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In this newsletter:
Benchtest 06.2019, National Pension Fund Part 7, FIM Bill and Income Tax Act challenges and more…



NAMFISA levies

  • Funds with year-end of July 2019 need to have submitted their 2nd levy returns and payments by 23 August 2019;
  • Funds with year-end of January 2019 need to have submitted their 1st levy returns and payments by 23 August 2019;
  • Funds with year-end of August 2018 need to submit their final levy returns and payments by 30 August 2019; September 2018 year-ends need to submit their final levy returns and payments by 30 September 2019.
It must be borne in mind that the new levy was introduced only from 1 November 2017 and the levy must thus be pro-rated between the new levy and the old levy calculation methods..

Phasing out of cheques - reminder
 
Local banks no longer accept any cheques issued after 1 February. Note that cheques will expire after 6 months, thus 1 August. Cheques issued on 1 February 2019 will thus be valid only up to 31 July 2019.


Registered service providers

Certain pension fund service providers need to be registered by NAMFISA and need to report to NAMFISA regularly

These service providers are:-

  • Registered Investment Managers
  • Registered Stockbrokers
  • Registered Linked Investment Service Providers
  • Registered Unit Trust Management Companies
  • Registered Unlisted Investment Managers
  • Registered Special Purpose Vehicles
  • Registered Long-term brokers
  • Registered Long-term insurers

If you want to find out whether your service providers are registered, or whether you need to establish directly from NAMFISA because the service provider does not appear on the list, use this link...

Check out our new retirement calculator


Our web based retirement and risk shortfall calculator has been enhanced and updated to assist you to determine how much you should contribute additionally, either by way of lump sum or regular salary based contribution, to get to your target income at retirement, death or disablement.

Try it out. Here is the link...




Dear reader

In this newsletter RFS Managing Director, Marthinuz Fabianus concludes his discussion on how a National Pension Fund can be established.

In ‘Tilman Friedrich’s industry forum’ we present -

  • The editor's views on investment markets.
  • Feedback on the status of the FIM Bill.
  • The FIM Bill requires all existing funds to re-register – brace for challenges.
  • The Administration of Estates Act – where do we stand?
  • Pensioners, the FIM Bill and the Administration of Estates Act.
  • Certain common provident fund benefits challenged by Inland Revenue.
  • Have investment markets normalised – the full article.
  • FIM Bill to be tabled in parliament.

In ‘News from RFS’, read about our staff philosophy and how staff is engaged.

In ‘News from the marketplace’ read about –

  • The National Pension Fund – where do we stand?

In ‘News from NAMFISA’ we present –

  • Circular CM/02/04/2019 – investing offshore;
  • Explanatory note PF/EN/01/2019 – how to classify investment in property;

In ‘Legal snippets’ we report on a financial adviser who was held liable for his client’s loss.

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




Rationale for the proposed approach to the operationalisation of the National Pension Fund (NPF) - Part 7

After circling around the issue in each of the past 6 months’ editions of this newsletter, albeit for much needed background, the curtain comes down and I share below my views on how Namibia can introduce compulsory participation in a retirement savings plan for her people.

you guessed it right! I am suggesting that the Social Security Act, No. 34 1994 (SSA) which provides for the establishment of a National Pension Fund (NPF), a compulsory contributory social pension scheme, instead provides for a compulsory membership to a Retirement Fund  as defined in the Income Tax Act, say a “compulsory occupational retirement savings fund”.

Why do I say this? Over the past 20 years, our Social Security Commission (SSC) has attempted without success to bring into operation the NPF law, at great cost to the tax payers. The main reason for the failure has to be the fact that SSC has been using international experts who tried to copy and paste western world social security models to our local environment, which repeatedly proved not to be sensible. Another probable key reason is that SSC in all attempts to establish the NPF stared themselves blind at the overnight empire this institution would become if it would manage the operations of the National Pension Fund in addition to the other funds they currently manage; such as the Maternity Leave, Sick Leave and Death Benefit Fund (MSD), Development Fund, Workman Compensation Fund and eventually, the National Medical Benefit Fund. The thought of the institutional capacity SSC would create to manage the NPF had tongues wagging about a) how this entity would eclipse the mighty Government Institutions Pension Fund (GIPF), b) the funding of associated costs of creating the immense capacity required and c) the jostling for control and power, were all amongst the contentious issues and causes for disagreements amongst key decision makers.   

The 2018 labour force survey indicated that 726 000 persons were gainfully employed. However, the same survey indicates that only 308 000 of the above number of persons were formally employed, with the remaining balance of 418 000 being informally employed. The 2018 NAMFISA annual report on the other hand, indicates that around 287 000 members actively contributed to retirement funds (including retirement annuity funds). At the time of writing, the available statistics from SSC as at May 2017 indicated that 676 000 persons actively contributed to SSC’s Maternity Sick Leave and Death Benefit (MSD) Fund. These figures don’t add up nicely, but discounting the number of persons actively contributing to retirement funds per NAMFISA report, leaves you with around 389 000 persons who could contribute towards retirement savings, but currently don’t per SSC figures. What is evident from above information, there is a case for a NPF in a relevant form.

