|In this newsletter:
Benchtest 06.2020, reassurance on Covid-19, S14 transfers and more...
After being passed by the National Council with changes, the FIM Bill was returned to the Ministry of Finance to examine the proposed changes. These amendments accepted by Parliament. The Bill is now with the President who has the discretion to either assent to the Bill or withhold his assent.
Once the President has signed the Act it will be published in the government gazette. It is not known when this will take place. The Minister of Finance can take one of two routes as also elaborated on in the NAMFISA Circular FIM 06/2020 with NAMFISA preferring the route whereby up to 12 months will be granted in which the Standards and Regulations are finalised and issued. If the Minister agrees, it will be 12 months after promulgation that the FIM Act is effective and then a further 12 months for registration of Funds, i.e. up to 24 months (from promulgation) until a fund, financial intermediaries and other financial institutions have to be FIM Act compliant.
Pension fund governance - a toolbox for trustees
Registered service providers
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...
In ‘Tilman Friedrich’s industry forum’ we present:
In ‘News from NAMFISA’ read about:
In ‘Legal snippets’ read about:
As always, your comment is welcome, so open a new mail and drop us a note!
Pension fund member seeking assurance concerning COVID-19
The Namibian had a WhatsApp post where the person writes “Will the GIPF and other pension fund managers please provide assurances to their members that COVID-19 will not be detrimental to future pension pay-outs and the principal amounts invested? Is it worth having a pension fund for the young?”
This is indeed a profound concern this young pension fund member raises. As far as Retirement Fund Solutions is concerned, as the biggest wholly Namibian owned pension fund management company, administering pension funds for majority of the country’s SOE’s, large private sector groups where we are dominant manager of pension funds for employees of the majority of banks in Namibia, but also other private sector entities, I would like to assure this member that it is still worth having a pension fund, particularly as a young person who still has many years to retirement and on the basis of the following considerations:
Given these considerations, I have no doubt that it remains worth having a pension fund in particular for younger members who still have a long time to work until they reach retirement.
Monthly Review of Portfolio Performance
to 30 June 2020
In June 2020 the average prudential balanced portfolio returned 2.3% (May 2020: 0.7%). Top performer is Hangala Prescient Absolute Balanced Fund with 3.2%, while NinetyOne Managed Fund with 1.4% takes the bottom spot. For the 3-month period, Prudential Managed Fund takes the top spot, outperforming the ‘average’ by roughly 2.3%. On the other end of the scale, Allan Gray Balanced Fund underperformed the ‘average’ by 2.0%. Note that these returns are before (gross of) asset management fees.
The Monthly Review of Portfolio Performance to 30 June 2020 provides a full review of portfolio performances and other interesting analyses. Download it here...
Should you now buy, sell or stay put?
‘Factset’ journal recently published some rather disturbing statistics on the S&P 500 share index as depicted in graph 1 below. It shows record high cuts to earnings per share estimates for the second quarter of 2020. The Q2 bottom-up EPS estimate (which is an aggregation of the median Q2 EPS estimates for all the companies in the index) declined by 37.0% (to $23.25 from $36.93) during this period. This is the largest decline since a 34.3% decline which occurred in quarter 4 of 2008, when the global financial crisis struck global economies. This is evidently the result of COVID-19 and the lockdown imposed on the US economy.
Read part 6 of the Monthly Review of Portfolio Performance to 30 June 2020 to find out what our investment views are. Download it here...
S 14 transfer to another fund – it’s now or never!
Since Namibia is about 4% of the SA economy it is not far-fetched to surmise that there will be not much more scope than about 40 stand-alone funds of currently about 70. I do not believe it will be viable to operate a stand-alone fund with less than 1,000 members as it will simply become too expensive to manage with the onerous and extensive requirements with which trustees will be burdened under the FIM Act.
In Namibia there are currently 27 funds with more 1,000 members. Of these 11 funds are umbrella funds which leaves 16 employer sponsored stand-alone funds, of which quite a few are already earmarked for a steep decline in membership. I do not expect more than 10 to 15 employer sponsored funds left in the next 5 years.
For those funds that are unlikely to survive, there is currently a last window of opportunity to move into an umbrella fund before extensive and onerous requirements under the FIM Act will make trustees’ lives a misery and a transfer to another fund a challenge.
To give trustees a taste of what will be require before any business can be transferred from a fund to another fund, consider RF.S.5.22. This is a standard issued under Chapter 5 (the retirement funds chapter) of the FIM Act. Bear in mind that all Standards and Regulations under the FIM Act can still undergo some changes and bear in mind that there are currently 23 standards already issued in draft format under chapter 5, another 11 ‘general’ standards issued in draft format under chapter 10 and 7 draft regulations issued under chapter 5 that should not be overlooked in anything done that effects a retirement fund. So here is what RF.S.5.22 prescribes:
In addition to the requirements of RF.S.5.22, Chapter 10 of the FIM Act contains the following requirements:
Where an amalgamation or transfer has been approved, the amalgamating financial institutions or financial intermediaries and any other party to the amalgamation, or the transferor and transferee financial institutions or financial intermediaries, as the case may be, must within 10 days from the date of the amalgamation or transfer, deposit with NAMFISA -
Will equity markets take Corona in their stride?
