Important notes and reminders

VET levy claims procedure

If you do not want the VET levy to be only a tax burden to you, claim your staff training costs back from NTA. PWC’s ‘Tax First Special Edition’ offers some guidelines how to go about claiming your training costs. The deadline for submitting your claim for costs incurred over the past 12 months is 1 May 2017. Read the newsletter here...

Are your service providers registered?

Certain service providers to pension funds are required to be registered by NAMFISA to provide services to pension funds. These are –

• Short-term insurance brokers
• Short-term insurers
• Short-term re-insurers
• Long-term brokers
• Long-term insurers
• Investment managers
• Medical aid funds
• Pension funds

The information is available on the NAMFISA website although it would appear that the information is not fully up-to-date. For your convenience find the lists here...

Newsletter

Dear reader

In this newsletter we comment on a proposal for NAMFISA levies to increase by up to 2,400%, we question how concerned trustees are about corporate governance, we relate how important it is for trustees to stay close to members through regular communication and we give an update on the Once Chart of Accounts project of NAMFISA and indicate that costs are likely to increase by at least 50%.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 03.2017

In March the average prudential balanced portfolio returned 1.95% (February: -0.64%). Top performer is Investec (2.30%); while EMH Prescient (1.25%) takes the bottom spot. For the 3 month period Namibia Asset Management, takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Momentum underperformed the ‘average’ by 0.9%

Is SA facing a financial tsunami?

There can be little argument that South African financial markets are experiencing turbulent times. Looking further abroad, there is no less argument for agreeing that global financial markets are experiencing turbulent times and there is no end in sight. As I previously opined, president Trump is not America, he is just a pawn in a well-established chess game that has been going for a very long time and that will not be diverted in its focus and intent by a president, of which there have been many. In the same way president Zuma is not South Africa. He too is just a pawn and I believe this is substantiated by the panicky spiking of the Rand after the dismissal of former finance minister and its speedy recovery once the hype of this move was out of the system. Certainly the media is playing a key role in inciting panic and making investors act against their own best interests. I do not believe it is rational to take any investment decision based on what any individual has said or done, how ever influential he may be, unless your intention is to speculate by pre-empting public response to such statement or act.

Read part 6 of the Benchtest 03.2017 newsletter to find out what our investment views are. Download it here...

Pension funds may have to pay up to 2,400% higher NAMFISA levies

NAMFISA has circulated proposed changes to the current levy structure. These changes will have a major impact on funds and trustees and principal officers are advised to acquaint themselves with this matter and to formulate their position. Unfortunately the due date for comment of 21 April has already expired.

Download the NAMFISA circular here...

Read our client circular that reflects our thoughts on this, here...

The direct levy on pension funds is proposed to change from N$ 250 per fund plus N$ 12 per member and pensioner, per year, to 0.0027% of total assets per year.

Besides citing very noble objectives in setting the new levy structure, NAMFISA has given no indication what the impact of the proposed changes would be on its total income.  Applying the current levy structure to our client base, the direct levy on pension funds increases from approximately N$ 400,000 to approximately N$ 4 million – an astronomical increase by any measure. As the previous basis was purely fund membership while the new basis is purely fund assets the impact of the proposed levy varies from fund to fund. In our client base the lowest increase will be 80% and the highest 2,400%, the average increase being 1,000%!

We estimate the impact of the increase in the direct fund levy for the industry to increase 10 fold from approximately N$ 4 million to approximately N$ 40 million

Of course pension fund members will further be taxed by NAMFISA  through the following levies: -

• Levy on insurance companies changes from 0.1% of total liabilities to 0.3% of gross premiums income. Based on the NAMFISA statistical bulletin for quarter 2 of 2016, the levy on long-term insurance companies will drop from approximately N$ 40 million to approximately N$ 5 million.
• Levy on unit trust schemes (where a fund invests in these) increases by 1,600% from 0.0033% plus N$ 5,000 per year to 0.053% of total assets managed. Assuming that funds investing through unit trusts will not be levied both the levy on unit trust management companies and the levy on asset manager who mostly do manage the assets of unit trust management companies we assess the impact only under the following bullet point.
• Levy on asset managers increases by 1,250% from 0.0012% plus N$ 5,000 to 0.015% of the total value of investments. We estimate the impact of this to increase the levy from approximately N$ 2 million to approximately N$ 21 million.
• Levy on unlisted investment managers is to be introduced at 0.053% of total assets managed. We estimate this new levy to raise an additional income of N$ 2 million.
• Levy on stock brokers increases by 800% from 0.0033% to 0.026% of total value of total value of securities traded. Unfortunately we do not have any statistics to estimate the monetary impact of this increase on pension funds.
• Levy on short-term insurers decreases from 1% to 0.569% of gross premium income. We estimate  the impact of this decrease to be a reduction of income from approximately N$ 9 million to N$ 5 million.

Conclusion

We estimate that the proposed new levy structure will net NAMFISA an additional income of approximately N$ 20 million per year. The most significant change is that the burden on pension fund members will be raised by approximately N$ 57 million, while the burden on long- and short-term insurance companies will be reduced by N$ 39 million.

Assuming that half of the long-term insurance premiums are contributed by pension funds, pension funds will carry levies of around N$ 65 million which means that the pension fund member/ pensioner will contribute approximately N$200 per annum.

Calculating the future and the present value of a member contribution of N$ 200 per year over a 40 year working life time, plus another 20 years in retirement, at a real return of 5% per annum implies that each fund member must pay NAMFISA N$ 4,500 up front to compensate it for its regulatory role, or must pay N$ 36,000 in today’s terms at the end of his or her 40 year fund membership!

Pension funds are undoubtedly the biggest contributor to the coffers of NAMFISA by far!

Corporate governance and managing trustee expenses

South Africa prides itself of being at the forefront of good corporate governance on the basis of the 16 plus one principles formulated in the King IV report.

A trustee on a pension fund’s board of trustees is in no different position to a director on a company’s board of directors. Trustees in SA have been held liable in their personal capacity for wrong doings on their fund and Namibian courts will undoubtedly look for SA precedents when adjudicating on any wrong doing by a board of trustees in Namibia.

The key concepts of directorship and trusteeship  are

• Duty of good faith
• Duty of care
• Duty of skill

Trustees are required to manage the affairs of their fund in the best interests of their members. As a trustee there are many areas one needs to consider and measure your fund to understand whether you are doing good, bad or indifferent. Commonly for example, trustees measure the performance of the investments of the fund. The investments being the biggest asset of the fund, the performance can fortunately be measured against readily available benchmarks and trustees will at all times know how they are doing and when they may expect to face head winds from their members if they are not doing that well. So that area is covered pretty well provided trustees have applied care, skill and good faith in appointing the asset managers they did appoint.

But what about fund expenses, managed by the trustees in their absolute discretion? There are no readily available benchmarks. So one board of trustees may decide that the fund should carry the cost of each of their trustees doing an MBA or similar qualification to better qualify them in managing the affairs of the fund. Another board may decide it should be good enough to have each trustee attending a relevant training course once every second year. One board may decide trustees need international exposure to be better equipped to act in the best interests of the fund’s members taking into account international developments while another fund is only prepared to support local seminars and courses.

So how does your board of trustees decide whether your policies measure up well against the duties of care, skill and good faith? This is particularly critical as far as expenses are concerned that are incurred for the direct or indirect personal benefit of trustees – an area where trustees are likely to face serious censure if they have not managed to separate personal interests from fund interests.

As far as the example of training goes, one important consideration is whether trustees are serving the fund on a full-time basis or only on a part-time basis. If one looks at this question from a company’s point of view, any company would go to much further extents in training staff to run the business of the company because the benefits of such training would accrue to the company on a ‘24/7 basis’, i.e. the dedicated employee is expected to plough back into the company everything he learnt.

Directors or trustees typically only serve the company or fund on a part time basis and are expected to have a sufficiently solid foundation to understand and to apply their obligation of duty of faith, duty of good care and duty of skill to overseeing the management of the business of the entrusted entity. So one needs to distinguish clearly between these two situations. Company’s often have benchmarks for staff training and maybe the VET levy is a good starting point as this is what government effectively has resolved employers should spend on training their staff. The same principles can be applied to a pension fund where the payroll comprises of the salaries paid to full time staff plus the trustee remuneration.

To assist trustees we have established a data base of funds administered by RFS. The average in each case is probably a good benchmark. Anything closer to the minimum or to the maximum should be probed properly to determine whether it can be justified or whether it may expose the trustees to a risk.

Here are the figures your fund may wish to benchmark to.

• 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 service provider self-assessment 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...

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Be in touch with members of your fund!
by Marthinuz Fabianus - Deputy Managing Director

It has been so many years since I have been on the road to talk to groups of members of pension funds. This may explain why I thoroughly enjoyed and appreciated recent road trips I embarked on during March to engage and present to members. The exercise evoked good memories of my early encounters with members across different industries, from all levels of employees and from across the length and breadth of the country more than 20 years ago in some cases.

My first session was with over 300 factory workers of a fishing company. Even though this is obviously a very large group and you will expect not to have an effective and meaningful conversation, the opposite was true. The group was very attentive, enthusiastic and engaging. It was in hindsight pleasing to observe that the group consisted of many who were part of the same group that I consulted to more than 10 years ago and were at that stage very hostile as they were filled with distrust, ignorance, with anger and disappointment amongst many negative feelings. This was because their previous pension fund at the time was poorly managed and the members were kept in the dark about the affairs of the pension fund. Having provided them with a lot of education, assurances and commitments for the transition (which were obviously lived up to), assured me of a respectable return encounter. This time around, members were interested in finding out if the benefits offered by the fund could be improved further. They made suggestions to be allowed to make additional or voluntary contributions and suggested an increase of the group funeral benefits. They also requested that their pension fund savings be used as security for housing loans from financial institutions. This is the kind of constructive conversations trustees and pension fund service providers alike should and can have when members are happy with the management of their pension fund.

My second session was with a much smaller group of white collar mining employees. In this session, the members where facing an imminent retrenchment from their employment and thus had a bleak outlook. To make matters worse, the average prudential portfolio returns were depressed over the past year as a result of overall an down turn and volatility in financial markets that prevailed and continue unabated for the past 2 years.  This scenario affirms the point that pension fund investments are long term in nature and should not have to be called upon in the short term, lest it be perceived incorrectly as disappointing.  Instead, members of pension funds should be educated to plan financially for certain eventualities, e.g. sudden loss of income.

My third engagement with groups of members during the course of March this year was with another relatively big group of educationalists from the vocational sector. This group also had various questions they needed answers on but focused on the stringent guidelines laid down by the Pension Funds Act regarding the disposition of benefits on the death of a pension fund member, as well as the income tax deductibility of pension fund contributions.

Unless trustees in particular make a point to engage and have face-to-face contact with members, I would venture to suggest they will not really be able to stay on top of the pension fund needs of their members and risk providing  benefits that are out of pace with member needs.

Marthinuz Fabianus is Deputy Managing Director of Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years' industry experience.

Kai Friedrich's Administration Forum

Status of the One Chart of Accounts project launched by NAMFISA

Reporting in accordance with the latest proposals by NAMFISA in terms of its One Chart of Accounts project will become a new obligation for all pension funds. At the risk of being accused by some quarters of spoon feeding our clients and being suspected by other quarters of manipulating our clients to serve our interests, RFS has actively involved itself in this project. We understand the realities of our pensions industry which unfortunately does not seem to be the case with a number of other role players.

NAMFISA requested feedback on the time frame for gearing up to report in the new format and on the costs it would entail to gear up to report. We have realised that the main burden for providing information would rest on asset managers and have consequently drawn their attention to the new proposals. Asset managers have now taken this up with NAMFISA and are in direct communication with NAMFISA.

From our side, we will assist our clients to consolidate the information that other services providers, such as asset managers, are to provide and will set up our processes to extract the information we maintain on our systems. Much of our preparatory work has been done in this regard and we do not foresee that it will require a long preparation period, provided the format of the report will remain as is.

We have put together a cost estimate for gearing up and for regular reporting in future and have informed NAMFISA as requested. If reporting in the new format will replace the current SIH reporting, costs will be some 50% higher than those of the current form of reporting due to significantly increased information requirements. Unfortunately the report does not lend itself to automation as the information has to be provided from different information custodians to then be consolidated into a composite report.

Kai Friedrich, Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from RFS

The RFS / SKW youth soccer tournament 2017

RFS once again sponsored the RFS / SKW youth soccer tournament that took place at SKW Soccer fields from 21 to 24 April.


Above: Kai Friedrich hands the RFS sponsorship to Mr Vincent Molzahn, Chairman of the SKW soccer division.


Above: Kai Friedrich hands the trophy to the captain of Kaizen Football Academy youth team, winners in the under-17 category.


Above: the winning under-17 team of the Kaizen Football Academy.

News from NAMFISA

Industry meeting of 13 March 2017

You should take the trouble to read the notes of the latest pension funds industry meeting held on 13 March 2017 for insight into the goings on at NAMFISA.

Our staff attended this meeting and prepared notes  for the convenience of clients and readers that you can download here...

Media snippets
(for stakeholders of the retirement funds industry)

Review of pension fund trustee decision

This case (Maphoyisa v Municipal Gratuity Fund and Sanlam Life Insurance Limited or Maphoyisa case) is about the prescription of a claim of a minor beneficiary after reaching age of a majority. In SA age of majority was changed from 21 to 18. The same is due to happen in Namibia. The Child Care & Protection Act was promulgated in Gazette 5744 of 29 March 2015 and sets the age of majority at age 18. At this stage the Act has not commenced yet.

A complaint was lodged by a person who claimed to have been dependent on the deceased and should have been considered for an allocation of a portion of the death benefit. The Fund did not deal with the merits of the complaint. Instead the Fund relied on the Prescription Act 1969 (which also applies in Namibia) which stipulates that if the creditor is a minor the period of prescription will not be completed before a year has lapsed after the day he ceases to be a minor. The Fund argued that the complainant was out of time to lodge a complaint as his claim prescribed on 10 November 2016 (1 year after he turned 18) and the complainant only lodged the complaint on 22 November 2016.

The PFA then referred to a Supreme Court of Appeal finding which essentially provided that legislation cannot have retrospective effect, unless the new legislation expressly states it applies retrospectively (where it impairs a vested right acquired under existing legislation).

In light of this, the PFA reached the conclusion that since the Children’s Act did not state it applied retrospectively and the new majority age would impair the rights of the complainant, the majority age of 21 must apply to the complainant. As such the complainant’s claim had not prescribed as he was only 18 years old when the complaint was lodged. His claim would only prescribe on 10 November 2019, one year after he turns 21.

The trustees’ decision that was taken 12 years before the complaint was lodged, was set aside and the trustees were ordered to re-apply their discretion.

Presumably by now the moneys would have been distributed so if the trustees then arrive at a different allocation, any underpayments must be made good while the fund would sit with the challenge whether or not to recover any overpayments.

Read the full article by Gennel Chettiar of Norton Rose Fullbright in Insurances Gateway of 21 March 2017, here...

What to do when the market drops

“Often when the market dips, even slightly, people’s first reaction is to act hastily, this can only be to the detriment of your investments. While the ultimate goal of investing is to realise growth on investments, there’s an element of risk that is innate to investing, especially in stock markets. It is therefore important for investors to understand the market risk to ensure an appropriate response in the event of a temporary drop in the market.”

In order to see your investment grow, follow this advice:

• Don’t sell on a whim
• Diversify further
• Stay put, block out the noise
• Continue investing

Career opportunity

Retirement Fund Solutions has an opportunity for a qualified, skilled and experienced individual to join our team as a Product Manager for the Benchmark Retirement Fund, reporting to the Director Operations: Umbrella Funds.

Download the advertisement for the vacancy, here...

Important notes and reminders

SME Bank Exposure

Following an enquiry by NAMFISA as to the exposure of pension funds to SME Bank, the following asset managers confirmed to date that they have no exposure on any of their pension fund portfolios. Should your manager/s not be reflected please make direct enquiry with the manager.

• Eos Capital
• Capricorn Asset Management
• Allan Gray
• Investec
• Investment Solutions
• EMH Prescient
• MMI
• Namibia Asset Management
• Old Mutual
• Prudential
• Sanlam Investment Management
• Stanlib

Trustee training 4 and 5 April on fiduciary duties and fund governance

A two-day trustee training course by Peter van Ryneveld on fiduciary duties and fund governance will be hosted by Elite Consulting Namibia on 4 and 5 April 2017 in Windhoek at the Safari Hotel & Conference Centre. The cost of the training will be N$ 4,600 (excl. VAT) per delegate for attending both days.

Should you be interested to attend this training, please contact Elite Consulting at tel 301267. Find the course outline here...

Comments on ‘one chart of accounts’ under FIM Bill due 28.04.2017

NAMFISA granted extension to submit comments on the ‘One Chart of Accounts’ proposals until 28 April. As the required information is maintained and has to be provided by different service providers to the fund, principal officers will be in an unenviable position having to co-ordinate and consolidate for reporting purposes the information as provided by the various service providers. We therefor urge all principal officers to acquaint themselves with this topic and to establish from their service providers what the cost implications of these proposals will be for their fund as well as how long it would take the service providers to set up their systems to report in the required format.

In this context, it is to be noted that the terminology used by NAMFISA is misleading. This project is not about establishing a common chart of accounts for all regulated entities. Any accountant will know that a chart of accounts is a listing of the accounts reflected in an entity’s general ledger. This project is rather aimed at establishing standardised reporting of information required by NAMFISA.

Some of our main concerns in this regard were presented in Benchtest 12.2016 newsletter.

Minister of Finance invites public to comment on proposed session of insurance business to Namibre by 3 April

In a news release of 14 February 2017, Minister of Finance announced the withdrawal of recent notices and proposed amendments to regulations relating to the session of insurance business, issued under the Namibia National Reinsurance Corporation Act. This was done in response to litigation initiated by a number of insurance companies on the basis that full consultation had not taken place before these notices were issued.

To counter the insurers’ objections, the Minister is inviting written representations from A wider audience than just industry stakeholders on or before 3 April 2017.

Newsletter

Dear reader

In this newsletter we highlight the practical consequences of IT practice note 5 of 2003 for trustees of pension funds, we explain what benefits a member should typically expect to receive from a pension fund and Entrépo ceasing group underwriting. In our commentary on investment markets we offer an interesting insight into a number of indices and what these indices may herald on market movements for the next 12 months or so.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 02.2017

In February the average prudential balanced portfolio returned -0.64% (January: 1.32%). Top performer is Metropolitan (-0.16%); while Momentum (-1.06%) takes the bottom spot. For the 3 month period Old Mutual Pinnacle Profile, takes top spot, outperforming the ‘average’ by roughly 1.0%. On the other end of the scale Momentum underperformed the ‘average’ by 1.4%.

Where are markets heading?

It is always interesting to study the movement of indices over time and in particular it is interesting to study relationships between different indices in an effort to get a feeling for where markets are likely to head. In this commentary we will be looking at a few interesting relationships.



Firstly, graph 1 has been indicating to us for a long time that the Rand was undervalued and the recent movement corroborates this assertion. The graph indicates that the Rand is currently fairly valued at 11.23, it being at 12.45 at the time of writing this article. The Rand now only requires a further appreciation of 10% to get to fair value by our measure. This graph also shows that the Rand tends to significantly overshoot only in one direction, probably as the result of overly negative sentiment towards the currency from time to time with 3 severe bouts of undervaluation.

Read part 6 of the Benchtest 02.2017 newsletter to find out what our investment views are. Download it here...

The practical consequences of tax practice note 5 of 2013

Retirement Fund Solutions (RFS) is an employer with regard to benefits payable by an approved fund administered by RFS, per schedule 2 of the Income Tax Act (ITA). In this capacity we will deal with the income tax requirements of benefit amounts payable upon the death of members or pensioners/annuitants of pension funds as follows:

• Where a pension fund in terms of its rules provides annuities to widows and children and also lump sum benefit upon death of a member RFS will ascertain that 51% of the lump sum benefit allocated by the trustees to each beneficiary in accordance with section 37C is applied to provide annuities to the designated dependants. One-third of the annuity capital (or the full annuity capital if it is less than N$ 50,000) may be commuted for cash. Neither the commutation of annuity capital nor the remaining balance of 49% of the lump sum death benefit constitutes “gross income” as defined in Section 1 of ITA and no tax directive needs to be obtained.
• Where a pension fund in terms of its rules only provides lump sum benefit amounts upon death of a member, RFS will ascertain that 51% of the lump sum benefit allocated by the trustees to each beneficiary in accordance with section 37C is applied to provide annuities to the designated dependants. One-third of the annuity capital (or the full annuity capital if it is less than N$ 50,000) may be commuted for cash. Neither the commutation of annuity capital nor the remaining balance of 49% of the lump sum death benefit constitutes “gross income” as defined in Section 1 of ITA and no tax directive needs to be obtained.
• Where a pension fund in terms of its rules provides that upon the death of a pensioner any remaining capital in the pensioner’s account is to be as lump sum, this must be paid in the form of a taxable annuity for a period not less than 5 years.

Trustees are advised to ascertain that the resolutions for the disposition of lump sum benefits upon death of a member of their pension fund per Section 37 C of the Pension Funds Act are consistent with above ITA interpretations.

Read more on the application of Practice Note 5 of 2003 on benefits payable upon death, here...

Pension fund governance - a toolbox for trustees

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

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Does my employer pension fund provide adequately for me?
by Marthinuz Fabianus - Deputy Managing Director

Background

The above question is but one that a member of a pension fund may ask. However, the question begs a lot more answers than can be provided in a short article like this one. Conceivably, what can a pension fund member possibly expect or not expect from a pension fund? Most of the existing employer pension fund arrangements in Namibia provide benefits to members on the occurrence of major life events; being upon reaching retirement, in the event of death, when the pension fund member is declared medically unfit to continue working and lastly when the member resigns from their employment or is retrenched.

You may also occasionally find an employer’s pension fund that provides a benefit in the event a member suffers from a pre-defined so called dread disease.  Lastly, some pension funds allow their members to borrow from their pension fund savings in respect of housing benefits or use member pension fund savings to provide security to financing institutions in respect of housing loans provided to members of the fund. This article will however only focus on the model benefits payable by a pension fund upon reaching retirement age, in the event of death or if a member is declared medically unfit to work due to injury or sickness (i.e.  medical disability).

Retirement Benefit

A member may retire and access their retirement benefit typically from age 55, although neither the Pension Funds Act nor the Income Tax Act sets a minimum retirement age. Anecdotal evidence suggests that a member who contributes 14% of salary for an uninterrupted period of 30 years, assuming the contributions made and earned interest of 4% above inflation, can expect his total retirement savings to provide a monthly pension of around 63% of salary. Should any of the above variable factors be more or less, than the pension that can be expected at retirement will also increase, respectively decrease. A universally accepted pension as % of salary before retirement is 60%, after 30 years of membership, i.e. 2% per year of membership. The taxability of the benefits at retirement and the pension options at retirement are different subject matters all together and I will not deal with these here.

Benefits upon Death of Member

Pension funds typically takes out insurance cover on the life of each of their member to supplement any savings that have accumulated in the pension fund on behalf of a member. Should a member die before retirement, the total lump sum available should at least be sufficient to provide an income to the spouse for the remainder of her life of 40% of the member’s salary before the member’s death.  A pension to children (average 3) of around 6.5% per child until each child reaches majority age should ideally also be provided for. This suggested pension to spouse and children at current inflation of around 7% over the relevant period for spouse and children will require capital of around 8-10 times annual salary of the deceased member. Again, dependents’ pension equal to about 60% of salary is in line with universally accepted norms (more especially ILO conventions on social security).

Benefits upon disability

Most pension funds take out insurance cover for each of their members against disability as a result of injury or sickness. The insured benefit is usually a salary replacement benefit payable monthly, the typical benefit being 75% of salary. This benefit is paid by insurer directly to a qualifying member or indirectly through the pension fund.  The member usually retains his membership of the fund and continues to contribute to the fund whilst contributions paid previously by the employer are paid on its behalf by the insurance company. The member will also retain the insurance cover for death whilst receiving a disability income benefit. The death cover may even include an annual adjustment to counter the effects of inflation.

Marthinuz Fabianus is Deputy Managing Director of Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years' industry experience.

News from the market

Entrépo Life terminates underwriting of all group business

Entrépo Life (Pty) Ltd recently announced that it will no longer underwrite any group business and instead focus exclusively on individual business. Group schemes currently underwritten will have to be placed with another insurer at the next renewal date.

Media snippets
(for stakeholders of the retirement funds industry)

PFA hits fund with punitive damages payment

In this case a member resigned from an umbrella provident fund in November 2013. The member’s employer refused to sign the termination form as required by the umbrella fund as it resolved to charge the member. A case against the member was opened by the employer in a civil action in 2014 but due to its complexity had still not been finalised by the time the article was written but was placed on the court roll for 13 to 17 February. The member complained that he was prejudiced by the benefit not having been paid to him.

The administrator of the umbrella provident fund submitted that the complainant must be paid what is due to him for the following reasons:

• there was no judgment against the fund or the complainant to withhold any benefit in terms of section 37D;
• enough time was allowed for the third respondent to provide the judgment for damages and the member was now being prejudiced by withholding his payment; and
• the court matters were civil proceedings between the employee and his employer.

The case of the member related to breach of his employment contract. In her ruling the Adjudicator ruled that “In the present case, the deduction relating to a breach of contract is not permissible in terms of the categories of section 37D of the Act. Furthermore, the fact that the third respondent has instituted civil action against the complainant does not justify the withholding of the complainant’s withdrawal benefit. This Tribunal notes with concern the passive role adopted by the administrator of the umbrella fund by failing to request reasons or documentary proof for the withholding of the benefit. If the fund made this simple request at the onset, it would be in a better position to assess the claim based on the merits, thus preventing the complainant from incurring prejudice. In the present case, the deduction relating to a breach of contract is not permissible in terms of the categories of section 37D of the Act. Furthermore, the fact that the third respondent has instituted civil action against the complainant does not justify the withholding of the complainant’s withdrawal benefit.”

Apart from ordering the fund to pay the complainant the withdrawal benefit plus interest, it was also ordered to pay the complainant punitive damages in the amount of five percent of his benefit for its failure to satisfy itself as to whether or not the contemplated deduction was allowable, thus resulting in the complainant not being paid his benefit timeously.

Read the article in Insurancegateway of 15 February 2017, here…

Is equity essential for a retirement investment portfolios?

