Important notes and reminders

Annual ERS return due 30 January 2019
 
Funds have become used to submit the already fairly detailed unaudited ERS annual returns within 30 days of 31 December 2018. This is over and above the quarterly returns and the annual financial statements that also have to be submitted. Although the latest requirement for submission of the quarterly return (see next topic) makes no reference to the annual ERS return we assume at this stage that the annual return still has to be submitted as before by 30 January even though the quarterly return now require the same and much more detailed information.
  
Quarter 4 of 2018 SIH returns – forewarning

The SIH return at 31 December 2018 is due to be submitted by 30 January 2019 (note that the 45 days period has now been replaced with a 30 day period).
 
And here is another Christmas present from NAMFISA (but note that there is currently no penalty linked to non- or late submission)…..

It appears NAMFISA is intent to require funds to now submit a much more detailed return previously referred to as OCoA (now referred to as COA or chart of accounts) return by 30 January 2019 (note that the until now applicable 45 day period was reduced to 30 days). We do not believe the industry is geared for this return and urge funds to immediately apply for extension of at least one month should they receive this new requirement. Currently no service provider is contracted to provide this type of information and it speaks to reason that funds first need to amend their agreements with their service providers  while service providers first have to be clear on exactly what information they are required to provide and in which format this has to be done. None of this information is known yet. Worse, having spoken with one of the NAMFISA senior analysts in the PF department we were informed that this new return has not been loaded on ERS yet!! She does not know when this will be done, but their IT department is still busy making changes to the ERS platform as well as to the Excel sheet. In her words “it should still go out by end of this week”. She could not provide any answer to how the industry should start preparing for this if no template is available yet.
 
We urge funds to take ownership of this challenge. NAMFISA strongly dislikes service providers to approach it with concerns and problems on behalf of pension funds and believe that pension funds should be much more effective in taking this matter up with NAMFISA.

NAMFISA levies

• Funds with year-end of November 2018 need to have submitted their 2nd levy return and payments by 24 December 2018; December 2018 year-ends by 25 January 2019.
• Funds with year-end of May 2018 need to have submitted their 1st levy return and payments by 24 December; June 2018 year-ends by 25 January 2019.
• Funds with year-end of December 2017 need to submit their final levy return and payment by 31 December 2018; January 2018 year-ends need to submit their final levy return and payment by 31 January 2019.

Update on proposed amendments to the IT Act
 
The Institute of Chartered Accountants in Namibia recently issued an updated on proposed amendments to the Income Tax Act that downloaded here...
 
Inland Revenue introduces ITAS
 
Inland Revenue press release informs the public of the introduction of the new integrated tax administration system with the following notifications:

• There will be 2 weeks downtime for all individual and business transactions from 31 December 2018 to 16 January 2019;
• Good standing certificates and taxpayer registration will not be available during this period
• During this period tax forms  can be submitted at all offices and payments via EFT and direct bank deposit can be made;
• When the new system is operational, taxpayers are urged to register as E-service user by logging in on www.itas.mof.na and downloading the ITAS Portal User Guide.

If you have missed the news release, you can download it here...
 
Phasing out of cheques
 
The Payments Association of Namibia has announced that cheques will be phased out as a payment instrument by 30 June 2019.

The Payments Association informed the public by media release recently that banks will not accept any cheques written out after 1 February 2019 and that no cheques deposited after 24 June 2019 will be processed anymore.

2018 review and 2019 prospects
A note from the Managing Director
 
When I look back over the year which has seen its tail end, I realise we have a lot to be grateful for. The year started with bleak and uncertain prospects for rain, but eventually most of the areas of our land received normal to above normal rain fall. It is my wish that our entire country will be blessed with goods rains with the rain season around the corner. You may wonder what the relevance of rain to Retirement Fund Solutions is, they are not farmers? Well, rain is the lifeblood of our human existence.

What else can we be grateful about for 2018?
 
We are grateful that all our staff as the backbone of the business have to this end been well to provide their trusted services. We are grateful for the families and friends and most importantly our clients who have supported us throughout the year. We have to be grateful for new learnings that propelled the progress we have made as a business and indeed progress made in any area of our individual lives. We are grateful for the new colleagues that joined us in the course of the year as well as for staff who graced us with various long service and celebrated these milestones of 5, 10 & 15 years as announced in the course of 2018. Lastly, but not the least, we also have to be grateful that despite the very tough operating environment, we have been able to produce a good set of financial results and that we continue to be a sound and healthy business concern.
 
