| In this newsletter: Benchtest 12.2018, the National Pension Fund, FIM Bill concerns, new CoA report, Admin of Estates Act and more... |
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Tilman Friedrich's Industry Forum Monthly Review of Portfolio Performance to 31 December 2018 In December 2018 the average prudential balanced portfolio returned 0.74% (November 2018: -1.73%). Top performer is Momentum (2.33%); while Namibia Asset Management (-0.56%) takes the bottom spot. For the 3-month period, Momentum takes top spot, outperforming the ‘average’ by roughly 1.74%. On the other end of the scale Namibia Asset Management underperformed the ‘average’ by 2.50%. Can you currently invest anywhere but in cash? In this month’s commentary we continue the discussion on the US repo rate and its implications for global financial markets and therefor on investment decisions. What is the risk of investing anywhere other than cash now and in which asset class can you otherwise invest? We have in last month’s commentary shown how closely correlated the SA interest rates and the JSE is to its US equivalents. Fiscal policy is driven primarily by the state of the economy which drives inflation and the tools used to drive policy are interest rates and the supply of money to the market. If the economy overheats inflation rises and this will result in the lifting of the Fedrate (or repo rate in SA). If the economy is moving into recession, the Fed will attempt to stimulate it by dropping its policy rate. Inflation will follow the decline in the economy. When the global financial crisis struck at the end of 2007, the US economy turned into recession. The Federal Reserve responded by lowering its policy rate from 5.25% in July 2007 to 0.25% in December 2008, and by flooding the market with money, in order to support the economy. GDP did recover rapidly out of negative territory up until the middle of 2009 to peak at just below 6% in quarter 2 of 2014. Since then it has declined steeply to steady at around 2% barring a blip taking it to just over 4% in the middle of 2018, probably the result of changes to US tax laws (refer to graph 1 below). Read part 6 of the Monthly Review of Portfolio Performance to 31 December 2018 to find out what our investment views are. Download it here... It’s the dog that wags the tail - how the US economy impacts SA (and Namibia) For those readers who may have overlooked our monthly investment commentary in last month’s Performance Review as at 30 November 2018, we present this here once again. The US Repo rate is currently 2.25%.While the US annual CPI has steadily been creeping up from around 0% in January 2015 to 2.95% at the end of July, it has been on the decline again since then, contrary to the Fed’s expectation, to reach 2.18% at the end of November. This means that any US citizen investing in US treasuries is now for the first time since November 2015, earning a positive real interest rate. If this trend continues, the appetite of US investors for equities is likely to wane, removing the underpin of equities in the US and globally. The declining inflation in the US is probably also at least part of the reason why the Fed has no raised the repo rate at its last sitting, contrary to a general expectation that it would. The US needs inflation to deflate its huge debt burden and expected quantitative easing to do this job. It seems though that this strategy has not worked and the risk of deflation is on the rise. This may present major structural challenges and may result in us treading a very uncertain path and in increased market volatility. A negative real interest rate is clearly not sustainable and is the cause of artificial imbalances in asset valuations that are due to correct once the situation returns to normal as we are starting to see now. The US repo rate should be around 1.5% higher than US CPI, going by historic evidence stretching back to 1988 and up to the onset of the global financial crisis. Based on current US CPI of 2.2%, the US repo rate should be around 4%. Once the repo rate offers a real return of 1.5% or reaches 4% under current inflationary conditions, it would indicate a normalised interest rate environment. At the more recent rate of upward adjustment of the US repo rate and the state of the global economy we are once again looking at around 3 to 4 years now until we reach this point given that we saw 6 increases of 0.25% each over the past 4 years. This of course assumes that the global economy will pick up at the speed it has over the past 4 years, whereas at the moment it could go in either direction. So where will this leave SA? Graph 1  Graph 1 above shows how closely correlated the SA and the US repo rates have been over the past 30 years plus, the SA repo (measured on the left vertical axis) generally lagging the movement of the US repo (measured on the right vertical axis). With an expectation that the Fed is unlikely to raise its repo rate given the current state of affairs, the SA Reserve Bank is unlikely to lift its repo further any time soon unless forced to do so because of a declining positive differential between US and SA real repo rates. Graph 2  Since one would expect the interest rate to impact the exchange rate