“The advancement of medical science means that most people are likely to spend virtually the same amount in retirement as they did working and building up their retirement nest egg. This longevity places a huge amount of pressure on the retirement capital that is available when an individual stops working and significantly increases the importance of starting to save for retirement as early as possible…It’s also important to differentiate between saving and investing. While South Africans are notoriously bad at saving, there are some households that have savings accounts. However, this saved capital should not really be factored into long-term investment goals – especially retirement . This is because while a savings account is excellent for minor financial emergencies, the money is not usually being invested optimally as interest from fixed deposits or other pure savings facilities are simply too low over time to grow money enough to meet the needs of retirement…Having established that our money needs to work harder than ever to keep up with the rising cost of living and our longer lifespans, rather than asking whether equities are essential, we should be asking ourselves why equities are essential…The answer is relatively simple. Equities have the proven potential to provide higher returns than most other investments over a period of time but due to the higher risks involved in getting these higher returns, equity investments should be chosen for longer-term goals, which are ideally more than five years away. As such, investment funds with a strong equity bias are one of the best ways to invest for the long term and, as such, should be considered an essential part of any well-planned and diversified investment portfolio.”

Read the insights from Jo-Anne Bailey of Franklin Templeton Investments in Risk Africa News of 8 February 2017, here...

Can I cash out my pension to invest?

Reader’s question: “I am considering resigning from my job. l have worked for 22 years and under a pension fund scheme. l am 46 years’ old and expect to get slightly over R500 000. Is it possible to invest in a vehicle that will pay out at an income of at least R15 000 per month?”

The answer to this question addresses a few important considerations such as tax and risk versus return, inflation risk versus capital risk that any fund member considering to cash out his or her pension benefit for investment should be aware of.

Read the article by Mduduzi Luthuli in Moneyweb 13 March 2017, here...

Media snippets
(for investors and business)

Why is the Rand strong but foreigners are dumping SA assets?

The Rand strengthened by 3% in February despite net foreign investment outflows from bonds and equities of N$ 53 bn. Over the past 12 months the Rand strengthened by 17% despite net outflows of foreign capital from equity and fixed interest securities of R 64 bn. How can this apparent contradiction be rationalised?

The main reasons offered for this are the following:

• The current commodity rally from it trough in January 2016 (follow this link);
• Emerging markets currency rally as the result of carry trade and the commodity rally;
• SAB acquisition; and
• Repatriation of moneys loaned offshore.

Read this interesting article by Dawie van Vuuren in Sharenet of 22 February 2017, here…

The problem with saying “my door is always open”

“If you are in an influential position, you have probably said words to the effect of “My door is always open.” You likely meant this declaration very genuinely. You might well feel that you are a pretty approachable sort of person and that others feel comfortable coming to you with their issues and their ideas. This may be true. But it probably isn’t. Leaders often have an inflated idea of how easy it is for others to speak honestly to them..”

“So how do you, as a leader, acknowledge power differences and genuinely encourage others to speak up to you? Our research suggests that you need to ask questions in five areas:

First, are you honestly interested in other people’s opinions? Being genuinely curious about other perspectives requires a humility that can be in short supply as you head up the organizational hierarchy. Before you conclude that you are sure you don’t have a problem in this area, it is useful to check by asking yourself, “How do I know that I have a reputation for being open to changing my mind?”

Second, have you considered how risky it feels for others to speak up to you? It may well be that on the previous 10 occasions you received challenge with interest and admirable attentiveness, but on the eleventh you’d had a bad day and just couldn’t stop yourself from interrupting and grumpily disagreeing with the person. The eleventh occasion is the story everyone will tell around the office. And that story is the one that will live on for years.

Third, how aware are you of the political game being played? Politics is an inherent part of organizational life; personal agendas play out all the time in what we choose to say to one another. Enabling others to speak up means understanding why this person might be saying what they are saying (or why they are staying silent).

Fourth, what labels do people apply to you, and what labels do you apply to others that define the rules of what can be said? When we meet with others, we label them, consciously or unconsciously. But inevitably they are all markers of status, and status governs the unwritten rules around who can speak and who gets heard.

Finally, what specifically do you need to do and say to enable others to speak? This might include anything: reducing status difference by choosing to dress more casually, introducing a “red card” at executive committee meetings to ensure someone has the ability to challenge you.

Read the full article by Megan Reitz and John Higgins in Harvard Business Review of 7 March 2017, here...

And finally...

“The question isn't at what age I want to retire, it's at what income.”
~ George Foreman

Important notes and reminders

Inland Revenue announces tax incentive programme

Here is your opportunity to rid yourself of penalties and 80% of interest raised against your account by Inland Revenue.

Read the circular issued by Deloitte here…

Comments on one chart of account under FIM Bill due

NAMFISA has called a meeting of all interested parties to discuss a single chart of accounts for the financial services industry for Monday 27 February. Whilst RFS had assigned Kai Friedrich to represent RFS in this regard, our voice will not receive the necessary weight to prevent extensive new requirements from being imposed at what we would expect to be a significant cost to pension fund members in the near future.

We urge all principal officers to acquaint themselves with this topic and to support our efforts in this regard by attending the meeting on 27 February.

Some of our main concerns in this regard were presented in last month’s newsletter.

Quarterly SIH and annual ERS returns completed

All annual ERS returns due by 31 January 2017 and all quarterly SIH returns due by 15 February 2017 were submitted in time thanks to exemplary cooperation between the principal officers, investment managers, investment consultant and our staff. Thank you all!

Newsletter

Dear reader

In this newsletter we highlight the risk that paying little can actually become quite expensive. We emphasise the importance of member communication in an environment where members are required to exercise certain choices without being properly equipped to do so. In the vein of what you pay versus what you get, we provide a glimpse of what you get when you employ RFS that you are likely to look far and wide to find elsewhere. In our investment commentary we try to provide a bit of perspective on the current status of investment markets to the concerned pension fund member.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 01.2017

In January the average prudential balanced portfolio returned 1.32% (December: 0.40%). Top performer is EMH Prescient (2.19%); while Momentum (0.55%) takes the bottom spot. For the 3 month period Prudential, takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Momentum underperformed the ‘average’ by 1.4%.

What is your investment strategy?

If you followed investment markets more generally and latest investment returns of pension fund portfolios more specifically, you will be forgiven for your concern about the seemingly poor short-term investment returns of your Benchmark Default portfolio or any other portfolio you may have chosen to invest in, for that matter. However before you go off on a tangent because of these disappointing short-term results, you must ask yourself whether you have defined your investment strategy? What is your investment horizon? If you want positive returns for the next 6 to 12 months, do not invest in prudential balanced portfolios but rather in cash!

Read part 6 of the Benchtest 01.2017 newsletter to find out what our investment views are. Download it here...

Paying less can become expensive!

Those of our readers, who follow South African financial media, and more specifically, articles dealing with the pension funds industry, will no doubt realise how much noise is nowadays made about costs and the eroding effect costs have on the benefit members will eventually receive. The FSB is on a major drive to reduce costs, effectively forcing funds into umbrella funds.

One of the problems in this industry is that a significant proportion of costs cannot really be quantified and will not be part of the equation of cost versus benefit.

If you choose an asset manager offering the lowest management fees, can you be sure you will secure a better outcome? Of course not, but how do you factor in future out - or under performance?

|If you choose any other service provider, such as your consultant, your actuary, your insurer or your administrator on the basis of lowest costs, can you be sure of a better outcome? Again, definitely not. How do you factor in future losses, direct and consequential, such as industrial action by your employees, arising from inferior service delivery?

If you choose to move to an umbrella fund because of it relieving you from your obligation to serve as a trustee or principal officer or to designate staff at your cost to these positions, can you be sure of a better outcome? Once again I venture to say, definitely not. How do you factor in the cost of future industrial action by dissatisfied staff for the wrong doings of a third party over which you have very little or no influence?

We believe that the question of fees needs to be seen more philosophically. Yes costs erode the outcome, always. How about if you did it yourself, assuming you really want to save all costs? Would you be in a better position? This is the key question in our view.

We are all in an occupation to serve or to produce for other people, who in turn are in the same position, to the best of our ability. We all want to live, eat and drink and if we don’t produce our own food and drink we have to buy it from someone who does. That person spends his time on doing that and does not have to attend to his investment because I do this for him again.

The first principle is, whatever you do not do yourself, you will have to pay someone to do it for you. Specialisation and a functional free market mechanism is really what one should be concerned about. Once these two factors are in place, the outcome should be optimal.

Given that you cannot be a master of all trades and therefore have to rely on the free market mechanism and specialisation, the second important principle is that of ownership. A free market economy with individual ownership of production factors has proven to be superior to an economy with collective ownership of production factors. In our many years in this industry, it has been shown all over again that this principle holds true for pension funds as well.  Where a fund is managed through collective ownership, it is usually dysfunctional, at the expense of its members. Where a fund is driven by the conviction of ownership of the employer, it is usually functioning exemplary, for the benefit of its members. In the same vein, an umbrella fund will never be able to emulate the advantages of true ownership.

Pension fund governance - a toolbox for trustees

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

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Member Communication – The need for a study if trustees measure up?
by Marthinuz Fabianus - Deputy Managing Director

Over recent years, pension funds have evolved in terms of the level of sophistication in the management as well as the benefits offered to members. With the advent of technological advancement, the person managing the fund (i.e the trustee) as well as the ordinary pension fund member is inundated with a plethora of choices. Pension funds now offer individual members within a group set up, the choice to decide on an investment strategy best suitable to their needs. Members are offered the choice to decide on the level of benefits needed in the event of death so as to meet the needs of the member’s dependants in the event of the untimely passing of the member. Members are also required to decide whether they have a need to make additional savings in order to adequately cater for their retirement needs etc.

However, all these options and choices offered by pension funds to members do not adequately take into account the level of financial acumen and the literacy levels of all members of pension funds.  According to a study by the National Literacy Programme in the Ministry of Basic Education, it was revealed that 35% of the Namibian population above the age of 15 (and 38% of the Namibian population above the age of 16) were illiterate in 1991. Though accepted that improvements may have since taken place in this regard, I made the case in an earlier article that such a scenario poses serious constraints on members’ active participation in modern day pension fund arrangements.

There is a need for thorough study to establish whether members of pension funds that offer flexible arrangements are adequately aware of the different options offered by their funds. A second objective of such study should be to establish where members are indeed aware of the existence of such options, do they understand such options correctly to enable them to make correct use of the choices available to them.

The need to empower members of a pension fund to take full advantage of the benefits offered by their fund cannot be overemphasized. The role of a pension fund trustee is rather onerous and judicious. Pension fund trustees would ultimately fail in their duty should they not ensure that their members fully understand the benefits and choices offered by their pension fund. This goal is only achieved with proper dissemination of information and result driven communication initiatives targeted at all members, irrespective of their different levels of employment within the employer. Corporate governance guidelines and NAMFISA place a huge responsibility on the shoulders of all involved in the management of pension funds. The duty to report back to those you are accountable to in an accurate, timely and objective manner etc. is paramount.

Both the Sanlam and Old Mutual SA pension funds surveys of 2009 and 2008 respectively, found that more than 80% of fund members do not fully understand the benefits offered by their respective funds. However, there has not been a study to specifically determine the understanding of the flexible options offered by funds and the concomitant correct utilisation of the flexible options by members of those funds.

Determining what members know and understand about the workings of their pension funds, but specifically their knowledge and understanding of all options offered by their funds, have implications for the performance measurement of those entrusted with the management of pension fund business, not least being the trustees. Such a study also has implications for the industry as its outcome may speak to the need to set benchmarks for acceptable levels and forms of member engagement. Communication to members should not just be a tick box exercise, but rather it must address the genuine need for knowledge empowerment and must be purposeful in achieving tangible results amongst members across all levels.  Put differently, the measurement of whether trustees have carried out their trustee duties and responsibilities successfully, must have as one of its key points of reference the measurement of members’ understanding of the benefits and choices offered by the fund.

Marthinuz Fabianus is Deputy Managing Director of Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years' industry experience.

Kai Friedrich's Administration Forum

Your retirement nest egg deserves the highest standards of governance!

For the peace of mind of trustees our safety net offers you:

• Fidelity cover of N$ 5 million, excess of N$ 250,000 1 July 2016 to 30 June 2017, Western National Insurance Company;
• Professional indemnity cover of N$ 50 million, excess of N$ 250,000 1 July 2016 to 30 June 2017, Western National Insurance Company;
• Directors' personal liability cover of N$ 5 million per director, 1 November 2016 to 30 June 2017, Santam;
• Full-time internal audit, compliance and risk management function supported by 2 independent chartered accountants on a part-time basis;
• Off-site disaster recovery data centre;
• Continuous data and system replication;
• On-site back-up generator;
• Secure IT production centre;
• High availability virtual server environment;
• 61 full-time staff focussed on fund administration only;
• Average of 16 years relevant experience per employee;
• Average of 7 years’ service with RFS;
• Staff with undergraduate diploma or certificate as highest qualification – 20;
• Staff with degree as highest qualification –  14;
• Staff honours degree as highest qualification – 7;
• Staff with post graduate diplomas as highest qualification – 8;
• Chartered accountants – 3;
• CFP® practitioners – 3;
• A track record and reputation second to none... and more!

How much is good governance worth to you as a trustee – can you afford to pay less for compromising on any of these credentials?

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from NAMFISA

Namfisa Statistical Bulletin Q2 2016 - Pension funds in perspective

Namfisa recently published its latest quarterly statistical report for the second quarter of 2016.

* Note – while this information is provided by the pensions industry at least on an annual basis, it is not provided in the quarterly statistical bulleting published by NAMFISA. The latest published bulletin is for Q2 of 2016.

Download the full report here...

Media snippets
(for stakeholders of the retirement funds industry)

Mother fails in bid to claim all her son’s death benefit for herself

In this case, the mother of a deceased member laid a complaint with the SA adjudicator on the trustees’ decision to allocate a portion of the death capital to a daughter of the deceased who was born 2 days before the deceased passed away. The complainant contended that the deceased was not married and had no children. The suggestion of the fund to have the complainant undergo a paternity test [DNA test?] to determine whether or not the girl was the daughter of the deceased was turned down by the complainant.  On that basis the trustees accepted that the girl was his child and allocated a portion of the lump sum to her.

In her determination, the adjudicator made a few important points:

•  The primary purpose of a death benefit is to protect those that were financially dependent on the deceased.
• Section 37C imposes 3 duties on the board of trustees when disposing of a death benefit –
  • Identify and trace all dependants and nominated beneficiaries.
  • Effect an equitable distribution of the death benefit.
  • Determine an appropriate mode of payment.
• The law recognises 3 categories of dependants –
  • Legal dependants;
  • Factual dependants;
  • Future dependants.
• A member is legally liable for the maintenance of spouse and children.
• A factual dependant has to prove that he was financially dependent on the deceased at the time of the member’s death.

Concluding this case the adjudicator ruled that in the circumstances, this Tribunal is convinced that the board of the trustees correctly identified the deceased’s dependants. The deceased would have been legally compelled to provide financial support to the child had he survived. However, a minor child would need a longer period of financial assistance as compared to the complainant who was working at the time of the deceased’s demise and had gone on retirement. Therefore, this Tribunal is satisfied that the board of trustees applied its mind to relevant considerations when it took into account the age of the child in deciding to allocate a bigger share of the death benefit to her.”

Read the article in FA News of 6 January 2017, here…

How much are your paying for your RA

“Last year the Association for Savings and Investment South Africa (Asisa) introduced the Effective Annual Cost (EAC) standard. This was a significant move to help investors make direct comparisons of the costs of different financial products. The idea was to make sure that there was a standardised measure used across the industry so that comparisons were genuinely done on an “apples with apples” basis. All costs would have to be disclosed in certain brackets and expressed as a percentage of assets invested. Historically, different products had not only shown costs in different ways, but many had layered costs in ways that were very difficult for investors to understand. Setting a standard to ensure that investors were truly aware of what they would be paying and could compare this across different providers was therefore a big step. However, the truth is that it hasn’t delivered the neat solution that many might have been hoping for. I have discovered this over the last few weeks as I have tried to gauge the true costs of different retirement annuity (RA) products.”

Read the article by Patrick Cairns in Moneyweb of 15 February 2017, here…

Taking a balanced off-shore view

“South African investors have become very aware of the potential benefits of balanced unit trusts. Over the last decade, the local multi-asset categories have become by far the most popular place for people to invest their money.
This is because of the diversification that they offer. This means that they should produce more stable and less risky returns than investments in just one asset class. More recently, South Africans have also started to take a balanced view when looking for offshore exposure. Over the last five years, the assets under management in locally registered global multi-asset funds have more than tripled.”

Read the article by Patrick Cairns in Monweyweb of 14 February 2017, here...

How much is enough to hold offshore in 2017?

“Representing less than 1% of the global economy and expecting less than 2% growth in GDP per annum over the next two years, the South African economy appears unlikely to offer local investors the chance of decent returns. The economy remains hindered by socio-political and economic factors. To mitigate the risk of over-concentrating assets domestically and increase their potential for greater and diversified returns, high-net-worth investors are increasingly taking advantage of their R 11 million allowance to invest outside of South Africa.”

Read the short article by Warren Thomson in The Investor 14 February 2017, here...

Media snippets
(for investors and business)

Forex collusion: ‘No penalties sought against Absa’

“The South African Competition Commission said in a statement that it found that from at least 2007, “the respondents had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving US dollar/rand currency pair. Further, the commission found that the respondents manipulated the price of bids and offers through agreements to refrain from trading and creating fictitious bids and offers at particular times. Traders of the respondents primarily used trading platforms such as the Reuters currency trading platform to carry out their collusive activities. They also used Bloomberg instant messaging system (chat room), telephone conversation and had meetings to coordinate their bilateral and multilateral collusive trading activities. They assisted each other to reach the desired prices by coordinating trading times. They reached agreements to refrain from trading, taking turns in transacting and by either pulling or holding trading activities on the Reuters currency trading platform.  They also created fictitious bids and offers, distorting demand and supply in order to achieve their profit motives.

Our question - does this explain the inexplicable weaknesses and strengths of the SA Rand that one has seen over the last few years?

Read the article by Antoinette Slabbert, in Moneyweb of 16 February 2017, here...

15 best countries for business in Africa

According to this article, Namibia is 4th best country for doing business in Africa, one ahead of Botswana and one behind Morocco. This is good news for us. Let’s try to improve on it!

Get the full list from IT News Africa of 20 January 2017, here...

Presentations need not be so theoretical

“Imagine you are trying desperately to pay attention to a technical presentation being delivered, and all you really want to do is to (theoretically) rather stick a fork in your eye than be bored to (technical) tears! In this article, let’s look at how you can turn a seemingly dull subject into an exciting showcase.”

Here are her 4 key points -

1. Consider the content of your speech and write down the top 3-5 points;
2. Anchor each point with an activity to further entrench and embed the learning into the minds of your audience. You can do this through a simple on-stage demonstration illustrating how something is done;
3. Take your 3–5 points of wisdom and package them in a structure that is memorable to your audience;
4. Personalise your message with a story of your life experience on the subject matter.

Read the short article by Dineshrie Pillay in Accountancy SA, here...

Analysis and interpretation of tax law

“Legislation is generally interpreted based on the grammatical and ordinary meaning of the words of the law. This literal approach to interpretation was described in the judgment of Commissioner for Inland Revenue v Simpson. In a taxing Act one has to look merely at what is clearly said. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly at the language used. The approach was however qualified to some extent in the case of R Koster & Son (Pty) Ltd & another v CIR (Koster case) where it was held that:

[I]n construing a provision of an Act of Parliament the plain meaning of its language must be adopted unless it leads to some absurdity, inconsistency, hardship or anomaly which from a consideration of the enactment as a whole a court of law is satisfied the Legislature could not have intended.

It was similarly held in the case of Venter v Rex that:

… the court may depart from the ordinary effect of the words to the extent necessary to remove the absurdity and to give effect to the true intention of the legislature.”

Read the article by Pieter van der Zwan in Accountancy SA, here...

And finally...

“Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries.”
~ Douglas Casey, classmate of Bill Clinton at Georgetown University

Important notes and reminders

Annual ERS returns due

In a communication from NAMFISA of 8 January, retirement funds are reminded that the annual ERS returns are due by 31 January.
In summary the following sections will need to be completed:

• General details - Principal Officer / Consultant to complete
• Governance Part 1 - Principal Officer / Consultant to complete
• Governance Part 2 - Principal Officer / Consultant to complete
• Governance Part 3A - Principal Officer / Consultant to complete
• Governance Part 3B - Principal Officer / Consultant to complete
• Balance Sheet - RFS to complete
• Income Statement - RFS to complete
• Investments - RFS to complete (information to be by funds’ asset managers)

The notice of submission of these returns was very late and we suggest that funds request extension until 15 February 2017 as it will be very difficult to meet the due date. The NAMFISA application form can be downloaded here…

Quarterly SIH returns due

The quarterly SIH returns are due by 15 February. Principal officers are required to sign off the hard copies of the return. Principal officers need to ascertain that this requirement is met and that the return is submitted on or before 15 February to avoid being penalised at the rate of N$ 500 per day.

Namibian residents owning shares in SA companies – here is some important information

If you own shares in your own name in SA companies be aware of estate duty consequences. Download the note of caution by Hartmuth van Alphen here…

Comments on one chart of account under FIM Bill due

Whilst RFS had assigned Kai Friedrich to assist and advise NAMFISA in this regard, our voice will not receive the necessary weight to prevent extensive new requirement from being imposed at a significant cost to pension fund members in the near future.

We urge all principal officers to acquaint themselves with this topic and to support our efforts in this regard by submitting their comments by not later than 3 February.

The request for submissions can be downloaded here…

Here are some of our main concerns in this regard:

NAMFISA intends to set up a single interface for uploading data from the industry. The data NAMFISA intends to collect however, in practice comes from different sources. It will not be purposeful to design an interface where data from different sources are in a single input document as this would mean manual intervention by pension funds. This should at all cost be avoided and from NAMFISA perspective it should really make no difference how the interfaces are set up. To make the process efficient, there should be a separate interface for each source of data. The following data sources typically exist in the pension funds industry:

• Financial data – from the funds’ general ledgers
• Investment data – from the funds’ asset managers
• Member data – from the funds administrators’ member data bases
• Extraneous and non-financial data:
  • Valuation related – from the valuator
  • Indirect loans – from the sponsoring bank
  • Claims ageing – manual or customised reporting
  • Other member data manipulation – manual or customised reporting

It seems NAMFISA may not be aware of the fact that there are these separate sources of data and putting all into a single interface will not serve the purpose of automating the data capturing process for pension funds. Each separate source should have a separate interface and should be uploaded as a separate process.

We also believe that NAMFISA should collect only ‘raw data’ from the different data sources. Data providers should not be required to do any data manipulation. NAMFISA obviously has its own information and statistical requirements for which ‘raw data’ has to be manipulated.  If this is done by NAMFISA, it means that only its systems will have to be coded and it also means that the manipulation will be done in a systematic and consistent manner. If data providers are required to do the data manipulation, it would mean that each provider’s system has to be coded specifically for NAMFISA requirements. This makes the process significantly more costly for members as an estimated 20 or so systems will have to be customised for the NAMFISA requirements, and is likely to produce inconsistent results that may not be reliable for NAMFISA’s purposes.

Finally, as the NAMFISA framework stands now, it requires vast volumes of data from pension funds (and the other regulated institutions). At this stage it appears that it will degenerate into a monster of a data base that NAMFISA will establish and that will have to be updated by pension funds and their service providers on a quarterly basis in NAMFISA’s quest for managing risk. The resources this will require in terms of data storage capacity and processing power is likely to be similar to all IT systems of all regulated financial institutions put together. Sanity should prevail here in taking this process forward step by step. First collect the key information only, process and analyse it and see to what extent it will serve the purpose of managing the industry risk. As we have pointed out before – the trustees are accountable for managing the risks of their pension funds and can be taken to court by fund members and NAMFISA. Yet we do not believe there is a single fund where risk is managed at the level of detail that NAMFISA now seems to be intent to do. NAMFISA effectively now takes the responsibility of trustees for managing risk upon itself! Do we still need trustees, or can the trustees perhaps be exonerated for not managing the risks of their funds anymore because it is done by NAMFISA in so much more detail based on industry wide benchmarks and parameters that would not be available to trustees?

Newsletter

Dear reader

In this newsletter we draw attention to a (possibly) vast and costly new NAMFISA reporting requirement for funds if funds do not act now, we present the closing act on purchase of member owned annuities (for now?), we examine why additional voluntary contributions are not tax deductible and we make suggestion for raising financial literacy amongst fund members.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals.

In our commentary on global investment markets we look at what we can expect of financial markets in 2017.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 12.2016

In December the average prudential balanced portfolio returned 0.42% (November: 0.59%). Top performer is Prudential (1.31%); while Allan Gray (-0.19%) takes the bottom spot. For the 3 month period Prudential, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 1.3%.

What will 2017 bring us?

Since June 2014 to end of December 2016, the JSE Allshare index made no progress and has been hovering around the 2016 year end level of 50,000. The investor in the JSE Allshare index thus had a return of zero percent. Taking into account dividends of around 3.3% would have still produced a negative real return of 1.4% to end of December with an average inflation rate of 4.7%!


Now consider the above graph. This depicts the performance of the more common investment portfolios employed by pension funds in Namibia. The blue bars to the right represent balanced portfolios comprising of a mix of asset classes with an equity exposure of between 60% and 65%. The grey bars represent more conservative portfolios comprising of a mix of asset classes but an equity exposure of mostly below 40%. Bearing in mind that the investor’s real return on the JSE Allshare index would have been minus 1.4% over the very same period, most pension fund investors should take comfort in the picture presented by the above graph. Over this period the typical balanced pension fund portfolio still returned 2.2% above inflation before asset manager fees, an outperformance of the JSE Allshare index plus dividends by 3.6%. Still, this is a very low real return considering that pension funds are built on the premise of investments returning 5% above inflation, after fees. Clearly this shows that rebalancing is under way in financial markets and this we expect to continue for the next year and longer!

Read part 6 of the Benchtest 12.2016 newsletter to find out what our investment views are. Download it here...

Transfer of retirement capital to a member-owned annuity

RFS has been pursuing this topic relentlessly with insurers and South African and Namibian tax authorities and regulators for many years in an effort to obtain clarity on the legal framework, any pitfalls and the potential risks these might pose to RFS as administrator and to the trustees of retirement funds it administers.

Through these tireless efforts we have at long last reached a point where we believe that both RFS and the trustees of retirement funds it administers are sufficiently exonerated by Inland Revenue and NAMFISA, in the event of any recourse by a member for the consequence of his or her retirement capital having been transferred to an insurer to arrange a pension in the name of the retiree. Our first concern was with regard to the transaction not having been treated correctly for tax purposes. Our second concern was with regard to the possible loss of the protection offered by section 37 A and B of the Pension Funds Act, in the event of the demise of the insurance company to which the capital was transferred.

At long last NAMFISA has now confirmed to us in writing that it considers ‘PN25/1/1/p’ an official NAMFISA circular although it is a facsimile sent to former manager of Old Mutual employee benefits that was complemented by a note addressed ‘To Whom it May Concern’. These two documents bear no resemblance to official NAMFISA circulars. NAMFISA now confirmed the content of these two documents, that a retiree can arrange a member owned annuity from an insurer with his or her retirement capital in a retirement fund and that the protection of section 37 A and B would extend to this capital once it resides in the insurance company. This addresses our concern with regard to the Pension Funds Act.