Special mention needs to be made of the clients we have been able to retain following a review of our service contracts. You will no doubt appreciate that clients do not grant us service contract extensions on a silver platter. But rather through careful evaluation of our performance and robust assessments against alternatives in the market.

We have in the above respect passed the test and secured reappointments to the following accounts:

• Bank of Namibia Pension Fund
• Namdeb Provident Fund
• Nampower Provident Fund
• Universities Retirement Fund

I would like to thank each and every staff member for their contribution and of course these clients for having once again entrusted RFS with the responsibility to administer their funds for another tenure.
 
2018 has also been an eventful year in the history of RFS. During May, we have had to take the difficult decision to terminate our plans to change operating systems. After more than 3 years of trials and errors of the MIP System, we decided to cut our losses and remain with our old and trusted fund administration system COM_PEN. We are now firmly looking forward to the improvements we can expect to this system in partnership with our system providers Megatech Systems and the parent company EBS International.
 
Another historical event, was my succession of RFS founder Tilman Friedrich from 01 July.  We are still in the forming, storming and norming stages, but we should and I believe we all do appreciate that if you  are going to remain dependent on a single person, then you will invariably run into problems sooner or later. We for this reason developed and maintain a staff planning model which is underpinned by a staff competency identification and concomitant skills and capacity development. We are not in a race against time but rather we are racing against ourselves. For this reason, in my approach to change management, I believe there is a need to continue to be patient and sensitive to allow all amongst our staff and clients to naturally embrace the change incumbent upon us.
 
On the outlook for the year ahead and the foreseeable future, I have many reasons to be optimistic. Of course our country’s economic climate is still unfavourable with subdued growth prospects in the absence of clear stimulus for growth in sight. This dampens prospects even for organic growth of a business including our very own. If you do take the trouble of reading through our own loaded monthly newsletter (Benchtest), you would no doubt have become aware of the multitude of threats facing pension funds and by extension our business. However, we have devised strategies that we have started to put into action to ensure we can ultimately overcome the challenges facing our business. A Greek philosopher Aristotle said; “knowing yourself is the beginning of all wisdom”. My optimism therefore stems from my conviction that we have the best team in our game to overcome the normal challenges facing us.
 
The main pillars of our strategies aim to ensure that we remain relevant in our market, to create value in the interest of all of all key stakeholders and to ensure long term sustainability and survival of the business. Our nature dictates that we will transparently share all strategic endeavours with our staff and clients. My further conviction is that we can only be successful in our plans if we can take along our staff and clients any direction we move.
 
As we look forward to entering 2019 with zeal, I would like to take this moment to wish all our readers, partners and indeed our valued clients and our staff, a peaceful and safe holiday and festive period.
 
My sincere gratitude for the wonderful partnership we have been able to enjoy over the past year and I look forward to building on this in 2019!

Newsletter

Dear reader

In this newsletter our managing director offers season’s greetings; we share a few comments on proposed changes to the Income Tax Act; we speculate on the status of the FIM Bill and we examine a few technicalities with regard to unclaimed benefits and the Prescription Act.

In our investment commentary we examine how the US economy impacts SA (and Namibia) and we try to find out what we can expect of equities after their recent decline.

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...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

The mainstay of pension investments is failing its duty!

Equities are the mainstay of pension fund investments and comprise the bulk of the investments of the typical prudential balanced portfolios. Equities are expected to return around 6% before asset manager fees. However, when we consider graphs 1.1 to 1.10 in the Monthly Review of Portfolio Performance to the end of October 2018, covering various periods from 20 years to the latest month, it appears that other than the 15 and the 20 year periods, equities have not been able to achieve their expected real return. Adding dividends of around 3% to the returns reflected in these graphs, equities will also have achieved their goal over the 10 year period, the point at which equities had 10 years ago just recovered the losses sustained as the result of the global financial crisis. For all other periods, equities have fallen severely short of their return expectation. Fortunately the prudential balanced portfolio managers move pension fund investments between asset classes by buying in market troughs and selling when markets peak. Looking at the same graphs again it will be noted that the average prudential balanced portfolio has in most instances returned more than inflation plus dividends of around 3% p.a. Still the average prudential balanced portfolio did not return inflation plus 6% for any period up to and including the past 5 years.
 
