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In this newsletter:
Benchtest 10.2020, pension funds industry in sorry state, the future of stand-alone funds and more...



NAMFISA levies

  • Funds with year-end of November 2020 need to have submitted their 2nd levy returns and payments by 24 December 2020;
  • Funds with year-end of May 2020 need to have submitted their 1st levy returns and payments by 24 December 2020; and
  • Funds with year-end of December 2019 need to submit their final levy returns and payments by 31 December 2020..

Pension fund governance - a toolbox for trustees

  • 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...

Registered service providers
UPDATED May 2020


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 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...


If you need any assistance with your personal financial planning, you are welcome to get in touch with Annemarie Nel (tel 061-446 073) or with Kristof Lerch (tel 061-446 042)



Dear reader

In this newsletter we address the following topics:

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

  • NAMFISA sees pension fund industry in a sorry state!
  • Undermining the purpose of your own retirement fund?
  • FIMA bits and bites - fines;
  • FIMA and the future of stand-alone funds;
  • It’s tough times for any investor!

In ‘News from RFS’ -

  • Status of ITAS project;
  • Long-service awards complement our business philosophy.

In ‘News from NAMFISA’ read about:

  • Industry meeting set for 26 November;
  • NAMFISA raised red flags about non-compliance amongst pension funds.

In ‘Legal snippets’ read -

  • What makes a valid will?
  • Ensuring and equitable distribution of lump sum death benefits.
...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




Monthly Review of Portfolio Performance
to 31 October 2020


In September 2020 the average prudential balanced portfolio returned -1.5% (August 2020: 0.9%). Top performer is Old Mutual Pinnacle Profile Growth Fund with -0.3%, while NinetyOne Managed Fund with -2.2% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 1.8%. On the other end of the scale Allan Gray Balanced Fund underperformed the ‘average’ by 2.2%. Note that these returns are before (gross of) asset management fees.
 
The Monthly Review of Portfolio Performance to 31 October 2020 provides a full review of portfolio performances and other interesting analyses. Download it here...


Offshore diversification – an imperative for pensioners!


It’s tough times for any investor, particularly someone planning to retire within the next 5 years or having retired already. Conventional investment wisdom as implicit in the management of investments in prudential balanced portfolios, will find it hard to deliver positive real returns. Many an investor may feel enticed to take bigger risks in their investment decisions and invest more speculatively in the hope of these investments yielding the desired returns. Few will factor in the true risk properly, if at all.

In the past, wars proved to provide an escape from a desperate situation. Who is prepared to speculate on a war once again solving our prevailing problems and presenting a global economic and financial reset?

Investment managers of these portfolios should rather cast their nets further and find more ‘unconventional’ investment opportunities without venturing into highly risky and speculative investments. This requires some lateral thinking but it offers a significant opportunity to ‘win the race’ if one is first out of the blocks.

Read part 6 of the Monthly Review of Portfolio Performance to 31 October 2020 to find out what our investment views are. Download it here...

NAMFISA sees pension funds industry in a sorry state!

On 9 November, The Namibian reported on the NAMFISA annual report released on 22 September. The report in the Namibian unfortunately paints an out-of-context, sorry picture of the state of the non-banking financial institutions industry in general and of the pensions industry more specifically.
 
I find this report quite interesting, for placing a huge question mark over the pension funds industry in general and potentially creating the fear amongst retirement fund members that retirement funds are on the brink of collapse and that one should get out one’s money sooner rather than later, because after all, who would want to have his retirement nest egg exposed to the risk of ending up in an insolvent retirement fund?
 
RFS being a stakeholder and having served the industry for the past 20 years, cannot vouch for this negative experience with regard to the funds we are serving. Most of these funds have been around for 30 years and longer and we are not aware of any having incurred losses because of the trustees having failed in their duties and responsibilities or that any trustee has been found guilty of such failure.
 
The report makes reference to NAMFISA ‘failing in its supervisory and regulatory mandate because of ill-advised decisions’. Reading this, one may wonder what ‘ill-advised decisions’ this may refer to. This could refer to a decision taken by the minister of finance about 3 years ago to substantially reduce the proposed drastic increase in levies that NAMFISA had in mind.
 
Of course, a lower funding rate for its activities will impact negatively on NAMFISA meeting its supervisory and regulatory mandate. The question is, what is a reasonable funding rate? Sure, with more funds one can do more to “…foster and enhance the soundness of NBFIs, maintain the highest standards of business conduct by reducing and deterring financial crime, and ultimately, solidify confidence in the financial system.” Since the member has to carry not only the levies, but also increased costs of governance and of service providers, who are responsible for complying with ever increasing requirements, and since the incremental benefit of increased governance requirements gets ever smaller, there must be a cap on how much members should fairly expect to pay for the benefit of NAMFISA looking after their interests.

