Chrysler Building and the Empire State Building were competing for the world’s tallest tower status, before the Great Depression ensued...Within weeks of global equity markets peaking in 2007, the Burj Dubai (later renamed the Burj Khalifa) took the title of the world’s tallest freestanding structure, even before it was completed. “Shortly thereafter, we had the global financial crisis.” Mansharamani says the indicator works for three reasons. Skyscrapers are always built with borrowed money, indicating easy money conditions in the world. They are built by developers hoping to attract tenants – making it a speculative investment...”
Read the full article by Ingé Lamprecht in Moneyweb 20 September 2018, here...
Residents celebrate as Western Cape municipal dam overflows
Residents of Ceres in the until recently-parched Western Cape celebrated this week when the town’s Koekedouw dam overflowed for the first time since 2014. This as a three-year drought – the worst in a 100 years – is broken by good rains in the Western Cape.
Watch the video clip in Business Insider of 19 September 2018, here...
See also: Stunning time-lapse images show how Cape Town's biggest dam has filled up.