an interesting question is whether this is indeed the case. Graph 2 above measures the differential between the US and the SA real repo rate, i.e. the nominal repo rate minus annual inflation (the red line measured on the left vertical axis) and the Rand: US Dollar exchange rate (the blue line measured on the right vertical axis). Tracking the red line against the blue line, one will note a fairly distinct decline in the real repo rate differential (i.e. SA offers a higher real repo rate than the US) up until around 1994, coincidentally the time of the democratization of SA, despite a growing gap in real repo rates in favour of SA. There is hardly any correlation between these two lines over this initial period. Over this period the Rand weakened steadily against the US Dollar. From the beginning of 1999 up until about 2012 a relatively higher real repo rate in the US is accompanied by a weakening of the Rand and vise-versa, and we see much closer correlation between the red line and the blue line. Since 2012 the real repo differential hovered between minus 4% and 0% in favour of SA while the Rand continued to weaken significantly against the US Dollar from about 9 to its current level of around 14. It would be interesting to overlay political events in SA onto this graph such as the election of president Zuma and the end of his term. This graph does indicate that the Rand is currently excessively weak relative to the real repo rate differential between the US and SA, possibly for political reasons. This is also borne out by graph 5.1 in paragraph 5 above. Looking at the last few months, the real repo rate differential is closing in favour of the US and we simultaneously see a weakening of the Rand. This indicates that SA will be under pressure to raise its repo rate if the US inflation continues to drop or if the US lifts its repo rate. Graph 3  As illustrated in graph 3 above, both the S&P 500 and the ALSI have grown strongly in real terms since the beginning of 1987. While the current S&P 500 price: earnings ratio at 18.9 is well below its 30 year average of 22.3, the current ALSI price: earnings ratio of 14.9 is now on its 30 year average of 14.7. Graph 4  However looking at graph 4 above, the S&P 500 CPI adjusted earnings (measured on the left vertical axis) of currently 145 are twice its 30 year average of 71. The ALSI CPI adjusted earnings (measured on the right vertical axis) of currently 3,411 are 40% higher than is 30 year average of 2,400. This also indicates a risk of earnings declining to more normal levels and a consequent risk of equity markets adjusting downward. With these expectations, the Rand and local interest rates will remain under pressure for the next 2 to 3 years and this will also impact negatively on local inflation. Equity markets are exposed to the risk of a downward adjustment. Low returns on equities and rising interest rates will also impact negatively on the consumer. On the flipside, a weak Rand should promote exports and support Rand hedge shares that benefit from the weak Rand and should promote local manufacturing and exports which should eventually create jobs and lead to improved consumer sentiment. Minister at long last responds to FIM Bill concerns The Minister of Finance at long last responded to a long list of concerns industry raised with him during a meeting held on 26 July, in a letter dated 11 December. Although the meeting was arranged with the Minister, he unfortunately did not attend. The hand of the ‘ghost writer’ is all too obvious in the Minister’s response. As one commentator observed “what is the purpose of requesting a meeting with the Minister to listen to concerns and grievances of an industry and its regulator if the Minister considers it appropriate to simply sign off the answers provided by the regulator that the industry has taken up with the regulator before and has been unable to get what it would consider a fair hearing.” A reader will be able to get a good feeling by simply browsing over the responses provided to the arguments raised by the industry, without needing to refer to the submission by the industry to the Minister. Download the response here... Annual ERS return replaced by CoA return It appears that the annual ERS returns as at 31 December funds had to submit by 15 February over the past few years has now been replaced by a quarterly ‘Chart of Accounts’ (CoA) return. Not only has NAMFISA unannounced cut down the time for submission from 15 February to 31 January for the first return as at 31 December, but this is also now a format that is quite different from what has last been under discussion and testing and totally different of course form the previous ERS returns that service providers slowly got on top of. Our precursory assessment of these all-new reporting requirements highlights the following concerns:
It seems that the Registrar has little sympathy for funds requesting extensions, on the basis that there has been sufficient forewarning for some time that a ‘new animal’ will be released from its cage and the argument that ‘all other industries’ also have to submit by 31 January 2019. (Interestingly we understand that the insurance industry was in fact granted extension.) Tough luck for you if you thought it’s going to be a house cat and it actually turned out to be a lynx since its release jbC (‘just before Christmas’). The fact that pension fund administrators administer significant numbers of financial institutions on the outsourced basis, each one of whom has to submit the all-new report, whereas the other regulated industries typically only report on their own institution on the in-sourced basis, seems not to carry any weight! We have pointed out before that it serves little purpose to require any reporting that is not aligned to international generally accepted accounting standards, which CoA certainly is not. It is so detailed that it will be impossible to achieve consistent disclosure by all funds and hence any comparisons between funds and pension fund industries be it local or international, will not be reliable or meaningful. It is a futile exercise that will only add to the cost of compliance of funds and puts ever more in question the viability of funds other than very large funds, to retain their identity as stand-alone fund. The following commentary by a well versed trustee gives a reflection of the current state of affairs in our industry: “I really do not think that the Chart of Accounts is reasonable at all for Pension Funds, and this project must have been scaled down to balance the costs versus the benefits. Further, they should have developed the returns in Excel which can then be uploaded. These returns should also have been coherent and meaningful rather than an endless list. NAMFISA must act reasonably as administrators of the Pension Funds Act. Reasonability is required of administrators of all laws by our Constitution. We must go back to the drawing board, agree on what is reasonable to be provided on quarterly basis and to be provided on annual basis (together with the AFS) as well as formats and structure of the returns. They must also show their readiness on the project and remove all errors that are being encountered, things don’t balance.” Administration of Estates Act Surprise An amendment to the Administration of Estates Act (Government Gazette 6813 of 31 December 2018) has been passed by parliament and signed into law on 31 December 2018. It requires with immediate effect, that all monies payable to minors and persons under curatorship payable from pension funds, insurance policies, annuities and even from deceased estates, to be paid to the Guardians Fund in the Master’s Office. This Amendment Act applies ‘notwithstanding any other law’. It thus overrules every other law including the Pension Funds Act that otherwise offers such attractive protection to beneficiaries. It passed through parliament without any question being raised where one would have thought that the phrase “...notwithstanding any other act...” should immediately raise red flags and should arouse probing questions on what other acts may be overridden and in which way! The implications of the Amendment Act were never discussed with the pensions industry and, as we understand, other affected industries although it has a severe impact on it and its stakeholders. It was also slipped through at year end, seemingly a strategy for implementing controversial amendments? We have raised our concerns with the Master of the High Court, the deputy permanent secretary of the Ministry of Justice and NAMFISA respectively, immediately upon our return to office in January. The Master advised that it was not the intention to oblige pension funds to pay all amounts due to minor beneficiaries to the Master as stated in the Gazette. The intention is that all lump sum amounts are to be paid to the Master but that all recurring payments should be paid as before by the administrator of the pension fund to the beneficiary. Imagine the duplication of effort of pension funds paying monthly pensions to the Master and the Master now transmitting these onward to the designated beneficiaries! NAMFISA circulated a notice to pension fund stakeholders with a copy of a letter issued by the Minister of Justice on 22 January in which stakeholders including pension funds and their administrators are informed that “The Minister of Justice has decided, in the interests of all concerned stakeholders, to consult with the industry members to discuss the implementation of the Amendment Act. These consultations will take place during the second week of February 2019... Until such time, all affected institutions are advised to continue making payments for the months of January and February 2019 in terms of their mandates prior to 31 December 2018.” Interested readers can download the letter here... (This letter also contains some reference to the rationale for this amendment. ) The position pension funds find themselves in at the moment is untenable. A new law obliges funds to pay over all amounts due to a minor beneficiary, to the Master as from 1 January 2019. Nothing is in place on the Master’s side to deal with the consequences of this law. Funds now need to decide whether they are comfortable being in breach of a law on the basis of a letter from the Minister ‘advising’ stakeholders to continue as before. Is this condoning and promoting lawlessness? We suggest that something has gone horribly