Namibia has a thriving and world class occupational pension funds’ industry, within a dynamic regulatory environment. I therefore submit that a National Pension Fund law should require that say all persons contributing to current SSC MSD fund be required to contribute to a Retirement Fund (say as currently defined per Income Tax Act). Minimum contributions towards retirement funding are to be defined, and provision should preferably be made for income benefits for dependent survivors upon death and upon permanent incapacity (disability). The rationale for my suggestion is that we should make best use as a country of our already existing infrastructure managing occupational pension funds, to extend retirement funding coverage to the 389 thousand qualifying and gainfully employed persons of our country, currently without occupational saving arrangement. In my earlier articles I have already recognised Namibia’s affiliation to international bodies and signatory to certain conventions (like the ILO) which are key considerations from government’s point of view. I previously also touched on the international benchmarks with regard to the inclusion of persons in the informal sector in a NPF scheme.

I can just state here, that I safely concluded that extending occupational fund arrangements on a statutory basis to all qualifying employees will ensure that we can more than meet development goals per various conventions. My previous conclusions on the need to extend retirement savings coverage to persons informally employed was that this is not viable and is also in keeping with international trends. However, this issue has been one of key hold backs for our NPF, where the Ministry of Labour has been persistent on having informally employed persons covered in a NPF. The Labour Resource and Research Institute (LaRRI) produced a report titled “Namibia Informal Economy”, which I can only recommend for instructive reading. I believe coverage to this group of persons should be on a voluntary basis.


Conclusion

I have warned in my inaugural article, which appeared in the December 2018 edition of this newsletter, that the ‘devil lies in the detail’. I have taken the risk of oversimplifying my suggested solution, but the bigger problem is overcomplicating attempts to solve national problems like the case of the NPF. There is no need for SSC to reinvent the wheel by creating capacity to manage operations of membership and contributions to a NPF.

Naysayers may only see   self-interest in my suggestion – as the NPF, if managed by SSC, will no doubt destroy the existing occupational pension funds industry. However, there is a lot of merit in using all existing infrastructure such as insurance companies that offer underwriting cover for group arrangements, access to world class asset management firms, pension fund administrators with underutilised pension fund administration systems, the current regulator of the occupational pension funds industry (NAMFISA) who has already built major capacity and even an institution like NAMIBRE stands to benefit big time from such a set up. The SSC in this case will be the custodian of the NPF law.  I had thought that Namibia and South Africa with similar social security and occupational pension fund set ups would be ideal pioneers for the suggested arrangement, until my research revealed that Ghana is currently the one African country that has already embraced this concept.


Finally, it would be important to also streamline other social security initiatives that our country is lauded for having maintained, such as the current old age grant by the state which is a non-contributory scheme and even a reform of the SSC MSD Fund. I would venture to say the “compulsory occupational pension funds” can be considered to be levied a tax to either subsidize the old age grant and/or the Development Fund with the SSC. The long-term goal and benefit has to be that more persons change their employment status in order to qualify joining the “compulsory occupational pension funds”.

Marthinuz Fabianus graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme at University of Stellenbosch and various short courses including a macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz also serves as trustee on the board of the Benchmark Retirement Fund and is a member of the board of the Retirement Funds Institute of Namibia. Marthinuz also served as a Commissioner on the Social Security Commission from 2015-2017.



Monthly Review of Portfolio Performance to 30 June 2019

In June 2019 the average prudential balanced portfolio returned 1.7% (May 2019: -2.8%). Top performer is Hangala Prescient Balanced Fund with 2.8%, while Allan Gray Balanced Fund with 0.4% takes the bottom spot. For the 3-month period, Hangala Prescient Balanced Fund takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 3.3%. Note that these returns are before asset management fees.

Avoid permanent loss but be prepared to give up value

If you own something you do not use, chances are you will lose – “use it or lose it” is a rugby rule. It applies to all spheres of life. What you use, no one will be able to take from you, if we equate ‘using’ to ‘consuming.

This wisdom also applies to your investments. Your capital is something you do not use and chances are you will lose. This is not to say that you will always lose, but there will be times when you will lose. The best thing you can do is to be prepared for losing at times.

One also needs to distinguish between different types of losses namely, a temporary loss and a permanent loss. A permanent loss is something you cannot recover as opposed to a temporary loss.

Since we are dealing with pension fund and personal investments, in terms of market conditions we find ourselves in a situation where we feel we have been on a losing streak for quite some time.

Read part 6 of the Monthly Review of Portfolio Performance to 30 June 2019 to find out what our investment views are. Download it here...


FIM Bill reading in parliament postponed

Much to the dismay of the Minister of Finance, the second (?) reading of the FIM Bill in parliament was postponed to when parliament reconvenes in September.

When the Minister tabled the Bill he made mention that the retirement funds industry will move from a compliance based, to a risk based supervisory regime. Well, I am not sure this is true. The retirement funds chapter (Chapter 5) is not too dissimilar to the old Pension Funds Act, given that it substantially dilutes the protection mechanisms of the Pension Funds Act in the FIM Bill and that it eliminates any interest an employer may have had in retirement provision for its employees altogether!