On our tax concern, Inland Revenue a while ago confirmed in writing to the Life Assurers Association of Namibia that retirement capital from a pension fund would not be taxable if it is applied to purchase an annuity in the name of the retiree, on the basis of the argument that such purchase is not a voluntary transaction but is a requirement in terms of the relevant fund’s rules. This argument of course implies that only annuity purchases by members of a pension fund will be tax free (or rather not gross income) but not those by a member of a provident fund. Inland Revenue has set conditions that have to be observed when such transactions are entered into. Firstly, the policy must mirror the extensive protection afforded to pension fund capital under sections 37 A and B of the Pension Funds Act. Secondly the rules of the purchasing fund must oblige the member to purchase an annuity and must make provision for the annuity to be purchased in the name of the member. As far as the first part is concerned, we as administrators cannot verify this and we will expect that the receiving insurance company assumes this responsibility. As far as the second part is concerned, RFS will ascertain that these are met.

Can your employees deduct voluntary contributions to the fund?

The contract of employment

One principle of the Income Tax Act is that expenses can only be claimed for tax purposes if they were incurred in the production of income (refer section 17.(1)(a).

In the case of employees Inland Revenue will not easily accept any claim for expenses incurred by the employee. An employee can only claim expenses that he is required to incur in terms of his employment contract. In other words the salary you earn is dependent on you incurring certain costs so these costs are incurred in the production of income.

If an employer can formulate the employment contract in such a way that a pension contribution in respect of the employee’s bonus is an obligation, the employee should be able to claim that expense. If the decision is left to each employee, the employer should find that it is not possible to formulate it in the contract as an obligation. This does not mean that every employee has to have the same contract of employment. So certain employee categories or certain employees can have a special provision in their contract of employment that others do not have, to make the contribution obligatory.

The fund rules

Most fund rules provide for voluntary contributions by members. I caution to use this clause as the heading is problematic, referring to ‘voluntary’. As pointed out above, the word ‘voluntary’ means it cannot be an obligatory contribution by the employee and would thus not be incurred in the production of income.

It is important that the rules of the fund mirror the employee’s employment contract. Thus, if a contribution calculated on a member’s bonus is a condition of employment, it should not be referred to as ‘voluntary contribution’ in the fund’s rules.

The Income Tax Act on fund contributions

The definition of ‘pension fund’ requires that the rules of a fund provide in (b)(i) that ‘…all annual contributions of a recurrent nature of the fund shall be in accordance with specified scales…’. The definition of ‘provident fund’ lays down the same requirement. Typically, this refers to the contribution percentages at which members contribute on a monthly basis. The definitions do not make any reference to any other contributions.

Section 17 of the IT Act deals with ‘General deductions allowed in determination of taxable income’. Section 17(1)(n)(i), sets out that the employee may deduct ‘…by way of current contributions [which are required to be in accordance with specified scales per definition of ‘pension fund’ and ‘provident fund’] in the year of assessment and directs that ‘…such contribution is a condition of employment…’ The IT Act contains no other specific provision that allows any deduction for contributions to a pension fund, and here I do not refer to a transfer of accumulated contributions to another fund.

Conclusion

As set out above, the principle of the IT Act militates against an employee deducting any expense that he was not required to incur in the production of income [and that can only be achieved through the contract of employment].

This sets out the dilemma of employers wanting to allow staff to make additional contributions to their fund and indicates what route the employer and the fund should take to achieve their goal of having employees contribute to the fund in respect of their bonus.

I would caution employers though not to create an impression towards employees that voluntary contributions are tax deductible, or worse, to offset voluntary contributions from an employee’s salary in determining the taxable income unless you have obtained comfort that Inland Revenue will allow these as a deduction for tax purposes.

Pension fund governance - a toolbox for trustees

To verify whether your fund service providers are duly registered by NAMFISA, download the list here...

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

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Our sorry state of financial literacy
by Marthinuz Fabianus

The popular and powerful adage “knowledge is power” has been traced back to the 15th century.  I consider myself fortunate to have learnt it early on when the emblem of my brand new primary school in Arandis, named after Rössing Uranium Mine, was unveiled in the early 80’s with this inscription. However, in recent times, this quote has been re-coined to “shared knowledge is power”. I cannot agree more with this, as it brings to mind the unfortunate state of ignorance about financial matters of the majority of members of pension funds in Namibia. Despite some initiatives, notably by the Financial Literacy Initiative (FLI) of the Ministry of Finance and NAMFISA’s consumer education campaign, I am afraid not much if anything at all seems to be done to improve the level of financial illiteracy amongst pension fund members.

The FLI that arguably may have reached the biggest audience, seems to focus mainly on personal and business finance, whilst NAMFISA’s consumer education campaign that one would have expected to deal more with pension funds, seems to have died a natural death. I would like to believe that for the majority of grassroots members of pension funds, their single biggest asset when they hang up their working tools to retire, would be their pension fund savings.  Pension fund concepts are probably amongst the most complex to understand and relate for many pension fund members. However, if pension fund assets amount to more than 70% of our country’s GDP, then the owners of these assets need to be made more knowledgeable about the workings of the vehicle hosting their largest single asset.

Now reading this you are probably thinking “yeah right, tell us how to improve their knowledge”, or “you try making members understand pension fund benefits and investments!” Well, I am not professing to have much needed answers, however first step is for pension fund stakeholders to recognise that not much has been done and resolve to do somewhat more than hitherto has been the case.

Over years of my experience with pension funds, I found that employers that take an active interest, place great value on pension funds as an extension of employee benefits and recognise it as key in attracting and retaining staff, tend to be more concerned about pension fund members’ need to understand the benefits offered. These employers in addition to their contributions to their employees’ pension fund would also employ a person(s) in their human resources team to look specifically after the affairs of the pension fund either as fund Principal Officer or assistant to the fund’s Principal Officer.

Members of funds would mostly trust their own colleague if they needed advice or need to be referred for advice on pension fund matters. If a person in such position builds up all required knowledge on the structure, workings and relevant laws applying to pension funds, he or she can become a key asset to an employer. With the trust the in-house person would automatically command amongst less literate members of the fund, I believe such a person can be the appropriate medium to educate members on matters concerning their fund and related employee benefits matters. This person has the added advantage that he or she better knows and understands the culture of the employer and other employer information that may be too sensitive to entrust to outside service providers and has access to various resources of the employer as may be needed in rendering a service to members of the fund. I believe investment in such a resource by the average size employer can thus be invaluable in increasing the level of financial literacy amongst pension fund members.

Marthinuz Fabianus is Deputy Managing Director of Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years' industry experience.

Media snippets
(for stakeholders of the retirement funds industry)

So you think you can pick next year’s winning fund?

“One of the biggest challenges to any investor is overcoming their own behavioural biases. A lot of the time, the biggest risk to our wealth is ourselves.

Studies in behavioural finance have shown how investors often act irrationally and are swayed more by emotion than reason. One of biggest behavioural biases we face is that we overestimate our own abilities. We think we are smarter than we actually are.

This is what leads a number of investors to think that they can pick the best fund from year to year. They believe that they have the ability to earn better returns by moving between unit trusts than simply sticking to one manager over the long term.”

The results of a Moneyweb study shows why the answer is not to pick last year’s winner.

Read the article by Patrick Cairns in Moneyweb of 17 January 2017, here…

Bull and Bear - a consensus view of the market over the next 12 months
15 January 2017

The Bull & Bear report is a collation of the performance expectations of seven South African Asset Managers over the coming 12 months.   

100% say

• they expect SA inflation to trend downwards
• they expect Global inflation to trend upwards

86% say

• they are neutral on Resources
• they are bullish on Value
• they are bearish on Euro-Zone bonds
• they are bearish on UK bonds
• they are neutral on UK equities
• they are neutral on South American equities
• they are neutral on Emerging Europe equities

Asset managers’ view of the current SA Equity market

Keep calm and carry on investing, says Allan Gray

“A year ago investors were desperately seeking ways to take money offshore with the rand trading at R15.60/US$. The rand is now trading at R 13.60/US$ and this quest has gone quiet. This is counterintuitive: surely a dollar at R13.60 is a better investment than a dollar at R15.50 if the fundamentals are the same? The deficit on the current account is similar to a year ago, the fiscal position unchanged and, if anything, the probability of President Jacob Zuma leaving office early has lessened despite ever-more damning evidence of corruption and mismanagement in the ruling party. People have just chosen to worry about these issues a bit less. Maybe the level of concern is normal now and was too extreme in December 2015/January 2016.”

Download the commentary by Andrew Lapping, Chief Investment Officer of Allan Gray here…

Media snippets
(for investors and business)

Namibian stats at a glance

Do you know what the poverty line is or what our main imports and main exports are, or what the main drivers of inflation are? If you are interested to find out more, download the document here...

How well can you trust your boss?

“Here's the funny thing about integrity: It's one of the most crucial ingredients of effective leadership, but it's notoriously hard to measure. One reason is that integrity is somewhat contextual; psychologists have found that the same person may act with integrity in some situations but not others. And it's true that corrupt, mischievous work cultures tend to unleash deviant behaviors even in those who'd behave ethically under other circumstances. By the same token, "prosocial," ethical cultures discourage naughtiness, forcing even those with relatively little integrity to act in uncharacteristically moral ways (at least for a while).”

• Look at the work culture the boss operates within the business;
• Being too focused on achievements and career makes one selfish and can justify nasty behaviour towards others;
• Employees’ assessment of the integrity of their boss can be fairly predictive;
• Creative people are more likely to cheat;
• Charisma is often psychopathy in disguise;
• Boring often means trustworthy;
• Arguably the most relevant factor when it comes to assessing integrity is emotional intelligence.

Read the interesting post by TC Primuzic in FastCompany, here...

And finally...

“While honesty is lazy—it simply involves recalling facts and one’s own experience—deception takes a lot of effort, creativity, and intelligence.”
~ Friedrich Nietzsche

Festive season dates

Please note we will be closed on 23.12.2016 and will reopen on 03.01.2017.

Newsletter

Dear reader

With this newsletter we conclude 2016. We extend our sincere gratitude for the great support of our clients and the exceptional dedication of each member of staff over the course of 2016 and the years before! We wish all of you a peaceful festive season and a prosperous 2017! May the New Year be blessed with adequate rainfall for all who depend on it, with success in your business endeavours and with health and happiness in your private lives!

In this newsletter we do a bit of introspection on claims that RFS is inflexible and arrogant, the implications of rules not providing for maternity leave, can an employer deduct an employee’s debt, should group schemes become retail products and a reader’s letter on BoN asset swaps.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals.

In our commentary on global investment markets we look at policy options for re-igniting the global economy and what the potential impact could be on the investor’s investment decisions.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 11.2016

In November the average prudential balanced portfolio returned 0.59% (October: -1.95%). Top performer is Investec (1.56%); while EMH Prescient   (-0.91%) takes the bottom spot. For the 3 month period Metropolitan, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale Namibia Asset Management underperformed the ‘average’ by 1.8%.

As 2016 is drawing to a close

Unlike the usual format of this column I do not comment on investment markets this time around or provide our investment views. They are unlikely to change from our Monthly Review of Portfolio Performance to October 2016. However, by the time the November issue will be released I will be overseas, watching the markets from a different, very cold perspective.

Do refer to our October issue for the last review of investment markets and our investment views for 2016. I trust you find something of interest and something you can personally relate to from time to time in these reviews!

Read part 6 of the Benchtest 11.2016 newsletter for a brief review of developments at RFS during 2016. Download it here...

Commentary: Is RFS inflexible and arrogant?

As the saying goes, ‘the tallest poppy gets its head chopped off’. It seems that there are persons out in the market with only one goal and that is to tarnish our exceptional reputation by making us out to be inflexible and arrogant. Those that know us will no doubt agree that we are in fact humble and down to earth and will discount such comment as a deliberate attempt at discrediting RFS. These could be competitors who want to raise their image to our level by lowering ours or it could simply be persons who have an axe to grind with us.

Our fee model

Our ‘arrogance’ is typically portrayed in the context of our fee model. RFS probably uses one of the most scientific methods to determine the cost of its services to its clients of service providers in the pensions industry. For any client it should be comforting to know that the services you pay for are determined in a scientific manner. This means that they are fair towards you, first and foremost. Fairness in determining fees is an obligation of any service provider who is a member of any professional association. In our case, top managers are members of a number of different professional associations whose code of ethics obliges them to apply fairness in the determination of their fees. This means the client is paying for what he is getting. Conversely it also means the client is not paying for a service he is not getting. Secondly, a client should be comforted knowing his service provider applies a scientific method to determine the costs of his services as this means the service provider has a sustainable business model.

The fact that RFS has been around as a self-sustaining Namibian organisation for over 17 years now is testimony to the sustainability of our business model. New entrants to the industry may prefer a misguided strategy of buying market share by offering unsustainably low fees. For the client who buys into this, it means one of two things. The service provider will either revert back soon with the scenario of having to close doors or the client agreeing to a fee adjustment or of the service provider in fact closing doors – a nasty situation for any pension fund if it was your administrator.

Would you call this arrogance?

Our business principles

Our ‘inflexibility’ is typically portrayed in the context of our way of dealing with client enquiries on special ‘non-standard’ services. As our slogan goes ‘rock solid fund administration that lets you sleep in peace’, we are very principled in approaching such requests. Firstly, requests must be defined properly so that both parties understand what is required, what the parties’ expectations and obligations are, what risks need to be addressed and how these risks will be addressed. Until all these pre-requisites have been met, trustees may at times experience our response frustrating and overly dogmatic. However at the end of the day, our concern for protecting the interests of fund members and trustees should in the final analysis provide the comfort and peace of mind to our clients that all ‘i’s’ have been dotted and all ‘t’s’ have been crossed and that their risk exposure is consequently minimised. RFS’ reputation speaks for itself!

Would you call this inflexible?

Conclusion

Comments referring to RFS being arrogant and inflexible have to be interpreted in the context of their origin. We do not think they are appropriate. Being a humble, down to earth organisation believing to apply the highest standards of fairness, we invite any client or prospective client to explore with us our model for setting fees for the services we provide.

Do your fund rules provide for maternity leave?

For member contributions to be tax deductible it is essential that these are made in terms of the rules of the fund. The Income Tax Act granting the concession to members to make tax deductible contributions to a fund requires that membership of the fund must be a condition of employment and that regular contributions must be in accordance with specified scales. The Income Tax Act does not link the employer contributions to an individual member’s pensionable salary but rather to his/her total approved remuneration. Remuneration is a wider term than pensionable salary and can include other costs of employment relating to the employee.

Pensionable salary is normally defined in the rules of a fund as the basis for determining the contributions to be made to the fund by the member and by the employer.

Most rules of funds would define pensionable salary as -

“The MEMBER'S basic annual salary or wages and any other regular amounts paid to such MEMBER as are regarded as pensionable by the BOARD OF TRUSTEES at the request of the EMPLOYER”

As far as the rules are concerned, contributions must thus be linked to pensionable salary. Whether or not a salary is paid during maternity leave is usually set in the conditions of employment.

Scenario 1 – No salary is paid to member on maternity leave

Where no salary is paid, there should be no contribution by either member or employer, based on the definition of pensionable salary.

If the employer does not continue to pay any regular amount to the member while on maternity but wishes to continue contributing this would be in contravention of the rules. It would essentially be a voluntary contribution by the employer, posing the risk that the Receiver might disallow it for tax purposes. It is unlikely though that the employer would exceed the total that the Income Tax Act allows the employer to deduct for tax purposes in respect of such member, it being based on the wider concept of total remuneration per Income Tax Act, rather than the narrower definition of pensionable salary in fund rules.

Scenario 2 – employer continues to pay a salary to the member on maternity leave

If the employer continues to pay any regular amounts to the member on maternity leave, both parties should contribute based on such regular amount. In this scenario the failure of the member to contribute while on maternity leave is a contravention of the fund rules and must be recorded as a debt to the fund. The member’s record would be built up by the administrator from month to month as if that contribution was received. How that debt will be disposed of, is a matter between the fund and the employer.

The risks faced by the fund and the employer under this scenario of suspending the member contribution though is minimal. If an agreement has been reached between employer and member to do so, the member has very little argument to challenging the employer as this actually benefits the member at the time of maternity leave.

Conclusion

Both scenario 1 and scenario 2 pose potential risks, where the rules of a fund do not provide for members on maternity leave. The potential risks posed by scenario 1 and scenario 2 are small. The rules should preferably be amended to correctly reflect the employer’s employment practice in this regard.

Can you deduct the employee’s debt to the employer with his permission?

Section 37 D of the Pension Funds Act prescribes the conditions under which an employer can have an amount deducted from a member’s benefit and paid to the employer directly. Section 37 A prohibits the member to give permission for the deduction of his debt to his employer while section 37 D defines very specific scenarios under which an amount can be deducted from a member’s benefit. A member cannot authorise a deduction and payment directly to the employer other than with regard to a housing loan or housing loan guarantee.

Section 37 D does allow a deduction where the employer has obtained a court order based on damage caused to the employer by the member as the result of his or her theft, fraud, dishonesty or misconduct, or where the member has in writing acknowledged to this. The amount determined by the court or acknowledged by the member as the damage caused can be deducted and paid to the employer directly.

While cheques still represent legal tender, funds often employed the practice of instructing that an uncrossed cheque is issued for any amount to be paid to the employer for reasons other than those aforesaid. The member is then requested to endorse the cheque to the employer. This practice has been followed on the basis of the argument that the member first received payment from the fund and then made over the payment to the employer. We are not aware of an instance where a court has ruled against this practice but stand to be corrected on this.

Should group schemes offer members choice based on personal needs and preferences?

“No more business as usual for (SA) employee-benefits” is the headline of an article that appears below. The message of this article is that “The one-size-fits-all model of offering employee benefits to large groups of employees was simply no longer appropriate.”

It is a well-known statistical phenomenon that in any population, let’s talk about pension fund membership and members’ needs in this case, the bulk of experiences in the population are concentrated around the centre of the curve with a steep decline in experiences on either side of the curve. In terms of cost effectiveness the further any fund tries to move to the outer ends of the needs curve, the more costly it will become to provide for the need and the less value the fund will add in providing for a particular need relative to the greater membership of the fund.

To satisfy every need of every member in a group arrangement is certainly nice to have but will not be affordable and not in the interest of the bulk of members. That is not the purpose of a group scheme!

Retail products in contrast are built around and for the needs on the individual. But the individual has to weigh up the cost of providing for each of his needs against the benefit this presents to him and will take a rational economic decision. In a group scheme everyone will have to contribute towards the cost of the scheme providing for my unique needs.

A group scheme aims to cover the bulk of members’ common needs at an affordable cost!

Having said this, RFS will now have the capability through its new MIP administration platform to offer extensive individual choice and flexibility adding every extent of complexity that one can think of. However, our business purpose is to provide appropriate solutions rather than deliberately increasing complexity for the sake of building our revenue streams.

Pension fund governance - a toolbox for trustees

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

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

News from RFS

RFS re-appointed by Unipoly

We were delighted to receive the wonderful news of our reappointment as fund administrator to the Unipoly Retirement Fund effective 1 January 2017. We sincerely appreciate this gesture of confidence of the Fund’s board of trustees, after a tenure of 16 years with a flawless record! We believe that our expertise is unrivalled in the Namibian market and that the trustees’ decision will prove to have been in the best interest of their Fund, its members and the employer. We look forward to be at the service of the Fund for our forthcoming tenure.

Christmas celebrated at RFS

RFS staff heralded Christmas with this artistic Christmas tree that is decorated with 2016 pictures of highlights of the staff's lives.

Media snippets
(for stakeholders of the retirement funds industry)

No more business as usual for SA employee-benefits

“South Africa’s employers and pension funds need to change their employee-benefits engagement models to align and recognise them as a critical ingredient to employee and member value propositions that guide financial planning to create financial freedom.

It is sad, but true, that too many South Africans would rather stay in the warm shower of deniability, when it comes to planning for retirement, as opposed to taking charge of their lives by spending some time in the cold shower of reality to better understand their financial status and plan for retirement; one of the country’s top insurance-industry leaders said yesterday.

One of these is that the one-size-fits-all model of offering employee benefits to large groups of employees was simply no longer appropriate. We live in a world that is volatile, uncertain, complex and ambiguous. The old certainties no longer apply. Individuals want to know what value we’re offering them; they want to know that we understand their needs and are willing to walk the retirement planning journey with them. They want to know that the information and solutions we’re offering can be trusted.

Read the short article by Sandile Hlophe. CEO of Group Arrangements at Liberty posted in Cover, Financial Planning, Retirement of 18 October 2016, here…

Media snippets
(for investors and business)
 

The CEO of a £1.4 billion software giant says Blockchain won't succeed...

The CEO and founder of cloud accountancy software giant Xero thinks blockchain, one of the hottest concepts in technology at the moment, won't succeed in banking because of "surveillance culture and tribalism."

Read the post by Kathy Caprino in Linkedin of 31 October 2016, here…

The ‘state capture’ report

Now that you, dear reader, are no doubt also departing on your well-deserved Christmas holiday, you may find the time to acquaint yourself with the content of the report of former SA Public Protector, Thuli Madonsela on the state of capture, referring to the Gupta debacle in SA.

Download the 26 page executive summary and form your own opinion, here…

(You may just need a brush to call your hair to order again.)

And finally...

“It does not matter how slowly you go as long as you do not stop.”
~ Confucius

Important announcements

Vacancy: Audit, Risk & Compliance Manager

We have a vacancy for a senior manager on our team. If you know of someone who may fit the bill, please take a look at the advertisement for the position, here...

New telephone number - 061 446 000

Our new switchboard number is 061 446 000. Please amend your phone list accordingly. Download the new extensions, here...

New MIP administration system goes live

Please read more about this topic under RFS company news below.

Newsletter

Dear reader

In this newsletter we report on NAMFISA’s latest position on the transfer from approved an fund to a member owned annuity, we report on a new twist with regard to the tax implications of retiring from a provident preservation fund, news on the implementation of MIP admin system, NAMFISA’s project to establish a common chart of accounts for all financial institutions and other news from NAMFISA and the market.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals.

In our commentary on global investment markets we look at the potential impact of the US President-Elect's policy statements, and the (un)likelihood of a revolution in the coming years.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 10.2016

In October the average prudential balanced portfolio returned -1.95% (September: -1.59%). Top performer is Metropolitan (-1.35%); while Namibia Asset Management   (-2.80%) takes the bottom spot. For the 3 month period Allan Gray, takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.9%.

How will the new US president impact global financial markets?

The US elections during October were undoubtedly the most important news event of the last quarter of 2016. Hillary Clinton was credited with a handsome lead over Donald Trump until the day before the elections by the main stream media. Was this based on objective opinion polls or was it just a premeditated campaign against a candidate that is not part of the political establishment in the US? Hillary Clinton of course is firmly entrenched in the political establishment as wife of a former president and as former Secretary of State during President Obama’s first term of office. So these media have clearly betrayed their own bias for the political establishment and cannot lay any claim to independent reporting. I guess these media will quickly sweep this under the carpet and will want the public to quickly forget about their biased reporting.

The fact that president elect Trump is ostensibly not part of the political establishment has raised the hopes, and fears, of many that the US will experience nothing short of a political and economic revolution under his leadership, hopes of those who want to see a change from the past, fears of those who prefer to have the status quo maintained.

Uncertainty of course is not good for financial markets and causes volatility. Analysts are trying to forecast what the consequences might be of the policies they think the new president will adopt or he promoted during the course of the election campaign. If the new presidency proves to be a political and economic revolution, there will be winners and losers and you will not want to be betting on the wrong horse in terms of your investment decisions. So how should you respond to this situation?

Read part 6 of the Benchtest 10.2016 newsletter to find out what our investment views are. Download it here...

Transfer of retirement capital to a member- owned annuity policy

The good news is that NAMFISA has at long last responded to the question whether a retiree can apply his retirement capital to arrange a member owned annuity policy with an insurance company, after it took advice from an advocate. The bad news is that we are none the wiser from the response we received.

1. The position of NAMFISA
   
   1.1. In its response NAMFISA makes the following two statements that we question:“I am of the considered view that Circular no 25/1/1/p should not be withdrawn.”
   
   The ‘circular’ referred to is an unofficial memo addressed to Mr Zamuee. It does not reflect the format in which circulars are normally issued by the Registrar and is not referenced in the typical fashion of the Registrar’s referencing of circulars. In our understanding it is therefore not a circular and has no relevance to any other person.
   
   1.2. “Accordingly, the status quo regarding the Authority’s interpretation of the words ‘including an annuity purchased or to be purchased by the said fund from an insurer for a member’ [our underscoring]…”.
   
   The words we have underscored are as ambiguous as the memo 25/1/1/p is, that has led to us questioning the intention of this ‘memo’. The underscored statement above, ‘for a member’ could mean the annuity when purchased from the insurer must be issued to the fund from where the capital derives or it must be issued to and in the name of the retiree.
   
   We are none the wiser and the matter remains as clear as mud! It would be good if the advocate’s opinion could be shared to dissolve the continuing ambiguity.
    
2. The position of Inland Revenue
   
   2.1. From an Income Tax Act perspective, Inland Revenue laid down the following conditions for arranging a member owned annuity:
   
   2.2. The annuity purchased by the fund must be compulsory, non-commutable, payable for and based on the lifetime of the retiring member.
   
   2.3. The annuity may not be transferred, assigned, reduced, hypothecated or attached by creditors as contemplated by the provisions of section 37A and 37B of the Pension Funds Act No 24 of 1956.
   
   2.4. The member should not be able to have access or withdraw any portion of his/her two thirds of the pension fund benefit.
   
   2.5. No fund may purchase a member owned annuity unless its rules specifically provide for the purchase of a untied annuity in the name of the fund or in the name of the member from a registered insurer.

Conclusion

1. We believe that our question to NAMFISA was clear. The fact that NAMFISA’s official response has not answered our question can only mean that NAMFISA has not taken a view on this matter knowing full well what the concerns are. In the light of this state of affairs, NAMFISA implicitly approves of the common practice of retirees arranging a member owned annuity policy with an insurer.
2. As administrator of funds, RFS will assure that Inland Revenue condition 2.5 above is met. We are in no position though to assure that conditions 2.2 to 2.4 are met. This has to be assured by the insurer that issues the relevant policy.
3. We advise brokers and retirees to ascertain that all 4 conditions set by Inland Revenue will be met before entering into a transaction involving the purchase of a member owned annuity from an insurer for the retiree.

Can you retire from a provident preservation fund?

Background

In the latest development, Inland Revenue has concluded that a person cannot retire from a provident fund! O.K. of course you can retire if you understand this to mean that you have your retirement capital paid out to you in cash. This the Receiver cannot prevent. However the Receiver can tax you as if it were a normal resignation benefit and this is the conclusion Inland Revenue now seems to have come to in its interpretation of section 16(1)(z)(aa) read together with the definition of ‘preservation fund’.

