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Benchtest 08.2021, impact of FIMA on fund transfer, insuring risk benefits and more...
We cannot report any further progress, and it appears the Act is currently with the Ministry of Justice. I would think that it must also still go through Inland Revenue’s hands. From the tax perspective, FIMA certainly would require a thorough review and amendments.
Home office expenses and your tax return
In a letter to the Institute of Chartered Accountants of Namibia of 21 September 2021, NamRA acknowledges that –
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 our Benchmark column, read about…
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!
Follow this link to the monthly Performance Review and read paragraph 6.
FIMA bits and bites – key points to consider when joining another fund after FIMA
FIMA will raise the goalposts for funds, trustees, and service providers materially. Compliance failure under FIMA may lead to imprisonment of up to 10 years and penalties of up to N$ 10 million. In certain instances, even trivial administrative shortcomings can result in imprisonment. Boards of trustees currently often comprise the employers’ senior management members, and imprisonment would automatically disqualify the senior management member from filling any senior position at the employer. As a result, many employers and trustees are contemplating a move to an umbrella fund. We would advise that funds better carry out their decision to move to an umbrella fund before FIMA becomes effective.
Funds must take note of the following few key points applicable once FIMA is in place:
An inconspicuous NAMFISA circular suddenly causes havoc amongst pension funds
When Namibia became independent, Namibia took over the South African laws applicable to Namibia at the time. One of these laws was the Pension Funds Act, and South African pension fund management practices also continued, based on the same laws.
For longer than I care to remember, South African and Namibian funds offered death- and disability benefits. In most cases, insurance companies did and still reinsure these benefits. Rules would refer to the fact that these benefits are reinsured and are subject to the insurer’s terms and conditions, limitations, and exclusions. Except for the GIPF, funds in Namibia are too small to carry any death or disability risk. In a pure defined contribution fund, the fund would not have any reserves to absorb any difference between the benefit it has to pay and the insurance recovery. Namibian funds may still maintain a reserve for such purposes, but FIMA prohibits defined contribution funds to maintain a risk reserve. South African defined contribution funds are not allowed to carry such reserve.
In 20017 NAMFISA issued circular PI/PF/Cir/01/2017. This circular served to advise funds that no Board of Trustees is permitted to abdicate any of its powers, duties, or responsibilities... in the process of outsourcing certain functions to service providers... The Boards of all Funds are further advised that they will be held fully responsible for action taken by a service provider or other person on behalf of the Fund.”
Since the beginning of this year, NAMFISA no longer accepts any reference to the fund’s insurance policy. All-of-a-sudden it requires full disclosure of the insurers’ terms and conditions, restrictions, and exclusions, arguing that a general reference to the insurance policy is an abdication of the board’s powers and that the trustees must take all decisions regarding death benefits. This requirement derives from NAMFISA circular PI/PF/Cir/01/2017 that it issued nearly five years ago!
NAMFISA also quotes section 11(d) of the PFA. Section 11 (matters the rules must include) states the following in subsection (d): “the conditions under which any member or other person may become entitled to any benefit and the nature and extent of any such benefit;” Therefore, according to NAMFISA, rules must reflect all terms and conditions, limitations and exclusions. NAMFISA goes further and effectively outlaws the exclusion of causes relating to civil commotion, strikes, and labour unrest, arguing that these are the member’s constitutional rights. Whether NAMFISA will apply the same logic to insurance companies is not known yet. NAMFISA now acts as custodian of any law in the Republic of Namibia, including its constitution. It extends its reach even further. It argues that any reference in the rules to an insurance policy means that the fund is undertaking insurance business. It supposedly contravenes section 10 of the PFA. That section allows funds to only carry on pension fund business, as defined in the PFA.
Effectively from one day to the next, pension funds are now accused of doing business illegally. For the past eight months, NAMFISA has been declining many, if not most, applications to register rule amendments and rules. Many funds are paralysed, very often to the detriment of the member.
In practice, funds cannot mirror all the insurance company's terms and conditions, limitations, and exclusions in the fund’s rules. When assessing any claim, insurers must apply their expertise and exercise discretion, and anyone questioning the insurer can refer the matter to court. Consider COVID-19, which was declared a pandemic. We know that such pandemics occur infrequently. Insurers suffered severe losses from this pandemic. They will not have taken a pandemic into account when they set their premiums. It also does not make sense to price in occurrences that happen rarely. The insurer would rather exclude such surprises in the future. How is pandemic defined so that rules can include this term? International conventions may have defined this term, but there will be many other terms for which no convention exists. The question then is whether the insurer applied reason in its interpretation of a term.