wrong here and quite a few top officials in government should be questioned and taken to task! The unintended (intended?) consequences of the Estates Act So between the Master and the Minister, the decision was taken that private sector is unreliable, if not outright corrupt and criminal in disbursing moneys due to minors. Government must thus step in to protect the interests of minors by assigning responsibility for the disbursement of all benefits to minors to the Master. It is noteworthy that the incriminated institutions, pension funds, insurance companies and trust administrators are all regulated by either the Master or NAMFISA. Have these regulators not done their job properly to allow such misconduct to permeate their systems? Here are a few of the consequences that the man in the street should take careful not of as it may impact his or her estate planning badly: Duplication of administrative effort As we have pointed out in the preceding article, obliging any institution paying monthly benefits to minors, to transfer these monthly payments to the Master for onward transmission to the beneficiaries by the Master duplicates the administrative effort and present wastage of resources. Even if the Master were not to recover its administrative effort, it still comes at a cost to the taxpayer and remains wastage! Trusts rendered superfluous In estate planning of individuals, setting up trusts to take care of any surviving minor beneficiary will become an anachronism as the designated trust will be required to transmit the capital received from the estate to the Master within 30 days. So where the testator may have planned for family members to manage the trust in the interests of their minor survivors, knowing the family circumstances, the Master will now assume the responsibility. It seems that testators now need to consider rather setting up such trusts outsider the borders of Namibia if they want to avoid the scenario of the Master looking after their minor survivors. This will clearly promote capital flight but does the Master have the reputation and trust of the general public that one would gladly make over one’s legacy to the Master? Responsibility for investment of trust assets now assigned to the Minister Amongst the reasons offered for the amendment of the Administration of Estates Act were “...to ensure effective governance as there was not provision in the existing...Act to determine and the standard of bookkeeping...” and “...the Act did not provide for a clear and transparent investment process.” Well, the Amendment Act still does not determine the standard of bookkeeping nor does it provide for a clear and transparent investment process. This can of course be done via regulation as the Amendment Act now provides. Evidently though, the Minister has total discretion how to invest and this can mean that all moneys are to be invested in treasury bills and government bonds, earning inferior returns for their minor beneficiaries. Pension fund governance - a toolbox for trustees The following documents can be further adapted with the assistance of RFS.
News from RFS RFS welcomes new staff Helena Simon joined our permanent staff complement on 1 January 2019 as a Fund Accountant in our Benchmark team. She is a Namibian by birth and matriculated at the Hage Geingob Secondary School in 2008. She took up full-time studies at NUST in 2009 and obtained a Bachelor in Accounting and Finance degree 1n 2014. Helena was employed by Alexander Forbes since 2015 as a Fund Bookkeeper. Julien Oosthuizen joined our permanent staff on 1 January 2019 from Alexander Forbes to strengthen our Benchmark administration team. Julien hails from Usakos and matriculated at Jan Möhr High School in 2007. She obtained a B. Tech degree in Business Management from NUST in 2016. Julien started her career in the financial services industry in 2011 with Momentum as a New Business Officer. In 2012 she moved to the FNB Trust department as an administrator. In 2014 she moved within the FNB Group to Wesbank as an Administrator. She joined Alexander Forbes in July 2015 as an Administrator. Menesia Nangolo joined our permanent staff on 1 January 2019 after having been in diverse temporary employment from 2014 to 2017. She matriculated at David Bezuidenhout High School in 2009 and proceeded to university where she obtained a Bachelor in Financial Management Honours degree from the International University of Management in 2014. We welcome our three new staff members heartily and look forward to them applying their traits for the benefit of our team and our clients! RFS says goodbye
RFS says thank you for loyal service We express our sincere appreciation for 5 year’s loyal service and commitment to RFS and our clients to –
RFS places great value on and encourages staff to advance their qualifications to be in a better position to serve our clients beyond expectation. We share our pride with and congratulate –