We have studied the Income Tax Act again and conclude that any benefit derived from a provident preservation fund must be taxed in the same manner as the equivalent benefit from a provident fund. The Income Tax Act does not distinguish between a benefit derived from these two types of fund. Note that in the below deliberation text in brackets [ ] reflects our comments.

Deliberation

Our conclusion is based on the following:

1. Definition of ‘gross income’ –

“gross income”, in relation to any year of assessment means … -

(dD) any amount received or accrued under the rules of a preservation fund [meaning both, a provident preservation fund and a pension preservation fund but excluding a pension fund and a provident fund] upon

(i) the withdrawal of a member’s benefit or any portion of a member’s benefit [meaning either a provident preservation fund or a pension preservation fund, but not a pension fund which is taxable per section (d), or a provident fund which is taxable per sub-section (dB)(ii)]; or
(ii) the retirement or death of a member of the provident preservation fund [meaning not a pension fund which is tax exempt per section (d)(i), (d)(ii) and (d)(iii), or a pension preservation fund which is tax exempt per section (d)(i), (d)(ii) and (d)(iii), or a provident fund which is taxable per sub-section (dB)(i)]; or
(iii) the cessation of the preservation fund [meaning either a provident preservation fund or a pension preservation fund, but not a pension fund, tax free, or a provident fund, taxable per sub-section taxable per section (dB)(ii)];”

The above definitions thus effectively render all benefits from a provident fund and a provident preservation fund taxable in the same manner.

It is to be noted that ‘benefit’ as referred to in the Income Tax Act in the context of approved funds, refers to a benefit as provided for in terms of the rules of an approved fund. To establish the type of benefit accruing to a member, one must refer to the rules of the fund. A retirement benefit per rules of a fund therefore cannot be converted to and taxed as a withdrawal benefit by the Income Tax Act. The Income Tax Act does not define any benefit from an approved fund and does not deem a retirement benefit in terms of a fund’s rules a withdrawal benefit under any circumstances.

2. Exemptions – section 16(1)((z)(aa)

“There shall be exempt from the tax …-

(z)(aa) an amount equal to one-third of any amount derived from a provident fund, except where such amount is so derived as a consequence of the termination of the taxpayer’s office or employment due to dismissal or resignation or upon the dissolution of such provident fund or a provident preservation fund due to the retirement or death of the member of such fund;”

This section in our opinion misses a comma for enabling the correct interpretation. As we will show below, Inland Revenue’s latest interpretation would imply a comma that would lead to a meaningless statement if one attempts to determine what the section states about a provident as opposed to a provident preservation fund. For this purpose we put in brackets the part that deals with “…dismissal, or resignation or upon dissolution…” where the definition of ‘gross income’ already renders these benefits taxable in the same manner whether it is from a provident fund or a provident preservation fund. Evidently there cannot be any argument that a benefit derived upon early termination of membership is taxable.

Inland Revenue’s latest interpretation reads the exclusion after the comma as a single statement and links the reference to “…due to the retirement or death..” only to “…provident preservation fund…”, as it is part of the exclusion. It would then read as follows:

“There shall be exempt from the tax …-

(z)(aa) an amount equal to one-third of any amount derived from a provident fund, {except where such amount is so derived as a consequence of the termination of the taxpayer’s office or employment due to dismissal or resignation or upon the dissolution of such provident fund or a provident preservation fund due to the retirement or death of the member of such fund};” The part “…due to retirement or death of the member of such fund” can then not refer to ‘provident fund’ but only to ‘provident preservation fund’. Clearly, if the exception covers the remainder of this subsection as struck out above as Inland Revenue’s interpretation would require, this interpretation cannot be correct as the statement with regard to provident fund would be incomplete and would not make sense.

Our interpretation requires the comma after the words ‘preservation fund’ where it appears last in this section and then would read as follows:

“There shall be exempt from the tax …-

(z)(aa) an amount equal to one-third of any amount derived from a provident fund, {except where such amount is so derived as a consequence of the termination of the taxpayer’s office or employment due to dismissal or resignation or upon the dissolution of such provident fund} or [from] a provident preservation fund, due to the retirement or death of the member of such fund;”

Conclusion

We have taken this matter up with Inland Revenue and have requested a review of its latest interpretation. Until such time as Inland Revenue has changed its position, persons contemplating the transfer to a provident preservation fund upon resignation from another fund must be made aware of Inland Revenue’s latest position. Brokers involved in such transactions should take cognisance of the possible consequences for clients who have or still intend to transfer retirement capital to a provident preservation fund.

Until this matter is resolved, prospective provident preservation members have two options. Firstly they can challenge Inland Revenue. Alternatively they can transfer their benefit to a pension preservation fund.

Pension fund governance - a toolbox for trustees

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

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

News from RFS

New MIP administration system goes live

After a long and arduous journey we have finally reached the point of going live on MIP with our first fund, after a parallel on both systems gave us the necessary comfort.

We are appealing to all stakeholders to bear with us during this challenging period of running parallel and converting funds one-by-one. We are convinced that when you and we look back in a year’s time, it will have been worth our effort and your patience!

RFS re-appointed by Namwater

We were delighted to receive the great news of our reappointment as fund administrators to the Namwater Retirement Fund effective 1 November 2016. We sincerely appreciate this gesture of confidence of the Fund’s board of trustees, after a tenure of 8 years with a flawless record! We believe that our expertise is unrivalled in the Namibian market and that the trustees’ decision will prove to have been in the best interest of their Fund, its members and the employer. We look forward to be at the service of the Fund for our forthcoming tenure.

News from NAMFISA

Harmonisation of chart of accounts of regulated industries

NAMFISA has set up a work team tasked with the harmonisation of the chart of accounts to be used by all financial institutions regulated by it. RFS has designated Kai Friedrich to assist the team with this task.

In principle the idea of a standard chart of accounts being introduced for all regulated entities is very sound. This should make reporting much easier for both parties, the entity and NAMFISA and it should make it easier for NAMFISA to analyse and evaluate the data it receives.

In practice we foresee some difficulties particularly as far as the income statement of the different entity types are concerned, where each type of entity will have a significant number of income and expense categories that are unique to that industry but are not appropriate to the other industries.

In addition, NAMFISA intends to collect not only financial information drawn from entities’ general ledgers, but it will also require extensive financial and non-financial personal information of the entities’ clients that will have to be drawn from the entities’ client data base.

In this regard NAMFISA must recognise that the client data base administration and accounting systems are written to serve the business purpose of the entity rather than to provide for the supervisory purposes of the regulator. NAMFISA should not require the entities to do any data analysis or evaluation in accordance with its requirements but should ascertain that its own systems are set up to do this. Regulated entities should only be required to provide raw data. An interface must be developed by NAMFISA to import raw data from regulated entities who should be geared to export this data in a predefined format.

We also would like to impress upon NAMFISA, instead of heading off into a massive data collection exercise from the start that may throttle its processes, for yet to be defined purposes, initially only key data be collected that is required for defined purposes. It should start off with an annual exercise and only consider quarterly reporting once the annual exercise has been in place for a while and has shown to add value for the resources it will consume.  The data NAMFISA has indicated it would require is likely to require a system with a processing and storage capacity equal to the aggregate of the processing and storage capacity of the system of each regulated entity.

Finally it is important that NAMFISA gives due recognition to IFRS as applicable to each regulated industry. It will be totally counter-productive should the end product of the harmonisation project be incompatible with IFRS. In the final analysis this would mean that regulated entities would have to maintain dual accounting records and reporting functionality, one for the purposes of NAMFISA and one for IFRS purpose.

Staff changes

NAMFISA announced the appointment of Ms Erna Motinga as Assistant CEO: Supervision and Ms Lovisa Indongo-Namandje as Acting GM: Provident Institutions. We congratulate Erna and Lovisa on their appointments and look forward to working with them in promoting the interests of the pensions industry.

News from the market

Red flags raised over governments tax propositions

“Economic analysts and tax experts have raised red flags over the Government’s proposition to introduce a raft of taxes while revising others including abolishing of tax exemptions for foreign investors saying the move could backfire for treasury.”

Read the full brief in The Villager, here…

Hollard rated AA(ZA)

Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to The Hollard Insurance Company Limited of AA(ZA), with the outlook accorded as Stable.

Read the full report in Cover of 18 November 2016, here…

Media snippets
(for stakeholders of the retirement funds industry)

Understanding employee benefits – the role of a trustee

“The role of a trustee can be broken down into these functions:

1. Manage retirement funds and compliance with the requirements that apply to these funds.
2. Acting in the best interest of the members of a fund at all times.
3. Make sure that members are aware of the roles of trustees.
4. Behave in a responsible and prudent manner that benefits the member of a fund, not for personal gain.
5. Governance and stakeholder relationships – Making sure that the fund is managed in a transparent and fair manner.
6. Research, explore and execute different investment strategies and policies that will deliver the best returns for members of a fund.”

Read the full article in FA News, here...

Pension funds wrongly withheld pay-outs

Here are 2 cases where SA Pension Funds Adjudicator (‘PFA’) ruled that the fund wrongly withheld the pay-out and was ordered to pay out the complainant’s benefit without delay, in some cases with punitive damages to be paid to the complainant. In both cases the funds argued that the Pension Funds Act allowed them to withhold or deduct.

1. Ms M owed Akani fund administrators money relating to a study loan and another loan. Akani also said it was investigating a number of suspicious transactions performed by Ms M over weekends, when its offices were closed.
   
   Akani said it had confronted Ms M about the transactions and she had subsequently resigned. It was awaiting completed forms from Ms M to finalise her pay-out from her Akani sponsored retirement fund, from which it would subtract any deductions for study loans and advance payments made to her.
   
   In her determination, PFA said the tribunal could find no lawful or reasonable grounds for Ms M’s benefit to be withheld. She also ruled that the deductions could be made from Ms M’s remuneration, not her withdrawal benefit.
    
2. Mrs K complained that Akani told her she would not receive a benefit from her Akani sponsored retirement fund, because Akani had trained her and paid her a bonus subject to her working for one year.
   
   Akani told the adjudicator it regarded Ms K as “absent without leave”, because she had not returned to work after it re-opened in January 2016. It said Ms K had not served out her notice period, and it was entitled to make any necessary deductions in lieu of this. It also submitted that Ms K had been granted an advance payment provided she remained employed for a year.
   
   In her determination, PFA said it was noted that Ms K had breached her employment contract by failing to serve her notice period and by not honouring the conditions for the advance payment. However, she again found that the deductions Akani wanted to make from Ms K’s withdrawal benefit were not permissible under the Pension Funds Act.

Read the full article by a Staff Reporter in Personal Finance of 20 October 2016, here...

Media snippets
(for investors and business)

Top 5 regrets of midlife professionals

Here are the top 5 regrets from midlife professionals from around the world:

1. I wish I hadn’t listened to other people about what I should study and pursue. Most typically, they’re living a life their parents told them to live, and engaging in careers their authority figures demanded or strongly encouraged they pursue.
2. I wish I hadn’t worked so hard and missed out on so much. So many men and women in middle age share that they regret what they’ve missed out on in life, by working so hard. They missed being in the fabric of their children’s lives. Or they missed the chance to have children. They missed the opportunity to build true intimacy and closeness with their spouses, family and friends. They missed experiencing adventure, travel, enjoyment, vitality, learning, spiritual growth – not having the chance to stop and relish life, nature, good health, peace, or relaxation.
3. I wish I hadn’t let my fears stop me from making change. Mid-career professionals share with me that they have so much fear and resistance around making change, particularly if it means they have to stretch out of their comfort zone, speak up and stand up for themselves.
4. I wish I had learned how to address toxic situations and people. Toxicity – at work, in relationships, and in our own thoughts — hurts us terribly, but often we don’t see it clearly enough until our bodies break down, or other crises hit that focus us to take brave new action to learn to love, protect, and heal ourselves.
5. I wish I hadn’t let myself become so trapped around money. Their fears around money, or their slavery to it, generate deep regret. People share that they know they’re not living the life they long to, and they’re sick and depressed about it, but they simply can’t see a way out because they’re trapped about money.

Read the article by Kathy Caprino in Linkedin of 31 October 2016, here…

Garden insurance critical to avoid financial loss

“Research conducted by the Michigan State University’s Department of Horticulture indicated that a good landscape design can increase a home’s value by 5 – 11%. However, many homeowners fail to check whether their homeowners insurance cover extends to protect their garden, placing themselves at an increased risk of financial loss caused by damage to their gardens.”

5 to 11% of the value of your house represents a significant asset that should not be treated differently to any other asset as far as insurance is concerned. And there are many potential risks that this asset is exposed to. Think of flooding, mud slides, hail, falling tree, fire and so on…

Read the post by Christelle Fourie-Colman, Chief Executive Officer of MUA Insurance Acceptances, here…

Three key investment mistakes to avoid

“The current environment is an extremely testing one for fund managers. There is so much uncertainty on so many levels, that selecting appropriate investments takes both a lot of analysis and a lot of courage.

However, Paul Bosman, the co-manager of the PSG Balanced Fund, says that even in times like this it is possible to build robust portfolios that allow both the fund managers and investors to sleep well at night.”

Surely this concern is currently on everybody’s mind, at least if you are approaching retirement or are already retired. Here are the three mistakes to avoid:

1. Understand the risks. It is possible to manage risk by trying to work out what is already in the price of an asset. And when quality assets sell off, that doesn’t make them more risky, but less so.
2. Be circumspect. Just because something is down, doesn’t mean that it’s cheap. You still need to look for inherent quality that’s worth paying for.
3. Do not construct a portfolio around a single outcome.  Nobody can know with 100% certainty that South Africa’s credit rating will be downgraded. So it would be irrational to build 100% of a portfolio around this outcome. But if you think there is a 30% chance that we will be downgraded and you can build 30% of your portfolio accordingly, that’s rational.

Read the full article by Patrick Cairns in Moneyweb of 7 November 2016, here...

How TomorrowToday's Quest Framework predicted Donald Trump's Victory

“On the 20 July 2016, TomorrowToday's futurist Dean van Leeuwen made a bold prediction. He predicted that Donald Trump would win the US Presidential election. Dean didn't make the prediction because he felt Donald Trump was the right person for president because he didn't. His prediction was based on the back of comprehensive research TomorrowToday has been doing on a powerful concept: The power of a leadership quest.”

Read the post by Dean van Leeuwen on ‘Tomorrow Today’ to understand the power of a ‘leadership quest’ here...

And finally...

“Work hard, be dedicated, stay grounded and have a passion for what you do.”
~ David Beckham’s message to the youth

Important announcements

RFS telephone number due to change
to 061 446 000

Take note that we have installed a new switchboard with many new features, one of which is that it will allow direct calls to our staff members without intervention of our receptionist. Further official communication will follow in due course.

You will be alerted to the new number when you call in on our current number 231 590 once the new number has been activated.

New MIP administration system due to go live

Please read more about this topic under RFS company news below.

Newsletter

Dear reader

In this newsletter we examine how much protection a smooth growth portfolio really offers vis-à-vis market linked portfolios. We examine who qualifies to be nominated as a beneficiary of a death benefit. MIP admin platform will soon go live, so please bear with us. The industry should soon know whether retirement capital can be transferred to a member owned annuity, SIH report format and content are due to change early 2017 and more topical articles you will find below.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals.

In our commentary on global investment markets we look at policy options for re-igniting the global economy and what the potential impact could be on the investor’s investment decisions.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 09.2016

In September the average prudential balanced portfolio returned -1.59% (August: 1.86%). Top performer is EMH Prescient (-0.52%); while Stanlib   (-2.43%) takes the bottom spot. For the 3 month period Metropolitan, takes top spot, outperforming the ‘average’ by roughly 1.5%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.2%.

Do your grandmother and a burglar only still need cash?

This was the topic of the speech of Carsten Lange of Delta Secondary School who won this year’s German speakers’ competition held amongst various schools in Namibia. He went through various arguments for and against cash as legal tender. He correctly pointed out that internationally crime is generally not committed by means of cash and concluded in saying that for his part, he would like to continue being able using cash.

I am not sure whether this learner had had in mind Bank of Namibia’s declared intention of doing away with cheques when he prepared his talk. Fact of the matter is that internationally central banks are on a mission to do away with cash. Money laundering, crime in general and being in a better position to track the flow of moneys are the arguments used to push this down citizens’ throats. But is this the real reason behind efforts to do away with cash?

Read part 6 of the Benchtest 09.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a toolbox for trustees

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

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

Do you need a smooth growth portfolio protect your retirement nest-egg?

In this article we will be looking at the alternatives for protecting you retirement nest-egg against short-term market down-turns. In this context it should be appreciated that normally a retiree must apply two-thirds of his retirement capital to purchase a pension, while only one-third may be paid out in cash.

As far as the two-thirds portion of the retirement capital is concerned, a prospective retiree need not be concerned about any short-term down turn in the market. This is so because this capital will be returned to him with investment returns over his remaining life, usually anything from 15 years upwards, a long period during which the market should have recovered again. The down turn will only impact the level of post retirement income while the down turn prevails and this should be for a short term.

As far as the one-third cash portion is concerned, a fund member will obviously be worried about the impacted of any down turn in the markets in which the capital is invested. His retirement planning may be dependent on realising a certain amount in respect of the one-third pay-out, say for paying off the balance on his home loan or on the loan arranged to purchase that last new Benz before heading into retirement. If the N$ 2 million the retiree had hoped for turns out to be only N$ 1.7 million, the shortfall of N$ 0.3 million will mean that a portion of his post retirement income will now have to be applied to pay off the balance on the outstanding debt. How ‘mission critical’ the one-third pay-out is to the retiree, should inform his decision how this portion of the retirement capital is to be invested. How long before retirement a decision has to be taken and what options are typically offered in the market will be examined further on.

Retirement capital is generally invested in the same asset classes no matter what retirement product one is looking at, namely equity, bonds, cash and property. The difference between the most common retirement products lies in the manner in which the returns on the investment in these asset classes are passed on to the prospective retiree. Returns are either allocated directly to the retiree or are allocated by way of a mechanism that resembles the principle of a ‘funnel’. The difference is that in the former method, the return flows ebb and flood while in the latter method a regulated flow passes through the funnel no matter a what rate returns are pouring into the funnel. Of course the funnel serves no purpose anymore should returns dry up totally or flow out as fast as they trickle in and in such event the retiree will experience exactly the same returns under both methods. In the retirement funds industry former method of investing is referred to as market linked investing while latter method of investing is referred to as smooth growth investing or return smoothing.

The following graphs depict the performance of the worst performing prudential balanced portfolio on the Benchmark Retirement Fund platform over the period January 2002 to August 2016, the best performing prudential balanced portfolio and the Benchmark Default Portfolio that are all market linked portfolios and the most popular alternative, the Old Mutual AGP portfolio with a 50% guarantee.

Let’s look at the Graph 1 which depicts rolling 12 month returns. Firstly, it shows that the AGP portfolio commenced in January 2008 when the market was on a steep downward slope and just before its trough in consequence of the financial crisis. One may argue that the first 12 months’ or performance to January 2009, probably even longer, are not representative of the characteristics of the smooth growth portfolio compared to the market linked portfolio. The graph shows that at the worst of times, in January 2009, the worst performing market linked portfolio had a one year return of minus 22%, the Benchmark Default market linked portfolio had a one year return of around minus 8% while the best performing portfolio had a one year return of around minus 3%. At the same time the smooth growth portfolio had a one year return of 10%. As depicted by Graph 1 above, markets have recovered rapidly from this trough as the result of the quantitative easing program.

One can conclude from this graph that the smooth growth portfolio has outperformed some of the market linked portfolios over 1 year periods at times by around 5% and underperformed at other times by up to 20%. The smooth growth portfolio has thus protected the prospective retiree’s one-third by around 30% over a one year period if compared to the worst performing market linked portfolio, by around 20% compared to the Benchmark Default Portfolio and by around 15% compared to the best performing market linked portfolio.

If we now look at the same portfolios but over rolling 5 year periods as depicted by the Graph 2. This graph shows that the smooth growth portfolio outperformed the market linked portfolios from commencement to late 2013 and underperformed since then. To what extent the initial outperformance was the result of perfect timing of the introduction of this portfolio, history will show. Going by the principles and assuming Old Mutual will be able to produce average returns over the long-term one should expect this portfolio to underperform the average manager because of the cost of the guarantee it offers.

Graph 3 depicts the cumulative return of the smooth growth portfolio and the market linked portfolios since 1 January 2009

Conclusion

From these graphs the smooth growth portfolio relative to any prudential balanced portfolio can add value over the short term (+/- 12 months) if the main concern is to avoid negative returns on the commutation. Tracking the worst performing market linked portfolio’s performance over rolling 12 months, it underperformed the smooth growth portfolio by 30%, with a performance of – 22%, when the bottom fell out of the market but outperformed smooth growth portfolio by 25% when the market recovered soon afterwards. Given that most members would have to arrange a pension with two-thirds of their retirement capital their highest underperformance risk based on the statistics of the worst performing prudential balanced portfolio is then 10% (30% *1/3) while they risk losing outperformance at the same time of 8.3% (25%*1/3), at times of extreme volatility.

Given that a fund member invests in the investment management skills of the provider of the smooth growth portfolio only, sacrifices returns of 0.2% p.a. to pay for the guarantee and sacrifices the flexibility of moving between asset managers to improve performance, a member may prefer to retain greater flexibility. This would however require the member managing the risk against short term negative returns differently. Within most funds a member should normally know 12 months ahead of time that he intends to go on retirement. The member can then move to the cash portfolio 12 months before retirement at times of high market volatility in respect of the one-third retirement commutation. Through preservation, the prospective retiree should also be able to defer retirement to ride out any trough in the market in respect of his one-third commutation at the time of planned retirement.

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Kai Friedrich's Administration Forum

Who qualifies as a beneficiary to your death benefit

• A nominated beneficiary must survive the member of the fund to qualify for the benefit payable upon the death of the member. This means that the estate of the nominated beneficiary cannot benefit anymore.
• A nominated beneficiary does not acquire any right to a benefit of a member during the lifetime of a member.  It is only upon the member’s death that the nominated beneficiary is entitled to accept the benefit and the fund is obliged to consider the beneficiary in the distribution of a benefit. Until the death of the member, the nominee only has an expectation of claiming the benefit, but has no vested right to the benefit.
•  A nominated beneficiary is only entitled to that portion of the benefit allocated by a deceased fund member to him or her, if there is no dependant and no shortfall in the estate of the deceased member.
• A beneficiary of a benefit upon death of a fund member must be a natural person. A member of a fund cannot nominate his/her estate as a beneficiary (subject to a narrowly defined exception). The same applies to nominations of Companies and CC’s as beneficiaries. The benefits payable by a fund upon the death of a member shall not form part of the estate of such a member, as per section 37C(1) of the Pension Fund Act. Thus a nomination of a member’s estate as his/her beneficiary does not carry any weight at all in the trustee’s considerations. Benefits are only payable to the estate if the deceased fund member has not nominated any beneficiary and leaves no dependant.

If a fund member nominated a beneficiary found to not qualify as a nominee, such as having predeceased the fund member, the remaining nominees would not be entitled to receive the non-qualifying nominee’s share. The board of trustees is only allowed to pay such a portion of the benefit as is specified by the member. This portion would then have to be paid to the estate of the deceased.

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from RFS

New MIP administration system due to go live

After a long and arduous journey we have finally set the beginning of November as the date for our first funds to go live on our new administration platform. The process of conversion entails an initial phase of running parallel on the first funds to go live in order to identify any quirks that have not been picked up during the preparation and testing phase that took place over the past year. From here on we will convert funds as they move into a new financial year up until June 2017.

As much as we are excited about the new features and facilities that this web-based system offers and the efficiencies we expect to be able to realise, we are realistic enough to expect hiccups during the implementation phase. It goes without saying that during the implementation phase, we may not at all times be able to adhere to the standards we have set for ourselves in terms of service delivery and turnaround times.

The system will allow us to reduce investment timing differences in respect of cash flows to a minimum. However, it will require some changes to our investment administration processes. Other processes administration processes may also have to be adapted and some of this will impact on our clients’ processes. These changes will be communicated with clients over the course of the next few months.

We are appealing to all stakeholders to bear with us during this challenging period of running parallel and converting funds one-by-one. We are convinced that when you and we look back in a year’s time, it will have been worth our effort and your patience!

New staff appointments

It gives us great pleasure to share our latest permanent appointments with our clients and readers and to welcome them to our team:

Daltrie Tsowaseb joined us on 9 May as Fund Accountant to create capacity in the Private Fund Accounting team. Daltrie has been working as a fund accountant at Old Mutual for over 3 years and has also gained accounting experience at Agra and Pupkewitz. He holds a Bachelor in Accounting Science from UNISA and is busy with a Postgraduate Diploma in Forensic Auditing.

Leana de Klerk joined us on 16 May as Fund Administrator to create capacity in the Benchmark Team and to assist with projects. Leana has gained valuable experience at Alexander Forbes and for the last 10 years at Old Mutual Corporate as administrator and team leader. She holds a B Comm degree from UNAM and completed a management development program at the University of Stellenbosch.

RFS staff surprises residents of Oude Rust Oord with flowers


It has become a tradition for a group of RFS staff visting Oude Rust Oord to share a moment of joy with residents when handing over fresh flowers.


The team was rewarded with a hug and a smile from one happy resident.

News from NAMFISA

Transfer of retirement capital from approved fund to unapproved policy

Concerning this topic, a NAMFISA official recently advised as follows:
“We have received back the legal opinion. We will have to table the opinion internally after which a circular or directive will be drafted to industry. Due to the administrative processes around issuing legislative instruments, this may take us to the end of the calendar year but I do not foresee it taking longer than that. I cannot make the contents of the opinion public but I do believe it does break our deadlock and will drive our circular/directive.”

In the meantime caution remains warranted before transferring retirement capital to an insurance policy issued in the name of an individual retiree.

SIH report for quarter ended 30 September due

The Excel based report for the 3rd quarter is due for submission by principal officers by 15 November. Take note that passive investment breaches resulting from market value and presumably also exchange rate movements (‘volatility in the financial markets’) will not be considered as Regulation 28 breaches anymore. The onus remains on the fund to prove this.

Similarly, where a limit is breached at quarter end the presumption is that the breach occurred during the whole quarter and will be penalised accordingly unless the fund can show that this was not the case.

News from the market

Finance Minister Calle Schlettwein on state of the economy

“Let me take this opportunity to brief the House and the public about the general state of our economy, the main outcome of the recently announced credit rating assessment by Fitch Credit Ratings Agency early this month and the impact on Namibia, actual or potential, of BREXIT; that is, the expected exit of the United Kingdom from the European Union.”

Read the full brief in The Villager, here…

Government relaxes good standing certificate rules for SME’s

“The Ministry of Finance has scrapped an August directive requiring small businesses to have a certificate of good standing to qualify for payments of goods and services delivered to the government.”