If a fund is large enough, it can self-insure life events. Else, it must purchase insurance coverage from an insurer. Whether large or small, any fund can only carry an element of risk through building up a reserve. Building up a reserve implies cross-subsidisation between member generations and is not fair to those members that do not benefit from the reserve while others are benefiting from the reserve. Any risk beyond what the fund effectively self-insures, the fund must place with an insurance company. The trustees are grossly negligent if the fund does not insure the excess risk and can end up in jail under FIMA. The moment a fund purchases insurance for excess risk from an insurance company, it must ensure that no further liability can arise. It must ensure that it does not offer a benefit that the insurer does not cover. The fund must then insert a copy of the policy in the rules or ensure that the rules generally refer to the policy. From a user’s perspective, there is little difference between these two alternatives. It’s a question of studying the insurance policy addendum of the rules or studying the separate policy. Most members are not affected by the terms of the risk cover and would not want a set of rules containing a copy of each insurance policy.
On the contrary, no member would have the courage to study rules comprising of hundreds of pages. Pension funds do not attempt to satisfy the needs of each member but are group arrangements aimed at satisfying the needs of a majority of members at an affordable cost.
The retirement funds industry is facing a serious challenge since the beginning of the year. It is as if the government introduced a new law, although nothing actually changed. NAMFISA’s interpretation of 50-year-old sections of the PFA is now causing havoc in the pensions industry. Unfortunately, the current state of affairs is suffocating the industry without benefitting the member. It is causing frustration, undue delays, and additional, unproductive work for NAMFISA and the industry.
NAMFISA should first consult the industry and consider its inputs before instituting new requirements or issuing a circular to avoid such situations. If these inputs conflict with NAMFISA’s views, NAMFISA should obtain a legal opinion on its submissions and the submissions made by the industry. The legal opinion should then become the basis for a circular. Before officially issuing the circular, NAMFISA should obtain industry inputs on a reasonable time frame to implement any changes the circular will require. Finally, NAMFISA should issue an official circular to the industry.
Preservation fund, retirement annuity fund, and the IT Act
The Income Tax Act, Act 24 of 1981 currently only offers two arrangements for individuals to make tax-deductible contributions towards retirement. Firstly, an individual may make tax-deductible contributions to a pension fund or a provident fund arranged by his employer and where the individual is obliged to contribute. Secondly, an individual may make tax-deductible contributions towards a retirement annuity fund as agreed with the fund under a policy (issued by an insurance company) or under a contract (issued by the fund).
The importance and the value of retirement provision are recognised globally, and most countries make provision for one or more pension arrangements. The Melbourne Mercer Global Pensions Survey succinctly highlights the challenges faced by global pensions systems. “Pension systems worldwide, including social security systems and private sector arrangements, are now under more pressure than ever before. Significant ageing of the population in many countries is a fact of life. Yet this is not the only pressure point on our pension systems. Others include:
Namibia also experiences most of the challenges highlighted in Global Pensions Survey. COVID exacerbated the situation, as we know. Many employers and their staff took a contribution holiday that may significantly impact the ultimate retirement outcome for the members affected.
Our pension system is very similar to that of South Africa. Namibians may currently only deduct N$ 40,000 from tax regarding pension savings contributions and study policies. In contrast, SA allows the taxpayer to deduct up to 27.5% of the individual’s annual income, limited to no more than the actual contributions made. SA only caps the tax deduction at R 350 000 per annum. In addition, SA pays a higher social old age grant of R 1,890 compared to only N$ 1,300 in Namibia.
The Global Pensions Survey ranks SA in position 28 of 40 surveyed countries, and Namibia ranks lower. Namibia, therefore, has good reason to consider every option for further encouraging and improving retirement provision. The Income Tax Act is one available tool to achieve the goal of enhancing taxpayers’ retirement provision.
While in employment with compulsory participation in the employer’s retirement fund, there is no real need and often no scope to enhance employees’ retirement provision. When leaving employment, employees may and often do preserve their accumulated retirement capital in a preservation fund. By exempting a transfer of such withdrawal benefit to any other tax-approved fund, the Income Tax Act does encourage taxpayers to preserve rather than withdraw their retirement capital. Having exited from the retirement fund, the employee may join another employer where retirement fund membership is compulsory and continue building his retirement capital. However, should he not join another employer with a retirement fund, the employee would have to subscribe to a retirement annuity fund if he wanted to continue saving up for retirement. Compared to pension- or provident funds (including preservation funds), most retirement annuity funds are less flexible and, often, the member incurs high initial fees. It would also require the unnecessary membership of two funds if the employee preserved his capital from his previous retirement fund in a preservation fund.
