|In this newsletter:
Benchtest 12.2020, the purpose of a pension fund, FIMA and hybrid funds and more...
FIMA was due to be published in the government gazette before the end of the year but this did not happen. It means that the President may not have signed the Act yet, after all. In accordance with the implementation schedule envisaged by NAMFISA, all necessary standards and regulations will now be finalised within 12 months of the proclamation of the Act, where after funds have another 12 months to get ready and to have their rules approved, i.e. at this stage, by early 2023.
Register now for FIMA training
Following her successful collaboration with RFS in presenting the first FIMA webinar training series, Andreen Moncur, the presenter of this series, will offer further weekly training sessions on specific topics early 2021.
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 RFS’ -
In ‘Legal snippets’ read -
In media snippets, read –
...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!
Monthly Review of Portfolio Performance
to 31 December 2020
In December 2020 the average prudential balanced portfolio returned 1.9% (November 2020: 5.7%). Top performer is Hangala Prescient Absolute Balanced Fund with 3.6%, while Allan Gray Balanced Fund with 0.6% takes the bottom spot. For the 3-month period, NAM Coronation Balanced Plus Fund takes the top spot, outperforming the ‘average’ by roughly 3.4%. On the other end of the scale Stanlib Managed Fund underperformed the ‘average’ by 2.0%. Note that these returns are before (gross of) asset management fees.
Read part 6 of the Monthly Review of Portfolio Performance to 31 December 2020 to find out what our investment views are. Download it here...
The 2020s are going to be about rifle shots, not the shotgun approach of index funds!
In his newsletter ‘Thoughts from the Frontline’ of 23 January 2021, John Mauldin presents a number of US market metrics that should make an investor think.
Consider the so-called ‘Buffet Indicator’ as per graph 6.1 (Source: Adviser Perspectives), that measures US equities as a percentage of nominal US GDP. It is at an all-time high and about as far above the ‘Exponential Regression’ line as it was at the end of 2000 when the S&P 500 dropped from its peak of 1,518 at the end of July 2000 to 815 by end of August 2002. That was a drop of 87%! It took the S&P 500 5 years to get back to the July 2000 level, i.e. by 2007, only to drop back to 735 at the end of January 2009 through the global financial crisis. That was a drop of 108% from the peak it reached at the end of April 2007. As we speak, the S&P 500 is testing the 4,000 level, evidently driven by quantitative easing that we have referred to repeatedly in earlier newsletters.
Read part 6 of the Monthly Review of Portfolio Performance to 31 December 2020 to find out what our investment views are. Download it here...
FIMA bits and bites – does this Act make provision for ‘hybrid’ funds?
FIMA will present the pensions industry and other stakeholders with lots of challenges over many years to come. Besides the fact that it is difficult to read and to understand because it is so vast, and the fact that it is not only the relevant financial institution chapter (law) one has to consider, but a number of other chapters too that impact every financial institution chapter (law). At the outset, every fund faces the challenge of having its rules approved by NAMFISA. The ‘old’ rules approved under the Pension Funds Act may not comply with provisions of FIMA, which is in many respects quite different to the Pension Funds Act despite a lot of similarities. Before submitting the rules of an existing fund, one needs to make sure that they do comply to the best of one’s understanding. In this endeavour it may be purposeful to obtain the opinion of relevant NAMFISA officials on any grey areas as early as possible, in order to stand a better chance of crossing the first important hurdle of obtaining approval of the rules by NAMFISA. Any opinion that may have been expressed by a NAMFISA official though, is no guarantee, and when it comes to the official approval of the rules, NAMFISA may have concluded differently and therefore does not approve the rules. Even if the rules are then approved, NAMFISA can still change its view with regard to any specific matter later and a court may yet conclude differently, should such matter be challenged in court.
Pooled pensioners in a DC fund?