Read the full report in Windhoek Observer, here…

Our comment: is this the right message to the conscientious taxpayer? Why should SME’s have lower standards for meeting their obligations towards the fiscus than the man in the street or large organisations?

Media snippets
(for stakeholders of the retirement funds industry)

Funds can delay paying a benefit while criminal charges are investigated

In this case, the member resigned on 31 October 2011. Shortly thereafter the employer opened a case of fraud against the former employee and requested the fund to withhold payment of his resignation benefit. Although the employee neither admitted liability nor had a judgement been obtain, the fund administrator submitted an e-mail dated 19 January 2016 to the adjudicator in which the National Prosecuting Authority confirmed that it had every intention to prosecute the former employee

“A retirement fund is entitled to delay paying out a withdrawal benefit pending the outcome of a criminal case into whether a member’s former employer suffered damages as a result of the member committing fraud, theft, dishonesty or misconduct. However, the fund cannot exercise this right unreasonably or indefinitely.

This principle was highlighted by Muvhango Lukhaimane, the Pension Funds Adjudicator (PFA), in a determination handed down recently.”

Read the full article by Staff Reporter of IOL, here...

No one should withhold your pension fund unreasonably and indefinitely after you have admitted in writing that you owe your employer.

In this case a member was dismissed by the employer for alleged fraud in 2013. The member admitted guilt in writing in respect of an amount of N$ 16,000 and was dismissed in 2013. The employer instructed the fund administrator to withhold the former employee’s termination benefit in the amount of N$ 148,000. A criminal case was pursued but was withdrawn in court for further investigation as the file had gone missing from the magistrate court.

“On June 2, Pension Funds Adjudicator Muvhango Lukhaimane ruled that a provident fund is entitled to withhold a withdrawal benefit pending the outcome of legal proceedings against the member. However, the employer must exercise this power reasonably and not indefinitely, Lukhaimane said. Lukhaimane said the criminal matter may proceed to determine his criminal liability, however, this should not result in his money being withheld further as he has admitted liability.”

Read the full article by Thuli Zungu in Sowetan of 10 July 2016 here…

Bull and Bear - a consensus view of the market over the next 12 months
5 October 2016

The Sanlam SPP Bull & Bear report is a collation of the performance expectations of seven South African Asset Managers over the coming 12 months.

100% say

• they are bearish on US, Euro-Zone, UK and Japanese bonds

71% say

• they expect Emerging markets to outperform Developed markets
• they are neutral on Mid-caps
• they expect SA inflation to trend downwards
• they think that the SA interest rate is stable

Asset managers’ view of the current SA Equity market

Download the full report here…

Media snippets
(for investors and business)

Sarb accused of causing economic downturn

SA can cut interest rates, boost infrastructure spend and liquidate the PIC: Duma Gqubule. “The South African Reserve Bank (Sarb) is implicated in causing the last three recessions, as well as the current economic downturn, says Duma Gqubule, founder of the Centre for Economic Development and Transformation.”

Read this interesting commentary on what SARB should do to boost economic growth by Prinesha Naidoo in Moneyweb of 27 September 2016, here…

How do we maintain our retirement income and our capital?

I intend on retiring in March 2017. I would like your opinion on the following:

•  I will require R24 000 per month income after tax; my house is paid for and do not have any debt; my wife and I are healthy.
• We have R3.3 million in compulsory savings and R3.25 million in discretional savings. I also have emergency fund of R500 000.

My questions are as follows:

• Will we be able to maintain that income for the rest of our lives with inflation taken in to account and maintain my capital?
• How do you suggest I invest the capital to maintain the income, taking inflation into account?

Read this interesting exposition on how the reader should go about achieving his income objectives with the available capital by Nikki Taylor in Moneyweb of 3 October 2016, here...

Unique things that great bosses do every day

“In one study, 61% of those working for bad bosses said they were looking for another job, while just 27% of those working for good bosses were considering alternate employment. And here’s one that’s really startling: 65% of people with bad bosses said they’ve sometimes misrepresented the truth at work, compared to only 19% of those with good bosses. Just as great bosses bring out the best in us, bad bosses bring out the worst… Being a great boss obviously has a tangible value other than just being liked, but how do you know if you are one? And, if you’re not, how do you get better?”

Here are the unique qualities of a great boss –

• He shares information;
• He puts a lot of thought into hiring;
• He looks for and celebrates wins;
• He respects your time;
• He is empathetic;
• He is accountable;
• He says “thank you”;
• He doesn’t forget that people have lives outside their work;
• He is a great communicator;
• He creates leaders.

Read the full article by Dr Travis Bradberry in Linkedin, 12 October 2016, here...

Here is how you know you’ve got a really great boss

“In identifying admirable leaders, I focus first on three characteristics: empathy, empowering others, and generosity. Together, they form the basis of “others-focused” leadership that distinguishes the best from the rest.”

Here is an excerpt on these 3 key characteristics:

1. Empathy - empathetic leaders invest the time and effort in getting to know their teams. They really listen and seek to understand what is important to them professionally, but even more importantly, their personal and social goals.
2. Empowering others - empowering leaders aren’t afraid to step aside and share responsibility. They trust their teams, knowing they have surrounded themselves with people who are very capable of tackling the challenges and opportunities in front of them. The leader is always accessible as a resource, but doesn’t need to be part of every decision.
3. Generosity - The best leaders are not only transparent in admitting their mistakes, but they’re generous in giving recognition, sharing credit, patting someone on the back for a job well done, and offering their time.

Read this interesting article by David Schonthal in Linkedin of 4 October 2016, here...

What can you do with a Bitcoin?

“I am sure you've heard of Bitcoins. They're one example of the new form of currency being created on the Web. Think of them as dollars, or pounds, or Euros, or Norwegian Kroner or Thai Bhat. You can use them to buy and sell goods online, at stores that accept them. For most of us, the way we would get Bitcoins would be to buy them, which you can do very easily using "normal" currency (mainly your credit card).

But do you know what to do with a Bitcoin? Four things really..

1. Use it like real money;
2. Trade it like shares;
3. Invest in Bitcoin mining;
4. Tell your hipster friends about it.”

Read the post by Graeme Codrington in ‘Tomorrow Today’s Tips on Tuesdays’ of 10 October 2016 here...

And finally...

“Coming together is a beginning; keeping together is progress; working together is success.”
~ Henry Ford

Newsletter

Dear reader

In this newsletter we continue our support to trustees with a Privacy Policy. We investigate whether a member can nominate a church as a prospective beneficiary to his death benefit and whether a member is in receipt of a disability income benefit can choose to resign or retire. We provide feedback on the latest Pensions Industry Meeting conducted by NAMFISA, we report on an interesting case relating to a permanent life partner’s claim to death benefits, and more. Find it below.

As usual we also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 08.2016

In August the average prudential balanced portfolio returned 1.86% (July: 0.61%). Top performer is Allan Gray (3.13%) while EMH Prescient (0.52%) takes the bottom spot. For the 3 month period Metropolitan, takes top spot, outperforming the ‘average’ by roughly 1.0%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.0%.

How should I secure my retirement nest-egg in the face of volatility and turmoil?

Global financial markets are in a sorry state and it is very hard to see a silver lining. The US economy is showing mixed signs, no clear trend to be seen, the European economy is flat, Japan is struggling, so is China, not to speak of Russia and many of the developing countries including South Africa and us. The one thing these countries all have in common is a huge debt burden often substantially higher than the countries’ GDP, at historically low interest rates. China, for example has accumulated total debt of US$ 28 trillion, representing a whopping 255% of its GDP by the end of 2015 (worse even than Greece) - an increase of 107% over the past 7 years. That is 38% of global GDP and as much as the commercial banking loan books of the US and Japan combined! The Bank of International Settlements is warning that China is facing an escalating risk of a major debt and banking crisis. The BIS is also concerned about a possible spill-over from China to the global economy.

These are prevailing economic threats to the global economy. Of course with the wars going on around the Mediterranean and on the border between Russia and the Ukraine the economic concerns are reinforced by concerns about a possible major military confrontation between Russia and the US with its European allies.

Read part 6 of the Benchtest 08.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a privacy policy

In this newsletter we present a privacy policy that sets out how the fund (and its administrator) will deal with sensitive personal information of fund members.

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

• Download the privacy policy here...

AND

• 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 service provider self-assessment 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...

In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:

• Service provider agreements are not in place.

Can a church be nominated as beneficiary?

One of our pension fund clients recently raised the question whether or not a member can nominate a church as beneficiary to his/her death benefit.

An article in Personal Finance, 1st quarter 2016, sets out two diverging views on this topic. The Pension Funds Act clearly does not consider the estate as a nominee, the estate only being referred to as the default recipient in the event of there being neither dependants nor nominees. In our opinion a nominee cannot be a non-natural person based on the definition of ‘nominee’ per Oxford English dictionary that reads “person who is nominated for an office, a position”. We believe that only a natural person can be nominated to an office or a position. In the other definitions of derivatives of ‘nominee’ the dictionary never refers to a non-natural person. Similarly, the definition of ‘person’ also specifically refers to a ‘human being’ in one instance but nowhere to a legal or non-natural person. We agree with the assertion in the attached article that the intention of section 37C is not to provide for inheritance but rather to provide for social objectives of providing for dependants and nominees that survive a deceased member. Only if neither dependants nor nominees exist would the benefit fall into the realm of inheritance through having to be paid into the deceased’s estate.

The answer is thus not clear-cut. In the first instance the trustees must ascertain that the needs of all dependants have been established and will be addressed by the proposed death benefit distribution. Only if this is the case, the trustees can consider any nominated beneficiary who is not a dependant, particularly if it is a non-natural person. If this has been achieved to the satisfaction of the trustees, we would suggest that the trustees obtain a written acceptance of the proposed distribution from the natural beneficiaries designated by the deceased before finalising the distribution that includes an allocation to the church, to mitigate the risk of a dependant or a nominated natural person challenging the payment to the church.

But what about the IT Act prescribing that an annuity must be paid if needs be to the estate?

As we commented in a previous newsletters with reference to Inland Revenue Practice Notes 5 of 2003 and Practice Note 1 of 1998, the former directs that a minimum of 34% of the total capital available upon death in a defined contribution pension fund must be paid in the form of an annuity (and note this proportion is applied at benefit level and not at beneficiary level) while the latter prescribes that no further commutation is allowed of an annuity upon death of the annuitant.

The definition of ‘pension fund’ in the IT Act that Practice Note 5 of 2003 relies upon, states that ‘… the fund is…established for the purpose of providing annuities for employees on retirement from employment or for widows, children, dependants or nominees of deceased employees, or mainly (interpreted to mean 51%) for the said purpose and also for the purpose of providing benefits other than annuities for the persons aforesaid (i.e. the remaining 49%).

So here the IT Act prescribes that annuities must be paid to inter alia to nominees who according to our interpretation of Section 37C of the Pension Funds Act cannot be a non-natural person, i.e. a trust or an estate for that matter. Does this now mean that where the deceased has left neither a dependant nor nominated a beneficiary, the fund cannot rid itself of its obligation to pay a benefit in the event of death of the member or pensioner?

The crucial difference between the Pension Funds Act and the IT Act is that the Pension Funds Act does not define ‘person’ and one has to resort to the dictionary to establish its meaning. The IT Act in contrast does define a person as  ‘…includes any trust and the estate of a deceased person…’.  So the concern that a fund cannot pay an annuity to an estate is evidently unwarranted.

Can a member in receipt of a disability income choose to resign or retire?

We were recently approached with a question with regard to the following scenario:

The fund member who is 48 years old now, was declared disabled in 2008 and is still receiving a disability income from the Fund’s insurance company. The member decided that he does not want to be on disability anymore and that he wants to terminate his membership and receive his fund credit to go and start a business. Per the rules, early retirement age is 50, normal retirement age is age 60 and late retirement is age 70.

The two questions arising from this scenario are:

• Can the Trustees prevent and or enforce the rule and force him to remain in the fund until such time that he can exit and what are the consequences?
• Can they allow the member to terminate his membership to the fund as he wishes and what will be the consequences thereof?

In finding an answer to these questions, one has to study the rules of the fund and these will be different from fund to fund although some of the principles will mostly still be relevant.

1. Firstly, the definition of ‘employee’ and of ‘membership’ in fund rules typically require that for every new employee fund membership shall be a condition of employment of all persons in the permanent and full-time service of the employer who have not yet attained normal retirement age.
2. Secondly rules would typically direct that membership terminates only when the member ceases to be an employee, unless he/she is in receipt of a disability benefit, or when he or she becomes entitled to any benefit in terms of the rules.
3. Thirdly, the rules typically then provide for withdrawal benefits, retirement benefits, death benefits and disability benefits. For this scenario the rules on retirement benefits, resignation benefits and disability benefits must now be considered to establish whether they specifically allow or prohibit a member in receipt of a disability income to withdraw from the fund voluntarily.
   1. The withdrawal benefit would typically apply if a member terminates service before normal retirement age and is not entitled to any other benefits under the fund. Unless elsewhere specifically allowed, a member in receipt of a disability benefit would thus not meet this precondition.
   2. Retirement benefit would typically be available when a member reaches normal retirement age, in the event of voluntary early retirement as from an earlier age and only with the employer’s consent, in the event of ill-health early retirement as from any age, again only with the employer’s consent due to ill-health, or in the event of late retirement after normal retirement age, mostly also only with the employer’s consent. Only one of these alternative retirement avenues are thus not subject to employer consent, being normal retirement, where it is the member’s right to retire.
   3. Finally, rules typically provide for a disability benefit to a member who becomes disabled before normal retirement age provided that the claim has been accepted by the insurer. The rules mostly further provide that contributions towards the fund will continue for as long as the member is in receipt of a disability benefit and he/she will consequently remain a member of the fund for as long as the disability benefit is paid by the insurer and until the member becomes entitled to any other benefit in terms of the rules.

In terms of paragraph 2, membership of a member in receipt of a disability benefit can typically only terminate when he/she becomes entitled to a retirement benefit or death benefit, but not upon withdrawal (resignation). Since the member is only 48 years old and still below normal retirement age, he is not entitled to retire early in terms of the relevant rule due to him being ‘under age’. This leaves as only potential early exit option, retirement due to ill-health. This rule typically requires employer consent due to ill-health. In our opinion, this rule cannot be used as the member is not employed by the employer anymore, although this would have to be confirmed by reference to the conditions or contract of employment. If the definition of employee in the fund rules reads similar to that in 1 above, it would clearly preclude a person on a disability benefit to remain an employee, stating that the person must be either in the permanent full-time employment or must be employed on a predetermined contract period. If the person is no longer employed by the employer there is no employer to consent to the person’s ill-health, and early or late retirement for that matter. We would further argue that even if by some remote deduction the person could still be regarded an employee of the employer, the intention of the early ill-health retirement rule cannot be to allow a member to employ this clause where the rules still provide a benefit for the very reason of ill-health. This member in most cases then also cannot proceed on early retirement nor retire late, as this would also require employer’s consent, where the disabled member does not have an employer anymore who could consent.

Based on the above scenario the member in most likelihood cannot exit the fund prior to reaching normal retirement age. The situation would be different once the insurer ceases payment of the disability benefit.

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Gunter Pfeifer's Benchmark Notes

Preservation should become compulsory

‘Leakages’ in the pensions system are an issue that policy makers, employers and fund trustees alike should be seriously concerned about, and lump sum benefits represent one of the most serious leakages in the system. After all, the purpose of a pension fund is primarily to provide for the needs of members upon retirement and for dependents of members in the event of death of a member.

Barring a few exceptions, the vast majority of pension fund members will not be able to purposefully apply a lump sum benefit to meet their and their dependents’ needs for as long as they may live. We therefore urge the regulator to do what is in the best interest of pension fund members – enforce preservation upon termination of fund membership until retirement. It is noted with interest that NAMFISA considers draft statement RF.S.5.8 on compulsory preservation as being ‘sensitive’ and requiring more consultation. If it is left to the unions, it is unlikely that compulsory preservation will ever be introduced.

Do not access your retirement funds when changing jobs, no matter how tempting it may be.

Gunter Pfeifer is former Principal Officer and now a trustee of the Benchmark Retirement Fund. He holds a Bachelor of Commerce (Cum Laude). He completed his articles with Deloitte & Touche. He completed the De Beers Program For Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. He was formerly Financial Manager of De Beers Marine.

Kai Friedrich's Administration Forum

The risk of terminating membership upon dismissal

Whilst the dismissal of an employee may appear to be purely a matter of following the correct procedures as envisaged in the Labour Act, the implications for the employer may be a lot more profound than just a possible reinstatement.

Consider the scenario of dismissing an employee. HR will now complete a withdrawal form that will be forwarded to the pension fund administrator. As far as the Fund is concerned its rules would typically determine that membership of the Fund terminates upon termination of employment by the employer. The implication for the administrator is that a termination benefit must be paid. Whether or not the employer was within its rights to initiate the termination of this person’s membership of the Fund is not within the administrator’s knowledge. The fund administrator will therefor terminate the employee’s membership of the fund and will pay out the benefit due to the employee in terms of the fund’s rules.

The employee then challenges his dismissal. In the meantime and before the matter is concluded, the employee passes away or becomes disabled. The court then finds the dismissal to have been unfair and orders the reinstatement of the employee. Where does this now leave the employer as far as the fund’s death or disability benefit is concerned, to which the employee should now be entitled in the light of his reinstatement?

The dismissal of an employee can clearly create a dilemma for the employer given that the employee can challenge such dismissal, while the fund is obliged to terminate fund membership once a notification of termination of service has been issued by the employer.

To avoid the risk of being held liable to make good the loss of the benefit that would have been due to the employee from his fund upon death or disability, the employer should rather consider suspending contributions to the fund in case of a dismissal where there is any possibility of such dismissal being challenged by the employee. The employer would thus not contribute to the fund in respect of the employee but the fund would maintain death and disability benefits. The cost of keeping cover in force will be a fraction of the cost of making good the loss of the benefit to the employee.

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from NAMFISA

Transfer of retirement capital from approved fund to unapproved policy

The latest feedback on this topic is that NAMFISA engaged an advocate to provide an opinion. NAMFISA has not had a response yet. It did receive a number of queries from the advocate on the matter and responded accordingly. NAMFISA thus awaits his feedback but will continue making regular follow-ups. Again caution is warranted with the transfer of retirement capital from an approved fund to a member owned insurance policy until NAMFISA has pronounced itself on this matter.

Feedback from industry meeting held on 19 September

Rauha Shivute and Justine Shipanga represented Retirement Fund Solutions at the latest pension funds industry meeting of 19 September 2016. Here are the key messages:

• Ms Grace Mohammed still acting as GM Provident Institutions;
• 231 complaints received over 2nd quarter, 54 relate to pension funds;
• FIM Bill now expected to be tabled in parliament only in November;
• NAMFISA identified statements RF.R.1, RF.R.4, RF.R.5, RF.R.6 and RF.S.5.1 – RF.S.5.10 as being critical. Download our summary here…
• RF.S.5.8 on resignation benefits/ compulsory preservation is sensitive, requires more consultation;
• RF.S.3.5.6, unclaimed benefits being discussed with Ministries of Finance and of Justice;
• June SIH returns, 84 funds submitted in time, 7 submitted late, 6 had to resubmit;
• Total industry assets N$ 122.3 billion, N$ 14.9 billion in insurance policies, N$ 3.8 billion in unlisteds;
• Quarterly reporting being adapted to reflect risk based approach of NAMFISA, chart of accounts being standardised across industry, report to be rolled out quarter 1 2017;
• A number of prescribed standard forms must now be submitted on ERS;
• Ministry of Finance considering proposed amendments to regulation 28;
• 81 funds submitted levy returns in time, 13 did not submit and will be penalised;
• Non-payment of contributions must be reported to NAMFISA.

Download the notes of the meeting here...

Reader's letter

Bank of Namibia in talks with local asset managers

In this letter a reader expresses her concern about the offshore component of her pension fund capital prospectively being repatriated to Namibia where this is her only consolation in the face of our volatile currency. She specifically enquires whether:

• this would apply to her living annuity;
• whether asset managers have expressed their willingness to cooperate and if so, which ones;
• whether it would at all be possible to circumvent this if all asset managers were to cooperate; and
• whether this would be legal if instituted via the asset managers?

In our response we point out that asset manager are generally vested with full discretion as to the allocation of capital to foreign markets and could use this discretion to meet Bank of Namibia’s request. We do believe that managers would not do so out of their own volition due to the likelihood of losing investors’ funds and would only move if the industry in unison would go this route. However even in such event pension fund trustees in all likelihood would not easily agree with such a move.

Another route government could follow is to enforce repatriation through an amendment of regulation 28. If this were to happen, all pension funds and their members would be in the same boat and there would be no way to avoid one’s offshore exposure being repatriated.

The letters are in German and for the sake of our German speaking readers they can be downloaded here...

Media snippets
(for stakeholders of the retirement funds industry)

Permanent life partners – can you claim fund death benefits when your partner dies?

“Permanent life partners do qualify as dependants in terms of section 1(b)(ii) of the Act. This of course does not mean you will automatically receive any part of the death benefit - the fact that someone falls within the definition of “dependant” only entitles him/her to be considered by the Board when making the benefit allocation decision. Once the Board has identified all the dependants, the next stage of the enquiry will be to examine the needs of each dependant so that it can make an equitable distribution amongst them. In doing so, it will consider all the relevant facts (to the exclusion of irrelevant facts) and factors such as:

• The age of the parties;
• The relationship with the deceased;
• The extent of dependency;
• The wishes of the deceased placed either in the nomination forms completed during his lifetime and/or his/her last will; and
• The financial affairs of the dependants including their future earning potential.

Once the trustees have established the needs of each identified dependant they will distribute the death benefit according to the level of dependency of each dependant.

An interesting observation of the adjudicator in the case Whitcombe vs Momentum Provident Preservation Fund and another reported in this article is as follows:

“However, a death benefit payable to Ms Pollock [the permanent life partner] was limited to the extent of her provable dependency. Therefore, where the board conducted an investigation and determined her extent of dependency, any gratuitous payment made to her on top of what had been determined to be the extent of her dependency on the deceased, which had the effect of reducing the initial allocations made to the deceased’s children who were mentioned in the will, is unreasonable and an improper exercise of a discretion vested in the board.”

In Namibia of course, children of a deceased have no automatic right to the benefit unless they were dependent or nominated as beneficiary by the deceased.

Read the full article by Liz de la Harpe in Insurancegateway of 30 August 2016, here...

The two options at retirement

In this article Patrick Cairns addresses the option between a living annuity (investment linked annuity) from which a pension can be drawn as long as the account has funds and a guaranteed annuity that will be payable for life.

The reader’s question is relevant to every prospective retiree even though it refers to retirement from SA equivalent of our GIPF, the GEEF. It reads as follows:

“I will retire at the end of October 2016 from government service. I have the option of a retirement gratuity of R1.2 million plus a monthly pension of R 27 414 for life, or a resignation benefit of R5 047 648.

The downsides of taking the annuity option are that when I die the monthly pension that will go to my wife will halve; and that when she dies, the pension stops altogether and nothing will go to our children. I'm also worried by the current political landscape in South Africa whether I can have peace of mind with regard to how the GEPF will be managed in future.

My question is this: If I rather take the resignation benefit of R5 047 648, can I obtain a monthly income comparable to the monthly pension of R27 000 plus the yield on the investment of the R1.2 million gratuity through investing this amount?”

Read the full article by Patrick Cairns in Moneyweb of 1 September 2016, here...

Media snippets
(for investors and business)

An unexpected way to stop people from quitting

“At my company, year after year we score high in our employee satisfaction surveys. Yet, despite these results, we still see a sizeable chunk of annual staff turnover. This has always bothered me. If people love the company, why are they leaving? In part, it’s simply a sign of the times. Millennials change jobs more frequently: an average of once every 2.5 years during the first decade out of college. That’s double the rate of their Gen X predecessors.

But I wanted to better understand the actual reasons why this happens. So over the past year, we spoke to a range of employees in an effort to find out. In doing so, I realized it wasn’t about compensation (or, at least, just about compensation). Nor was it problems with bosses or co-workers. Many people were leaving because they wanted to try something new. They wanted to be challenged with a different role and different set of responsibilities.

We were losing A players, in other words, because they were bored. Personal development is far more than just a buzzword to Millennials. In fact, 65% of Millennials say that personal development is the most important factor on the job, according to a UNC Kenan-Flagler Business School study. And this doesn’t mean just levelling up an existing skill set. It means being able to explore and internalize different skills entirely: to learn something new.”

If you experience this phenomenon in your company and are looking for clues to address it, read the full article by Ryan Holmes in Linkedin of 13 September 2016 here...

Want to be an Authentic Leader? Try this Smartphone Hack

“Earlier this year, I received some tough feedback via our bi-annual workplace survey: My thousand or so employees said I wasn’t accessible enough on a day-to-day basis. As CEO of a social media company—which prides itself on open communication—this was a pretty big concern for me. I wanted to remedy it quickly.

My priorities were pretty straightforward. I needed a way to frequently share breaking company news, solicit and respond to feedback and provide transparency into the business. I needed to do this for every member of my staff, around the world. But my time commitment also needed to be minimal: I couldn’t afford to spend hours prepping updates. Finally, this had to be something I could do from anywhere, since my schedule often requires travel.Fast forward to the present, and I’ve been doing weekly video selfies on Facebook at Work for four months now. Here’s what I’ve learned and some ideas on how this approach could be adapted to companies of any size:

Don’t make it a work of art: Minimal prep and zero production value are key.

So, I just did away with all that. I shoot my videos—selfie-style—on my iPhone. I give myself one take to get them right, no cuts or edits. If I fumble, I generally just regroup and keep going. In the end, I think the low-production value actually adds an element of transparency and authenticity—I’m not hiding behind edits.
Having said that, I’m not just rambling on, stream-of-consciousness style. After some trial and error, I’ve settled on a pretty standard format for each video:

• a brief hello and intro;
• a quick rundown of major company wins across different departments;
• a short section sharing what’s top-of-mind for me this week;
• and then a final segment where I respond to a few user-submitted questions.”

Read this interesting article by Ryan Holmes in Linkedin of 7 August 2016 here...

Emotional Intelligence: How Competent Are You?

“When I talk about emotional intelligence, I’m not referring to a fixed trait. Emotional intelligence is a set of skills that can be developed. In my model of emotional intelligence those skills fall into four domains: self-awareness, self-management, social awareness, and relationship management. Richard Boyatzis and I worked with KF Hay Group to produce a tool for assessing twelve emotional intelligence competencies nested within each of these four domains that make people stars in the workplace. Competence is another way of saying skill. It’s learned and learnable...In our research, we’ve specified emotional intelligence competencies used by outstanding leaders that can be assessed objectively, behaviourally—everyone can see it, you know you’re doing it…

Self-awareness

Emotional Self-Awareness: Leaders who are attuned to their feelings and how they affect their job performance. They use their values to make decisions. Emotionally self-aware leaders are authentic and able to speak openly about their emotions.