The devil though lies in the detail and this anyone will realise when you inculcate the string of regulations and standards that were issued, if you have the capacity to inculcate the huge volume of detailed prescriptions. As a point in case, to determine late payment interest on a benefit, the fund will have to weigh up various parameters to assess whether it complies with the following:
  • Interest at the ‘prescribed rate’ must be credited to a transfer value for every day following the ‘prescribed period’ up to date of transfer.
  • ‘Prescribed rate’ is the greater of
    • (a) the average of 30 to 60 day government securities,
    • (b) the average of 30 to 60 day deposit certificate rate as applied by the 4 largest banks and
    • (c) the rate of interest applicable to unpaid transfer values as per rules of the fund.
  • ‘Prescribed period’ is the period starting 60 days from receipt of the prescribed form from the member until date of payment.
  • The daily interest rate is to be calculated on the basis of 365.25 days per year.
Can anyone argue that this is not utterly compliance based? Even if a fund tried to avoid having to apply the rate as determined in accordance with the first 2 bullets by setting a rate that should (hopefully) always exceed the result of the two other calculations, there is no benchmark one can work to, to set a higher rate that can be determined in a simple manner.

The next very concerning consequence of the late payment interest prescription is that the underlying assets may actually never have earned the returns the fund is obliged to pay to the exited member, out of the pocket of the other members! Of course the other members can challenge this and argue that the delay in payment was not due to their doing and they cannot be held liable to pay up for the shortfall. This may very well end up as a personal liability of the trustees. Any practitioner will know that delay in payment is more often than not outside the control of the fund, sometime well within the control of the exited member, sometimes within the control of Inland Revenue – but the remaining members of the fund have to cough up for all delays, whatever the reason.

As the next heading states – ‘the FIM Bill – brace for challenges! As industry, I guess we have to acknowledge defeat. We have unfortunately not been able to obtain an open ear for the concerns we have voiced over many years. There has never been an arbitrator between NAMFISA as Bill sponsor with vested interests and industry with its own vested interests. I fear that the Bill will pass through parliament and national council without much questioning due to its complexities and due to the fact that politicians do not have the technical and practical insight into the potential consequences of the Bill. As I pointed out above, the retirement funds chapter, and most probably the other chapters too, are actually quite inconspicuous. Once passed however, NAMFISA will have exclusive, unfettered legislative powers by means of it issuing standards that will become law without parliamentary oversight.


The FIM Bill – brace for serious challenges!

I have been expressing my concern about the implications of the FIM Bill and the fact that it will turn an established industry upside down, ever since it reared its head. The more I look at it the more I realise what the industry and its stakeholders will face – uncertainty, frustration and expense for many years to come, and the fun will start soon!

When I refer to the fun to start soon, I refer to how this Act is to be interpreted, how NAMFISA will interpret and apply it, how we will go about obtaining certainty where there is none and how long will it take at what cost to obtain clarity?

Let’s look at funds currently offering pension or annuity benefits to its members and their dependants and nominees.

In the interpretation of the Act, the definitions of key terms are very important. What benefit may a ‘retirement fund’, as it will in future be referred to, offer. The definition of this term in the retirement funds Chapter 5 only refers to benefits to members of the fund. Does this mean that a fund can no longer offer benefits to dependants and nominees of fund members upon their death? Contrast this definition with that in the Pension Funds Act that specifically provides for such benefits as well. Obviously NAMFISA will tell you what it thinks, which may not necessarily be correct. Now we have a new animal with its own definition – the ‘beneficiary fund’. Its definition only makes provision for benefits payable on the death of a member, clearly excluding any other benefits.

But are these two definitions mutually inclusive or exclusive? In the definition of ‘fund’ in the retirement funds Chapter 5, the Bill refers to this including a ‘retirement fund’ and a ‘beneficiary fund’. When the Bill deals with registration application, registration requirements and the effect of registration, it refers to the broader term ‘fund’ thus applying to both types of fund. Does this mean that a retirement fund can also serve the dual purpose of being a beneficiary fund if its rules so provide? Obviously NAMFISA will tell you what it thinks, which may not necessarily be correct.

So, clear as mud. But reading further the definition of ‘financial institution’ in the preliminary Chapter 1 lists a ‘beneficiary fund’ and a ‘retirement fund’ as a financial institution. Does that definition necessarily imply that a ‘financial institution’ has to be a legal person therefore prohibiting the registration of a legal entity that is both a ‘retirement fund’ and a ‘beneficiary fund’ as referred  to in the definition of ‘financial institution’ in the preliminary Chapter 1? Obviously NAMFISA will tell you what it thinks, which may not necessarily be correct.

As a trustee you may thus follow the directives of NAMFISA and act accordingly, only to find someone  who did not agree with you, successfully challenging your decision in a court of law and holding you liable for his loss or damage in your personal capacity.

If you did obtain legal opinion that contradicts NAMFISA’s opinion, you are likely to find that NAMFISA will not register your rules or your rule amendments. Now you have one of two choices. Challenge NAMFISA through the available means and go through a long drawn-out process or do as you were told and face the possible consequence of being held personally liable for loss or damage caused.

