|In this newsletter:
Benchtest 01.2019, Administration of Estates, National Pension Fund 2, the CoA Return and more...
Important notes and reminders
VAT refunds stuck in the system!
And our Managing Director continues his discussion on a National Pension Fund.
Tilman Friedrich's Industry Forum
Monthly Review of Portfolio Performance
to 31 January 2019
In January 2019 the average prudential balanced portfolio returned 1.2% (December 2018: 0.74%). Top performer is Namibia Asset Management Fund (2.7%); while Allan Gray Balanced Fund (-0.49%) takes the bottom spot. For the 3-month period, Hangala Prescient Absolute Balance Fund takes top spot, outperforming the ‘average’ by roughly 2.78%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 3.25%. Note that these returns are before asset management fees.
The world of investment and retirement is not what it used to be!
Politicians, particularly those of the western world, would want to make us believe we live in an open global economy. However, where international trade is concluded in a single currency, where fiscal and monetary authorities intervene massively in financial markets, more will have to be done by the politicians to make the public believe.
The law of demand and supply, has no bearing on the behaviour of markets today. Savers are paying off the debt of borrowers through artificially low interest rates that are set by monetary authorities. So-called ‘safe haven’ investments are earning negative real interest rates and the investor is now conditioned to accepting that he will have to work until he drops dead, instead of realising his dream of retiring at an age where one might still be able to enjoy life for a while. Retirement ages are extended while pension entitlements are at best being questioned and already reduced in some countries.
With negative real interest rates seemingly having become the ‘new norm’, asset valuation models are now being questioned. Why should this be of concern to a pension fund member? Well the point is that pension fund contribution structures were established over the course of the past century or more based on the assumption of cash returning around 2% above inflation, bonds around 4% above inflation, property around 5% above inflation and equity around 8% above inflation. A typical balanced portfolio comprising of a mix of these assets based on conventional investment theory was expected to return roughly 5% above inflation, net of fees. Pension theory then arrived at a net retirement funding contribution rate of 11%+, to produce an income replacement ratio of 2% per year of membership.
Indications based on the ‘new norm’ are that one is now only looking at a net return of between 2% and 3% p.a.
Read part 6 of the Monthly Review of Portfolio Performance to 31 January 2019 to find out what our investment views are. Download it here...
Can you currently invest anywhere but in cash?
The US Repo rate is currently 2.25%. In this month’s commentary we continue the discussion on the US repo rate and its implications for global financial markets and therefore 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 graph 1).
Over the past just over 30 years the US Fed Rate was on average around 0.7% above inflation. However, excluding the period since the start of the global financial crisis from December 2007 to date the differential was 1.7%. Graph 2 shows how well correlated these two metrics have been since 1987 (Fed Rate measured on the right hand axis) but it shows a large gap between these currently. The graph also confirms that a 2% shift between the two axes produces a good fit of the two lines. The gap between these two lines can close through a decline in inflation or an increase in the Fed Rate or both. As things stand, it seems that the Fed has stalled further rate increases for the time being while the inflation rate is on a downward slide. This is not what the Fed wants to see as it means that the economy is in reverse gear and therefor it cannot afford to lift the Fed Rate, the chance being that it will be reduced if inflation continues to sag. Currently the differential between the Fed Rate (2.5%) and US annual inflation (1.9%) is 0.6%. This is still around 1% lower than the long term average.
Tracking the red (CPI) lines and the blue (policy rate) lines in graph 2 and 3, it is indeed surprising how closely they resemble the other, as I referred to in last month’s column, “the dog wags the tail”. Note that on graph 3 the SA Repo is measured on the left hand axis and the CPI (Namibian) on the right hand axis. Evidently SA had nothing to do with global politics, e.g. Kuwait invading Iraq or with the Tech Bubble yet our market moved in sympathy with the US market. Currently the differential between the Repo Rate (6.75%) and Namibian annual inflation (5.1%) is 1.8%. That represents a real rate of 0.6%. Over the past just over 30 years the Repo Rate was on average around2.5% above inflation. However, excluding the period of artificially low interest rates since the start of the global financial crisis, from December 2007 to date, the differential was 3.6% and this is where we have to get back to for a normalization of asset class valuations. A normalization will probably be delayed due to the state of the SA economy. Undoubtedly also due to the absence of sufficient risk premium for foreign investors, we saw R 120 billion foreign portfolio investment leaving local markets for the year 2018. To lure foreign investor into SA, the repo will have to be raised substantially. Once the Federal Reserve resumes lifting of its policy rate, SA Reserve Bank’s hand will in any event be forced.