Emotional Self-Control: People skilled at managing their emotions. Leaders with this skill remain calm and clear-thinking in stressful situations and hold on to their emotional balance.

Achievement Orientation: Leaders who hold themselves and others to high standards. They work toward challenging and measurable goals. They continually seek ways to improve their performance and that of their team.

Positive Outlook: These leaders see every situation as an opportunity, even those that may look like a setback to others. They see other people positively and expect them to do their best. They expect the changes in the future to be for the better.

Adaptability: Leaders with this skill handle many demands while staying focused on their goals. Uncertainty is both expected and comfortable for these leaders. They flex in response to new challenges and are quick to adjust to sudden changes.

Social Awareness

Empathy: Leaders who can comprehend an individual or group’s unspoken emotions. They listen well and easily grasp other’s perspectives. Empathetic leaders explain their ideas in ways other people understand and work well with people from diverse cultures and backgrounds.

Organizational Awareness: Leaders who understands all aspects of an organization: where formal and informal power is held, relationships that provide opportunities for networking, conflicts, unspoken norms, and guiding values.

Relationship Management

Influence: Leaders who are skilled at appealing to others and developing buy-in from key players in a situation. They are engaging and persuasive with individuals and groups.

Coach and Mentor: Leaders who take interest in assisting others. They know the individuals with whom they work, including their strengths and goals. They give constructive feedback to co-workers and help others focus on growth opportunities.

Conflict Management: These leaders make an effort to recognize different perspectives. They focus on helping everyone find the common ground upon which they can agree. They allow everyone’s opinion and direct efforts toward finding an agreeable resolution.

Inspirational Leadership (Inspiration): A leader who inspires can move people. Their articulation of a shared mission causes others to join them. They show others the purpose behind their day-to-day work.

Teamwork: These leaders build an atmosphere of cooperation, helpfulness, and respect. They help others commit to the group’s effort. They help a team develop an identity, positive relationships, and spirit.”

Read the article by Daniel Goleman in Linkedin of 7 September 2016 here...

And finally...

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance.”
~ Cicero, Roman Emperor, 55 BC

Newsletter

Dear reader

In this newsletter we continue our support to trustees with a rule defining the appointment and term of office of the board of trustees, we contemplate on how remaining pension capital may be disposed of upon death of the pensioner, the dichotomy of the Namibia Investment Promotion Act and the NEEEB, Benchmark breaches the N$ 2 billion mark, RFS non-standard fees in perspective, Bank of Namibia wants funds to repatriate offshore investments, Inland Revenue and good standing certificates and more. Find it below.

As usual we also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 07.2016

In July the average prudential balanced portfolio returned 0.61% (June: -2.85%). Top performer is Metropolitan (1.76%); while Allan Gray (-0.30%) takes the bottom spot. For the 3 month period Old Mutual, takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Investec underperformed the ‘average’ by 0.9%.

In our performance review newsletter we present a guest commentary on the direction of interest rates and the outlook of asset classes. For the investor, this article provides an excellent guide to investing under prevailing uncertainties. Read part 6 of the Benchtest 06.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - trustee term of office

In this newsletter we present a rule that deals with the appointment of member and employer trustees, their alternates and the term of office.

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

• Download a draft rule dealing with the appointment of the board of trustees here...

AND

• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:

• Service provider agreements are not in place.

Accelerated payment of remaining capital and Income Tax practice note 1 of 1998

Inland Revenue many years ago issued Practice Note 1 of 1998 in response to the advent of new investment linked annuities, or also referred to as living annuities. In short this practice note prescribes that not more than 20% and not less than 5% of the capital at the start of every year may be paid in the form of an annuity. It also prescribes that in the event of death of the annuitant, no further amount may be commuted for a cash lump sum and that the balance must be paid in the form of an annuity over no less than 5 years. It goes without saying that this annuity is taxable.

Defined contribution pension funds of course also place the emphasis on the retirement capital retaining its identity as the property of the fund member. Where such fund provides for members converting the capital to an annuity within the fund, rules typically attempt to retain the ‘ownership’ notion by availing the remaining balance upon death to the deceased pensioner’s successor/s. Where this occurs, the principles laid down in practice note 1 f 1998 also apply.

But what about retirement annuity funds offered by insurance companies? There appears to be some difference of opinion in the market whether or not the retirement annuity fund can also affect an accelerated annuity of the remaining balance upon death over 5 years. We are of the opinion that once retirement capital has been transferred to a Retirement Annuity Fund, it must under all circumstances be paid in the form of a ‘life annuity’ and cannot be accelerated independent of where the capital derived from. This opinion derives from the definition of ‘retirement annuity fund’ in the Income Tax Act that categorically states that the fund may only pay an annuity for life of a beneficiary. Clearly accelerating the payment would not meet the ‘for life’ requirement.

The dichotomy of performance agreements for investors and NEEEB

The topic of the year so far has undoubtedly been the NEEEB for Namibian PAP’s (previously advantaged persons) in business. The message sunk in even if this initiative does not come to fruition. Many PAP’s in business will unfortunately think twice about new investment in their business or starting up any new business according to the mantra ‘once bitten, twice shy’.

This would be a pity for our economy particularly in view of government’s efforts to attract investment to Namibia, as more recently manifested in a number of bills signed into law by President Geingob that are aimed at promoting foreign investment in Namibia.

According to a recent report in Oshili24, the new Namibia Investment Promotion Act aims to promote sustainable economic development and growth through mobilisation and attraction of foreign and domestic investment to enhance economic development, reduce unemployment, accelerate growth and diversify the economy.

Can this dichotomy be rationalised or do we rather need a statutory environment that extends protection to all investors. If we have rules that make local investors skittish, what is the foreign investor going to make of it?

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Gunter Pfeifer's Benchmark Notes

Benchmark breaches the N$ 2 billion mark

The Benchmark Retirement Fund today is by our estimates the 4th largest fund in Namibia in terms of membership and 6th largest fund in terms of total assets, having achieved this milestone over a mere 16 years since it was established. Benchmark today has 9,000 members and assets exceeding N$ 2 billion.

Read the full report here...

Do not access your retirement funds when changing jobs, no matter how tempting it may be.

Gunter Pfeifer is former Principal Officer and now a trustee of the Benchmark Retirement Fund. He holds a Bachelor of Commerce (Cum Laude). He completed his articles with Deloitte & Touche. He completed the De Beers Program For Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. He was formerly Financial Manager of De Beers Marine.

Kai Friedrich's Administration Forum

"Non-standard service fees" – is this principle in your fund’s interest?

Clients often appear to be irritated about our charging and fee philosophy, more particularly with the principle that while we are usually paid a retainer fee, certain services attract a so-called “non-standard service fee”. In one instance this practice has even been discredited as being unprofessional! Typically, clients take the position that all fund management services must be covered by the ‘retainer’ fee.

The Code of Ethics and Professional Responsibility of the Financial Planning Institute defines a pensions practitioner’s practice for determining fees for professional services. It requires of a professional member of the Institute to “..explain in writing, the precise range of professional services that the fee is intended to cover, the basis on which the fee is computed…” and that “…the main criteria are fairness and equitability for the client and the member…”.

This means that a professional service provider should not charge for work it has not executed. By implication, the principle requires a service provider to charge for services carried out.

The services we carry out in return for a ‘retainer fee’ agreed upon with our clients, are clearly defined in our service level agreement, and in addition, our service level agreement clearly demarcates our mandate from that of other service providers and also clearly defines services we will provide on an ad-hoc basis as and when required, for which we would then raise an additional “non-standard service fee” as agreed upon with our client in advance. If a service provider were to include all conceivable services that a fund might require in the course of time, clearly provision would have to be made for the unknown requirement for ad-hoc services. This would entail charging for services not rendered on an on-going basis and applying the over recovery to recover the cost of ad hoc services should they be required at any time in future. In our view this is inconsistent with the Code of Ethics and Professional Responsibility.

An analogy ‘closer to home’ for most, is building a house. The only two possible arrangements with the contractor consistent with our professional obligations are, firstly that where you add to the original plans you pay extra and where you deduct you get a price reduction. Alternatively, you agree with the contractor that whatever you desire to be changed must be changed without reference to the costs and that the contractor then informs you only upon completion, what the actual cost is. At this stage we apply the former approach which we believe is the right approach.

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from the market

Bank of Namibia in talks with local asset managers

The Bank of Namibia is in talks with local asset managers for the companies to swap their foreign investments for local ones as part of moves by the central bank to boost foreign reserves. The stock of international reserves stood at N$19,2 billion by 12 August, deputy governor Ebson Uanguta said yesterday. Reserves have been declining due to a slowdown in the economy and a decline in exports. He said the central bank already has an agreement with the Government Institutions Pension Fund, and was targeting the fund to move about N$5 billion worth of assets from abroad to Namibia. Uanguta said by moving assets to the Bank of Namibia, the companies will earn the same interest they would have abroad. “The earnings are the same, they are not reduced,” he said. The assets are denominated in Namibia dollars. Ideally, the central bank would like to have reserves amounting to 4,5 months of import cover, he added. The current reserves are about 2,4 months of import cover. By comparison, Swaziland and Lesotho have about six months of import cover, while Botswana has, because of its rich diamond exports, built up about 17 months of import cover.  ~ The Namibian

This report is concerning. Firstly, it seems to take a simplistic view that the decline in foreign reserves is the result of a slow-down in the economy. Here one should ask – what is government doing to prevent huge amounts of money leaving the country because of the fact that it nowadays primarily appoints foreign contractors to the construction projects it gives out? One side of this coin may be that Namibia has to lay out less tax payer’s money to achieve the same economic benefit as Namibia would have, had it appointed the more expensive local contractor. The other side of the coin though is that this money leaves the country never to return and never to be taxed again. Had the money remained in the country it would have changed hands and each time it would have changed hands there would have been a tax implication. Has any adviser to government or the Bank of Namibia every done a cost benefit study to determine the efficient frontier for this trade-off?

This report is also concerning because it will impact me as pension fund member. How can the Bank of Namibia make an arrangement with any asset manager I have appointed to move my foreign investment back to Namibia? To say that the “earnings are the same” sounds quite naïve unless it meant to say that any downside currency risk will be borne by someone other than me.

News from Inland Revenue

Certificates of good standing now mandatory

We read the comment by Minister of Finance Calle Schlettwein that taxpayers are ‘getting away with murder’. One of the measures now taken by Inland Revenue is to make it mandatory for persons contracting with, or providing services to government to submit a certificate of good standing from Inland Revenue before any payment will be made to them.

Download the to the letter to government departments here...

It has also become practice of most SOE’s to make the submission of a certificate of good standing a condition of tender when inviting tenders for products and services.

Unfortunately, as many taxpayers know from first had experience, Inland Revenue’s tax records are in many cases incorrect as the result of which the taxpayer’s interests may be seriously compromised. Is it not rather a matter of Inland Revenue getting away with murder, using the Minister’s phrase, and the insistence on this certificate being tantamount to extortion?

Media snippets
(for stakeholders of the retirement funds industry)

Withheld pension: fund loses case

In our previous newsletter we reported on a case where the SA Adjudicator condoned the withholding of a benefit for a 5 year period.

In this case a member was dismissed for reasons referred to in section 37 D of the Pension Funds Act. The employer laid criminal charges against the member but the member was acquitted by the court. The employer also initiated a civil case against the member which floundered and was eventually dropped. The member lodged a complaint with the adjudicator against the fund and his former employer, because his pension benefit had been withheld, and his employer had made several deductions from the benefit to settle legal costs. The adjudicator ruled in favour of the member and ordered the fund to pay the withdrawal benefit with interest from the date the civil action was to have been launched in court. The deduction of legal costs was thus disallowed by the adjudicator.

The fund launched an appeal against the adjudicator’s ruling at the High Court against the rate of interest that the adjudicator applied, while the member launched a counter application for interest to be calculated from date of dismissal rather than the date the civil case was to have been launched in court as directed by the adjudicator.  The High Court dismissed both claims and confirmed the adjudicator’s statutory powers to determine the date from which interest is to be calculated as well as the rate of interest to be applied.

The matter was then referred to the Supreme Court of Appeal by the fund but it lost the case with the court essentially confirming the verdict of the High Court.

Read the full article by Martin Hesse in Personal Finance of 2 July 2016, here...

Reality of retirement

“Q: I am 56 years old, healthy, have a reasonable job and presume I can work for the next 10 years.

I have a home which is worth about R2.5 million, with a relatively small bond. However, apart from an annuity worth about R300 000 I have no other savings.

My youngest child is almost independent, and in a couple of months’ time I will be able to save R10 000 per month. This amount can increase to R20 000 in the next 18 months.

How should I invest this money and how much trouble am I in?”

Read the answer to this question by Patrick Cairns in Moneyweb of 18 August 2016, here...

Media snippets
(for investors and business)

A guide to SA’s economic bubble and coming crisis

This somewhat dated but still very relevant technical analysis of what has caused the economic bubble in SA since the financial crisis and what is in stall for the SA economy should still be of interest. Namibia of course is in very much the same boat as SA and we are now at the beginning of the crisis alluded to in this article.

Read the full article by Jesse Colombo in Forbes Magazine of 19 March 2014 here...

Top five leadership qualities you need today

“Much has been written about agility, creativity, innovation, curiosity and perspective and yet our ability to develop these qualities in ourselves and others often requires a very practical approach.  Firstly, we need to unpack what each of these qualities really mean and then explore the specific areas we need to develop within ourselves.   Once we have a clear idea, we need an action plan to realise the change we have identified.  After all, theory without action is dead!

Leadership agility is considered the master competency in navigating our VUCA (Volatile, Uncertain, Complex and Ambiguous) global business environment.  In Bill Joiner and Stephen Joseph’s book Leadership Agility, the authors estimate only 10% of leaders have mastered the level of agility needed for consistent effectiveness in our turbulent era of global competition.

So let’s unpack these five qualities in brief in the context of leading in today’s disruptive environment:

• Agility:  The mental and emotional ability to adapt to volatility and change as it occurs – unexpected or anticipated.
• Creativity:  A constant quest for the next big idea to drive your business forward.
• Innovation:  The ability to transform ‘big ideas’ into action and business success.
• Curiosity:  A mind-set of relentless exploration, research and questioning into broad social and economic trends (past, present, future).
• Perspective:  The ability to understand the broader climate and context in which you operate.

These five critical qualities work together to deliver a mind-set best equipped to navigate today’s disruptive economy.  They are as fluid, dynamic and ever evolving as our business environment.

Work with a coach or mentor to assist you here.  Focusing on your own development will free you up from any habitual ways of thinking (and doing) that may be inadvertently curbing your progress, and will ultimately serve you extremely well.”

Read other interesting articles on leadership and management in mowbraybydesign here...

Finding time to be a good leader

“We know this all too well. One of the biggest concerns I have about senior leaders is that most of them are too busy. They're "stuck in the weeds" as the Americans would say, answering emails, attending meetings, managing details, and working long, long hours. You might think that this is what senior leaders are supposed to do: that's their job. But actually, senior leaders are meant to be the thinkers in the organisation. You have become a slave to the urgent, to the mundane, to the repeat appointment, to your team's habits, and it will wear you down sooner than later.

So, what should we do about it?

There's a simple starting point: create a NOT to do list.”

Download the full article from Tomorrow, Today’s Tips on Tuesdays, here...

And finally...

“[People] didn’t see the signals because they all look at official data and not at the things... you can see with your own eyes.”
~ Pippa Malmgren, popular contemporary speaker and commentator.

Newsletter

Dear reader

In this newsletter we continue our support to trustees with a generic code of ethics policy. This should of course be adapted to meet the needs of a particular fund. Find it below.

We comment on benchmarking of fund management costs, we report on the annual Benchmark member meeting and our client function both held recently, we consider a change in the method of payment of disability pensioners, a change in the taxation of trustee and principal officer fees and we examine our company’s extensive safety net for clients.

Of course as usual we comment on the global financial markets environment and also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 06.2016

In June the average prudential balanced portfolio returned -2.85% (May: 3.44%). Top performer is EMH Prescient (-0.86%); while Namibia Asset Management   (-3.87%) takes the bottom spot. For the 3 month period Allan Gray, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale Investec underperformed the ‘average’ by 1.2%.

Is a bad weather warning on the horizon?

The ‘ZIRP’,  acronym for zero interest rate policy that has been applied by many of the large global economies since the financial crisis, projects some bad weather warnings on the screen of pension investors the consequences of which are not all that clear.

More directly it has been eroding the social security systems of these countries as these systems are to a large extent dependent on fixed interest instruments delivering real returns. Those that are still actively contributing towards their social security systems will be on the losing end of this equation and will either have to pay in ever more or will experience ever declining old age provision and will have to make supplementary provision. Those that are already receiving benefits will be faced with a steadily declining standard of living as the result of the systems not earning real returns anymore.

More indirectly, savers have been turning their backs on fixed interest bearing assets in favour of equities, property and other assets that generate real returns. As the result global equity markets, property and a number of other markets are bloated. At some point in time this imbalance has to correct as no one can afford to invest in an asset returning negative yields in the long-term while flows into such assets will eventually dry up.

Read part 6 of the Benchtest 06.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a code of ethics policy

In this newsletter we present a code of ethics policy. 

Ethical principles are the values that set the ground rules for all activities of trustees of retirement funds. As trustees seek to achieve responsible business success, they are challenged to balance these principles against each other, always mindful of the promise to members that they will achieve responsible commercial success.

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

• Download the code of ethics policy here...

AND

• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:

• Fund rules do not provide for a term of office of the trustees; and
• Service provider agreements are not in place.

Fund governance - do you benchmark your management costs?

Readers will be forgiven for immediately having thought about administration costs when reading this headline – but no; this is actually not what this article addresses.

Stand-alone funds employ service providers who are paid in accordance with the service level agreement entered into between the fund and the service provider. But this is mostly not where things end. Funds often also remunerate their trustees and boards of trustees often incur discretionary expenditure on trustee compensation, trustee training, trustee meetings, travelling, entertainment, communication – going as far as employing staff renting office or investing in office space, effectively running a business.

Should trustees be concerned about all these costs their fund incurs? When considering administration fees and fees for other services provided by service providers, it is common cause for trustees to pay close attention to these costs. These costs also can generally be benchmarked to some extent if trustees bear in mind that barring auditors and actuaries, no standards exist as to what the consultant’s or the administrator’s services must entail as the result of which it will be difficult to compare apples with apples.

So what about the other costs incurred at the discretion of the trustees, particularly any costs incurred on and in respect of the trustees themselves? Undoubtedly, this area becomes a lot trickier but is the area that the trustees should probably be even more concerned about than the costs of services acquired in the ‘open market’. Trustees should not be complacent in this regard in the light of their fiduciary duties and the personal liability they may face should any court of law rule that trustees acted negligently. Those trustees that attended the recent trustee training seminar organised by Elite Consulting and conducted by Peter van Ryneveld, will remember that Peter cautioned delegates of trustees misusing their powers and incurring excessive expenses.

The Namibian pension fund industry being as small as it is, it is difficult to determine any norm in respect of what is reasonable and what is well over the top when questioning the discretionary trustee expenditure level. From our data base the following statistics should assist trustees to measure their fund’s expenditure levels, bearing in mind that the larger the fund the lower the expenditure levels should be:

*  The industry average for 2015 according to the Namfisa statistical bulletin was 0.58%.

Note that these amounts include the cost of all external service providers as well as trustee discretionary expenditure but exclude the cost of investment management.

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Gunter Pfeifer's Benchmark Notes

Benchmark announces 2015 results to members

The Benchmark Retirement Fund conducted its 7th annual member meeting at Safari Hotel on 21 July.

At this occasion the Principal Officer, Kai Friedrich (above) gave an overview of the key financial statistics of the fund as at 31 December 2015. Investments held by the Fund's members grew by N$345 million during the 2015 financial year, and the Fund had assets of N$1,963 billion under management for more than 8,800 members.

Günter Pfeifer, Director Operations of the fund presented recent changes to the rules of the fund that introduced new products into the fund.

• Download the presentation here...
• Download the 2015 Annual Report here...

The fund now caters for:

• Large funds that want to retain their stand-alone benefit and contribution structure while giving up their status as separate legal entity in the face of every increasing governance requirements;
• Medium to large employer groups who take comfort in a standard benefit structure at low cost;
• Small employer groups not catered for in conventional arrangements;
• Members who want to preserve their benefit upon resignation from their employer;
• Members who have reached retirement and want to arrange a pension;
• Beneficiaries of death benefits who need to arrange an annuity –
• ...and for those who want to be part of a fund with an exceptional reputation for unequalled service levels, offering low cost access to reputable, popular pension fund investment managers, monitored by professional trustees, supported by expert investment consultants.

For enquiries on any of these unique Namibian products, email This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. or call either on tel 061 231 590 if this is a matter you are currently grappling with.

At the same event, Chris Tisdall of Allan Gray (above) gave an illuminating insight into the future of financial services with his talk on ‘Technology Disruption – A case for hope and caution for long-term investors’. Download the presentation here...

Email This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. or call either on tel 061 231 590 if this is a matter you are currently grappling with.

Do not access your retirement funds when changing jobs, no matter how tempting it may be.

Gunter Pfeifer is former Principal Officer and now a trustee of the Benchmark Retirement Fund. He holds a Bachelor of Commerce (Cum Laude). He completed his articles with Deloitte & Touche. He completed the De Beers Program For Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. He was formerly Financial Manager of De Beers Marine.

Kai Friedrich's Administration Forum

Disability income benefit to be paid by insurance company

We are currently on a drive to arrange for all funds we administer that the disability income benefit be paid by the fund’s underwriter directly to the disabled fund member instead of first paying it into the fund for RFS to then pay it to the disabled member.

The insurance company should then make the required deduction for housing loan repayments and pay these either to the fund in respect of a loan granted by the fund or to the employer for a loan granted either by the employer of by the Bank. The insurer should also deduct the member pension fund contribution and pay this to the fund together with any employer premium waiver.

This will avoid a duplication of effort between the insurance company and RFS as administrator in respect of payment of the benefit to the disabled member.

Trustee fees and principal officer fees are subject to PAYE

We have obtained a tax opinion confirming that the change in the Income Tax Act effective 1 January 2016 with regard to the treatment of directors’ fees for PAYE purposes also applies to all regular amounts paid to trustees and principal officers.

This implies that the fund must deduct PAYE from all regular payments by the fund to the fund’s trustees and principal officer. As for any salaried employee, it also implies that PAYE5 certificates will have to be issued by the fund at the end of every tax year. To manage PAYE deductions the fund will have to run a payroll at least as from the start of the 2017 tax year.

Our Safety Net – can any fund afford less?

For the peace of mind of trustees our safety net offers you:

• Fidelity cover of N$ 5 million, excess of N$ 250,000 1 July 2016 to 30 June 2017, Western National Insurance Company;
• Professional indemnity cover of N$ 50 million, excess of N$ 250,000 1 July 2016 to 30 June 2017, Western National Insurance Company;
• Directors' personal liability cover of N$ 5 million per director, 1 November 2015 to 31 October 2016, Santam;
• Full-time internal audit, compliance and risk management function supported by 2 independent chartered accountants on a part-time basis;
• Off-site disaster recovery data centre;
• Continuous data and system replication;
• On-site back-up generator;
• Secure IT production centre;
• High availability virtual server environment;
• 64 full-time staff focussed on fund administration only;
• Average of 14 years relevant experience per employee;
• 24 holders of a diploma or certificate;
• 18 graduates;
• 7 honours degrees;
• 3 qualified chartered accountants;
• 4 CFP® practitioners (the only pension fund related professional qualification);
• A track record and reputation second to none;
• And more...

How much is peace of mind worth to you as a trustee – can you afford to pay less for compromising on any of these credentials?

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from RFS

RFS conducts its second client function

To cater for trustees of our stand-alone funds and managers of their sponsoring employers, RFS conducted its second client function at Safari Hotel  on 20 July. Instead of ‘wining and dining’ our clients, we prefer to convey a message of lasting value to our guests to achieve our intent of adding value in all we do.


This year we presented futurist Raymond de Villiers (above), whose topic was ‘Mind the Gap’ referring to the different generations, their typical profiles and how they respond to their environment. Employers and trustees must take cognisance of this and determine how to cater for these different generations to remain relevant.

Find the presentation and more information, here...


Above, Deputy Managing Director Marthinuz Fabianus at the 2016 client function.


Above, Director Sharika Skoppelitus at the 2016 client function.

Staff matters

In our environment long-term relationships are of great importance as our clients typically first become exposed to us when they join the job market as member of a pension fund and often continue this relationship until they retire and even thereafter as a pensioner. Trust cannot be bought but is earned over a long journey with clients.

Our company consequently places great importance on retaining staff in our efforts to cement relationships with clients, whether individuals or pension funds.

In this context we are proud of every employee who attains another long-service milestone. Of our 64 staff members, no less than 35 have been with us for 5 years, 15 have attained the 10 year anniversary milestone and 3 the 15 year milestone, in our 17 year history. Annemarie Nel has just been awarded the 10 year acknowledgement and on behalf of the company we express our sincere appreciation to Annemarie for her dedication and loyalty to the company. We look forward to her continuing serving her clients and cementing relationships with our clients.

Media snippets
(for stakeholders of the retirement funds industry)

Namibia should have a national pension fund within two years

Deputy minister of Finance, Natangwe Ithete made this statement at the recent Retirement Fund Institute of Namibia yearly conference and told the Republikein that he does not think that the national pension fund will get off the ground this year, but expects it next year. - The Republikein

The critical role of a consultant in an umbrella fund

“So what does a good governance model look like in the umbrella fund environment?

The fundamental first step for any company considering the move to an umbrella fund, or reviewing their current umbrella arrangement, is to appoint a consultant independent of any sponsor of an umbrella fund to oversee the tender process. Once in an umbrella fund, the appointment of an independent consultant should be a prerequisite. In fact, it is something that the regulators should insist upon. Once the consultant is in place he should be tasked with regular reviews of the quality of service provided by the umbrella fund, the investment performance delivered and the costs associated with the arrangement. Risk benefits should be put out to tender at least once every three years to make sure that members benefit from the lowest quotations.”

Read the full article by Magda Wierzycka in Moneyweb of 26 July 2016, here...

Fraudster exposed – DNA test rules out child from dead man’s estate

In this case a person claimed to have been in a polygamous relationship with the deceased and that the deceased had fathered her child. On this basis she claimed and the fund allocated a portion of the benefit to the mistress’ child. A DNA test carried out on a person who believed to be the father then proved that the deceased was not the father and the benefit for the child was reallocated to the wife of the deceased.

Once a fund has allocated and paid a benefit that subsequently proves to have been based on incorrect information, the fund may not be able to recover the benefit from the incorrect beneficiary anymore and may incur a loss. Once again, it is clear that trustees should not accept any statements, whether sworn or not, at face value but should ascertain that there is sufficient corroborative evidence in support of such a statement. At the end of the day it is advisable that trustees allow beneficiaries to submit any objection they may have to the benefit distribution they are proposing, to mitigate the risk of paying out on the basis of fraudulent statements and information.