Read more comments from our clients, here...
Death benefits and divorce settlements
In a settlement agreement between husband and wife that was made an order of the court in the final divorce order, the couple agreed on the following few key terms:
The former husband later got married again. The son of the couple proceeded to university. The husband passed away some 7 years after the divorce order was granted. At that time their son was in his last year of studies and had turned 21 in that year.
Dependency of son (section 37C of Pension Funds Act)
Whether or not the son was a financial dependant at the time of death of his father will depend on the factual assessment whether deceased father in fact continued to fund his son’s studies at the time he passed away. If the father still supported the son’s studies up to the date of his death, the son would have a claim for financial dependency against his father’s pension fund death benefit. The quantum of the claim would be based on the factual support given by his father for the remainder of the son’s studies, i.e. either the year in which the father passed away or any extended period the son might require to complete the course for which he was enrolled when his father passed away.
If the father no longer supported his son at the time of his death, his son would have no claim for financial dependency against his father’s pension fund death benefit either and would not be entitled to be considered for an allocation from the father’s pension fund death benefit by the trustees of the fund.
Dependency of divorced wife (section 37C of Pension Funds Act)
In this regard, section 28(5) of the maintenance Act No 9 of 2003 stipulates “Notwithstanding anything to the contrary contained in any law, any pension, annuity or compassionate allowance or other similar benefit is liable to be attached or subjected to execution under a warrant of execution or an order issued or made under this Part in order to satisfy a maintenance order.”
Any person claiming compensation to satisfy a maintenance order must therefore obtain an attachment order or execution warrant under section 28(5) of the Maintenance Act. The deed of settlement dissolving the marriage of deceased Plaintiff and Defendant spouse does not constitute an attachment order or execution warrant as contemplated by section 28(5). The deed of settlement does not contain any maintenance obligations of deceased towards his divorced spouse but only an obligation of deceased to pay his spouse certain amounts in respect of her revocation of a donation claim against deceased. Deceased’s spouse has no maintenance claim against deceased that meets the requirements of section 37A of the Pension Funds Act read together with section 28(5) of the Maintenance Act. In our opinion, there are therefore no grounds for providing for her either as a dependant of deceased or for any maintenance claim against the death lump sum as envisaged in section 37C of the Pension Funds Act.Section 14 transfers – some legal intricacies
There is a common misconception that the appointment of another administrator to a fund impacts the corporate identity of a fund. This of course is not the case. It is simply a change of service provider, that currently is not subject to any particular legal requirements.
When a board of trustees decides to terminate its stand-alone fund and to join another fund, or when the participating employer/ its fund management committee decides to terminate participation in a fund and to start participating in another fund it creates a totally different and quite a tricky scenario. The decision to terminate participation in a fund is always ultimately a decision by the employer. There is no legal requirement for a company to offer a pension arrangement and a decision to do so is purely that of the employer. In the same way the decision to discontinue participation in any of the manners set out above is an employer decision. Any decision by an employer to change conditions of employment, is of course subject to the employer observing the requirements of the Labour Act. The introduction of a pension arrangement clearly implies a change of conditions of employment. The decision to end participation in one fund and start participation in another fund does not necessarily imply a change of conditions of employment if all benefits and the contribution structure remains unchanged. The employer decision to end its participation in a stand-alone fund does not impact the legal identity of the fund in the first instance and the board of trustees can in theory decide to continue operating the fund for the benefit of the existing members. In practice however, it will be very difficult to do so if the employer and its employees no longer contribute to the fund. It will be a ‘closed fund’ with a diminishing membership.
Once a decision has been taken by an employer to discontinue participation in a stand-alone fund and to start participating in another fund instead, the trustees of the stand-alone fund thus need to decide whether they will continue operating the fund or whether the fund is to terminate. If the trustees decide to terminate the fund, they now need to decide whether the fund is to be dissolved in terms of section 28 of the Pension Funds Act (voluntary dissolution) or whether the fund’s assets and its liabilities are to be transferred to the other fund in terms of s14 of the PFA.
In a voluntary dissolution of a fund in terms of section 28 of the PFA the fund needs to appoint a liquidator and will go through a liquidation process. Liquidation is typically a long drawn-out and costly process as it has to comply with extensive legal requirements and the liquidator will typically have to be compensated in terms of statutory remuneration scales. While the fund is in liquidation, members would normally not receive any pay-out until the liquidation has received statutory approval. (Note that a fund can also be wound up by the Court in terms of section 29 of the PFA.)
In practice, a fund would only be dissolved voluntarily in a case where the employer is liquidated or dissolved and there will no longer be an employer: employee relationship after the fund was dissolved.