The problem is that you will have 12 months to submit your re-application for registration of your fund, once the FIM Act is proclaimed. This is not a long time when you start arguing with NAMFISA and being required to make changes, and makes more changes etc. What makes it worse, the Bill does not contain transitional provisions. Many funds will thus find that what they have been offering under the old dispensation cannot be offered under the new dispensation anymore and have to be pulled apart and placed elsewhere or dissolved for not being consistent with the provisions of the FIM Act anymore. Since you are likely to be subject to the Labour Act, you need to comply with this Act should any of your responses on the retirement fund side impact in any way the employees’ conditions of employment. How are you going to get your employees to toe the line and what if they are so aggrieved that they actually take industrial action against your business?

Evidently there may and will be situations where it is practically impossible to submit your application for registration of your existing fund within the prescribed 12 months.  So if your application is not approved within 12 months, your fund’s is no longer a legal entity, you operate illegally and face the prospect of a fine of N$ 5 million or 10 years in prison or both.

Being on the wrong side of the law as a fiduciary of others’ moneys is a no-win situation; you can only lose.


The Administration of Estates Act – where do we stand?

The Minister of Justice called a meeting with stakeholders for 10 July to discuss a further amendment to the Administration of Estates Act (AoEA) that would bring about changes to the previously promulgated amendments of 31 December 2018 and draft regulations.

While the proposed further amendments duly take cognisance of the drafting errors that were pointed out by stakeholders, it seems that none of the principles that stakeholders expressed their concern about and for which amendments were proposed, were recognised. Even this second attempt contains some poor drafting that will lead to further uncertainties

Key proposed changes to the AoEA are –
  • Capital underlying annuities seemingly will now also have to be transferred to the guardians fund (ambiguous drafting);
  • The Master seemingly may exempt a person or an institution in whole or in part, subject to certain conditions, from the requirement to pay to  the guardians fund (defective drafting)
  • The Minister may exempt partially or in toto a person or an institution, subject to certain conditions, from  paying interest on transfer payments to the guardians fund;
  • The Minister remains adamant about wanting to conscript all moneys of persons up to age 21 and replaced all references to  ‘minor’ by a reference to ‘a person under the age of 21’;
  • The Minister shall determine when this amendment will come into effect.
One proposed draft regulation deals with the governance framework of the guardians fund and contains the following interesting stipulations –
  • An investment committee is established for the guardians fund which shall comprise of the Master as chair and two experienced independent external members appointed by the Minister;
  • Remuneration and allowances, as approved by the Minister must be paid to members of the committee;
  • The committee must within 6 months after the close of its financial year report to the Minister;
It is interesting to note that:
  • the prudential investment guidelines otherwise applicable to NAMFISA regulated institutions do not apply so that all moneys can in theory be invested in government bonds (or any other dubious investment for that matter);
  • Unlike the future 90 day reporting timeline applicable to all NAMFISA regulated institutions, the guardians fund is afforded 6 months to report to the Minister;
  • The guardians fund will be a cosy closed shop arrangement managing the money of all minors in the country without any public accountability;
  • One of the arguments of the Minister in parliament for conscripting all moneys of all minors in Namibia, was his accusation of high fees being charged by private sector institutions. Now committee members must be remunerated without the Minister publicly committing to any cost benchmarking, in respect of private moneys conscripted by law.
The second proposed draft regulation deals with the financial administration of the guardians fund and contains the following interesting stipulations -
  • Great emphasis is placed on digitization and electronic records management;
  • Persons required to file any document electronically must retain a hard copy of such document until 5 years after the expiry of the matter at hand (presumably age 21 in most cases and must produce or submit such hard copy document to the Master when so required;
  • The Master’s electronic records shall be admissible evidence in a matter before the Court;
  • Beneficiaries’ moneys are pooled for investment;
  • Foreign investments are provided for;
  • Master is entitled to appointed investment managers, investment advisers and portfolio managers;
  • Cost of management of the guardians fund shall be borne by the fund without recourse to seeking funds from Treasury.
It is also interesting to note –
  • While the Master takes pride in its digitalization and electronic funds management, he seems not to quite trust his own proclamations and keeps a back-door open by compelling all and sundry to keep hard copies of all moneys conscripted without consent by the Master for a very long time;
  • How will private individuals and estates comply with the hard copy document retention requirement?
  • One of the arguments of the Minister in parliament for conscripting all moneys of all minors in Namibia, was his accusation of high fees being charged by private sector institutions. Now all costs incurred in managing the guardians fund must be borne by the fund, without the Minister publicly committing to any cost benchmarking, in respect of private moneys conscripted by law.
At the stakeholders meeting of 10 July, an undertaking was given to stakeholders that the Minister’s take-home from comments will be considered in a revised version of the amendment to be circulated before 31 July and to be shared with stakeholders at a meeting set for 13 August.

To anyone who may leave an estate or a trust from which persons under the age of 21 will benefit, you either need to take comfort that this capital due to such persons under age 21 will be managed by the Master within his unfettered discretion in every respect, including the manner in which it will be invested. If you cannot find peace with that arrangement you should either leave the moneys earmarked for persons under 21 to someone you have total trust and confidence in to look after your heirs under 21 within their total discretion, or you need to consider directing that these moneys be paid into a trust registered outside Namibia. Of course, having a trust outside Namibia, presents its own challenges that should be properly researched and assessed.