Read the full article by Thuli Zungu in the Sowetan of here...

Fund allowed to withhold benefit for 5 years pending outcome of legal matter

In this case, a member resigned from his employer and his fund membership consequently terminated in 2011. A case of fraud and theft was opened against the member by his employer. However the matter was quite complex and a forensic investigation had to carried out first. After still not having been paid his resignation benefit by 2015, the member submitted a complaint to SA Pension Funds Adjudicator, Ms Lukhaimane.

In her determination, Ms Lukhaimane said save to the extent permitted by the Pension Funds Act, the Income Tax Act and the Maintenance Act, no benefit shall be capable of being reduced, transferred or otherwise ceded, or of being pledged or hypothecated, or be liable to be attached or subjected to any form of execution under a judgment or order of a court of law.

However, Section 37D provided for an exception to this general rule. A fund could deduct from any benefit due to a member an amount representing damages suffered by his employer by reason of his dishonesty, theft, fraud or misconduct. The condition is that the member concerned must have admitted liability to the employer in writing or a judgment should have been obtained against her in a court of law. The object of section 37D is to protect an employer’s right to pursue the recovery of money misappropriated by its employees.

A provident fund is entitled to withhold withdrawal benefit pending the outcome of legal proceedings against the member, the Pension Funds Adjudicator has ruled. However, the power of withholding must also be exercised reasonably and not indefinitely, Ms Lukhaimane said.

Read the full article in InsuranceGateway of 6 June 2016, here...

Media snippets
(for investors and business)

Technology is about to usher in the age of immortality

“The intersection of wearable devices capable of giving information in real time to algorithms aided by artificial intelligence, means that computers will be able to systematically eliminate thousands of potential (mis)diagnoses to get to the most likely cause. Something which can be done systematically and much quicker than any human is capable of (as Google and others have demonstrated with the speed in which artificial intelligence can learn to play games as complex as Chess and Othello).

We have already seen the development of early detection systems that can prevent heart attacks linked to smartphones and the Apple watch.”

And ‘medical diagnoses as you go’ of course is not the only area of incredible advancement of technology but medicine is soon at the point where it will be able to replace every part of the human body barring the brain. The implications of this for business and pension funds are unimaginable for those living today, but for those that will be borne into this world, it will become normal!

Read the full article by Warren Dick in Moneyweb of 10 June 2016 here...

Enhance employees’ loyalty and dedication

“According to a 2014 Global Workforce Study conducted by Towers Watson, career advancement opportunities matter most to employees when deciding to join or leave an organization… Here’s how companies can create and define specific career paths to retain top talent and attract the best of the best.”

• Establish training programs and criteria. This requires an evaluation of everyone, looking at how their skills align with company expectations.
• Encourage feedback. When companies invest time and energy in listening to their talent, they’re creating a trusting environment, which is crucial to retaining top talent and building a team dedicated to growing with the company.
• Create a trusting relationship. Keep employees satisfied by creating a relationship built on trust and respect.

Read the full article from in-sight-view, here...

And finally...

Politics... something to contemplate on

“Those who are too smart to engage in politics are punished by being governed by those who are dumber.”
~ Plato, ancient Greek Philosopher

Important announcements

RFS re-appointed to Retirement Fund for Local Authorities and Utility Services in Namibia (RFLAUN)

The Retirement Fund for Local Authorities is the largest stand-alone fund in Namibia after the GIPF with over 6,000 members and over N$ 3 billion in assets. RFS has been serving this fund as administrator since July 2008. This service was placed out on tender recently. We are pleased to advise that RFS was re-appointed for a term of 5 years from 1 July 2016. This is certainly a feather in our cap and a reflection of the trustees’ level of satisfaction which our client service team has been able to provide consistently over the past 8 years!

We are sincerely grateful to the trustees of this prestigious fund for their decision and for this endorsement of our service delivery and we welcome the fund back to the ‘RFS fold’!

Take note of the effective date of the new withholding tax arrangement
(Notification courtesy of vA consulting)

Please be aware that from 21 June 2016 the following rates apply when calculating the withholding tax on services rendered by non-residents:
10% on management fees and consultancy fees, and
25% on directors’ fees and entertainment fees

Regards

Hartmuth van Alphen
vA consulting

C: +264 (0) 81 124 6892
P.O. Box 20645 Windhoek, Namibia

Newsletter

Dear reader

In this newsletter we continue our support to trustees with a generic unclaimed benefits policy. This should of course be adapted to meet the needs of a particular fund. Find it below.

We comment on challenges in managing fund investments in compliance with regulation 28, we comment on funds being pressurised into umbrella funds, we draw attention to the importance to nominate a successor to your annuity, we report on a new Benchmark product that will relieve trustees of their fiduciary and governance headaches and we once again examine the latest developments with regard to the taxation of death benefits.

Of course as usual we comment on the global financial markets environment and also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 06.2016

In May the average prudential balanced portfolio returned 3.44% (Apr: 0.12%). Top performer is Allan Gray (4.81%); while EMH (1.31%) takes the bottom spot. For the 3 month period Namibia Asset Management, takes top spot, outperforming the ‘average’ by roughly 2.8%. On the other end of the scale EMH underperformed the ‘average’ by 3.0%.

Brexit – I can’t hear it anymore

So the unthinkable happened. The British electorate was wrongfully given the opportunity to express its opinion democratically. The remainder of the EU should never allow a referendum on EU membership anymore as the electorate is not objective in contemplating on such decision, said a renowned French political commentator on TV the evening of the British referendum. What a blatant contempt and disenfranchisement of the European electorate. Can one still be surprised about the electorate’s skepticism towards this construct?

Former Prime Minister David Cameron, who probably tried to blackmail the EU into granting special concessions to Britain, eventually could not go back on his threat of a referendum which he probably was quite convinced, would go his way. He had no choice but to resign after this serious misjudgment of the attitude of his electorate towards the EU. As every coin has two sides the Brexit also has two sides and for anyone to pretend to understand exactly which side economically is the better one is preposterous. At the end of the day it was a decision between regaining and giving up political autonomy.

Read part 6 of the Benchtest 05.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - an unclaimed benefits policy

In this newsletter we present a generic unclaimed benefits policy. 

The Pension Funds Act does not make any reference to how unclaimed benefits should be treated. Consequently, it is left to a fund’s rules to stipulate how the fund is to deal with unclaimed benefits.

The aim of this policy document is to direct what the fund considers to be an unclaimed benefit and how unclaimed benefits will be managed and eventually disposed of.

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

• Download the unclaimed benefits policy here...

AND

• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:

• Fund rules do not provide for a term of office of the trustees; and
• Service provider agreements are not in place.

How do you manage compliance with regulation 28 in the interests of your members?

Unlike the SA equivalent, the Namibian regulation 28 does not offer a window period for correcting any breach of the limits set out by the regulation. It does not recognise the difference between an active breach, i.e. where the asset manager or fund have allowed cash flow to result in the breach of the limit, or a passive breach as the result of  market value movements or portfolio in- or outflows.

When questioned about its position on passive breaches at a recent industry meeting NAMFISA responded rather lapidary that such breaches of regulation 28 limits must be corrected within a reasonable time “to avoid excessive penalties” and encouraged funds to apply for exemption where this happens.

Funds in breach of a limit will thus incur a penalty unless the Registrar in his discretion waives the penalty. It is not clear whether this could imply that a specific breach at a specific point in time is condoned, or that a general exemption is granted for a specified period and whether the exemption will be from the date of the breach or from the date of the application for exemption.

To ‘play safe’ and to avoid having to apply repeatedly , if this is what any exemption granted would require, and to avoid penalties, funds  with segregated portfolios will have to consider instructing their asset manager/s not to operate too closely to the limits. The question is what margin to provide for? Just considering the total offshore exposure, running an exposure of 30% as opposed to the maximum of 35% would only protect against a market movement of 15%, not an exceptional move by any means considering that it can arise as the result of currency movement and/ or local or offshore market movement. Setting a cap that diverges from the portfolio manager’s own view would present a problem where the portfolio manager was given a fully discretionary mandate, as the mandate is immediately not a fully discretionary mandate anymore.

Funds with pooled portfolios face a different challenge as they cannot influence the investment decisions of the portfolio manager yet are still required to apply for exemption in their own capacity in the event of a breach if they want to avoid incurring a penalty –which of course will not be a given considering the discretion of the Regulator.

Unfortunately, as the result of the current regulatory environment, asset managers and funds will for all intents and purposes be obliged to move well below the limits to avoid any penalties, which is not in the interests of members.

Funds pressurised into umbrella for the wrong reasons

Over the past quarter of a century of my involvement in the pensions industry, our industry has undergone tremendous changes. Up until Namibia’s independence, all funds in Namibia were underwritten by a single insurance company with no choice and no flexibility regarding risk reassurance, investments and specialist service providers. Funds were not required to be audited or to prepare annual financial statements and were not managed by a board of trustees. Funds at the time were defined benefit funds where the member did not care about investment returns or investment managers. That risk was carried by the employer who typically had little or no insight into the financial affairs of their ‘fund’ other than being informed every three years whether the ‘fund’ had a deficit to be made good by the employer. ‘Fund’ is put in inverted commas, because in those days they were not free standing legal entities but rather a participant in a huge insurer managed insurance product.

Those were the good old days for insurers who had the market wrapped up and could do whatever they wanted without fear of being questioned. Namibia’s impending independence provided a convincing argument to advisers to have the insurers’ shackles broken. Most funds were liquidated, members were allowed to take their money or transfer it to what was perceived to be a ‘safer haven’. A new dawn broke, new funds being established as defined contribution arrangement instead of the prior defined benefit arrangement. Boards of trustees were now established and placed in charge of the business of their fund. Funds now had to prepare audited annual financial statements and were actually free to choose all of their service providers. The risk of poor investment returns was transferred from the sponsoring employer to the member.

But were the trustees really in charge and were they actually capable to manage the affairs of their fund? I venture to say that very few were indeed and even today very few are. Being burdened with other responsibilities concerning their own businesses it is hard to point a finger at the trustees. What actually happened was that advisers quietly took control of the pension fund business of their clients.

Advisers have since done a great job in continuously developing and inventing new products and services in many cases not unselfishly at all, but rather often with the intention to broaden their product offering and build their own business. Clearly this created an environment prone to conflicts of interest producing excesses such as bulking and other dubious practices. Does anyone believe that the integrity of the industry has improved since?

What makes things worse in my view is the fact that even the regulator is chasing shadows, not understanding the technicalities of many of these products and services and the hidden interests of their sponsors, and just following what is made out to be trends instead of critically probing these trends with the view to assess whether it is merely in the interests of service providers or of members. Its response typically is to impose more and more onerous requirements on funds and the industry as a whole thereby accelerating a move away from free standing funds into umbrella funds, where they will once again be under the total control of the product provider. Clearly some of the product providers’ main interest will be to grow their revenue and margins in contrast with a free standing fund where the employer as sponsor and its employees typically take a very personal interest in the business of the fund exclusively for the sake of the members of the fund. In South Africa the regulator has decided in a rather haphazard way that the number of free standing funds must be reduced and that any fund of less than 3,000 members should be accommodated in an umbrella fund.

The basic premise of a pension fund is that it is a compulsory group arrangement. By definition it is not intended to and does not meet the full spectrum of widely diverging needs of its members. With an active interest and the participation of the employer in a fund, it is likely that a fund will meet the needs of the majority of members, though, and at a reasonable cost. Nowadays there is an unfortunate trend to introduce more and more individual choice and complexity into these group arrangements, as if they were retail arrangements. All of these features however increase costs for the member, often primarily for the benefit of the product or service provider rather than the member. In such a scenario the free market mechanism is totally ineffective however, as the member is left to the devices of the fund’s particular service or product provider. Individual or retail retirement funding arrangements offer those few members with exceptional needs a wide choice of alternatives, at significantly higher costs, while the free market mechanism should serve to promote the interests of the individual. Since these arrangements are only exploited by a minority, they can only serve to complement compulsory occupational pension fund arrangements and should be considered for the exceptional needs rather than adding to the complexity of the pension fund.

It is often rather amusing to read articles by so-called financial experts where it is so obvious that they merely pretend to provide expert opinion, yet too blatantly promoting their service or product instead.

It is futile to question how developments of our industry over the past 20 years have impacted on members’ benefits. I suspect that members today in many instances are significantly worse off in terms of benefits received for every Dollar invested in the system, as the result of the self-interests of their advisers. Can one at least say that members are on average more satisfied with their retirement arrangement than they were 20 years ago? Again I venture to say that despite all the options and choices that were introduced into many pension funds, these have not really led to a positive improvement of members’ perceptions.

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Gunter Pfeifer's Benchmark Notes

The importance of designating a successor to your annuity

The way matters have evolved with regard to the treatment of death benefits from a pension fund, Inland Revenue is now clear that in the event of the death of a living annuity pensioner of a pension fund, no lump sum may be paid but only an annuity and this annuity must be paid over any period, but no less than 5 years. This successor annuity of course will also be taxable as the original annuity was. The problem is that this annuity would have to be paid to the deceased pensioner’s estate over a period of 5 years if the pensioner never nominated a pension successor/s.

We are therefore urging all pensioners of the Benchmark Retirement Fund to ensure that the Fund holds your written instruction regarding the successor or successors you want to continue to receive an annuity from the capital remaining, as your legacy.

Please email This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. or call either on tel 061 231 590 to make the necessary arrangements.

New product
Are you bogged down by increasing demands on trustees and increasing governance requirements?

The continuously increasing demands on trustees in terms of their fiduciary responsibilities and for more governance driven by NAMFISA, many boards of trustees feel ever more overwhelmed. The advent of the FIM Act that has been coming along for a long time now and may be expected to become law in the next year or two will only exacerbate this experience.

But what should trustees do to overcome this challenge? An umbrella arrangement is the obvious alternative and the one being strongly pushed by the regulator. But this is typically quite a drawn out and painful process and will become a lot more difficult once the FIM Act is in place.

So if this state of affairs concerns your board of trustees it will avoid prospective complexities if a decision is made and carried out before the advent of the new FIM Act.

Whilst RFS is not a proponent of umbrella funds under all circumstances, increasing regulatory demands unfortunately do make it more and more difficult for trustees to manage their private fund in compliance with these conditions. To assist trustees who feel overwhelmed by the regulatory demands we have developed an alternative within the Benchmark Retirement Fund that offers a smooth and painless transition into an umbrella fund. The Benchmark Retirement Fund, a unique Namibian fund, driven by Namibian intellectual capacity, will continue to find innovative ways to meet any needs that may evolve in the pension funds market.

Email This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. or call either on tel 061 231 590 if this is a matter you are currently grappling with.

Do not access your retirement funds when changing jobs, no matter how tempting it may be.

Gunter Pfeifer is former Principal Officer and now a trustee of the Benchmark Retirement Fund. He holds a Bachelor of Commerce (Cum Laude). He completed his articles with Deloitte & Touche. He completed the De Beers Program For Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. He was formerly Financial Manager of De Beers Marine.

News from RFS

RFS executive committee

To conclude the short biographies of the members of our executive committee that were presented in the past few newsletters, here is a picture of the team.


From left to right - Kai Friedrich (Director: Private Funds), Sharika Skoppelitus (Director: Client Services), Marthinuz Fabianus (Deputy Managing Director), Charlotte Drayer (Senior Manager: Systems and Training), Günter Pfeifer (Director: Operations), Frieda Venter (Senior Manager: Fund Accounting), Louis Theron (Director: Support Services), Victoria Nashongwa (Senior Manager: Fund Administration), Tilman Friedrich (Managing Director - refer to the short biography of him above), Hannes van Tonder (Senior Manager: Fund Administration).

Staff movements

A late announcement is that Zaskia Ochs, Senior Manager: Audit and Compliance, and Chanelle van Wyk, Wealth Manager, left our employ at the end of last year. These positions have been filled in the meantime and further announcements will be made in due course.

Letter from the head of finance of a large tourism company

“Hi RFS

Some feedback: I find the newsletters very interesting. Although most of it has no applicability to my day-to-day it is good to be informed and to be aware of the wider industry issues. It is a real value-add. Keep it up!”

Thank you T for your encouraging words. It is important to me to know whether this newsletter reaches its target audience as you have confirmed for your person.

Regards

Tilman Friedrich

News from NAMFISA

Staff movements

NAMFISA recently announced a number of staff movements including the departure of former General Manager: Provident Institutions, Ms Maria Nakale-Gaomas, whose duties will be fulfilled by General Manager: Insurance, Ms Grace Mohamed.

Read the notification here…

News from Inland Revenue

Death benefits in consequence of the death of a fund pensioner

A number of pension funds offer benefits in the event of the death of a pensioner of the fund. Typically the rationale is that if the deceased pensioner leaves capital this capital, or at least a portion thereof will be paid to survivors or designated beneficiaries of the deceased pensioner.  Clarity has now been obtained that in the event of the death of a pensioner, no further commutation of any portion of the capital will be allowed as the pensioner would probably have commuted the maximum 1/3rd at the time of retirement. Any capital left by the deceased pensioner may be paid to one or more beneficiary in the form of an annuity. This annuity can be over any period but for no less than 5 years and will be fully taxable.

Taxation of death benefits from pension funds

Clarity has now been obtained that a minimum of 34% of the total capital available for provision of benefits in the event of the death of a pensioner must be paid as an annuity. Inland Revenue allows the trustees to determine what portion of the total available capital in respect of each beneficiary should be paid in the form of an annuity and what portion may be paid as a lump sum but in aggregate the annuity portion may never be less than 34%. This already assumes that the beneficiary opted to commute for a cash lump sum one-third (17%) of the designated annuity capital. The total designated annuity capital is thus 51%, the balance of 49% representing a tax free lump sum upon the death of the member. The 17% commutation of the designated annuity capital is also tax free. We believe that if the 51% annuity capital is less than N$ 50,000 it may also be paid out as a cash lump sum and should then also be tax free. This means that where the total capital available upon the death of a pension fund member is less than N$ 98,000, it can be paid out as a tax free lump sum. We are still awaiting confirmation of our opinion by Inland Revenue.

Media snippets
(for stakeholders of the retirement funds industry)

Do your fund managers think differently or are they all doing the same thing?

Do all your fund’s portfolio managers hold a large stake in Naspers? If they do, your fund would have probably done very well as the result of this large stake in Naspers whose share price gained 470% over the past 5 years. But there is a serious risk that the fund is exposed to as the result of holding a large stake in a single stock and earning a large portion of its returns from this stock. “…And while you may not think there is anything wrong with Naspers, what this means is that you are concentrating your risk…It is important for investors to look for managers that think differently and have different stocks in their portfolios. This will mean that you get exposure to different drivers of both risk and return…Diversification is the only free lunch in investing... Good diversification gives you better returns at a much lower risk profile.”

Read the full article by Patrick Cairns in Moneyweb of  13 June 2016, here...

Downgrade – is the sky falling?

A number of clients have expressed great anxiety over the impact of a downgrade of South Africa on their investments. As usual in panic situations, the horses have bolted and it serves little purpose to now close the gate, as this technical analysis tries to show. Understanding and managing your risks is really the only answer and diversification is the only free ride you get to managing your risk. Reacting to a situation that is already apparent to everyone will not serve any purpose.

Read the full article in PSG Wealth Client Newsletter of  May 2016 here...

Why Allan Gray has increased its exposure to SA

“The Allan Gray Balanced Fund, has been increasing its exposure to local equities over the last six months. The weighting it gives to local stocks is still well below all-time highs, but it has been creeping upwards towards 50%.

The answer, according to chief investment officer Andrew Lapping, is that there is more to the JSE than what one might see at first glance.”

“We are not buying the market,” Lapping explains. “We are buying specific companies that we feel are undervalued. Following what happened in December with Nenegate we are finding more companies trading at a discount and we are buying those companies.”

“He points out that the All Share Index has become dominated by just two stocks – Naspers and SABMiller. Together they currently make up just over 25% of the entire Index. Over the last five years the share prices of these two stocks have grown exponentially, and they have become progressively more expensive.”

Read the full article by Patrick Cairns in Moneyweb of  6 June 2016, here...

The key to successful retirement is resilience

“Resilience is the ability to recover from setbacks, adapt well to change and keep going in the face of adversity. One way of doing this is having a purpose and an interest outside of your home and immediate family.

While it is true that you can’t change what happens to you, there is a window of opportunity between what happens to you and your response. And you have the power to choose your response.So how do you build resilience in the run up to retirement and is it too late if you’re already retired? It’s never too late to make good lifestyle choices and the options to cultivate a purposeful life after work are endless.

Why not consider a second career, or provide consulting services in your field of expertise? Pursue a new hobby or revive an old interest. Get involved in your community or with a charity organisation. Call an old friend or reach out and build new friendships. Join a mutual interest group, or even better, start one of your choice.

You’ve accumulated all this knowledge and experience why not mentor someone starting out in your profession? If you feel that you want to do something different, what’s stopping you?”

Read the full article by Brenda van Zijl in Moneyweb of 18 June 2016, here...

Media snippets
(for investors and business)

Getting executive pay right

Should executive pay be purely a function of the financial performance of a company or should it consider other metrics such as environmental and social aspects? Should the shareholders have the final say or should it be left to the remuneration committee?

The King IV Report stipulates that if shareholders vote against a remuneration policy or its implementation, then this must be discussed further. Based on this the Institute of Directors in Southern Africa suggests that if the vote doesn’t pass with 75%, then the company needs to engage with the shareholders that voted against the pay.

Read the full article by Patrick Cairns in Moneyweb of 14 June 2016 here...

3 Ways to be happily engaged at work

“It’s very easy to say your work sucks because your boss is mean and doesn’t care. But let’s be honest -- if you think that, you don’t care either. If you did, you’d do something to feel better. To help you, I’ve summarized three different ways you can become more engaged at work and at life. Among the U.S. workforce, engagement levels are low. And the bigger the company you work for, the higher the chance you're not engaged in your everyday work. This might seem like a problem for leadership or management -- for whom employee disengagement converts into loss of revenue and higher turnover rates -- but it is also your problem because you’re the one who is unhappy.

To help you, I’ve summarized three different ways you can become more engaged at work and at life.

• 1. Why do you wake up in the morning?
  Even the most dull working environment can be made fun and interesting by focusing on what's important to you -- whether it's paying rent or changing the world.
• 2. What exactly is important?
  For a lot of people, days are filled with meaningless tasks and pointless meetings that keep us from doing things that matter. Not always, but on many occasions, we have a chance to choose what we are doing, so it helps to think about which tasks best move you towards your goals. Remember, 80 percent of results are achieved with 20 percent of work. So eliminating all the “fake work” you can saves time and allows you to focus on things that matter.
• 3. Measure yourself.
  To increase your overall work satisfaction, it's important to reflect on how your work impacts others. Understand how the tasks you do are connected to the work of others on your team, and measure the positive impact you have. Knowing your importance increases your engagement levels greatly and makes you better at your work.

In the end, we are the ones who decide if we're engaged or not -- happy or not.”

This is an extract of an interesting article. Read the full article fromTravis Bradberry, here...

And finally...

Politics... something to contemplate on

“Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.”
~ Oscar Ameringer, "The Mark Twain of American Socialism."
 

Important announcements

Trustee training 13 and 14 June

Elite Consulting has once again hired Peter van Ryneveld to present a 1 ½ day training course for trustees. The training will commence each day at 08:30 and end at 17:00 with a lunch break between 12:45 and 14:00. Hand-outs on the course material will be given to each participant. The cost of the training will be N$ 3,900 (excl. VAT) per delegate for attending both days. Closing date for enrolment is 31 May 2016. Download an outline of the two-day training course including information on the presenter, here...

Newsletter

Dear reader

In this newsletter we continue our support to trustees with a generic communication policy. This should of course be adapted to meet the needs of a particular fund. Find it below.

We look at how far NAMFISA’s powers stretch as examined in a legal opinion by advocate Heathcote, we question why NAMFISA objects to vesting scales with reference to OECD guidelines, we provide feedback on the latest pension industry meeting and draw attention to an amendment of the Income Tax Act with regard to withholding tax on entertainment and directors fees payable to a non-resident.

Of course as usual we comment on the global financial markets environment and also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 04.2016

In April the average prudential balanced portfolio returned 0.12% (Mar: 2.76%). Top performer is Metropolitan (0.62%); while Stanlib (-0.45%) takes the bottom spot. For the 3 month period Namibia Asset Management, takes top spot, outperforming the ‘average’ by roughly 2.4%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.1%.

Volatility in global equity markets has declined substantially since the advent of the global financial crisis. The US S&P 500 moved from as high as 80 points volatility to hovering around 20 points since 2012. This indicates that investors believe markets are stable - or does this indicate that we are in the eye of the storm? Well looking at what is happening in the world around us we note that the Chinese economy is slipping further. Interest rates have not turned the corner and are at unsustainably low levels. This in our view is indicative of trouble brewing somewhere in investment markets. There is upheaval all around the Mediterranean, there is the threat of a Brexit, there is the European refugee crisis, an economic and political crisis in Brazil, the Ukrainian crisis, the US presidential elections, the unpredictability of the oil price and more. All of these present uncertainty and thus risk for the investor that should manifest in market volatility.

What should we expect to happen? A distinct possibility is that a Donald Trump as next US president, and as a political outsider, may well have the courage to act as if he was the new CEO, not being loaded with the political baggage of the candidates that participated in previous elections – take the pain now and move forward! Such a scenario really spells doom for debtors whose liabilities of course will retain their value while any assets will experience a decline in value.

Read part 6 of the Benchtest 04.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a generic risk communication policy

In this newsletter we present a generic communication policy.  The aim of this policy document is to embed good governance at a fund into the business of the board of trustees of overseeing the operations of the fund. The communication policy of the Fund is aimed at promoting and supporting the governance, fiduciary and reputational interests of the trustees and members.

This policy sets out to ensure effective communication that promotes and supports the objectives of the Fund. This policy also sets out the duties and obligations of each party that is involved in communication relating to the Fund and its members and stakeholders.

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

• Download the generic communication policy here...

AND

• Download the generic risk management policy here...
• Download the generic service provider self-assessment 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...

In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:

• Fund rules do not set out how unclaimed benefits will be disposed of;
• Fund rules do not provide for a term of office of the trustees; and
• Service provider agreements are not in place.

How far do the regulator’s powers stretch

In 2006 Advocate Raymond Heathcote was engaged by the Namibian Ombudsman, in response to a complaint laid by Sternlink Financial Services about certain directives NAMFISA issued, to express an opinion on the powers NAMFISA has under the NAMFISA Act read together with the Namibian constitution.

More specifically, Advocate Heathcote was requested to advise in relation to the following issues:

1. Does NAMFISA have the authority to regulate healthcare consultants?
2. Does NAMFISA have the powers to issue directives as it did?