RFS in pictures  Staff dressed up in recognition of cultural day. Legal snippets Death claims – a real life scenario In a recent case, a female fund member was married and had two children from the marriage. She joined the fund in 2007 at a time when she was divorced from her first husband. Member married again in 2009 and passed away in 2018. The only beneficiary nomination on record was that of her two sons from her first marriage. Prior to her passing, she instituted divorce proceeding and a divorce summons was issued 3 months before she passed away. The trustees are concerned that their decision could be challenged both if the to be divorced husband was to be awarded a portion of the death benefit but also if he was to be excluded from any award. The obvious question is what decision and action, if any, the trustees should take in the face of this dilemma. It would have helped their decision if the to be divorced husband had distanced himself from any award but as it seems he in fact lays claim to an award. It also appears that the relationship between the two children from the first marriage and the second husband was rather acrimonious, indicating that there will be fair chance of one or all 3 dependants challenging the trustees’ decision. Both children were still minor at the time of death of the member and were thus also legal dependants entitled to a fair portion of the death benefit of deceased member Depending on how far divorce proceedings had progressed, a divorce order could possibly still have been handed down even after the member passed away. It would appear however that this was not the case and the divorce proceedings therefore terminated as the result of the member’s passing before the divorce order was handed down. The fact that the member was about to divorce her husband, in our opinion, is irrelevant. At date of member’s death, she was not divorced and her to be divorced husband was still a legal dependant in terms of the definition of ‘dependant’ in the Pension Funds Act and is thus legally entitled to be considered by the trustees for an award of a portion of the death benefit of deceased member. It now becomes a matter of investigating the circumstances that prevailed at the date of death of the member in as much detail as possible. If the couple still shared a common household, the passing of the member would in most likelihood place the husband in a financially worse position than he had been before and there is a clear argument for his dependency on the deceased member. One would also need to establish what the husband’s future dependency would have been to determine whether or not his dependency would have increased or declined following the passing of his spouse. If the couple were already separated and lived apart, the preceding cause of dependency would not exist. However, the trustees now need to obtain information on the two spouse’s financial position to effectively put them into the position of the judge who would have had to establish any level of maintenance the surviving spouse would have been required to make. Since there were apparently no children from the second marriage, the trustees’ job becomes a little simpler. One now needs to consider for how long the two partners lived apart already and whether this state of affairs should reasonably have led to the manifestation of one of the partner developing financial bottlenecks. If this was the case the trustees should attempt to quantify the financial bottlenecks that have developed and whether any of the two partners made any contribution towards alleviating these financial bottlenecks. If this information now enables the trustees to quantify the actual support provided by the one partner to the other or by the financial bottleneck that arose on the side of one partner, the trustees should be able to make a decision that will be difficult to challenge by the deceased’s dependants. The next consideration of the trustees is to determine and quantify the extent of dependency of the two minor children. This will also not be an easy task as it would require the trustees to obtain as much information as possible on deceased member’s income and cost of living patterns. The trustees might want to refer to the deceased’s testament, if there is one, to pick up some hints to guide them. They might also want to consult close family of the deceased. At the end of the day, as much diligence the trustees may apply to this case, it does not mean that one or more of the legal dependants will not challenge their decision. In this situation it would help sharing their decision with the legal dependants and affording them an opportunity to object. If no one objects the trustee should feel comfortable to proceed. If anyone objects, the trustees should consider the arguments for the objection and whether this should require an adjustment to their initial award and/ or further investigation. News from the market Alexander Forbes in turmoil After the unceremonious departure of former CEO Andrew Darfoor a few months ago, at least another 5 top executives and members of the executive management team of 9 have left Alexander Forbes. It also cancelled the acquisition of a new administration platform that would have cost a significant amount. NEF secretary-general retires Tim Parkhouse, long-time secretary-general of the Namibian Employer’s Federation gave notice of his retirement at the end of 2019. Tim has done an excellent job promoting the interests of Namibian employers. His successor will have a