Should retirement funds registered under the Pension Fund Act be exempted from the AoEA requirements in this regard, another consideration may be to make contributions to a retirement fund and to nominate anyone you  want to benefit that is or may not be 21 yet when you pass away. Bear in mind that the trustees are vested with the responsibility to dispose of your death benefits but they will take you nomination into account.

The FIM Bill will definitely overrule the AoEA once again and your nomination becomes much more instructive to the trustees of the fund than is the case under the Pension Funds Act. Be sure you apportion the benefit fully between the people you want to benefit, in your desired proportions.


Pensioners, the FIM Bill and the Administration of Estates Act

Following the arguments presented in the previous article (The FIM Bill – brace for serious challenges!), there is a fair chance that ‘retirement funds’ as defined in the FIM Bill can no longer provide benefits arising from the death of a member and this includes the GIPF with over 30,000 pensioners. Pensioners may have to be transferred to a ‘beneficiary fund’ instead.

Problem is that the Administration of Estates Act, as amended effective 1 January 2019, states that “…any money…that is payable in respect of a minor or a person under curatorship…shall be paid directly to the guardians fund within 30 days after the date on which it became payable.” Does this mean that a fund cannot actually transfer the capital “…payable in respect of a minor or a person under curatorship…” to the beneficiary fund but only the capital in respect of major beneficiaries?

How will trustees know? The Administration of Estates Act evidently is ambiguous. In my layman’s opinion it cannot be transferred since the Act uses the phrase ‘payable in respect of’ and not ‘payable to’. Latter would have made it clear that the Act refers to the monthly pension payable and not the capital underlying the monthly pension. The draft revised amendment goes a step further in referring to “…a death benefit from a pension fund, preservation fund, provident fund and retirement annuity fund, including the total amount awarded for annuities and lump sum…”.  Although the underlined phrase is once again ambiguous, in my layman’s opinion it refers to the capital underlying the annuity. Again who will be able to conclusively tell the trustees what to do?

Establishing a beneficiary fund pro-actively and in anticipation of the FIM Act appears too early at this stage due to prevailing uncertainties. The Minister of Justice indicated at a recent stakeholder meeting that it will revise its revised draft amendment following the stakeholder meeting of 10 July. An indication was given that persons subject to supervision by any regulator (such as pension funds) may be exempted from the ambit of the AoEA.

In the mean-time, any fund that does not pay over amounts payable to a minor (person under age 21) contravenes the AoEA and any minor beneficiary who may feel that this fact has disadvantaged him or her in any way or manner, be it administratively or in respect of actual or prospective returns can take on the fund in a court of law and is likely to succeed. Any compensation payable by the fund as the result, may well end up having to be paid by the trustees in their personal capacity. This may well be a ‘worst case scenario’ but one that is not inconceivable and that should be overlooked lightly by trustees.


Provident funds facing a new Income Tax Act challenge

We have it ‘on good authority’ that Inland Revenue is in the process of reviewing the rules of all tax-approved provident funds to ascertain that the rules comply with the provisions of the Income Tax Act. It appears the concern is that provident funds offer benefits the definition of ‘provident fund’ in the Act does not provide for. The definition provides that such fund must have been “…established solely for the purpose of providing benefits for employees on retirement from employment or solely for the purpose of providing benefits for the spouses, children, dependants or nominees of deceased employees or deceased former employees, or solely for a combination of such purposes…”

Benefits currently commonly found in provident fund rules that do not meet the prescriptions of the definition include –
  • Resignation, termination or retrenchment benefits;
  • Funeral benefits for persons such as spouse, children parents in the event of their death rather than the death of the member;
  • Disability income benefits;
  • Study benefits.
Inland Revenue apparently intends to retract the tax approval of funds found to contravene the definition of ‘provident fund’. Clearly this would present major problems for the fund, the employer and the employee. Similarly, amending the rules to remove these benefits would present major problems to employers and their employees will not be amused by such a change in conditions of employment.

However, when one studies the definition of paragraph (dB) of the definition of ‘gross income’ in the Act, it defines ‘gross income’ as including “any amount received or accrued under the rules of a provident fund upon …(ii) the termination of such a member’s employment or membership of the provident fund due to dismissal or resignation, or for any other reason…” . This definition would be superfluous if a provident fund were not to be mandated by the definition of ‘provident fund’ to offer benefits upon resignation etcetera. The two definitions are clearly in conflict with each other.

I would argue that disability income benefits and resignation-, termination- or retrenchment benefits are all consistent with subsection (ii) of section (dB) of the definition of ‘gross income’ as being a benefit payable upon either ‘termination of employment’ (disability income benefit, where member remains a member of the fund) or ‘termination of membership’ of the fund (resignation-, termination- or retrenchment benefit where fund membership also terminates).

The question is - what was the intention of the legislator and how can this conflict of two clauses of the Act be resolved? Clearly every attempt should be made to maintain the status quo as represented by industry practice and to amend the Act to cover industry practice.