Where the employer continues operating, the trustees of a stand-alone fund need to resolve whether all members will be paid out their benefit and where after the fund will be dissolved voluntarily, or whether members will be given an option how to dispose of their benefit including the option to transfer to the employer’s new fund and where after the existing fund will also be dissolved voluntarily, or whether all members and all assets will be transferred to the employer’s new fund. The last alternative has to be executed in terms of section 14 of the PFA. This process is subject to some formal requirements of, and approval by NAMFISA. Once these requirements have been met, as confirmed by NAMFISA approval, all assets and liabilities of the ‘old’ fund will devolve upon the ‘new’ fund. The ‘old’ fund now needs to be deregistered by NAMFISA and its legal existence will have terminated upon deregistration.
Where an employer participated in a fund also comprising of other employers and then resolves to end its participation to start participating in another fund comprising of other employers and the employer takes the decision not to give members any option but to transfer all assets and liabilities to the new fund, such transfer is also subject to the provisions of section 14 of the PFA. The difference here is that the former fund will continue to operate for the benefit of the remaining employers.
Transfers of assets and liabilities in terms of section 14 of the PFA are always subject to an agreement between the two funds and this agreement must meet the requirements of both funds before it can be approved by NAMFISA.
A ‘section 14 process’ typically takes anything between 6 months and longer, sometimes substantially longer. In the course of the process, the employees would have already been enrolled in the employer’s new fund and the employer and its employees would have started to contribute to the new fund. As one can read out of the next topic ‘Matrix for implementation of amendments’, unless the fund’s generic registered rules will apply to the employees of the employer, the employer needs to submit its own rules to NAMFISA for approval. This approval process typically takes between 1 month and longer. Until such time that the rules are registered by NAMFISA. This could mean that the rules may have to be amended to meet any specific requirements of NAMFISA, in which event the amended part of the rules, as eventually registered, has no applicability. Since the process usually takes some time, members may have exited the fund in the meantime and may have received a pay-out based on rules that subsequently had to be amended to meet NAMFISA requirements. Members may have been overpaid during this time and this may have consequences for the fund.
During the period between the termination of participation in the old fund and the registration of the employer rules of the new fund, the old rules no longer have any relevance to any benefit entitlement of the members where the decision was to transfer all assets and liabilities in terms of section 14 of the PFA the moment the transfer has been approved by NAMFISA. Paying out in terms of the old rules poses the risk that the benefit actually due to the member upon exit from the new fund is calculated in a different manner for the period from date of termination of participation in the old fund until date of payment of the benefit. This could once again mean that the member was overpaid with consequent repercussions for the old fund.
To be certain that neither the old nor the new fund overpay a member during the period of ‘uncertainty’ it may be advisable that no benefit is paid out to a member who exits. In practice, both funds often make a provisional payment that is less than what the member should eventually receive under the rules of the new fund. Unfortunately, this is not without risk to both funds.
Matrix for implementation of rule amendments
Raising liquidity: “Selling the crown jewels.”
“…The build-up of wealth is closely linked to the accumulation of lifestyle assets such as homes and holiday homes, as well as items such as cars, art, jewellery, gold coins, and other collectables. Once, however, the wealth creation cycle is completed (usually at retirement age), we turn from being accumulators to consumers, and the need for income and liquidity becomes a priority. So just how does a portfolio generate enough cash, and what kind of investment strategies do we need to implement to make sure we can always pay our monthly bills?... selling assets requires careful planning and market expertise to ensure you are selling the right assets, for the right reasons, and for the best returns. It is important to understand exactly why you are selling, and what you hope to achieve.
Here are some points to consider before deciding which assets to liquidate:
Are RSA retail bonds an option for a pensioner requiring monthly income?
“RSA Retail Savings Bonds are available as either Fixed-Rate Retail Savings Bonds (available over terms of two, three or five years) or Inflation-Linked Retail Savings Bonds (which mature after three, five or 10 years). These bonds are effectively loans to the South African government, with a promise to pay back the capital after the term in question, along with interest, payable as described below. The minimum amount that can be invested is R1 000 and the maximum R5 million.
Fixed-rate retail savings bonds
Different [market related] interest rates apply to each of the maturities in the series as per the table below. Investors in these bonds can choose to reinvest their interest, have it paid out twice a year on the interest payment dates (March 31 and September 30 each year), or in your case, as you are over 60 years old, receive their interest payments monthly. These fixed-rate bonds also have a ‘restart’ option. This enables the investor to restart the term of the bond at a new prevailing (possibly higher) interest rate after 12 months, or to change the investment term.
The Inflation-Linked Retail Savings Bond
These series consist of bonds with a three-, five- or 10-year maturity. Capital amounts invested in these bonds are inflation-adjusted over the term. A floating interest rate is payable every six months on the interest payment dates.
In this article the author provides an exposition of the risks (inflation risk, income risk, default risk), which one needs to be aware of when contemplating to invest in any of these bonds.
Read the full article by Trevor Lee in Moneyweb of 30 June 2020, here…
12 Traits of emotional intelligence
“What makes someone great at their job? Having knowledge, smarts and vision, to be sure. But what really distinguishes the world’s most successful leaders is emotional intelligence — or the ability to identify and monitor emotions (of their own and of others).
Read the full article by Daniel Goleman in ‘make it’ of 9 June 2020, here...
Great quotes have an incredible ability to put things in perspective.
"Everything that irritates us about others can lead us to an understanding of ourselves."
~ Carl Jung