Whether a defined contribution (DC) fund may continue to offer ‘pooled pensions’ is one such area that was clear in my understanding of FIMA, but NAMFISA has a different view. Such funds are sometimes referred to as ‘hybrid’ funds. A number of defined contribution funds currently still offer ‘pooled pensions, or defined benefit (DB) type pensions where the employer stands in for any shortfall between the actuarial value of the liabilities of these pensions and their underlying investment value. For some employers, it is important to look after their retirees in retirement and to maintain a relationship with them throughout their years in retirement. Contented pensioners are great promoters of their fund and it’s sponsoring employer. This in turn should assist the employer to attract and retain staff in a competitive labour market, two of the main reasons an employer usually has for sponsoring its fund.
For the purpose of regulation and supervision by NAMFISA, such hybrid funds are considered to be DC funds that have a DB component, which means such DC funds are required to keep reserves and therefor they must be subjected to tri-annual valuation. These funds must report separately their DB component and their DC component under the various standards that apply to DB funds and to DC funds.
Investment smoothing reserve in a DC fund?
Some funds use investment smoothing, meaning that members are awarded annually an investment return that approximates the returns earned by the underlying investments, over time. In times when investment returns are high, members earn a lower return in order to allow the fund to allocate higher returns to members than what the investments actually earned, in times of poor investment returns. Another reason for maintaining an investment reserve is that fund member records are normally updated once a month as at month end, reflecting the fact that contributions are payable monthly, at the end of every month. In contrast, benefit payments cannot normally be timed to occur once a month at the end of the month, for various reasons, such as income tax and time lags upon withdrawing of funds from the investment, and the physical payment to the beneficiary. These timing ‘differences’ result in the fund having to award investment returns to a member it has not earned, or the fund earning investment returns it will not award to the member. Consequently, there will always be differences between what the fund’s investments earned and what the fund allocated to members and these need to be retained in a reserve account. Should a fund be operated on this basis, the fund is a ‘hybrid’ fund. A pure DC fund may only maintain an expense reserve for the difference between the employer’s payroll-based funding for expenses and the incidence of non-payroll-based ad-hoc expenses to which a standard applies prescribing the manner in which this reserve is to be managed. Again, I would have thought FIMA is very clear in requiring a fund being one or the other type fund, but it seems I may be wrong based on feedback we obtained.
For the purpose of regulation and supervision by NAMFISA, such hybrid funds that are required to keep reserves must be subjected to tri-annual valuation.
Typical balanced pension fund portfolios should offer peace of mind!
Just recently I came across interesting information in John Mauldin’s Thoughts from the Frontline newsletter, as reflected in figure 1 below. It depicts the stimulus as a percentage of GDP injected by a selected number of countries into their economies, where the blue circles represent the 2008 financial crisis stimulus and the red circles the COVID-19 stimulus.
Take Germany whose 2008 financial crisis stimulus was a mere 3.5% of GDP and in line with that of the US. This time around the stimulus represents 33% of GDP, nearly 3 times the stimulus given by the US at 12.1% of GDP. With an economy of only US$ 3.8 trn representing only about 18% to the US economy’s US 21.4 trn, the German COVID stimulus of US$ 1.3 trn, amounts to half the US stimulus of US$ 2.6 trn. These figures are based on World Bank GDP data of 2019, before the decimation of global economies by COIVD-19. According to John Mauldin’s newsletter global debt will be US$ 300 trn by the end of the first quarter of 2021, that represents 340% of 2019 global GPD, estimated at US$ 87.8 trn by the World Bank!
If you want to put this into the context of a household, that is the equivalent of a household having borrowed around 11 times its annual household income. If your household income is your salary and that is N$ 1 million, your debt is just over N$ 11 million. If you had to repay this debt at the bank’s mortgage rate of currently 8.5% over say 20 years, you would be in deep trouble as the loan repayment of N$ 1.18 million per annum would already exceed your salary and you have not paid your bills yet. Of course, we know that some governments nowadays actually pay zero % interest on the money they borrow. Even at 0%, the repayments over 20 years still represent 57% of total government revenue, before government has spent any money on infrastructure, health, housing, education, government and social services.