NAMFISA is now faced with the challenge of how to deal with applications for registration of rules or rule amendments of provident funds that provide for any of the benefits referred to above that are in conflict with the definition of ‘provident fund’ in the Act in the mean-time, particularly knowing that Inland Revenue will object to such rules or rule amendments.

This matter first has to be resolved before funds should submit rule or rule amendment applications or even only contemplate these.


Have investment markets normalised?

It is pretty much common knowledge that the situation we are and have been facing in investment markets globally for the past nearly 10 years, is the result of ‘ultra-loose’ monetary policy by central banks across the world, including Namibia. After the financial crisis, central banks poured money into the financial markets in order to encourage the consumer to pick up spending levels again after these had fallen flat in the aftermath of the financial crisis. Artificially low interest rates, designed to encourage spending, were great for the borrower, but bad news for the depositor, pensioners to a significant extent. In many instances depositors would earn negative real interest rates. To avoid this they would have been looking around for any asset class that offered any real returns. This is what we have seen, where all assets other than fixed interest investments experienced significant inflows resulting in their artificial and unsustainable growth.

This was certainly the case until the US Fed thought that it had achieved its objective of re-igniting economic growth. It started to raise the Fed rate for the first time in December 2015 when it looked like inflation was ticking up. At that point inflation has just turned positive and grew to 2.95% by April 2018, only to start turning down again since then to currently only 1.7%. The Fed rate was increased to 2.5% in December 2018 to stagnate since then and recent talk being for it to be lowered again.

The US Fed rate currently represents a real return of only 0.8%. Going by its long-term average the real rate should be around 1.7% in a normal interest rate environment. The likelihood is that the Fed will start reducing its policy rate which will imply a further decline in the real rate unless inflation continues to decline as well. While these trends continue, investment markets will remain distorted in favour of all asset classes other than fixed interest investments.

Furthermore we have seen a change of mind of foreign investors who have become nervous of developing countries and have consequently moved their capital to safer havens on a large scale. This has led to a depression of values in financial markets in the developing countries.

Asset classes that have been and still are benefiting from the artificially low interest rate environment have run so far ahead of themselves, particularly in the developed world, that there is little scope for further prudent growth. A normalization of the interest rate environment will have to happen but this does not seem to be imminent. In addition global financial markets are depressed as the result of the economic war the US is waging against all global economic adversaries. There is no end in sight to this either.

This is not a good time for the investor. Despite presenting a higher risk than cash and bonds, equities have been and are likely to continue yielding returns similar to those of cash over longer periods, but due to their volatility there will be shorter periods of them even under performing cash.

Graph 1
 

Considering above graph 1, it is interesting to note that the JSE Allshare index did not grow at all in real terms (the red line) over a 19 year period from January 1986 up to the end of 2004, the start of the commodity bubble that eventually burst in October 2007. Since then the market effectively moved sideways. Taking the full 33 year plus period, the JSE Allshare grew a meagre 2.6% p.a. in real terms. Adding the dividend yield of 3%, the JSE Allshare index returned 5.6% p.a. in real terms, substantially below a 100 year plus average of over 7%. In addition, if one removed the impact of the stellar performance of a few large cap shares such as Naspers, the performance of the JSE Allshare index has in fact been significantly worse that the index suggests.

Graph 2

 
Contrasting our local market with the US S&P 500, the US market in graph 2 above evidently showed a much more consistent growth over the same 33 year plus period. Despite posing a lower risk than the JSE, the US S&P 500 grew by a real rate of 4.7% p.a. Adding its dividend yield of 2.1% p.a., the S&P 500 returned 6.8% p.a., on par with its 100 years plus return, or 1.2% more than the JSE Allshare return.

Going by the graph 1 and 2 above and in the light of our expectation that markets will continue to move sideways for at least another 1 to 2 years, we will expect the local market to stand a much better chance of turning around than the US market. Investing in cash is a safe option for avoiding short term market volatility, but at the same time it means that one will most probably miss the opportunity of a turnaround of the local market. An investor with a time horizon of 6 months or longer should rather be in the market so as not to miss the turning point. In the light of an expected decline in interest rates, it is likely that fixed interest investments should do well over the next 1 to 2 years.


Pension fund governance - a toolbox for trustees

The following documents can be further adapted with the assistance of RFS.
  • 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.
 


From an actuary

“Dear K
I have conferred with R who did all the heavy work on this and we both concur that the data was very clean and accurate. So were the management accounts.  Thank you for this.”


...and from an HR administrator of an employer of RFLAUN

“Dear madam,
It was indeed an honor to be working with you when I was employed at ... as HR Administrator.
Your love and dedication to your work has left me amazed all the time. Even if there were delays from my side you were always calm and composed when re-requesting the information. Until the very last minute I received my pension from RFLAUN, you have been more than helpful.
Indeed, just because of your dedication, I regret leaving the Local Authority industry. It was really wonderful working with you.”


Read more comments from our clients, here...

 


RFS family day with potjie competition



RFS recognises that employees are its most important asset and believes that its people are more important for the success of the company than technology. We understand that our employees can only be successful if they enjoy the support of their families in all their occupational endeavours. Hence we make a point of undertaking events that involves their families.