We fear that already high costs of compliance, supervision and regulation, due to increase significantly once FIMA is effective, discourage saving with non-banking financial institutions, looking for alternative savings vehicles and contemplating investment in more risky assets.
 
We have been agitating for proper benchmarking of costs of supervision and regulation for many years. In a ‘desk study’ we carried out and reported on in Benchtest 09.2018, the conclusion we arrived at, given that it is extremely difficult to compare due to different mandates held by other national regulators and supervisors, the cost of supervision and regulation is Namibia is already very high by a number of different measures, even before FIMA becomes effective, as the following table indicates:

Current  status
UK
Australia
Namibia
GDP (N$ mil)
37,573,000
18,748,000
161,000
Population (N$ mil)
66
24,8
2,6
Total assets of regulated industries (N$ mil)
44,581,000
67,021,000
288,000
Total pension assets (N$ mil)
44,581,000
27,700,000
138,000
Pension fund & med aid membership (mil)
41,1
15
0,422
Total non-banking regulator expenditure (N$ mil)
1,522
984
202
Add: adjudicator @ 28% per SA precedent
435
192
--
Adjusted total equivalent expenditure (N$ mil)
1,987
686
202
Per capita pension assets (N$ 000)
1,084
1,115
53
Total expenditure - % of regulated assets
0,0044
0.0013
0,071
Total expenditure - % of pension assets
0,0044
0,0032
0.126
Expenditure - % of GDP
0,0053
0,0047
0,126
Expenditure – N$ per capita
30,10
35,32
77,69
Expenditure per regulated member (N$)
48,34
58,40
478,67

Undermining the purpose of your own retirement fund?
 
The purpose of a retirement fund is revealed by its name – ‘retirement funding’. Nothing new, I guess, to any reader. But what does retirement funding aim to achieve? Clearly, if I have been living on a remuneration package of say N$ 100,000 per month just before retirement, receiving a pension after retirement of less than N$ 50,000 per month becomes increasingly meaningless, if this is the only source of income I am dependent upon. I will not be able to survive on this unless I drastically reduce my standard of living and that will be very hard for any pensioner to achieve. It will mean poverty in retirement! Ideally one would want to retire without being forced to reduce one’s standard of living, meaning one would want to retire with a pension that is equal to one’s pre-retirement remuneration package. One may argue that one should be able to get along on a lower monthly income as a number of costs will reduce after retirement, such as the cost of housing as the result of the repayment of the housing loan, travelling to and from work, dressing up for work etc. In reality, the cost of living often increases as the retiree spends more on his leisure and, in particular, as the result of medical inflation typically running way ahead of the overall inflation rate.
 
The problem the retiree will face is, that once he reaches retirement, there is nothing he can do to redress an inferior income in retirement. Another problem is that most fund members firstly, do not know whether their retirement provision while in employment is inferior, average or superior and secondly, they typically only develop an interest in the consequence of their level of retirement funding shortly before their retirement.
 
In other words, it is really left to the employer to think further than what his employees tend to think and plan. The employer, who is concerned about the wellbeing of his staff, needs to ascertain that his employees will be able to retire in comfort, having spent their whole working life with the employer. As stated above, this implies that the employee should definitely have an income in retirement that exceeds 50% of his pre-retirement remuneration package and ideally this should be 100%. Globally the aim is to secure an income in retirement of 2% of the pre-retirement remuneration package, per year of service so that 100% would be attained after 50 years of service, 80% after 40 years of service and so on.
 
The reader will have noticed that I keep referring above to ‘remuneration package’ for a specific reason. In the case of most employers, remuneration package is more than ‘pensionable salary’, latter being the basis for determining the rate of retirement funding set by the employer. The relevance is that if the pensionable salary is only 70% of remuneration package, the desired income in retirement of 2% of remuneration package is already diluted to only 1.4% (70% of 2%) of remuneration package and this will thus mean that the retiree has to reduce his standard of living by 30%. Now, this rate of 2% per year of service pre-supposes a total retirement funding rate of 10% of remuneration package and a net investment return of 5% above inflation.
 
As administrator of a number of retirement funds, we are only dealing with ‘pensionable salary’ and do not know what the remuneration package of the fund members is. If one looks at the average pensionable salary, however, one can identify outliers. Our industry data base covers 54 contributory retirement funds. The average annual pensionable salary of the total database was N$ 222,000, the lowest being N$ 28,000 per member (retail business), the highest being N$ 581,000 per member (SOE). In general, the experience is that for members on the lower end of the income spectrum, there is no difference between total remuneration package and pensionable salary as they do not get any benefits. The opposite applies to members on the higher end of the income spectrum.
 
Employers need to be cognisant of the impact of remuneration structuring on the employee’s retirement income so as not to undermine the purpose and the credibility of their retirement fund. Offering a remuneration package to an employee that disappoints at the end of the employee’s working life is tantamount to wasting resources.