It is evident from the above analyses that the US Fed Rate is still around 1% off its long-term inflation differential and a normalised interest rate environment. Since the Fed has stalled further increases in its policy rate for the time being it is difficult to foresee for how long global financial markets will remain in the current state of flux but markets will definitely not show any fireworks for the next 12 months and perhaps quite a bit longer. Graph 4 shows a noticeable, negative trend in global equity markets since the beginning of 2018, the DAX leading the pack with a decline of close to 20%.
The question is whether we will see this continuing or whether equity markets have now bottomed out. Since 1986 SA equities now delivered a real return of only 5.7%, including dividends where the long-term expectation is 7.4%. This indicates that our equity market is now ‘behind the curve’ and needs to catch up again. Looking at the US equity market, the S&P 500 produced a real return of 6.7% including dividends which is in line with the long-term expectation of 6.5%. From that perspective, the US market does not pose a threat of a significant downward correction.
We believe that the normalization of interest rates has largely been factored into equity valuations already and that the risk of a further downward correction is slim. We expect normal returns from US equities and believe that SA equities need to catch up as they are behind the curve in terms of long-term returns. They should present a buying opportunity. Since there is no evidence that the global economy is busy turning around, it is difficult to identify any economic sector that might produce some fireworks over the next 12 months meaning that one should spread your investments across all economic sectors but should preferably pick companies with quality earnings and high dividend yields.
The CoA return - time for a post mortem?
The Chart of Accounts return came a long way and changed its guise repeatedly and substantially. The first time it raised its head in official form was so long ago, I can hardly remember – 2012 it was. By 2013 it had become imminent. We had already been in touch with our system vendors and they had started to gear up – and then it fell flat again. Imagine we had instructed our system vendors to proceed programming the report as it then looked on the basis of this reporting being imminent? It would have been a total waste of time!
2016 then saw a resurrection of the report under the guise of the One Chart of Accounts. Back then we questioned a number of principles, following an open invitation by the regulator, such as:
At the request of NAMFISA, RFS engaged in testing the report at considerable expense and provided extensive commentary. These comments were ignored by the regulator.
JbC (just before Christmas) the regulator issued a circulator informing all retirement funds that the new report now needed to be submitted, and this 15 days sooner than the predecessor report the industry had just gotten on top of, namely by 31 January. No guidelines were provided on how this report is to be compiled.
Pleas by RFS to provide an input sheet to industry to facilitate the uploading of information were dismissed by the regulator.
The report was not accessible on the ERS system until after Christmas, for all intents and purposes only on the 2nd of January.
RFS suggested to its clients immediately to apply for extension, having been aware about a number of problems with the report. These applications were all denied by the regulator on the basis of the arguments being unwarranted.
When it eventually became evident that there were indeed problems with the report, the regulator eventually granted some funds extension to end of February but at the same time set the condition that the predecessor report had to be submitted by 15 February! This predecessor report of course was substantially different from the new report meaning that the whole processes of compiling and submitting information needed to be started all over again. This condition was apparently eventually waived by the regulator. It did not affect RFS as our clients had all submitted their returns in the deficient format in time!
No sooner had some funds diligently and in time submitted their report as directed by the regulator, the regulator for the first time acknowledged some of the problems with the report. Certain fields were not open and could not be filled in. Funds were now directed to resubmit their reports within 7 days after these fields were opened!
We suggest that the run-up to the submission of the new report as set out above should warrant a post mortem to determine whether this reflects the spirit in which cooperation between the industry and the regulator should be approached. NAMFISA’S 2018 annual report defines objectives vis-à-vis its stakeholders as -
Child Care and Protection Act - an overview
The Child Care and Protection Act, Act 3 of 2015 was promulgated in Gazette 5744 of 29 May 2015, to give effect to the United Nations Convention on the Rights of the Child, the African Charter on the Rights and Welfare of the Child and other international agreements binding on Namibia.