This is telling us, firstly, that governments across the world have built up a huge debt burden. Secondly it tells us that governments across the world cannot afford to pay interest on its debt for the next 20 years. If the debt is borrowed from its citizens, it means that citizens will earn no interest on money lent to their government. Countries that are less fortunate as to be able to tap into the local capital markets, do not have the lever in their hands to determine how much interest they can afford and will pay to their lenders. Such countries with such debt burdens will simply not be able repay their debt. If we look at Namibia, its debt is expected to amount to 70% of GDP with an increasing trend, currently at the rate of around 12% of GDP per annum. Namibia has thus currently borrowed 2.3 times its annual household income. If we take the Namibian IJG Allbond index as proxy for our funding rate, government is paying around 13% to its lenders, the annual repayment over 20 years would exceed 30% of our annual household income. It all indicates that the Namibian government is currently really sailing very close to the wind!
Given that the world is hugely over-indebted, that many governments across the world will find it very difficult to just repay the capital, let alone interest and given that as the result only accelerating inflation or a very, very long time of very low interest rates can resolve this challenge, the huge stimulus extended to markets means that lots and lots of money is floating around looking for investment opportunities. We are seeing a lot of this happening and we see many youthful investors piling into a few in vogue shares, gold crypto currencies and other assets, in rather unqualified fashion. When one looks at equity indices, it appears that they are flourishing yet when one looks at the underlying shares, it becomes evident that they are actually driven by a handful large cap shares while the rest of the shares are actually not performing at all.
The following table recently presented in Cover magazine of 5 November provides an illuminating overview of cheap (out of favour) and expensive (in favour) stock markets in terms of a number of different criteria. The figures in brackets represent the 15-year median. Evidently none of these markets are considered cheap on all criteria. This is the result of earnings having collapsed after the COVID-19 hysteria struck.
It will be noted that even emerging markets are rated expensive on price: earnings and dividend yield, both of which are a result of the collapse of earnings due to COVID-19. We do not have the same information about South African stocks, however graph 6.1 below depicts 1 year trailing price: earnings and dividend yield of the JSE Allshare index. It shows that the SA price: earnings index has also increased sharply to 22, not far off its 30+ year high of just over 26 in October 2015, and far above its median over 30+ years of 13.6, despite a decline in the Allshare index, meaning that earnings have declined sharply since March of this year. Similarly, the dividend yield declined sharply to 3.25% and close to its 30+ year median of 3%. This of course is consistent with the conclusions depicted in the table above with regard to these two criteria.
The thrust financial markets have been experiencing as the result of the stimulus measures, since COVID-19 struck markets, should fizzle out by the time the stimulus measures have run their course, which will likely be in 2021. From that point onwards the value of shares will be determined on the basis of the relevant company’s performance rather than re-ratings due to the hype in the market that we are currently experiencing with regard to only a small number of favoured technology shares and favoured markets. One will therefor see a readjustment in equity markets between the small spectrum of favoured tech shares and favoured markets and the broad spectrum of those currently out of favour. Principally, economic fundamentals should improve as the COVID-19 hysteria subsides going forward.
As the global economies start to recover, company earnings should start to recover and dividend yields should improve. Some commentators believe that it could take up to 5 years for the global economy to reach its pre-COVID levels. With the stimulus thrust fizzling out share prices are likely to move sideways for quite some time. In the mean-time the investor will have to rely on dividends to generate his investment yield. Coming off a low, one can expect earnings growth to outpace inflation and dividend growth to track earnings growth. The investor should thus be able to expect a real dividend yield in excess of 3%. This may be low in relation to what we have seen in years gone by, however it is still a respectable return on any equity investment. As we know local cash currently generates a real yield of around 3% with a declining trend. The local IJG Allbond index generates a superior real return of around 11%. The downside of a fixed interest investment and cash is that their fortunes are likely to turn swiftly once inflation starts picking up, which it should do in view of excessive liquidity in financial markets, and interest rates start moving up in line with inflation. On that basis, an investment in a typical balanced portfolio should be able to generate a real return of around 5%, or around 7% in the prevailing inflationary environment. Once again this is not what we got used to in the years gone by, but it is pretty consistent with the long-term return expectation of the typical balanced pension fund portfolio.