FIMA bits and bites - fines

FIMA defines 4 categories of criminal offences by funds and their officers, in terms of the sanction:
  1. Maximum fine - N$ 500,000 or 12 months imprisonment:
    1. Contravention with regard to a NAMFISA inspection;
  2. Maximum fine - N$ 1,000,000 or 2 years imprisonment
    1. NAMFISA not notified within prescribed period of appointment of principal officer;
    2. New member or beneficiary not provided with a free copy of the rules;
    3. Fund failed to send free copy of the rules to every member;
  3. Maximum fine - N$ 2,500,000 or 5 years imprisonment
    1. Trustee or principal officer did not inform NAMFISA in writing of matter that may seriously prejudice the fund’s financial position;
    2. Trustee or principal officer did not inform NAMFISA in writing within 30 days of year-end of payment or consideration received from fund or a fund contractor;
    3. Board fails to send to NAMFISA and to employers a copy of the valuation report within 180 days of valuation date;
    4. Board fails on request of member to provide him a copy of an additional copy of the rules, the annual financial statements or valuation report or fails to allow him to inspect these and make extracts at the fund’s principal office;
    5. Board, trustee or principal officer fails to inform NAMFISA of auditor’s appointment or its termination or to submit annual financial statements to NAMFISA within 90 days of year-end or obstructs auditor in performing his duties;
    6. Board, trustee or principal officer fails to inform NAMFISA of valuator’s appointment or its termination or to submit the valuation report to NAMFISA within 180 days of year-end or obstructs valuator in performing his duties;
    7. Board, trustee or principal officer fails to comply with NAMFISA directive;
    8. Board, trustee or principal officer fails to comply with NAMFISA directive issued after an inspection;
    9. Board, trustee or principal officer fails to comply with written undertaking in relation to a condition with regard to the fund’s registration;
    10. Board, trustee or principal officer contravenes a provision relating to prohibition on disclosing confidential information;
    11. Board, trustee or principal officer knowingly or intentionally makes a false or misleading or deceptive statement, promise or forecast or conceals any material facts, in general or specifically for the purpose of inducing a person to enter into or desisting from entering into any contract with the fund or any rights under such contract.
  4. Maximum fine - N$ 5,000,000 or 10 years imprisonment
    1. Board, trustee or principal officer carries on business of a fund without being registered under FIMA;
    2. Board, trustee or principal officer uses the designation ‘retirement fund’ without being registered;
    3. Board or Fund carries on business of a ‘retirement fund’ for more than 12 months after FIMA being effective without being registered;
    4. Fund carries on business other than that of a ‘fund’;
    5. Fund provides a financial service without being registered under FIMA;
    6. Existing fund provides a financial service after failing to register under FIMA within prescribed time period;
    7. Fund fails to provide information as requested by NAMFISA where NAMFISA suspects its operating without being registered;
    8. Board, trustee or principal officer engages in misleading or deceptive conduct in relation to a financial service or makes a false representation about a financial service;
    9. Board, trustee or principal officer carries on irregular or undesirable practice after it has been declared as such by NAMFISA, or the fund fails to rectify, repair or repay any damage or consequence which arose out of such practice;
    10. Fund fails to report any change in control of the fund. 
We have highlighted in red those offences that may, but not necessarily do have a criminal intent. All other offences can only be due to an administrative failure without any criminal intent, yet they are made a criminal offence with potentially serious legal consequences and the consequence of not being fit and proper for any public position once the fine has been imposed. accrual is ended through payment by the employer.

FIMA and the future of stand-alone funds
– part 1

 
To many trustees who have attended the FIMA webinar series during September and October, it will have become evident that the new onerous requirements of the FIMA will present significant challenges to funds and their boards of trustees.
 
As we pointed out in Benchtest 07.2020, pension funds currently under the Pension Funds Act, need to comply with 29 legal and supervisory requirements. Pension fund administrators need not be registered at all and are therefore not subject to any direct compliance requirements.
 
Under the FIMA, pension fund administrators now have to register, will be regulated and are subject to a separate law that was devised for pension fund and certain other administrators and forms part of the barrage of laws incorporated in the FIMA. Between pension funds and pension fund administrators, by our count there are now already over 600 compliance requirements, and this is not the end of it, as a number of standards still need to be issued by NAMFISA. Currently the highest penalty/ fine that can be imposed between our courts and NAMFISA is an amount of N$ 1,000 per day for non-compliance with the investment prescriptions. All other fines and penalties under the current regime, are ‘paltry’ in relation to this fine.
 
Under the current regime the Pension Fund Act only once refers to imprisonment of a maximum of 12 months. Under the FIMA fines and penalties can be as high as N$ 10 million, and 10 years imprisonment, and such sanctions are multitude in each law of the FIMA.
 