This massive Act of 254 sections and 279 pages, plus 120 regulations covering over 300 pages that were promulgated on 30 January 2019, commenced on 30 January 2019. It provides for a penalty not exceeding N$ 50,000 or imprisonment not exceeding 10 years or both, for offences relating to abuse, neglect, abandonment or failure to maintain a child. It also provides for the state paying a maintenance grant, a child disability grant and a foster parent grant, in an amount and frequency as determined by the Minister by regulation.
The Act aims to:
If you would like to have any overview of the contents of the regulations to the Act, download it here...
Administration of Estates Act debacle
The amendment to the Administration of Estates Act 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 as from 1 January 2019 and requires that pension funds now have to pay any lump-sum benefit and any pension benefit to the Guardians Fund, given that the Minister of Justice believes that he has the powers to stay the prompt implementation thereof by way of public pronouncements and a letter which requires trustees to continue paying benefits to minor as before, ‘in the best interests’ of the minor. This puts trustees in a very awkward position. Firstly, can the Minister stay the implementation in this manner? Remember that trustees have a duty to comply with laws and regulations, the same for the funds’ auditors and non-compliance may carry serious sanctions for trustees and auditors. Why has NAMFISA not pronounced itself on this yet? Does this mean that all funds should obtain legal opinion on how they should act under these conditions?
Secondly, if the Minister’s official staying of the implementation of his amendment indemnifies trustees from being in breach of the law, which I believe not to be the case, how would they interpret ‘in the best interests of the minor’? Considering that the amendment was justified by reference to abuse of minors’ moneys by service providers and by reference to excessive costs having been charged to minors for the processing of benefits due to them. Now funds are to continue as before but does that include them condoning the abuse referred to? Surely it must be argued that this will then not be ‘in the best interests’ of the minor. Considering that the Master will administer these moneys at no cost, I would argue that trustees need to ascertain that minors should bear no costs in respect of the processing of any benefits payable to them. Just not sure who would do any work without compensation?
Let’s turn to the topic of costs. Clearly no-one would engage in business without compensation. Whether it is a minor or a major, everyone has to pay for any service consumed and that includes the taxpayer who has to pay for the services provided by government – through tax primarily but often through fees as well. Why should a minor be treated differently to a major? As far as my knowledge goes, fees charged by the various providers of financial services are based on the type of transaction and do not consider the age of the beneficiary. The free market mechanism surely will separate the corn from the chaff and ascertain that anyone charging unreasonable or abusive fees will sooner rather than later run out of business?
To use these arguments for government or one of its agencies to ‘nationalise’ a part of the economy in a monopolistic environment, is highly questionable. This insinuates that government can do better than private sector operating in a competitive environment. Unarguably this is not the case as has been proven by so many socialist experiments across the world, and this is regularly admitted by government. In contrast Martyn Davies MD of emerging markets and Africa at Deloitte believes that “…the state cannot be trusted to own anything... (see report ‘The state should not own anything’ further down).
Another interesting dilemma in this saga is that the amendment now inserted age 21 as age of majority for the purposes of the Act. Yet the Child Care and Protection Act just reduced the age of majority to 18 from 30 January 2019! Which one prevails?
Finally we have a dilemma regarding the Income Tax Act. The fund and its administrator are obliged in terms of the ITA to determine and to deduct income tax on any taxable benefit and to issue a PAYE 5 certificate to the relevant taxpayer. Furthermore, any annuity is gross income. The implication is that in practice the administrator must deduct income tax from the annuity and issue a PAYE 5 certificate for the amount paid and any tax withheld. In terms of the amended Administration of Estates Act, the annuity now must be paid to the Guardians Fund. The Guardians Fund in turn should pay this annuity as an annuity for the benefit of the minor beneficiary to the guardian. Since this will then also be an annuity it must be taxed, or at least it is taxable. The ITA never envisaged such a scenario and therefore does not require the Guardians Fund to deduct tax and to issue a PAYE 5 certificate, which does not change the taxable nature of the annuity. To address this dilemma will require some fancy footwork in terms of trustees deciding what they want to offer to the minor beneficiaries of any deceased employee and how this must be dealt with in the rules in order to deal with this dilemma,
To round off the discussion on the Administration of Estates Act debacle, our industry will now be forced to change its processes and procedures to comply with this Act. The Master will set up processes and procedures to receive, to record to maintain and to dispose of benefits it will receive in respect of minor beneficiaries – and this will only be for a short while where after the situation will change fundamentally once again! Come the FIM Act, we are effectively back to the previous dispensation because it will once again be the trustees’ responsibility to dispose of benefits for minors and majors in a clearly prescribed manner, as set out in section 276 and will have to be observed ‘despite anything to the contrary contained in any law’! Since the FIM Act will be a younger Act than the Administration of Estates Act, as now amended, the FIM Act will prevail!