It will be no secret to most that the poor performance of prudential balanced portfolios over the past 5 years is the result of the slow unwinding of the global low interest rate environment, which in turn was the result of quantitative easing through large scale asset purchasing programmes of the main central banks in the world. These programmes are being phased out now as the result of which we will see a normalization of the interest rate environment. Interest rates will go up until they represent a fair risk adjusted return relative to equities. In this adjustment phase global equities will remain under pressure.
 
Looking at various economic metrics it seems like global equity markets have run way ahead of themselves since the global financial crisis and that there is certainly lots of room for adjustment.

Graph 1

Graph 1 clearly shows that the SA CPI adjusted ALSI has been at dizzy heights relative to its 30 year historic levels, even though it does depict sideward movement since 2014 and a sharp downward correction of late. From 1987 up until 2003 the market and the P:E ratio were very closely correlated and the gap between the two was small. The first run up to the peak of the financial crisis was caused by the commodity run that benefited earnings of SA equities significantly. The subsequent run up to another peak was the result of the low interest rate environment through which the high earnings of the commodity run were largely maintained. Furthermore, the price earnings ratio of 15.4 currently is also still above its long-term average of 14.7. This is the multiple of earnings investors are prepared to pay for a share. Earnings are still high with lots of room for correction while the price investors are prepared to pay for these earnings also implies room for a downward correction of around 5%. Will a recovery of global commodities be the saving grace for SA, offering an underpin to the Allshare Index? Now let’s look at some indicators that could provide an answer to this question.

Graph 2

Graph 2 shows how closely correlated the oil price has been to the SA Allshare Index until the bottom fell out of the oil price and other global commodities simultaneously. Since then the gap between these two lines has closed, indicating that at the oil price as at the end of October, commodities and low interest rates provided support to the SA Allshare index.

We know that the US Fed rate is on an incline while at the same time global growth does not show any signs of a synchronized global economic recovery and it is unlikely that global commodity prices will recover soon. SA Reserve Bank increased the repo rate by 0.25% in early November, while the oil price has also fallen sharply since end of October. Both indicators will put pressure on company profits thus offering no reprieve to the SA Allshare Index.

Graph 3

Graph 3 depicts the same metrics in the US and it shows very similar trends. The 30 year average P:E of the S&P 500 is 22.3 which is above its current level of 19. In historic terms it seems that US investors are not as exuberant about US equities as SA investors are about SA equities but earnings are very high, representing the gap between the two lines that has really manifested itself since the introduction of quantitative easing. Again we know that US interest rates are on the rise, putting pressure on company earnings. At the same time it seems that the reduction in company tax rates and other fiscal measures taken by the Trump administration have been factored into share prices and offer no further support to US equities going forward. So the US market is similarly due for a correction. The question is whether a correction of the US market will impact SA equities.

Graph 4

Graph 4 shows that US and SA equities are fairly well correlated. The divergence up to the middle of 200 it to be ascribed to the tech bubble in which SA equities did no really participate either on the up or on the down. Since that bubble burst the markets moved in tandem for a long time until the first utterances in 2014 of the phasing out of quantitative easing and the lifting of interest rates where US equities continued to steam ahead while SA equities limped along. The conclusion one may draw from this is that a correction of the US market will impact the SA market. Although one may expect that the US Fed will try to manage the US economy in such a way that there will not be any rapid correction, it cannot control events happening everywhere in the world that may lead to a panic reaction and a rapid correction of markets.
 
The Fed rate is at the core of the future movement of global equities until all measures that have been placing a cap on global interest rates have been removed from the system. The US Fed rate is currently at 2.25%, while US CPI has steadily been creeping up to 2.52% at the end of October. Long-term statistics indicate that the Fedrate should be roughly 1% to 2% higher than CPI.  Based on current CPI, a US Repo rate of around 1.5% above CPI, or around 4% would indicate a normalised interest rate environment. At the more recent rate of upward adjustment of the Fed rate we are still looking at around 2 to 3 years now until we reach this point. Let’s continue keeping an eye on this.