Governance of retirement funds under the FIMA will be materially more onerous than it’s been under the Pension Funds Act. Serving as a trustee as a ‘side-line’ over and above occupying a full-time position at the sponsoring employer will become extremely challenging and will present significant risks to such a trustee and to his employer. Typically, employer appointed trustees are senior staff members. If such a trustee is found to have failed in his or her governance duties under FIMA, the array of penalties that can be meted out and include imprisonment, could disqualify such a trustee from serving on the employer’s board of directors or even in another position vested with governance responsibilities. Being a trustee will become a highly paid professional job to be executed on a full-time basis.
 
Due to these challenges, responsibilities and risks, many boards of trustees are starting to interrogate the continued existence of their fund as a stand-alone fund under the FIMA and a number have pre-emptively already decided to move into an umbrella fund to evade the above consequences.
 
The trend of stand-alone funds moving into umbrella funds is unfortunate as there were very good reasons for the reverse trend that occurred in Namibia (and in SA) in the 1980’s and 1990’s. In those days all Namibian funds were participants in one or other insurer’s underwritten umbrella arrangement. Considerations such as transparency, flexibility and control over ‘one’s own destiny’ swayed most employers’ decision to establish their own private fund based on their very specific needs, preferences and requirements. Trustees operating at arms-length and are unrelated to a participating employer cannot possibly address any labour related issues, that may arise out of the employer’s retirement funding arrangement, as effectively as the trustees of the employer’s own stand-alone fund can. Typically, failure to properly address any labour related issue can seriously impact the operations of an employer, as we have witnessed in many instances in the past.
 
Although most umbrella funds nowadays are no longer underwritten funds and can therefor offer a bit more flexibility and transparency, very often costs are hidden in the way investment returns are passed on to members and participating schemes are still coerced, if not required outright, to use the sponsor’s house products and intermediaries and do not offer a participating schemes any control over their own destiny.
 
Declaring our interests in the Benchmark Retirement Fund as RFS’ house product, we can state without fear of contradiction, that this fund offers total transparency to participating schemes, total flexibility in every respect except the administrator and the auditor, and extensive control over one’s own destiny, just short of being held accountable for the fund governance. The fund offers participating schemes the retention of their own identity, as if they were still the stand-alone fund, without the need to establish their own board of trustees and all that goes with it.


It’s tough times for any investor!
 
Last month I suggested in this column that this is not the time to increase your investment risk. This statement is immediately vindicated by looking at the 1-month performance of portfolios monitored by us per Graph 1 below. It will be noted that equity (green bar), the highest risk conventional asset class produced a negative 2.2% return for the month. Only portfolios holding no equities or very little in equities (no colour bars) have managed to produce just slightly positive returns while the special mandate portfolios with lower equity exposure (grey bars) in general produced better returns than the typical prudential balanced portfolios (blue bars) with a high equity exposure.
 
Graph 1

 
Looking at graph 2 below, it will be noted that the SA Allshare index in nominal terms (blue line) turned down since the beginning of 2018 while, adjusted by the change in the CPI index (red line), the peak was reached in April 2015 and since then the line trends downwards noticeably.
 
Graph 2

 
Drilling down into the main sectors within equity as per graph 3 below, it will be noted that since the beginning of 2020 all sectors, except ‘Technology’, produced zero or negative returns for the year to end September. The stellar performance of technology is to be expected in the light of the COVID pandemic.
 
Graph 3

 
‘Turning the clock back’ exactly 12 months though, graph 4 shows that for the year to end September 2019, only one sector, ‘Consumer Goods’, produced a decent return, while the other sectors, such as technology, produced hardly any return or negative returns. Last year September, no-one would have increased his exposure to the technology sector. This experience emphasises the role timing plays and the futility of speculating as one is most likely to miss the bus when making a call.
 
Graph 4

 
Evidently equity overall, as the mainstay asset class of retirement fund portfolios, failed to produce a positive real return since April 2015. This is clearly a problem for the investor, more specifically for someone trying to build up enough capital to enable his retirement in comfort. One may be forgiven for thinking that perhaps foreign equities may have been the place to be while SA equities are failing us. Looking at graph 5, however, we see that all main foreign share market indices produced zero return, except the US S&P 500 that produced a meagre 5% return for the year to the end of September.
 
Graph 5

 
To complete the picture, let’s look at graph 6 below. It depicts the cumulative out – or underperformance of the main asset classes in typical retirement fund portfolios relative to the average prudential balance portfolio (yellow line) since 2002. We see that bonds (green line) and cash (red line) initially out-performed equity (blue line) and the average portfolio for about 3 years to 2005. The table then turned in favour of equity against cash and bonds that started to seriously under-perform equity and the average portfolio up until 2008. Interestingly the under-performance of bonds and cash relative to the average portfolio was severe while the out-performance of equity relative to the average portfolio was muted. Since then the performance of all asset classes has been below that of the average portfolio on a cumulative to date basis. However, one can detect a slight improvement of fortunes of cash and bonds relative to the average portfolio while equity, the mainstay asset class, continued to weaken its relative position ever since 2014.
 