Estate planning in the new estates law environment
Estate planning is no longer what it used to be with the amendment of the Administration of Estates Act. Where a testator directed that a trust be created for his minor child or children, grandchild or grandchildren or any other minor to be funded from a portion of his estate after his passing away or if he has already created a trust for such minor beneficiaries, the testator needs to be aware that the moment a benefit becomes vested in a minor, i.e. the minor has a legal claim on receiving the benefit, the amount, whether it is a capital amount or an annuity, must be paid to the Master for disposition to or for the benefit of the minor in its absolute discretion.
Bear in mind that anyone above the age of 18 is no longer a minor as from 31 January 2019. The Master will thus now, most likely, pay out any remaining capital of a minor upon the minor reaching the age of 18. (Note that it is not clear yet how the conflict between the age of majority of 18 and the age of 21 specifically referred to in the amendment of the Administration of Estates Act will be resolved.) This may also not be what the testator would have wanted. Where the testator is also not comfortable that his bequest to a minor is entrusted to the Master of the High Court, he needs to consider the alternatives. Hopefully the Minister of Justice will realise that the amendment of the Administration of Estate Act may lead to capital flight from Namibian to other jurisdictions that still provide for freedom of testation.
Failing the retraction of the obligatory disposition of all moneys due to minors to the Guardians Fund, subject to the total discretion of the Master, testators conceivably may create a trust in South Africa or another jurisdiction and determine an amount to be paid into that trust without specifying the minor or minors in respect of whom this money is to be paid so that at that point the minor has no legal claim on the money. The trust deed in the neighbouring country would then lay down the parameters of how the money should be allocated to minor beneficiaries. Testators may also attempt to circumvent these unwanted consequences by nominating a trustworthy family member with whom they agree to accept a bequest and how the family member is to deal with the moneys in the interests of the minor beneficiaries.
Trustees are put under ever increasing, disproportionate pressure
So we in Namibia are trying to emulate, sometimes even lead the developed world in putting ever increasing pressure on trustees to shape up. Trustees are expected to become professionals in their role as trustee, never mind the fact that for 90% of all trustees this job has been assigned to them by or with the blessing of the employer, as an adjunct to their position in the management structure of the employer. They cannot, and will never be pension experts as this would require them to neglect their job that earns their company its keeps. Neither can pension funds, barring a few exceptions, afford to engage professional trustees.
I believe trustees already find the going tough, and that is even before they have been confronted with the requirements of the FIM Act.
Not interested in IOPS or ESG, you may think, but be aware! When the regulator sends this out for commentary, it probably has something up its sleeve! It will likely not be the last time you as a trustee will hear about these acronyms. Just another indicator that the road forward will be uphill for the pensions industry.
The direct cost of operating a retirement fund for employees is steadily increasing and that does not account for a significant element the employer is and has been carrying all along such as the time its senior staff spend on pension fund matters. For all its good intentions to provide for the well-being of its employees through its pension fund, the employer gets slapped with ever increasing regulatory demands and is exposed to the ever increasing risk of non-observances of laws and regulations some of which can have the consequence of a senior staff member either ending up in jail or being barred from serving on its board of directors.
In just about every discussion on global best practice with regard to the management and governance of the pensions industry, reference is made to ‘proportionality’. Surely in every country there should be intense discussion about what proportionately means for the country when striving to pursue global best practice? As far as my knowledge goes, there has never been an open discussion between the regulator and the industry as to what proportionately means to our regulator and our industry.
Pension fund governance - a toolbox for trustees
The following documents can be further adapted with the assistance of RFS.
News from RFS
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 –
Since its establishment in August 1999, RFS Tigers participated in every Volleyball for All tournament!
Above: the MD motivating our team.
Above: some of our ladies distracting the attention of their competitors!