1. The amendments to a large extent will raise the tax burden on Namibian tax payers. Increasing the tax burden on tax payers is never a welcome development even though it may be necessary from the greater national perspective. PWC has in the past raised its concern about the high tax burden of Namibian tax payers relative to their African neighbours. We suggest that at the very least, government should keep an eye on the competitiveness of the Namibian economy as it is the economy that will determine the well-being of Namibia. Any tax review should thus have as point of departure a benchmarking comparison of the tax burden of Namibians vis-à-vis its neighbours and should define the policy of Namibia in this regard.
2. Taxation of trusts and dividends paid to trusts: Companies are put under considerable pressure through various government initiatives to have their employees participate in the economic fruits of their employer company. Staff trusts are recognised as an appropriate vehicle to achieve this objective. We believe that trusts established solely for the purpose of having employees partake in the well-being of their employer should not become taxable entities. Since such arrangements are government desired outcomes, we also suggest that dividends declared to such trusts should be exempted from the proposed dividend withholding tax by excluding them from the definition of ‘trust’.
3. Definition of ‘educational institution’: Since education is a national priority it deserves special consideration from the tax point of view. The proposed amendment implies that it is only the educational institution itself that deserves special concessions. There are a number of umbrella bodies of a non-profit nature whose sole purpose is to raise funds to support one or more educational institution/s. We believe these bodies should also be considered educational institutions for the purpose of the proposed Income Tax Act changes.
4. We note that the tax deductible contribution limit of N$ 40,000 towards pension funds, provident funds, retirement annuity funds and ‘study policies’ is not proposed to be lifted. The disincentive this presents to members of funds in the absence of any deductibility of contributions never allowed as a deduction from benefits paid out increases with every year as the result of inflation and makes such vehicles ever less attractive for employees and employers.
5. The proposed changes do not refer to VAT Act changes, which may impact pension funds and should be commented on. VAT on asset management fees could reduce pension fund returns by around 0.2% p.a. RFIN should be particularly concerned on behalf of its pension fund members that VAT should not be imposed on asset management services to pension funds. Should this not be done, it will reduce the attractivenes of pension funds, that are already reeling under a number of other regulatory initiatives that will also reduce their attractivenes.
6. Section 3(1A) regarding the powers and duties of the National Revenue Agency (NRA): This amendment effectively empowers any staff member of NRA to the same extent as the Commissioner is empowered. This empowerment should be qualified by reference to a mechanism and process the Commissioner must follow to delegate his powers to another staff member of NRA. As it stands it is open to uncertainty as to who may exercise powers and lends itself to staff members exercising powers in a discretionary, haphazard and unfair fashion.
7. Section 16 regarding taxation of income from trade or business of charitable, educational and religious institutions: We do not find definitions of ‘trade’ and ‘business’ in the Act. Since such institutions operating on a non-profit basis undertake their activities in every regard to support their main purpose, whether by way of fees, events or any other fund raising endeavour. It is not clear what ‘trade’ or ‘business’ is intended to refer to and these institutions will be uncertain how to apply this section. We suggest that this should only refer to any business activity undertaken by any person or company related to and controlled by the approved institution.
8. Section 16 regarding the requirements for registering as a charitable, educational or religious institution: The reference to  being ‘widely accessible to the general public’ is vague and ambiguous and should rather refer to any exclusions it aims to prohibit. As it stands it requires the Minister to exercise discretion that can lead to ad-hoc, hap-hazard and unfair exercise of this discretion.
9. Section 16 (af) regarding receipts and accruals of political parties: The rationale for exempting political parties while taxing charitable, educational and religious institutions is unknown, is questionable and seems to ignore national priorities.

• 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 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...
• Download the list of fund service providers duly registered by NAMFISA here... 
• Download the Principal Officer performance appraisal form here...
• Download the revised service provider self-assessment here...

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 Chairman of the RFS Board, and retired chairperson, and now trustee, of the Benchmark Retirement Fund.

News from RFS

The RFS team in festive mood
 
Some action photos from the 2018 year-end function / family day:
 

Impatiently waiting for the action to start.
 

Powder coated
 

Father Christmas on his rounds
 

Attentively listening to the formal parts before lunch
 

The social 2018 committee arranged the day
 

The 2018 ‘RFS Fairy’ for assisting colleagues beyond the call of duty – Milton Mentile!

News from NAMFISA

Tabling of FIM Bill postponed?
 
Microlending legislation was to be overhauled by the FIM Bill, as will many other non-banking financial services laws. However due to it having been considered more urgent than the other financial services laws, it was removed from the FIM Bill and was promulgated separately on 31 July 2018 and commenced on 15 October 2018.
 