Graph 6

 
While the average prudential balanced portfolio achieved its implicit return objective of inflation plus 5% over a period of 10 years or longer, the return on an investment in that portfolio has fallen significantly short of the long-term return expectation, and the shorter the period the bigger the shortfall.
 
While we have not looked at property, it is common knowledge that property is in the doldrums in Namibia, in South Africa and in many other countries of the world as the result of the knock global economies took from COVID measures. It is also common knowledge that interest rates are negative or zero in many parts of the world, particularly in the developed world.
 
As COVID continues and most countries in the world are severely over-indebted and cannot afford any increase in interest rates, there is simply no silver lining on the horizon for the foreseeable future. Interestingly it was reported in the media recently that US value investment fund AJO Partners is closing down its fund after more than 35 years and is returning US$ 10 billion to its investors. CEO Aronson explained “Our relative performance has suffered because our investment edge, our ‘secret sauce’, is at odds with many forces driving the market.”
 

Conclusion

It’s tough times for any investor, particularly someone planning to retire within the next 5 years or having retired already. Conventional investment wisdom as implicit in the management of investments in prudential balanced portfolios, will find it hard to deliver positive real returns. Many an investor may feel enticed to take bigger risks in their investment decisions and invest more speculatively in the hope of these investments yielding the desired returns. Few will factor in the true risk properly, if at all.
 
In the past, wars proved to provide an escape from a desperate situation. Who is prepared to speculate on a war once again solving our prevailing problems and presenting a global economic and financial reset?
 
Investment managers of these portfolios should rather cast their nets further and find more ‘unconventional’ investment opportunities without venturing into highly risky and speculative investments. This requires some lateral thinking but it offers a significant opportunity to ‘win the race’ if one is first out of the blocks. In this endeavour, the investment manager must bring the investment closer to the investor. Do I need any return on investment, as commonly understood, if my money can be invested to build my foundation off which I can generate an income at some time in future? If my investment earns no return, investments with a social and/ or environmental objective should find it much easier to compete with conventional investments. I do have some thoughts in this regard that may be worth being explored further by investment managers
.

Anyone interested to venture onto this road with us is welcome to contact us.
 
Tilman Friedrich is a 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.
 

 
Compliment from a spouse of a deceased fund member

Dated 13 November 2019

“I would like to express my utmost gratitude towards RETIREMENT FUND SOLUTIONS and Ms J for being with me since my husband passed away.  Thank you for your compassion and dedication and tireless effort to process this claim for my son and me. May the Almighty bless you.”

Read more comments from our clients, here...
   


Status of ITAS project

RFS concluded the project of correcting the category for uploading pension payments and once again uploading all monthly returns for the period 1 March 2019 to 29 February 2020 on ITAS in respect of all funds it administers. Taxpayers should not experience any trouble submitting their return for the year ended 29 February 2020 and there should be no ITAS queries relating to information we have uploaded on ITAS for the past tax year.


Long service awards complement our business philosophy

RFS philosophy is that our business is primarily about people and only secondarily about technology. Every time a fund changes its administrator, a substantial amount of information and knowledge is lost. Similarly, every time the administrator loses a staff member, it loses information and knowledge, also referred to as corporate memory. We know that, as a small Namibia based organisation, we cannot compete with large multinationals technology wise because of the economies of scale that global IT systems offer. To differentiate us we need to focus on personal service and on the persons delivering that service to foster customer acceptance and service satisfaction. With this philosophy we have been successful in the market, and to support this philosophy we place great emphasis on staff retention and long service.

The following staff member celebrated her work anniversary of 5 years at RFS, having previously been employed for close-on 9 years! We express our sincere gratitude for her loyalty and support over the past 14 years to:
  • Salome Sloa
We look forward to Salome continuing her value-addition to her portfolio of key clients of RFS!

Important administrative circulars issued by RFS

RFS issued the following fund administration related circular to its clients over the last month. Should any client have missed this circular, please get in touch with your client manager:
  • Submissions on ERS (RFS 2020.11-15)

  

Industry meeting set for 26 November
 
NAMFISA recently sent out an invite to trustees, principal officers and other officers of pension funds to the last industry meeting this year. The meeting will be held on 26 November at NIPAM conference hall, ground floor starting 8h30 until 10h30. All are invited to submit annotated agenda items to Ms Martha Mavulu, This email address is being protected from spambots. You need JavaScript enabled to view it.
 