News from the media
RFS captures PMR Diamond Arrow award
Above: Louis Theron (L) and Gunter Pfeifer (R) with the 2019 PMR Diamond Arrow for the Pensions / Retirement Fund Administrators category.
Retirement Fund Solutions (RFS) has been awarded the 2019 PMR Diamond Arrow award. This is the 4th Diamond Arrow awarded to RFS for achieving 1st place in the category ‘Pension / Retirement Fund Administrators’ in as many times participated.
Marthinuz Fabianus, Managing Director of RFS, dedicated the award to the tireless commitment and dedication of RFS staff that often go beyond the call of duty. He remarked that the Diamond Arrow did not come easily as RFS squared off against established multinationals. He thanked RFS clients for consistent support and loyalty over the past 19 years RFS that has been in business.
The Diamond Arrow is awarded to the participant with the highest score of not less than 4.10/5. RFS scored 4.26/5.
Second place Gold Arrow went to Old Mutual with a score of 4.20/5. Sanlam took the Silver Arrow with a score of 4.15/5. Alexander Forbes was fourth in this category with a score of 4.06/5.
Death benefits – did you know that...
(for stakeholders of the retirement funds industry)
Before you restructure your fund, consider this truly independent advice
Richard Morris, former associate director of PWC offers some prudent advice which trustees should carefully consider when restructuring their fund. Although this is a fairly dated article it is still as relevant today as it was then and is worth reading by every trustee and adviser.
No fund manager stays on top for ever
In 2002 S&P Dow Jones Indices published the first S&P Indices Versus Active (Spiva) scorecard. It was a piece of analysis that compared the returns of active fund managers in the US against a broad market benchmark.
It wasn’t exactly a revolutionary piece of research, but it did introduce a new level of clarity to the argument for the use of index funds. Back in 2002, and consistently ever since, Spiva has showed that very few active managers are able to outperform a broad market index over any time period, either short-term or long-term, and even fewer can do so consistently…
What SPDJI did find surprising, however, was that this was a global phenomenon, and that it was persistent. The opportunity for active managers to outperform is higher in inefficient markets, but there just aren’t that many of these anymore.”
Read the full article by Patrick Cairns in Moneyweb of 19 February 2019, here...
Three factors that will determine your future wealth
Saving enough for retirement can seem like a daunting and complex problem. However, there are really only three things that investors have to consider.
“In its simplest form, saving for retirement depends on three factors: time, contributions and returns…
(for investors and business)
The state should not own anything
State-owned entities (SOEs) should be privatised, because the state cannot be trusted to own anything, says Deloitte MD of Emerging Markets and Africa Martyn Davies. This comes ahead of the 2019 budget policy statement at a time in which stabilising SOEs, which have weighed on the country’s finances, will again be at the fore. “Hopefully the trajectory is one from stagnation to currently thanks to [public enterprises minister] Pravin Gordhan moving towards stabilisation. The inevitable next step is privatisation. Those are the three steps,” Davies said at a media briefing. “I don’t believe the state should own anything. In SA’s case, you clearly can’t trust the state to own anything,” he said. Davies said President Cyril Ramaphosa will likely announce in the next few weeks that embattled power utility Eskom will be broken up. “It should have been announced a year ago but we waited until we’re in this policy limbo as we wait for elections,” Davies said. “Breaking up Eskom is inevitable otherwise it’s going to tank the economy.”
̴ The Red Eye – Momentum Investments
The six habits of successful companies
“What makes private companies great? In an unscientific analysis six habits found at the biggest private firms as well at some smaller, successful ones have been extrapolated. The writer hopes you can apply one or more of these lessons to your business, no matter what size.
Here is the list:
4 Simple things you can do to improve your leadership right now
“…Leadership can be easy, and I wanted to share four secret tips that you can do right now, that will make you a better leader and will help to improve your influence and results immediately.
Now you might not think that these are really secrets, but, given how few leaders do them, it certainly seems that way to me,
Did you ever wonder why??
WHY: Why is shifting responsibility to someone else called 'passing the buck'?
BECAUSE: In card games, it was once customary to pass an item, called a buck, from player to player to indicate whose turn it was to deal. If a player did not wish to assume the responsibility of dealing, he would 'pass the buck' to the next player.