challenge filling his shoes but this is what challenges are about. Media snippets (for stakeholders of the retirement funds industry) How to improve SA’s pension system How do I get my pension to last “I’m 75 and my pension resides on a Lisp (linked investment service provider) platform, in the form of a living annuity. I require growth of 5-8% net of costs, for my pension to sufficiently last. If I could, I would prefer to place the entire amount with a bank in order to earn the required interest. How can this be achieved, given the current regulatory requirements?” If you are a pensioner and the same thought has crossed your mind, read this article providing very useful advice that is equally relevant to Namibia, both in terms of products in the market and prevailing interest rates that are being offered by fixed interest products Read the full article by Trevor Lee in Moneyweb of 12 December 2018, here... Why it pays to be aware of the effects that inflation and interest will have on your pension pot. “... looking at the outcomes for pensioners against the promises made, the conclusion is a sad one: very few pensioners have been able to keep up with inflation over the years after retirement. The industry has let them down. What has gone wrong? There are a number of items to discuss but let’s start with inflation: while employed, members have the luxury of expecting at least inflation increases in their salaries and may get promotions. That stops at retirement – but inflation does not stop... Then we need to look at interest rates. There has been a lot more awareness recently of the problems of people who seek the greatest return on their ‘pot of cash’ which they typically were previously advised should not be exposed to the risk of negative returns (although that is very true!). The problem is that interest rates are linked to inflation which is the rate of change of prices...” Read the full article and consider the table that sets out how inflation will erode the value of your pension and how your retirement capital erodes rapidly if your draw down rate, annually adjusted by inflation, is not supported by future investment returns. Read the article by Liston Meintjes in Moneyweb of 14 December 2018, here... Monitor your pension fund “Many employees depend on their pension fund for retirement, but most do not even know the name of the company fund, let alone the benefits they will get from it. Consumer Line's experience shows that very few people take an interest in their pension funds... Some people don't even know what benefits they or their children and other dependants should expect when they retire, die or resign from their companies... Lesiba Tjikana, 50, of Mokopane in Limpopo has proof of the amount payable to him, but his fund administrator, SALT, paid far less than what he and his employer contributed. At the time of resignation, Tjikana and his employers had contributed R19700 but was paid only R9000.” Read the full article by Thuli Zungu in Consumer Line of 3 September 2018, here... Media snippets (for investors and business) Why save for retirement if you don’t intend to retire? “The products being offered to employees today are essentially the same that have been available for decades. Employees are being offered pension funds, death and disability benefits, and education savings plans based on the experience of providing these products to people living a ‘linear’ life. How relevant are these solutions to those joining the workforce today, who are frequently changing employment, freelancing in the gig economy, and not expecting life events to happen in a straight line? Financial services providers have to become more creative in thinking about solutions that are meaningful to people living their lives in a substantially different way. Pension funds that are based on the idea of someone starting to contribute at the age of 25 and carrying on for 40 years until they retire and then start drawing on those savings are the first place to start...You can’t convince someone that saving for their retirement is necessary when they have no intention of retiring in the traditional sense. To make saving meaningful, it has to be relevant. Employers and financial services providers can no longer get away with imposing products on employees and clients. As Regard Budler, the head of product solutions at Momentum Corporate notes, solutions have to be designed from listening to what people really need. Read the article by Patrick Cairns in Moneyweb of 9 November 2018, here... Three simple steps to getting your team excited about the future
Read this and other interesting articles from ‘tomorrowtoday’ Tuesday tip of 15 January 2019, here... Top 10 largest economies by 2050
And finally... Stats of the day  Our comment: The measure of ‘ultra-rich’ is roughly N$ 420 million. How many does Windhoek have – probably not much more than a dozen? Windhoek’s population of roughly 325,ooo in relation to Hong Kong’s 7.4 million means that Windhoek should be comfortable having some 400 ‘ultra-rich’ residents! If this were to be true they would in fact ‘own’ Namibia’s GDP! From Capricorn Asset Management Daily Brief of 1 October 2018. |
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