NAMFISA raises red flags about non-compliance amongst pension funds

This is according to an alarmist report in The Namibian of 9 November on the 2020 NAMFISA annual report. The message in this report may have come across as rather disturbing to many readers.


The most problematic findings were with pension funds, which are trusted with managing and growing people's retirement money.”

The following are some of the areas of non-compliance highlighted with regard to pension funds:
  • Funds with liabilities exceeding assets, and funds that did not have enough assets to match the liabilities promised to members, meaning should there be any retrenchment or sudden retirement of a number of people, the fund might struggle to liquidate and pay them out.
  • Contravention of Regulation 13(3), in that domestic assets consisting of shares acquired in companies incorporated outside Namibia exceeded the limit of 10% of the market value of a fund's total assets.
  • Funds not drawing committed capital for investment in unlisted assets, despite the outcry of access to capital, certain funds sit with capital.
  • Funds holding assets in transaction rather than investment accounts, thereby losing out on optimal growth.
  • Conflicts of interest were inherent in cases where board members held key positions at the fund's service providers, thereby casting doubt on the independence of key personnel.
  • Recommendations by the valuator are not implemented.
  • Board subcommittees taking uninformed due to the absence of clear written mandates and lack of feedback from service providers.
Other areas of NAMFISA concerns noted in the report:
  • The exposure or risk emanating from the inability to implement new legislation effectively.
  • Delayed promulgation of legislation is leading to delays in regulatory transformation, e.g. FIM Bill.
  • Non-compliance with the new legislative framework is becoming a reputational risk.
  • Namfisa is failing in its supervisory and regulatory mandate because of ill-advised decisions.

What makes a valid will?
 
Any person aged 16 and older can make a will. For the will to be valid it needs to meet the following conditions:
  1. The testator must be mentally capable of appreciating the nature and effect of his action.
  2. The testator needs to sign the end of the will.
  3. If the will consists of more than one page, each page must be signed.
  4. Two competent witnesses must be present when the testator signs the will.
  5. The witnesses must sign the will in the presence of each other and of the testator. 
Also be aware of the following important principles:
  1. A witness may not benefit from the will he signed.
  2. Executors, trustees and guardians are considered beneficiaries in terms of the Wills Act and may thus also not benefit.
  3. The testator can make any subsequent change to the will, provided he and two competent witnesses must sign next to the change in each other’s presence.
  4. A mark is as valid as a signature. But in such instance a commissioner of oaths must be present, must sign and certify that he is satisfied that the will is in line with the wishes of the testator. 
Also consider the following good advice concerning wills:
  1. Review your will regularly and promptly after significant changes in your life such as marriage, divorce, birth of a child and retirement.
  2. Earlier wills and codicils should be revoked when a new will is made as the earlier wills may be in custody of different persons. If not revoked, the earlier wills could be read together in the event of death.
  3. If an entity or institution is appointed as executor, the testator should agree on the fee for which the executor will administer the estate and this should be stated in the will.
  4. An executor must provide security to protect the estate from the executor stealing all the money in the estate, but if it is a trusted individual such as a family member this requirement can be excluded by introducing a specific clause to such extent.
  5. If a mortgaged property is bequeathed, clarify whether this includes or excludes the mortgage. Common law is that the property is bequeathed without the debt unless the will directs differently.
  6. Minor children cannot inherit cash or immovable property. Such bequests can be administered in a trust for the minor child but in the absence of such a directive in the will, the money will be held by the Guardian’s Fund.
  7. A substitute beneficiary should be nominated in the event of the beneficiary predeceasing the testator, as the bequest to the beneficiary would otherwise devolve in terms of the Intestate Succession Act. 
Read the full article with some interesting examples in Personal Finance for a more detailed exposition here…
 