Preservation funds and retirement annuity funds are ‘retail’ products aimed at their members saving up for retirement not linked to employment. In contrast, pension- and provident funds are institutional arrangements requiring an employer-employee relationship. When the Income Tax Act introduced provident funds, it would appear that the focus was solely on the preservation of retirement capital outside an employer-linked arrangement. However, as a retail product, a preservation fund lends itself to receiving ongoing contributions after the member preserved his retirement fund capital in this preservation fund. This arrangement would complement the retirement annuity fund. The employee would not have to belong to yet another fund for saving up for retirement. He would have a more flexible and cost-effective arrangement and more choices, encouraging competition in the retail market.
The government should consider expanding the scope of preservation funds as part of its tax policy review for the reasons set out above. To achieve this goal, the government should amend the definition of “preservation fund” along the lines of the definition of “retirement annuity fund” so that a member of the preservation fund can make ongoing, tax-deductible contributions to his preservation fund. It requires that the government also expands other sections of the Income Tax Act that refer to “retirement annuity fund” to include “preservation fund.”
The Benchmark Default Portfolio - Annual newsletter. Download it here...
Important circulars issued by RFS
RFS issued the following fund administration-related circulars to its clients over the last month.
Education is the key to prosperity in any society. To RFS, all forms of education take centre stage in our sponsorship programme. In this endeavour, RFS supports school sports events in various codes. More recently, RFS provided funding for the renovation of the historic hostel building of Privatschule Grootfontein. RFS’ former managing director was one of the founders of Projekt Lilie in 2005, which RFS has supported ever since. For the past ten years, RFS has also sponsored prize monies for NAMCOL achievers.
RFS’ director Rauha Hangalo handed over the prize monies of between N$ 2,500 and N$ 5,000 to this year’s NAMCOL achievers, in the presence of Dr. Harold Murangi, CEO of NAMCOL and other officials.
This year the following Namcol students excelled in their academic performance:
National Pension Fund – where do we stand?
Industry representatives recently called a meeting with the Social Security Commission to establish the status of the National Pension Fund. Unfortunately, the SSC did not provide any concrete information other than confirming that the project is still underway and it will make available the information in good time. The SSC would not comment whether it is looking at a DB or a DC fund or on the contributions or benefits that members would enjoy.
Industry meeting cancelled
NAMFISA cancelled the industry meeting scheduled for 15 September, as there were no agenda points from its and industry participants’ side.
Adjudicator determination on death benefit:
This case deals with a complaint by C DIENER (“the Complainant”) v PSG WEALTH RETIREMENT ANNUITY FUND (“the Fund”) AND PSG LIFE LIMITED (“the Administrator”)
Facts of complaint
The deceased completed a beneficiary nomination form in favour of his estate. He was a PSG Wealth Retirement Annuity Fund member with a benefit of R 1.7 million and a Discovery Retirement Annuity Fund member with a benefit of R 3.1 million. The complaint addresses the allocation the Fund’s trustees made as follows after they identified all surviving persons:
The trustees revised their allocation per the above table after establishing how much the Discovery Retirement Annuity Fund allocated to these beneficiaries. Whereas they initially allocated 21% to SH Naude, they reduced that allocation to 10% after they got the information from the Discovery Retirement Annuity Fund
The Complainant provided the following arguments against the allocation:
The tribunal must determine whether the Fund allocated the death benefit fairly and equitably to the beneficiaries.
Findings of the Tribunal
Citing section PFA 37C, the tribunal pointed out that the board must conduct a thorough investigation to determine the beneficiaries and decide on equitable distribution and on the most appropriate payment mode. More specifically, it must consider the following factors:
The tribunal considered that the PFA recognises three dependant categories: a legal dependant, a non-legal dependant, and a future dependant. It pointed out that there is no legal duty to support a non-legal dependant, but there is a legal duty to support a spouse and children. Factual dependants must prove their dependency. The tribunal agreed that the Complainant qualified as a legal dependant as they shared the same residence and were mutually dependent on each other. The deceased thus had a duty to support the Complainant. The Fund allocated a portion to the two major beneficiaries D Diener and J Naude, under section 1(b)(iii) [this section was introduced in SA but does not apply in Namibia].