In last month’s column, I suggested that offshore diversification is an imperative and this is what balanced pension fund portfolios do. Members of pension funds should thus be comfortable that their investment should deliver returns in line with their long-term expectation.
For a highly qualified corroborating and more detailed view on specific asset, read Jared Dillian in Mauldin Economics on the top consensus trade of 2021 here...
Compliment from a municipal payroll officer
Dated 18 December 2020
“...Let me use this opportunity to thank you for the pleasant working relationship with your office and in particular with you.
It was indeed great and enriching working with you, and the skills acquired during the encounters will remain useful in a long time.
A blessed festive season and new year. One of our African proverbs says only mountains don’t meet.”
Read more comments from our clients, here...
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:
Old Mutual merges 2007 and 2020 AGP series
Old Mutual informed its clients as follows:
“...Given that the BSR levels of the 2007 and 2020 series of Absolute Smooth Growth (AGP 50) and Absolute Stable Growth (AGP 80) have converged, these portfolios will be merged as follows:
The two series will be merged effective 1 March 2021 and will each have their individual bonus declaration up until the end of February 2021. After 1 March there will remain only the merged 2007 series and all contributions after 1 March will be made into the respective 2007 series portfolio.
These changes will be carried out by Old Mutual and do not require any action by the investor.
Read the full announcement, here...
For how long may a fund withhold payment of a benefit?
This case deals with HT Mashaba (Employee) who submitted a complaint to the Pension Funds Adjudicator (PFA) against ABSA Pension Fund (the Fund), ABSA Consultants and Actuaries (the Administrator) and ABSA Bank Ltd (the Employer), for the fund withholding payment of her benefit in terms of section 37D (1)(b)(ii).
Section 37D (1)(b)(ii) deals with the deduction from a benefit of an amount due to the employer in compensation for damage caused to the employer through dishonesty, theft, fraud or misconduct. The Employee’s service with the Employer was terminated on 2 December 2015 on the basis of the Employer suspecting her of having committed fraud that cause damage to the Employer. The Employer instituted a criminal case in January 2016.
Section 37D(1)(b)(ii) provisions:
A registered fund may-
(1)(b) deduct any amount due by a member to his employer on the date of his retirement or on which he ceases to be a member of the fund, in respect of-Facts of complaint(ii) compensation (including any legal costs recoverable from the member in a matter contemplated in subparagraph (bb)) in respect of any damage caused to the employer by reason of any theft, dishonesty, fraud or misconduct by the member, and in respect of which-(aa) the member has in writing admitted liability to the employer; or
The Employee informed the Employer that a syndicate had tried to transfer a customer’s moneys into her bank account but that she was not involved in this crime. When the Employee followed up on the payment due to her, she was informed that SARS had issued a tax directive and that the benefit was to be paid out on 9 January 2o17. The Employee was subsequently informed that her benefit would be withheld until her criminal case was finalised in court. The Employee stated in her complaint that the police tried to arrest her but did not do so because of a lack of evidence, as the misappropriated moneys were not paid into her account and that she was then reinstated. She also stated that she complained to the CEO of the Employer about the treatment she had received during the investigation. She stated that the police reported to the Employer that the Employee was in communication with the syndicate, that she was subjected to a disciplinary hearing in January 2017 and dismissed on the basis of this report from the police.
The Employee denied these allegations against her and requested the Tribunal to order the Fund to pay her withdrawal benefit to her.
The Administrator stated that the Employee of the Employer was dismissed and that it was advised by the Employer that the Employee was alleged to be linked to a syndicate that defrauded the Employer who instituted a criminal case in 2016. Due to the ongoing investigation, it had withheld the benefit in terms of section 37D of the Act.