Ensuring an equitable distribution of lump sum death benefits
 
Retirement fund trusteees have a duty in terms of section 37C of the Pension Funds Act, to distribute a deceased member’s death benefit equitably among beneficiaries which have been identified. To do this, trustees need to consider a number of relevant factors:
  1. Deceased member’s will as expressed in a written nomination addressed to the fund concerned.
    1. Although the will of the deceased is relevant, the primary purpose is to ensure that those financially dependant on the deceased during their life time are protected.
    2. Trustees should not place too much emphasis on the will of the deceased.
    3. An exclusion of a dependant by the deceased must be ignored.
  2. The beneficiaries’ financial affairs
    1. Beneficiaries’ current financial position should play the most important role.
    2. Automatically favouring legal over factual dependants will amount to improper exercise of discretion.
    3. Trustees must establish whether there are any legal procedings which may have an impact on a beneficiary’s financial situation.
    4. Even if the children of deceased are completedly dependent on another person for financial support, they should still be considered as possible financial dependants.
    5. The deceased’s arrear maintance payments to a beneficiary may be a relevant factor in assessing the beneficiary’s financial situation.
  3. Other benefits awarded to the beneficiaries
    1. Benefits due from another group life scheme or insurance policy or bequest from the deceased’s estate may impact the financial situation of the beneficiary and must be taken into account.
  4. Extent of beneficiaries’ dependency
    1. Specifically it must be established whether the beneficiary lived in the deceased’s home on a permanent basis at the time of death of the deceased.
  5. Beneficiaries’ future earnings potential
    1. Trustees must establish whether the beneficiary is employable and capable of working and a preference not to work (e.g. looking after the children) should not detract from the fact that the beneficiary is employable and capable to work.
  6. Age of beneficiaries
    1. The trustees’ main aim should be to ascertain that minors and dependent children are assisted and financially protected until they become self-supporting.
    2. The needs of minor children are more pressing and compelling than those of major children.
    3. Major children still studying should be considered for their financial need.
  7. Relationship of beneficiaries with the deceased
    1. Family problems and bad relationships between deceased member and beneficiary should not overshadow the decision of the trustees based on all the above factors.
  8. Amount available for distribution
    1. Where the capital available was insufficient to cater for the needs of the widow, minor children and major children, the SA adjudicator held that the interests of justice would be served by awarding the entire benefit to the widow and the minor children based on
      1. The respective ages of the beneficiaries, especially minors as opposed to the majors.
      2. The widow being unemployed and totally dependent on deceased.
      3. The educational level of the major children and the possibility of them securing satisfactory employment.
      4. The close relationship between the deceased, his widow and the minor children.
Note: The article refers to reasonable benefit expectations of a child for whom the deceased was not legally liable for maintenance. This provision does not apply in Namibia.
 
Read the full article in Pensions World for a more detailed exposition…



Living annuities: Is a draw down best taken from a local fund? 

In this article a fund member is contemplating to retire from a retirement annuity and to have maximum offshore exposure on the two-thirds to be applied to provide an annuity income. The member is posing the following questions

  1. Is a drawdown best taken from a local fund such as a money market or income fund or drawdown proportionately from all funds including the global funds?
  2. If the aim is to get maximum global exposure and the drawdown is taken 100% from local funds (depending on the answer to question 1), how much money should be invested in the local fund? Is it calculated on enough to cover 2/3/10 years of drawdown before needing redistribution?
  3. Is an exchange-traded fund (ETF)) an absolute no-no in a living annuity because of brokerage fees, with the caveat that drawdown will NOT be taken from the ETF except if a top-up may be needed for funds where drawdown is taken monthly? Therefore, brokerage fees won’t be incurred on a regular basis.
  4. Is tax like capital gains tax (CGT) paid on drawdown?
  5. If a large percentage is invested globally, and my risk is moderate, should the investment be diversified, and which groups of funds (equity, bonds, cash) should be considered?  

These questions are expertly answered by Richus Nel in this Moneyweb article of 10 November 2020 here…
 
Note: Capital gains tax is currently not applicable in Namibia but the tax aspects addressed in the article are equally applicable to the Namibian situation.
 

What to consider when choosing an annuity income
 
“Retiring from a retirement fund marks the transition from savings towards your retirement to drawing from your retirement capital and selecting the most appropriate annuity for your personal circumstances can be challenging… One of the first decisions a retiree will need to make is whether or not to commute one-third of their savings when retiring from the fund… There are a number of factors that you will need to take into account when deciding on a cash withdrawal such as… whether you have any immediate capital outflows you need to provide for, the extent of your debt, and whether or not you have discretionary funds to provide additional liquidity in retirement…
 
Leaving a legacy – If leaving a financial legacy for your loved ones is important to you, you may favour the idea of a living annuity as opposed to a life annuity…
It is important for retirees to bear in mind that a living annuity is an investment and, as the investor, the retiree takes all the investment risk. This means that poor investment returns can negatively impact on the amount you are able to draw from your living annuity…

Marital status – Your marital status will also play a role in choosing an appropriate annuity income. Most life annuities can be purchased on a single-life or joint-life which means that the annuity continues to pay until the death of the last-surviving spouse.

Propensity for risk – It is important for retirees to bear in mind that a living annuity is an investment and, as the investor, the retiree takes all the investment risk. This means that poor investment returns can negatively impact on the amount you are able to draw from your living annuity…

Capital amount – The amount of capital that you have at retirement is also a factor in determining which annuity vehicle is most appropriate for your needs. According to the Actuarial Society of SA Convention 2019, many South Africans choose to invest in living annuities even though they don’t have sufficient retirement capital to warrant their use…

Financial needs of loved ones – The financial needs of your loved ones in the event of your passing is another factor to consider. If you purchase a life annuity and pass away soon thereafter, there may be no benefit for your heirs – depending on the type of life annuity you purchased – and this is a risk you take in return for passing the investment risk onto the insurer…

Inflation – When purchasing a life annuity, you can choose upfront the manner in which your annuity income will increase. Generally speaking, you have the option to choose a level annuity that offers no annual increase bearing in mind that, while offering a higher income initially, will result in your purchasing power decreasing in value as a result of inflation…

Tax efficiency – …living annuities fall outside of the deceased’s estate and are not estate dutiable, neither do they attract executor’s fees. Therefore, from an estate planning perspective, living annuities can be effectively used to reduce costs if required.