On 22 June we held such a family fun day at ‘The Vintage’ in Olympia – a pleasant day it was and most enjoyable for around 90 adults and a lot of kids present. Every team really tried its best to walk away with the laurels but at the end of the day there can always only be one winner – this time it was ‘the witches’.



The National Pension Fund – where do we stand?


Following our enquiry with Mr Tim Parkhouse, secretary general of the Namibia Employers Federation, we were informed “...that there is no progress with respect to the NPF. The issue is still with the Ministry of Labour where there are apparently negotiations ongoing with the ILO regarding consultants (again) to do another study.

So this will be a long time yet, but we will keep you informed as and when anything happens...”

 


Offshore portfolio investment applications Circular CM/02/04/2019

In this circular of 18 June 2019, NAMFISA explains the process pension funds need to follow when they want to invest offshore.

Download the explanatory note here...


Classification of and reporting on property PF/EN/01/2019

In this explanatory note of 4 July 2019, NAMFISA explains how the ‘property’ asset class as defined in regulation 12, and the exposure limit as referred to in regulation 13(1), is to be interpreted. Accordingly a fund may invest in the shares, loans to and debentures of a property company that does not have to be listed on a stock exchange, but the ‘single issuer’ limit (currently 5%) and the maximum percentage (currently 25%) of aggregate market value of the total assets of the fund must be observed.

Download the explanatory note here...




Financial adviser held liable for loss of R 1 million

Whilst Namibia does not yet have the same legal structures in place concerning the conduct of intermediaries, the advent of the FIM Bill will certainly place our industry in a new orbit that will require more care and diligence in managing the affairs of your client. From that point of view the case cited below makes for interesting reading.

“The complainant was the executor of the estate for the late Mr H. Upon his passing on 13 April 2018, the complainant, whilst finalising the affairs of the estate, discovered that the deceased's existing life insurance policy had been cancelled and replaced with a new policy with another insurer. The complainant subsequently submitted a claim to the new insurer, which was rejected as the insured had passed away prior to the inception of the policy.

On further investigation, the complainant determined that the application for the replacement policy had been completed on 20 February 2018 and that there was correspondence dated 14 March 2018 from the respondent instructing the deceased to cancel his existing policy. This letter was signed by the deceased and forward to the existing insurer, however the replacement policy had at that time not yet incepted. The replacement policy was supposed to incept on 1 April 2018, however during the underwriting process there were concerns surrounding the results of the deceased's Body Mass Index ('BMI'). The results of the deceased's BMI resulted in the new insurer issuing an 'Acceptance of Offer Letter' which saw the inception date of the policy extended to 1 May 2018.

As a result, when the deceased passed away on 13 April 2018, there was no policy in place. The complainant was of the view that the deceased had not been correctly advised to cancel the existing life insurance policy before the application for the new policy had even been accepted, let alone the new policy having incepted. The complainant therefore held the respondent liable for the losses incurred as a result.

This Office (the FAIS Ombud) agreed with this view and the fact that the respondent had not acted with the required due skill care and diligence in the best interests of the deceased as required in terms of section 2 of the General Code of Conduct for Authorised Financial Services Providers and Representatives. This was communicated to the respondent, who accepted responsibility for the losses incurred by the complainant and provided the complainant with an offer of R1000 000, the cover amount, in full and final settlement. The offer was accepted by the complainant.

Whilst the facts surrounding this matter would appear to have been rather straight forward, and highlight the additional duty of care that a Financial Services Provider ('FSP') must exercise during the replacement of an existing life assurance policy, the significance of this matter lies in the respondent's willingness to resolve the complaint for the total loss incurred, despite this amount exceeding this Office's R800 000 jurisdictional limit.

The Rules on Proceedings of this Office do restrict the jurisdiction of this Office to the investigation of complaints where the losses incurred do not exceed R800 000, and any matter received that does exceed this limit would require that the complainant confirm in writing to forgo any amount in excess of R800 000. However, the very same rules do provide that this jurisdictional limit may be exceeded should the respondent agree to it in the interests of proceeding with the investigation.


It is therefore refreshing to note that especially during this time where there is a heightened focus on treating customers fairly, that a respondent has chosen to not only acknowledge the negligence that resulted in the losses incurred, but was also willing to resolve the matter in full. It is this type of collaboration between industry and an institution such as this Office, where the interests of the client are first and foremost, that will contribute further towards increasing the integrity of the financial services industry. Something that is not only part of the mandate of this Office, but an aspect that we take very seriously and we encourage more FSPs to follow the example above.”

This case was reported on in the FPI Member Community Digest of 4 July 2019.




How should you invest after retirement?

“...What is particularly noteworthy for Hugo, however, is when those returns are generated. Assuming an investor earns 5% above inflation for their whole lives... 87% is earned after retirement,” says Hugo. “That is quite scary and we need to think about it quite a bit, because when many clients, at age 60, come with their pot of money to an advisor, they say please help me to invest this money. It needs to last for the rest of my life, so can we please invest it conservatively. I don’t want to see volatility, and I don’t want to see it go down.”