Matter to be determined by the Tribunal
The tribunal had to determine whether the withholding of the Employee’s withdrawal benefit was lawful, with reference to section 37D (1)(b)(ii). (Note: This section is verbatim the same as that of the Namibian Pension Funds Act.)
The determination by the Tribunal
The tribunal found as follows:
As the result of the above considerations, the relief sought by the Employee cannot be granted. Only if the police finds there is no case to answer by the Employee and no civil proceedings have been instituted, the benefit must be released.
The order by the Tribunal
The complaint did not succeed and was dismissed.
This case is of particular interest as NAMFISA some years ago insisted that a benefit must be paid upon termination of service by a member where the provisions of section 37D(1)(b)(ii) (aa) or (bb) as set out above, have not been met at the time the employee’s service terminated. We have not seen any recent communications from NAMFISA relating to this section and do not know what its current position is. We shall appreciate feedback from any fund that has faced such directive by NAMFISA recently.
Read the full determination PFA/GP/00031125/2017/MD, here…
Mentally prepare for retirement: 21 tips – Part 1
Mentally prepare for retirement: 21 tips – Part 1
“Retirement is a major life change, that not everyone is prepared for. The following guide contains excellent tips how to mentally prepare for retirement. As it is a lengthy document, it will be presented in multiple parts over the next few newsletters, so make sure you don’t miss any of these. (Note: the source of this guide in not known.)
To Mentally Prepare For retirement, You:
1. Start preparing in advance
A lot of retirees only prepare for retirement financially and are not aware of the emotional impact retirement can have on your life. Every life change, whether it is positive or negative, comes with emotional discomfort. It can produce negative mental states that you’re maybe not aware of beforehand and come as an unsuspected surprise. And preparing a major life change for most people can’t be done within the turn of a day, week, or month. So, it’s best to start preparing yourself mentally 1-5 years before retirement.
This timeframe is different per person and circumstances, but be aware that it takes more time than you think to get used to the idea of retirement. Figure out what it entails for you. What you want to do in retired life and how you can prepare together with your spouse and family. So, preparing well in advance will make your transition into retirement less stressful.
When you’re planning on continuing your life without any other major life changes, then preparation of 1 year or less can be enough for you. But if you’re planning to do a 180 lifestyle change in retirement, for example, moving, selling the house or emigrate to another country. Then it can take up more time than 1 year of preparation. In these years before your retirement date, you can try things out and get prepared for what’s coming after you’re retired. And as you read the following tips, you will understand why 1 year sounds long but is sometimes not even enough. You want to make the most out of your well-deserved retirement, and for that preparation and planning is the key to success.
2. Visualize your life in retirement
You’d be surprised at how many people are so focused on the financial part of their retirement, without thinking about what to do with their time once they retire. They are not mentally prepared for retirement and can fall prey to loneliness, depression, or waste their days with unfulfilling activities. Or be occupied by other things that keep them from following their dreams.
Did you know that the chances of getting a depression increase by about 40% after retiring? It’s a shocking number but unfortunately true according to multiple studies. And most retirees who suffer from depression in retirement struggle because the transition from working life to a life filled with leisure is more difficult than anticipated. Or they didn’t think thoroughly about how they want to spend their time in retirement. That’s why it’s important to think about what you want to do in retirement. So you can make the most out of it.
Visualize what the things you’ve always dreamed about doing are. You can visualize being on your deathbed and ask yourself the question: what would I regret not doing in life? If you’ve found your answer then congratulations, you have your goal in life or dream to strive after. Or visualize together with your spouse of all the possibilities in retirement.
You can create a vision/ mood board for your retirement to make it more visible and shareable. Get creative with arts and crafts at home or make a digital board on Pinterest. Also creating a bucket list helps you to focus on what you want to do in life...”
Further parts of this interesting guide will follow in the coming newsletters.