Ongoing advice – Another consideration is that living annuity investors will generally require ongoing advice with regard to navigating investment risks, returns, cash flow and investment strategies and, as such, advice fees must be factored into the equation.

Transparency and flexibility – Living annuities provide annuitants with full transparency in respect of values, fund composition, investment performance and fee structures. Annuitants have full flexibility to choose their underlying investments and are free to move investment strategies…”

Note: The references in this article to capital gains tax, taxation of interest and dividends, taxation of a portion of the lump sum commutation do not apply in Namibia. The minimum and maximum draw rate in Namibia is 5%, respectively 20%. The reference to regulation 28 is also not fully relevant to Namibia.

 
Read the full article by Craig Torr in Moneyweb of 2 November 2020, here…



Investment lessons from a terrible, horrible, no good, very bad year 

“…2020 has reset the bar, with the world hammered by a deadly pandemic, communities ripped by police brutality, plunging global growth, the loss of hundreds of millions of jobs, protests and corporate collapses. 

However, this year has not been awful by all measures. The S&P 500 is 5% higher in November than it was in January and the gold price is up almost $500/oz, making for a bonanza for gold miners... 

Others have experienced the full force of the annus horribilis, with the magnitude of bankruptcies ranked by assets in 2020 towering over 2008. Collapsed companies include car-rental company Hertz …But overall, the signs point to recovery, and with this in the frame, the experiences of the annus horribilis offer at least three valuable investment lessons for building future-proof portfolios: 
  1. Prepare to be surprised: First, forecasting is a dangerous activity. This doesn’t mean you shouldn’t think about the future. Instead, know that the future will be filled with unexpected shocks and surprises – sometimes good, sometimes bad, but always unknowable ahead of time. The implication is that investments should not be built for the known or the widely anticipated. Rather, they must be built to withstand the harshest and worst circumstances…
  2. Be guided by principles, not crowds: Second, whilst following the crowds may feel right or seem sensible, rather choosing to focus on sound investment policies and principles will prepare you for times of stress. Notably, investing is ultimately about owning good assets that have been bought at the right price, and then holding the line though periods of economic stress.
  3. Choose wisely: Third, investing is as much about what you own as what you don’t own. Consider Catherine Wood’s ARK Invest, well known for its exceptional record in cutting-edge themes, whose successful investments in leading innovators have also flagged industries and sectors most at risk of disruption. For example, investments that you will not have wanted to own in 2020 are bricks-and-mortar retailers and travel businesses…” 
Read the full article by Adrian Saville of Cannon Asset Management in Cover of 11 November 2020, here…
 

Structured investments let you grow your money with certainty 

“In times like these, many investors turn to the perceived safety of cash – missing out on growth opportunities in the process. Structured investments, on the other hand, provide access to growth assets to help beat inflation while still giving investors the comfort of knowing that their initial investment amount is safe…

Typical features of structured investments:
  1. Capital protection: These investments are typically for a set period, and your initial capital amount invested is fully protected. Therefore, even if the index the investment is linked to has an overall negative return over the period, you’ll still receive your initial investment amount back
  2. Enhanced returns: These investments typically also offer an enhanced upside, should the index have an overall positive return over the period. This varies between different guaranteed investments but could be up to four times (400%) of the return over the period.
  3. Certainty around returns: The level or percentage of enhanced return will be confirmed at the beginning of the investment term, removing uncertainty.
  4. Tax advantages: Many guaranteed investments are set up in tax-efficient structures such as endowment or sinking fund policies. This means that you have no tax administration burdens as an individual investor, as the tax administration is taken care of within the policy on your behalf…
What to be aware of when investing in structured investments:
  1. Liquidity: – you only benefit from the capital protection and enhanced returns if you remain invested for the full investment term – say, five years.
  2. Default risk – this simply means the risk that the bank that undertakes to provide for the return profile, is unable to do so…Before investing in any solution, investors should always understand their own risk profile and tolerance, and what role the investment will play in their overall strategic financial plan. We encourage investors to seek the advice of a qualified financial planner before investing.”
Read the full article by Glacier, in Glacier Investments of 11 November 2020, here…



Great quotes have an incredible ability to put things in perspective.

"Our greatest glory is not in never falling, but in rising every time we fall.”
~  Confucius

 
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