The tribunal found that Discovery allocated a significant portion to the Complainant. As a result, she is in a far better position than all other beneficiaries. Section 37C’s object is that dependants are not left destitute by the member’s death and that the Complainant was not left destitute. The Complainant aimed to defeat the purpose of section 37C with her complaint, and the tribunal condemns her conduct as demonstrating the dependants’ greed. The tribunal concluded that the Fund considered the dependants’ financial circumstances and that the Complainant’s needs are properly catered for from the benefits she received from the deceased’s estate, the portion the Fund allocated to her, and the Discovery allocation. The tribunal confirmed that the deceased nominated his estate but that the death benefit does not form a part of the deceased’s estate unless there are no dependants and nominees. Since there are dependants, the nomination failed to act as a guiding tool to assist the Fund.
The tribunal found that the Fund considered relevant factors, ignored irrelevant factors, and did not fetter its discretion. It is therefore satisfied that the Fund allocated the benefit properly.
Order of the Tribunal
The complaint cannot succeed and is dismissed.
Read the determination here…
SA considering to introduce Social Security Fund
“The Department of Social Development has released a green paper on comprehensive social security and retirement reform for 2021. We note that it is largely similar to previous proposals dating back to 2012.
In brief, the proposal is to create a centralised National Social Security Fund managed by government. This fund intends to provide basic benefits for all qualifying citizens up to a threshold, including all employees from within the private sector. In addition, citizens can choose to top up their retirement benefits using an occupational or individual arrangement.
In practice, this means that most existing members will become dependent on government through the National Social Security Fund for their retirement and insurance benefits rather than through an occupational or individual scheme as is currently the case. We argue that such a route may result in reduced benefit security due to a number of deficiencies in the proposed system.”
The author raises the following arguments against the proposal, which are to a large extent also applicable to Namibia.
Note: These developments in SA are of great interest to us in Namibia as the Social Security Commission and government are also mulling the introduction of a National Pension Fund on a very similar basis. The Department of Social Development withdrew the proposal again, but the discussion in SA is unlikely to end.
New insights into trust and ethics among advisors and fund managers
“Coronation is dead right – ‘trust is earned’. That’s the fund manager’s marketing tagline. Last week it probably ‘unearned’ a huge chunk of trust.
On Friday, Fin24 provided details of a letter Coronation had sent to its clients describing how one of its managers had profited from exploiting a “pricing inefficiency”.
The letter, which related to the “legal and transparent” trades done by now-former executive Adrian Zetler, highlighted just why so many ordinary investors do not trust the investment community.
These ordinary investors comprise pensioners or employees who generally do not have the skills or resources (including time) to constantly track markets. They rely on extremely well-paid financial advisors and fund managers to fill that critical gap.
Rightly or wrongly many investors suspect that one way or another – always legal of course – their fund managers and advisors are benefitting unduly at their expense; this is the eternal ‘agency’ problem.
It may be just a few cents here and there for every share or unit trust involved, but for the ‘perpetrators’ all these cents add up to a very nice low-risk profit.
In the letter, Coronation explains that Zetler, who had been with the company for 11 years, resigned in January after the company took legal advice and launched an inquiry into his trading activity in some of Coronation’s unit trusts. The investigation went back three years. It emerged that Zetler had been involved in the trades since March 2020…”
Read the full article by Ann Crotty in Moneyweb of 20 September 2021, here...
SARS exercised unreasonable discretion in disallowing penalty
“…The taxpayer, Peri Formwork Scaffolding Engineering (Pty) Ltd, paid the PAYE collected of R10 648 340.93 over to Sars on Monday, January 8, 2018, when the payment was ostensibly due on Saturday, January 6, 2018. In terms of the Tax Administration Act, the payment should have been made on the Friday…
The taxpayer argued:
Three reasons you are losing the war for talent
“…Business leaders just can’t seem to fill their personnel pipeline. Many of those leaders, however, fail to realize that the “good people” they seek may be already on their payroll or have recently departed for a company that treats them better.
Those leaders don’t have a recruiting problem; they have a retention problem… So, how can you win the talent war with the talent you already have? Whether you lead an entire company or a small team, you can start by avoiding these three common pitfalls.
Great quotes have an incredible ability to put things in perspective.
"Diligence is the mother of good luck..” ~ Benjamin Franklin