This is an understandable approach. However, if the majority of your investment return [87%] needs to be earned post-retirement, you can’t afford to move away from growth assets. You still need to be exposed to the best generator of growth, which is the stock market.

For Hugo, the concern is that many investors don’t do this because they are focusing on the wrong risk.

“At age 60, many investors don’t want to take on growth assets like equities that will get them inflation plus 5%,” says Hugo. “But if you invest at inflation plus 2%, you lose 11 years’ worth of income. That is the cost of investing conservatively.”

That doesn’t mean there isn’t a need to be prudent with your money in retirement. Particularly because a large drop in the stock market in the early stages can have a material impact on your retirement as a whole, it is worth considering separating your capital into two parts – a conservative investment that can fund your income needs over the next few years, and a more aggressive investment that can generate long-term inflation-beating returns.”

Read the full article by Patrick Cairns in Moneyweb of 4 July 2019, here...


South Africans continue to work in retirement

“Nine of every 10 retirees included in Old Mutual’s survey are working to supplement retirement income. The 2019 Old Mutual Savings Monitor shows that many South Africans continue to earn some kind of income after they retire. It found that for every R100 these retirees receive, more than half (R56) is derived from post-retirement earnings.

The monthly contribution from a pension or retirement savings for nearly 80% of retirees makes up only 27% of their income, with other investments or savings contributing only 7%.

Retirees included in the survey were from a sample that had retired formally with income of R15 000 or more each month.

Two conclusions can be drawn from the fact that they have chosen to continue working past retirement age:
  1. They had not saved enough for retirement;
  2. They had underestimated the income they would be getting in retirement as well as their expenses.
...Fifty-three percent of retirees are still supporting dependent children and grandchildren, and of those, 41% are supporting dependents under the age of 12. In an attempt to cope financially, these retirees are cutting down on their expenses by spending less on clothing and shoes (45%), holiday and travel (41%), eating out and entertainment (39%), electricity and water (38%), entertaining at home (37%) and cell phone airtime (36%).

Nearly two-thirds of their income is directed toward living expenses, with 14% going to savings and 10% towards insurance and medical costs.


Most retiree households – 83% – have an emergency fund of some sort. Nearly 80% hold this in a bank savings account, with 35% having these funds unbanked or in cash. Nicholson says most surprising of all is that 14% admit to having a stash of cash that their spouse or partner is not aware of...”

Read these interesting findings of an Old Mutual survey of retirees in an article by Neesa Moodley in Moneyweb of 17 July 2019 here...




10 Years and counting...the longest bull market in history

“By some measures, the current bull market in US stocks is now the longest in history. The S&P 500 has not experienced a drop of more than 20% since March 9, 2009, more than 10 years ago. This extended rise in US stocks has also translated into a bull market for global stocks generally. Since the US makes up over 60% of the MSCI World Index, the performance of listed equities in New York has driven overall global returns.

The longevity of this bull market has however caused as much consternation as it has excitement. The longer it carries on, the more worried many investors have become that it must be nearing its end.... the scale of the current recovery is beaten by both the ‘roaring 90s’ and the recovery from the Great Depression in the 1930s. The rate at which the market has gone up has therefore been fairly moderate.... The second important consideration, Smit believes, is that, on certain metrics, equity markets do not look that expensive. ..the S&P 500 is currently not stretched by historical standards.

The S&P 500 PE valuation is very close to its 30-year average...So just on that basic principle, one cannot make the case that equities are overvalued.”

Read the full article by Patrick Cairns in Moneyweb of 30 April 2019, here...


Conversation with your ‘outer circle’

The Problem:

In spite of what we may think, the group of people we turn to when we have need to bounce an idea off, get advice or have a conversation, is usually surprisingly small. In other words, under scrutiny, our ‘inner circle’ is often far less diverse than we believe it to be. This can create blind spots and linear thinking within a business setting.

The Solution:

Frame an important question for your business / team. This could be a question concerning strategy, the future, something to do with your organisational culture, a perspective ...anything really, but identify a good question to be asking. It could even be, ‘what is the question that we as a business should be asking but aren’t?’

Identify 3 to 4 people within your business that fall outside of the circle of those people you usually connect with / chat to in the course of your day to day activities.

Go and ask them that question and have a conversation.


Tips:

This sounds disarmingly ‘simple’ so check yourself as to how ‘easy’ you find it. What made you choose the people you did?

Be intentional in how you tee-up the conversations. If it is somewhat awkward for you, it might be more so for those you target for the conversation. Be aware of this and look to mitigate this possibility. Make sure you get your timing (for the conversation) right.


Having had the conversations, reflect a while on what it was like; what insights you gained; what common themes emerged; how can you repeat this and perhaps make a habit of it.

What might happen if more people within your business did this?”

Get more general business management tips in TomorrowToday’s Tuesday Tips here...




Did you ever wonder why??

WHY: Why do X's at the end of a letter signify kisses?
BECAUSE: In the Middle Ages, when many people were unable to read or write, documents were often signed using an X. Kissing the X represented an oath to fulfil obligations specified in the document. The X and the kiss eventually became synonymous
.
 
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