Short-term insurers are another step closer to legal certainty on Covid related business interruption claims
“Short-term insurers now have a “tsunami of the legal certainty” around business interruption insurance claims linked to the Covid-19 pandemic and need to pay up.
That’s the word from the Federated Hospitality Association of South Africa (Fedhasa), an umbrella body that represents hotels, restaurants and other hospitality businesses.
Rosemary Anderson, Fedhasa’s national chairperson, has called on insurers to “do the right thing” and settle such claims in full, following yet another loss for insurers – this time in the UK Supreme Court.
The court on Friday ruled in favour of claimants in a precedent-setting test case that was brought by that country’s Financial Conduct Authority (FCA)...”
Read the full article by Suren Naidoo in Moneyweb of 19 November, here…
Refusing to come into work during lockdown
“...employers and employees find themselves caught in the balance of what is ‘reasonable’ in unprecedented circumstances.
This was highlighted in the recent CCMA case of Botha v TVR Distribution which showed that Covid-19 does not excuse a refusal to obey a lawful and reasonable instruction, said law firm Cliffe Dekker Hofmeyr.
In this case Botha, a sales executive, was dismissed for gross insubordination and insolence after refusing to attend work during the Covid-19 lockdown. The commissioner found that the dismissal was substantively fair but procedurally unfair.
“During the level 5 lockdown, Botha was informed that the company had applied for a certificate from the Companies and Intellectual Property Commission (CIPC) to allow it to operate as an essential service during the lockdown and that he was required to work and present himself at the office to do so.
“Mr Botha refused and provided a laundry list of excuses as to why he could not attend work, these being, among other things, that he hadn’t been provided personal protective equipment, that he had not been given a permit, and that the level 5 lockdown regulations did not permit him to work and he would not break the law.”
These allegations were shown to be false, said Cliffe Dekker Hofmeyr.
The commissioner found that the company had taken safety precautions, had the necessary personal protective equipment and that the CIPC certificate was sufficient to allow Botha to travel. Ultimately, Botha simply had no intention to attend work.
In coming to the decision, the commissioner considered the evidence and stated with reference to various authors and the Labour Relations Act that:
Read the full article by Staff Writer in Businesstech of 23 January 2021, here…
How can I buy Netflix and Amazon Shares in SA
“There are some investment platforms in South Africa through which you can set up an offshore investment brokerage account for the purpose of buying US-based stocks. You currently have R1 million allocation per annum to move offshore without South African Revenue Service (Sars) clearance, and up to R10 million per year by getting a tax clearance from Sars.
Many platforms require fairly high minimums. Investec’s, for example, is $300 000 (around R4.6 million), while PSG has an option for £5 000 (around R103 440).
FNB recently launched exchange-traded notes (ETNs) for as little as R10 where you can have fractional shares that track the likes of Netflix and Amazon.
There are also other options, like the Sygnia FAANG fund; it is rand-domiciled but gives you access to stocks such as Netflix and Amazon with a monthly debit order of R500 per month.
The art of investing is getting out the crystal ball and giving yourself the headspace to really think about the future and the trends that will shape the world we live in tomorrow...”
Read the full article by Trent Hodges in Moneyweb of 19 January 2021, here…
Can Namibia learn from Mauritius?
“Mauritius has long been valued as a jurisdiction with an efficient and effective regulatory framework and a diversified economy focused on the industrial, financial, and tourism sectors. Annual growth has averaged 5-6% over the past 10 years. The country is ranked first in Africa and 13th worldwide on the World Bank Ease of Doing Business Report 2020 (up from 20th in 2019).
Following the national budget delivered in June 2020, Mauritius has introduced a range of changes to make it easier for individuals to obtain residency in Mauritius. Two notable developments are a more flexible investment regime and an extended duration of residency permits. All changes have been implemented and are currently effective...”
Read the full article by Jaco van Zyl in Moneyweb of 15 January 2021, here…
Great quotes have an incredible ability to put things in perspective.
"When you come to a fork in the road, take it.” ~ Yogi Berra