We understand that industry stakeholders are challenging the Microlending Act and certain principles on the basis of them being inconsistent with the Namibian Constitution. Since the same principles are at play in the other financial services laws contained in the FIM Bill it appears that the Minister of Finance may after all not table the FIM Bill in parliament until the current legal challenge of the Microlending Act has been resolved by the court. How long this case will take to be resolved cannot be foreseen at this stage.

Legal snippets

Unclaimed benefits and the Prescription Act
An opinion by Andreen Moncur
 
The Prescription Act is applicable to retirement fund benefits and not the Administration of Estates Act. Sections 37B and 37C of the Pension Funds Act respectively expressly provide that a pension benefit is not an asset in a member's insolvent or deceased estate. The Act also expressly exempts registered funds from the provisions of the Trust Moneys Protection Act, 1934.
 
Where lump sum death  benefits are dealt with under section 37C, there can be no unclaimed moneys remaining in a pension fund after completion of the 37C process, as all moneys must be paid either to an identified dependant and/or nominee or to a nominee and/or the deceased member's estate or to the Guardian's Fund.
 
The Administration of Estates Act specifically deals with deceased estates, the administration of testamentary trusts and the administration of the property of minors and other persons under curatorship. Said Act does not deal with pension benefits. More specifically, section 93 of said Act does not apply to retirement funds as a pension benefit is not trust property held by the fund in terms of a mandate from a deceased person. A retirement fund is not an executor of a deceased estate, nor a trustee of a testamentary trust, nor a curator or tutor of a minor or other person under legal disability. Furthermore, until a benefit from a fund has actually prescribed in terms of the Prescription Act, it cannot be said to be an unclaimed benefit.
 
In terms of the Prescription Act, a beneficiary's claim against a retirement fund for a benefit accruing to such beneficiary from the fund prescribes 3 years after the date on which the benefit became payable. However, in terms of Common Law and more recently in the light of the Constitutional requirements of equity and administrative fairness, a benefit prescribes 3 years after the date on which the beneficiary became aware or ought reasonably to have become aware of his right to such benefit. There are numerous SA adjudicator examples of condonation of late claims, especially where the claimant is situated in a rural area or has a low level of formal education.
 
For the reasons set out above, I usually draft fund rules to provide that moneys (other than death benefits distributed under section 37C remaining unclaimed after 3 years from date of falling due for payment must be paid to the Guardian's Fund administered by the Master of the High Court for the account of the relevant beneficiary. This means that if there is a claim after 3 years but before 30 years has elapsed, the beneficiary will be able to access their benefit. After 30 years, the benefit will revert to the State.  
 
Benefit prescription practice and principles
 
While we are on the topic of unclaimed benefits and the Prescription Act (refer preceding article) Personal Finance magazine had an article on this topic that also makes for interesting reading.
 
Here are the key principles revealed in the article:

• The prescription period is mostly 3 years from the date the creditor has or should reasonably have become aware of the debt;
• The prescription period can be delayed or interrupted;
• The creditor must reasonably be aware of the debt;
• The creditor has failed to claim the amount owed;
• Prescription does not apply to minor children;
• Prescription only takes effect if successfully invoked as a defence by the debtor;
• In the distribution of death benefit, the onus is on the fund to take all reasonable steps to identify and trace the beneficiary;
• The liability of the creditor/ fund depends on (a) why did claimant not submit a claim earlier and (b) did the board take all reasonable steps to trace the person.

• Introduce a minimum level of compulsory pension contribution;
• Increase level of preservation and reduce leakage when changing jobs;
• Implement default investment, preservation and annuity strategy;
• Introduce compulsory annuitisation in provident funds;
• Reduce unemployment and accelerate economic growth;
• Promote home ownership as an important feature of financial security in retirement;
• Ensure right balance between adequacy and sustainability of pension system;
• Increase minimum level of support to the poorest pensioners;
• Increase coverage of employees in occupational pension schemes;
• Improve governance and introduce greater transparency to foster member confidence.

1. Understand what drives a company’s earnings
2. Understand the value of the company
3. Do their homework
4. Think long term
5. Have patience
6. Diversify
7. Accept volatility and live with it.

And finally...

Stats of the day


From Capricorn Asset Management Daily Brief of 13 November 2018.