As to the first question and with reference to the NAMFISA Act, advocate Heathcote concluded that NAMFISA does have the powers to supervise healthcare consultants.

As to the second question, advocate Heathcote turned to articles 21(j) 21(2) and 22 of the Namibian constitution. Article 21 deals with fundamental freedoms while article 22 deals with limitation upon fundamental rights and freedoms. These state the following:

“21 (j) practise any profession, or carry on any occupation, trade or business.”

“21 (2) The fundamental freedoms referred to in Sub-Article (1) hereof shall be exercised subject to the law of Namibia, in so far as such law imposes reasonable restrictions on the exercise of the rights and freedoms conferred by the said Sub-Article, which are necessary in a democratic society and are required in the interests of the sovereignty and integrity of Namibia, national security, public order, decency or morality, or in relation to contempt of court, defamation or incitement to an offence.

“22 Whenever or wherever in terms of this Constitution the limitation of any fundamental rights or freedoms contemplated by this Chapter is authorised any law providing for such limitation shall:
(a) be of general application, shall not negate the essential content thereof, and shall not be aimed at a particular individual;
(b) specify the ascertainable extent of such limitation and identify the Article or Articles hereof on which authority to enact such limitation is claimed to rest.”

On this question advocate Heathcote concludes that –

“…the directives issued by NAMFISA never had the force of law, were ultra vires and are null and void. In any event, to declare the provisions of the directive effective with retrospective effect, usurps a function which not event Parliament may do. In turn, to declare existing agreements null and void usurps the powers of a court of law – article 12(1)(a) of the Namibian Constitution.

That supervision is necessary, is not in issue. But the quest for supervision, and the necessity thereof, do not authorize unconstitutional action. By putting courts of law in an invidious position – by arguing that if it is now found that the directives do not have the force of law, the result would be chaos – is not constitutionally responsible or permissible. At the end of the day, total chaos is guaranteed if administrative bodies are allowed to operate as legislators. Valid “laws” should have been made by NAMFISA, e.g. regulations in terms of section 35 of the [NAMFISA] Act.’

Read the full legal opinion here...

What is wrong with vesting scales?

NAMFISA has taken the position that vesting scales shall not be allowed anymore. This is despite the fact that the Pension Funds Act does not prohibit vesting scales. Going by what advocate Heathcote concluded in the preceding article, the directives issued by NAMFISA do not have the force of law and are ultra vires.

However when the FIM Bill arrives, the law will prohibit vesting scales if NAMFISA has its way. But why should NAMFISA be so opposed to vesting scales? The argument put forward by officials is that employees are paid a package so a fund rule that provides for any portion of the employer contribution not being awarded to the employee is unfair towards the employee. Firstly why should NAMFISA take it upon itself to intervene in a labour issue if fairness was its only concern? Secondly, the argument that employer contributions are part of an employee’s remuneration package is flawed. Many employers’ policy is to pay a salary. In addition to the salary the employer incurs certain costs in an effort to achieve certain business objectives such as promoting long service with the employer.

The regulator should distinguish between mandatory pension schemes and voluntary employer sponsored pension arrangements. In the former case no one would object to the regulator prescribing the manner in which benefits are to be determined. In latter case however, it is preposterous of a regulator to prescribe to someone who makes voluntary provision for pension benefits how these are to be determined and will only lead to the employer losing interest in its initiative to voluntarily offer retirement arrangements to staff.

Vesting is a globally accepted practice. The OECD has produced ‘Guidelines for the Protection of Rights of Members and Beneficiaries in Occupational Pension Plans’. In the introduction the intention of these guidelines is defined as to “… guide regulators, supervisors and other entities involved in pension plan design, administration and management, rather than to bind member countries. They aim to present good practices as agreed upon by the 30 OECD member countries participating in the Working Party and the members of the INPRS that participated in the document’s development.”

Section II deals with benefits and vesting rights. Paragraph 2.2 more specifically states that “2.2 Accrued benefits should vest immediately or after a period of employment with the employer sponsoring the plan that is reasonable in light of average employee tenure. Benefits derived from member contributions to the pension plan should be immediately vested.”

So – what is wrong with vesting scales?

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Gunter Pfeifer's Benchmark Notes

The relevance of the salary replacement ratio

Most of us save for retirement in some form or another. All of us, however, hope that when we retire, enough investments have accumulated for a dignified retirement. Instead of just hoping for the best, one should plan for retirement and one of the tools that can be utilized is the salary replacement ratio. This ratio expresses the pension that will be received on retirement as a percentage of the pensionable salary in the last month before retirement. The table below reflects this ratio, based on certain assumptions.

You will realize that we place a lot of emphasis on ‘real investment returns’ and on ‘income replacement ratios’ and you may ask, are the figures used in the table good, bad or indifferent? Firstly, if you invested in equity only, history as shown that you can expect a ‘real investment return’ in the long term of around 7%. Pension funds, however, are only allowed to invest a maximum of 75% in equity. So ‘real investment returns’ from a typical prudential balanced pension fund portfolio, should be around 5% in the long term. The table uses 5% as the maximum as more conservative portfolios are likely to achieve lower real returns in the long term. You will notice that the table does not produce an income replacement ratio of anywhere close to 100% for any of the scenarios. Internationally pension fund structures aim to achieve an income replacement ratio of 2% per year of service, i.e., if you worked and saved continuously for retirement for 40 years, a well structured fund should be able to offer you a pension equal to around 80% of your last salary before retirement. An income replacement ratio of 100% is therefore essentially unachievable.

The table is read as follows: a member that has invested in a portfolio (or combination of portfolios) that yields 4% above inflation (i.e. ‘real investment return’ of 4%) and who has contributed 14% of pensionable salary to a retirement fund will have a replacement ratio of 63%. The pension to be received will be 63% of the last pensionable salary. It is important to note that contributions listed above are after risk premiums and other costs, i.e. it is the actual portion that is set aside for retirement. Total contributions to a retirement fund for this member could be something like 17%, where perhaps 3% is used to pay for death and disability cover as well as administration and other costs.

Another important assumption underlying the above ratios is the number of years that the member contributes to the retirement fund. In this case we have assumed 30 years of contributions until retirement age 60. Life expectancy after retirement has been assumed as 20 years. Where a member changes jobs, it has been assumed that any accumulated fund credit is preserved in a preservation fund and not eroded through a cash withdrawal.

Four factors are crucial to ensure a dignified retirement:

• Net contributions and investment returns need to be balanced. Where a moderate risk portfolio is chosen that yields on average 4% above inflation (after fees), net contribution rates should not be lower than 13%. Use the table to establish where you or your fund lie. Make changes while you still can.
• Pensionable salary should not be significantly lower than total remuneration package. Your standard of living is largely a function of your total remuneration. It is the pensionable salary however that determines the pension you will be earning one day.
• Setting retirement savings aside is a long process. The longer the period you save for retirement, the better. As a minimum it needs to be 30 years.
• Do not access your retirement funds when changing jobs, no matter how tempting it may be.

Gunter Pfeifer is former Principal Officer and now a trustee of the Benchmark Retirement Fund. He holds a Bachelor of Commerce (Cum Laude). He completed his articles with Deloitte & Touche. He completed the De Beers Program For Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. He was formerly Financial Manager of De Beers Marine.

News from RFS

RFS sponsors SKW youth soccer tournament


For the 12th consecutive year in our 17 years of existence, RFS sponsored the annual SKW youth soccer tournament that was staged by the SKW soccer division during April 2016. Over 1,000 young aspiring soccer stars from all over the country participated in this event. Our congratulations go to the organisers for a well-organised tournament. Pictured with winners, above Director Sharika Skoppelitus, and below, Director Gunter Pfeifer.

Download the final 2016 logs of this prestigious tournament here...

RFS executive committee


Louis Theron, Director: Support Services, joined the company in March 2008. He is a Namibian, born in Cape Town, but grew up on a farm in the south. He obtained a B Econ degree (in 1989) and a higher education diploma (in 1990) from UOFS. In 2003 he obtained an honours degree in business administration from the University of Stellenbosch. Before joining RFS, Louis was employed at Agribank as Manager Financial Services at the time of his departure. Closer to home he served as trustee of the Agribank Pension Fund for 11 years and represented Agribank as director on various boards.

News from NAMFISA

Industry meeting held 16 April 2016

Here are a few key issues arising from the meeting:

• NAMFISA will provide training on the completion of the quarterly ERS based returns;
• Once the quarterly return ‘goes live’ funds will have 30 days to submit (presumably this will now be 45 days until the end of March 2017 as per subsequent NAMFISA circular);
• Application for exemption from quarterly regulation 28 reporting by funds only investing in insurance policies will be considered on a case-by-case basis;
• Funds are permitted by regulation 29 to register their own SPV (this requires a fund to be of significant size to justify setting up an own SPV, of which there may be 2 or 3);
• Prescribed forms required to be submitted must be submitted on the ERS system. The system is not configured to receive multiple applications and in such cases these must be submitted manually;
• The industry should do more to resolve complaints at fund level so that there is no need to escalate them to NAMFISA;
• FIM Bill still receiving attention of Ministry of Justice;
• More FIM standards to be issued in due course;
• Market value movement breaches of regulation 28 limits to be corrected within reasonable time “to avoid excessive penalties” but funds encouraged  to apply for exemption where this happens;
• Ministry of Finance considering proposed amendments to regulations 28 and 29;
• Industry players encouraged to engage NAMFISA where the need arises;
• Pension funds must inform the regulator of late payment or non-payment of contributions and industry invited to make suggestions to NAMFISA how to deal with this problem;
• Some instances of late payment/ non-payment have been referred to Prosecutor General;
• NAMFISA commenced its Bill implementation project including risk based supervision;
• NAMFISA intends to issue a directive on corporate governance principles to pension funds in the course of the year;
• Next industry meeting scheduled for 12 September.

If you missed the communication of NAMFISA circulating the minutes of the last pension funds industry meeting, download the minutes here...

News from Inland Revenue

Income Tax Act amended

The 2016 Income Tax Amendment Bill tabled in parliament this in May will bring about the following change:

• Withholding tax on entertainment fees and fees paid to non-resident directors is raised back to 25% from 10%, as brought about through the 2015 amendment act. The effective date of this change is still to be announced by the Minister once the Bill is approved by parliament.

News from the market

SABCO and SAB African bottling operations to be merged

SA Competition Commission approved the merger of the Coca Cola bottling operations of SAB and Gutsche family investment trust held SABCO. This will effect various African operations but no reference was made to the Namibian operation in the media reports.

Letter from a reader

Question:

My wife has an amount of N$100,000 available for a low-risk (not unit trust) tax-free investment.

We have no debts. My wife works at UNAM, but she is settled with her investments. We have organised her investments to her satisfaction. She has 3 ½  years before retirement (she is 61). She has unit trusts with Old Mutual, and also has a Nampost savings account.
Now, we are looking for the best way to utilise the said amount. She is afraid of more unit trusts, and doesn’t want to pay taxes on her investments.

We thought about treasury bills, but she doesn’t need an extra income for now. She gets a small amount from a living annuity. Unfortunately, it culminated into paying a few thousand dollars income tax.

Response:

I gather from this that your two main concerns are tax and risk. There are very few tax free investments and all low risk investments are interest bearing investments.

Your choice is thus between a money market unit trust, treasury bills or a Nampost tax free savings account. All these investments do pay interest except that treasury bills would pay it out to you physically while you would be able to capitalise the interest earned on the other investments, i.e. it is just added to your investment and is not paid out to you physically.

Media snippets
(for stakeholders of the retirement funds industry)

Your employer can withhold your retirement benefit

To ask a retirement fund to withhold benefits, the employer must notify the fund in writing and provide the following information:

• the nature of the damage caused by the employee
• the rand [Namibian Dollar] value of the damage caused
• the date the employer began his or her investigation into the alleged misconduct
• confirmation of legal, civil or criminal proceedings, or the reasons for not initiating such proceedings
• any applicable SAPS [Namibian Police] case information
• the amount claimed in civil court
• a copy of the letter of demand
• confirmation of proceedings and how far they have progressed when employment was terminated or suspended
• any other factors that may influence the case

Once this information has been provided to the fund, the fund and its trustees will use their discretion to decide whether or not a benefit is withheld. The following factors must be considered;

• the above substantive requirements
• the value of the benefit
• the losses suffered by the employer, including the legal costs for recovery
• if the employer has taken reasonable steps to institute proceedings
• if there has been any unreasonable delay on the part of the employer in prosecuting the claim

Read the full article by Claire Densham Communications in Insurance Gateway, here...

PFA lays into fund for holding back death benefit

In this case that was referred to SA Pension Funds Adjudicator, a spouse of a deceased fund member complained about the fact that the fund of which her husband was a member had been waiting for almost 3 years for the payment of the death benefit due to her despite having had regular communication with the administrator of the relevant fund. During this period she had to survive on the old age grant which is not sufficient.

In her determination, SA PFA Ms Lukhaimane said: “For over a period of 30 months after the death of the deceased, no benefit had been paid to the complainant and eventually when payment was made in January 2016, only half of the benefit allocated to the complainant was paid.

It is clear from the submissions that the second respondent failed in its duty to distribute the death benefit within 12 months of the date of death in terms of section 37C(1)(a) of the Act.”

She ruled that the complainant must be placed in the position she would have occupied had the first respondent paid the death benefit within 12 months of the date of the deceased’s death.

“The first respondent should pay the outstanding amount of the death benefit to the complainant together with late interest at the rate of 9% per annum computed from 29 March 2014 [12 months after date of death of member] to date of payment and provide the complainant with a breakdown thereof,” Ms Lukhaimane ruled.

Read the full article in Insurance Gateway of 25 April 2016 here...

Fees, the most proven predictor of unit trust returns

“Anyone investing in unit trusts in South Africa is faced with a daunting choice. There are now over 1 300 funds registered in the country... Choosing an appropriate fund out of this universe is no simple task. The way most investors tackle this problem is to select the funds that have been the recent top performers…Analysis released by Morningstar on Monday re-confirms something that the company has shown before – that funds with lower charges are more likely to out-perform in future. And those with higher charges are not only more likely to under-perform, but to shut down altogether.”

Read the full article by Patrick Cairns in Moneyweb of 10 May 2016, here...

Media snippets
(for investors and business)

Can you afford a long and happy retirement?

“You may be among the fortunate, who followed all the financial advice available to you over the years and you scrimped and saved for retirement and invested sensibly in long-term growth portfolios. When changing jobs you transferred your retirement fund withdrawal benefits to a preservation fund and your most recent benefit statement shows you are on track to achieve your targeted replacement ratio after retirement.

But, how do you ensure that this money will produce the level of income that you are expecting and will continue to produce this level of income no matter how long you live for?

The answer is a simple one. You take out insurance against living for too long. And that is exactly what a traditional guaranteed annuity provided by an insurance company does. It pools the risks associated with thousands of different retirees into a risk pool where no-one knows how long any one annuity will be paid for, but where the average is more predictable. Individual retirees can relax knowing that their pension will continue to be paid no matter how long they live for.

Read what Simone Peile says on the ins and outs of guaranteed annuities in Moneyweb of 21 April 2016 here...

The 6 P’s of a successful retirement plan

“Your retirement years are something to look forward to. This is the time to spend with your grandchildren, pursue your hobbies full-time, or pursue whatever you find most fun and meaningful – at your own pace. But if you did not build up sufficient savings, this phase of your life could turn out to be highly stressful. How do you make sure that you’ve saved enough to enter your retirement years feeling confident and secure?”

• Postpone saving no longer
• Pay the taxman less
• Preserve your money
• Professional help is a must
• Prolong your working years
• Plan your post retirement business

Read the full article by Carl Roothman in Cover of 27 April 2016, here...

Standard Bank SA defrauded by R300 million through credit card scam in Japan

Owners 0f credit cards must be vigilant with regard to their credit cards. In this case 1,600 SA credit cards were used to draw multiples of R 14,000 cash from each account in Japan.

Read how the gangster achieved this feat in this article by Prinesha Naidoo in Moneyweb of 25 May 2016, here…

Research-proven tricks that make you seem smarter than you are

“It’s great to be smart, but intelligence is a hard thing to pin down. In many cases, how smart people think you are is just as important as how smart you actually are…You might not be able to alter your genetics, but there are some proven strategies that can help you appear to be smarter. Some of these strategies seem arbitrary, but research shows they make a massive difference.”

Here are these tricks in short:

• Use a middle initial.
  John F. Kennedy. Franklin D. Roosevelt [typically American – probably won’t work in Namibia]. For academic competitions, people who used middle initials were selected more frequently than those who didn’t.
• Make graphs.
  Research conducted at Cornell suggests that people are more likely to trust a source if it contains graphs.
• Skip that drink.
  A joint study conducted by the University of Michigan and the University of Pennsylvania revealed that merely seeing someone hold a drink is enough to make them seem less intelligent.
• Believe in yourself.
  Nothing projects intelligence quite like confidence.
• Write simply.
  If you’re really smart, you shouldn’t have to use big words to broadcast it. True intelligence speaks for itself, so you don’t have to show off your impressive vocabulary.
• Speak expressively.
  Communication expert Leonard Mlodinow makes the case that even if two people say exactly the same thing, the one who says it most expressively will be perceived as being smarter.
• Look 'em in the eye.
  In a study conducted at Loyola University, participants who intentionally managed their eye contact scored significantly higher on perceived intelligence.
• Wear nerd glasses.
  Research shows that people wearing glasses—especially thick, full-framed ones—are perceived as being more intelligent.
• Keep pace with the crowd.
  If you want to look smarter, you need to stop dawdling, but you also need to stop scurrying around like some crazed robot.
• Dress for success.
  A recent study by Northwestern University found that making people wear lab coats improved their performance in tasks that required intelligence and concentration.

Read the article by Dr Travis Bradberry in Linkedin of 10 April 2016, here...

And finally...

Smart-ass answers to smile about

A lady was picking through the frozen chickens at a Woolworths store but she couldn't find one big enough for her family.  
She asked a passing assistant, "Do these chickens get any bigger?"
The assistant replied, "I'm afraid not, they're all dead."

…and , I must share this one too.

“I fear the day that technology will surpass our human interaction. The world will have a generation of idiots.”
This wisdom is ascribed to Albert Einstein.

Important announcements

RFS office hours for first week of May

RFS staff voted unanimously to work on Tuesday 3 and Wednesday 4 May and to have the office closed in exchange on Thursday 5 and Friday 6 May. Clients are requested to take note of this arrangement and to make early arrangements with their administrator or client manager where necessary.

Quarterly SIH report now only due 15 May 2016

All funds need to note that the quarterly SIH report is due to be submitted to NAMFISA in the prescribed Excel format. The due date has been extended to 15 May.

Housing loan interest rate increases and payroll runs

With the increase of the repo rate from 6.75% to 7% by Bank of Namibia on 13 April, the housing loan interest rate in respect of loans granted to members by a fund will increase to 11% as from 1 May 2016. This means that the repayments of members who were granted loans will increase and payrolls will have to take this into account with the May payroll runs.

Newsletter

Dear reader

In this newsletter we continue our support to trustees with a generic risk management policy which should be further adapted to meet the needs of a particular fund. Find it below.

We also draw attention to the risk transfers of retirement capital from a pension fund to a member owned annuity presents to the retiree, we examine another death benefit prickly pear, namely lump sums payable in the event of a pensioner, we also examine the role of a principal officer and how to avoid conflicts with other service providers and we remind you of a 2011 Income Tax Act amendment that no longer allows proceeds from employer owned insurance policies to be paid to an employee's beneficiary tax free.

Of course as usual we also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 03.2016

In March the average prudential balanced portfolio returned 2.76% (Feb: 0.50%). Top performer is Namibia Asset Management (4.96%); while Allan Gray (0.78%) takes the bottom spot. For the 3 month period Allan Gray, for the 8th consecutive month takes top spot, outperforming the 'average' by roughly 1.3%. On the other end of the scale EMH Prescient underperformed the 'average' by 1.8%.

Read part 6 of the Benchtest 03.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a generic risk management policy

In this newsletter we present a generic risk management policy to assist trustees to avoid being sucked into NAMFISA's enforcement process because of a perceived lack of governance. The aim of this policy document is to embed risk management at a fund into the business of the board of trustees of overseeing the operations of the fund. The policy document should form the basis to implement an effective risk management process.

Risk can be defined as: "The threat that an event or action will adversely affect the Fund's ability to achieve its objectives, perform its duties or meet the expectations of its stakeholders". As most Namibian funds outsource their operating activities to their service providers, the approach of boards of trustees towards risk is different from what operating entities would follow. In the case of retirement funds the trustees will have to rely to a large extent on the fund's service providers to maintain sound standards of governance and to convey comfort to the trustess that such standards are indeed in place.

In this regard one approach is to request service providers to execute and submit an annual self-assessment.

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

• Download the generic risk management policy here...
• Download the generic service provider self-assessment here...

AND

• 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...

In future newsletters we will consider the following matters also identified by NAMFISA as frequently missing:

• Fund does not have a communication policy;
• Fund rules do not set out how unclaimed benefits will be disposed of;
• Fund rules do not provide for a term of office of the trustees; and
• Service provider agreements are not in place.

The risk of a member-owned annuity

In previous newsletters we have reflected on this topic. We believe that the answer to the question whether pension fund capital at retirement can be used to purchase a member owned annuity for a retiring member from an insurer, as opposed to purchasing a fund owned annuity for the benefit of the member from another approved fund, lies squarely in the domain of NAMFISA. NAMFISA has recently informed us that the issue has proved rather complex. It has consulted on several occasions internally, with the insurance regulators, with the tax authorities and with insurance providers. It was pointed out that blurred lines exist between insurance providers and pension funds internationally, also with regulators from around the world.

After all these consultations NAMFISA still finds very diverging views amongst affected parties. Due to the implications that this will have on two industries, it does not want to rush the process but rather to ensure that is has interrogated all eventualities before arriving at its position. As such, NAMFISA is looking into engaging external legal counsel to advise on this matter.

In the light of the fact that the matter is not resolved yet, we caution pension fund members and insurance company intermediaries on the risk that the purchase of a member owned annuity from pension fund capital at retirement may pose to the retiree. Should NAMFISA conclude that such transactions are not consistent with the Pension Funds Act, all persons who have entered into such a transaction are facing the prospect of being presented a tax bill for tax that was to have been paid at the time of retirement. Should this realise, the member is furthermore facing penalties and late payment interest.

Lump sum benefits upon death of a pensioner - another prickly pear

The principle of defined contribution retirement funds is that members build up their individual retirement capital from their own contributions and from a portion of the employer's contributions, together with investment returns. In contrast with defined benefit funds where the pension benefit is pre-defined and the employer carries the risk of under contributions and poor investment returns, a member of a defined contribution fund carries these two risks and is dependent on the capital that has built up to retirement to provide income in retirement. The member is the owner of the capital and many defined contribution funds reinforce this ownership principle by offering a refund of the balance of a pensioner's retirement capital in the event of the pensioner's early death following retirement.

Two questions arise. Firstly, does the Income Tax Act make provision for this type of benefit? Secondly, what does this benefit represent and how should this type of benefit consequently be taxed?

Turning to the first question, the Income Tax Act, in the definition of preservation fund states categorically that "...if a person dies after he or she has become entitled to an annuity, no further benefit other than an annuity or annuities shall be payable to such person's spouse, children, dependants or nominees..." This does make sense as a retiree had the option of having one third of the retirement benefit paid out in cash tax-free, as a once-off concession.

Although the definition of 'pension fund' in the Income Tax Act does not contain the same provision, this is probably not the intention of the legislator. This intention is also reinforced in Practice Note 1 of 1986 that deals with flexible annuities. In this practice note it is categorically stated that no further commutation of capital may be made upon the death of the pensioner. Any remaining capital must be paid out as an annuity over a minimum term of 5 years.

Turning to the second question, it appears logical that even if the Income Tax Act does not prohibit a further commutation of any amount upon death of the pensioner for a lump sum payment, such lump sum in effect represents an accelerated payment of what would have been paid in the form of annuities had the pensioner not passed away. Such lump sum payment would thus be fully taxable. Presumably Inland Revenue would not object to receiving its tax dues immediately and calculated on a higher taxable amount as opposed to receiving its tax dues on smaller monthly annuities over a period of time.

The principal officer - a need for demarcating boundaries

The position of principal officer is a statutory designation. It is the equivalent of the public officer companies were required to have in terms of the old Companies Act. The principal officer is essentially the physical embodiment of the intangible legal person, the pension fund. As such the principal officer has a limited number of statutory duties:

• Signing of certain documents, together with a trustee/ chairperson of the board of trustees, furnished to or required by the Registrar;
• Furnishing of additional particulars required by the Registrar in relation to a rule amendment;
• Submission of rule amendments and consolidated rules to the Registrar;
• Sign the prescribed certification of the valuator's report together with the trustees and that the report was sent to every employer participating in the fund;
• Submit to the Registrar under cover of a letter signed by him, the annual financial return of the fund;
• Sign any appeal to the Minister against a decision by the Registrar and lodge with the Registrar;
• Be the correspondent of the Registrar with regard to matters relating to the fund;
• Execute any function assigned to him in terms of the rules of the fund;
• NAMFISA requires the principal officer to sign off the SIH and ERS returns funds are required to submit on a quarterly basis.

In terms of the definitions to the regulations of the Pension Funds Act, "principal officer means the principal executive officer referred to in section eight of the Act who may be a member of the body administering the fund." There is a separate definition of 'person managing the business of the fund', in the Namibian context this is typically the board of trustees and not the principal officer.

And that's it as far as the duties and responsibilities of the principal officer go. Unless the engagement of a person to serve as principal officer requires the person to provide other specialist services, a principal officer does not need to be a specialist.

From our experience, employers are increasingly moving the administrative burden of their pension fund to the fund itself as the result of increasing regulatory demands on funds. It is thus the administration of the pension fund business not attended to by the fund administrator and other service providers for which funds nowadays require additional resources. This covers liaison between the employer, the fund and service providers on administrative matters. The technical matters requiring expertise that funds would normally require are generally covered by the mandate of one or the other fund service provider.

Where a fund employs an independent principal officer, it must ascertain that there is neither a gap nor an overlap between the mandate of the principal officer and that of the consultant and this is not an easy task as both functions are not well defined in our industry and differ from one service provider to the next.

Trustees are often not clear about their expectations and the roles of the principal officer and the other service providers. These funds end up either with another cost layer and confused roles of their service providers, or with a principal officer that assumes the function of the consultant.

The approach should thus be for funds to clearly demarcate up front the boundaries between the role of the principal officer the consultant and the administrator to avoid gaps and overlaps that draw the trustees into arguments and mediation between different service providers and make it difficult to place responsibility.

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Kai Friedrich's Administration Forum

Employer funded insurance policies - is your house in order?

A number of retirement arrangements have been set up in the past capitalizing on a 'loop hole' in the Act. This allowed employers to deduct premiums paid in respect of life policies taken out on the lives of employees (e.g. funeral policies, key man policies, group life schemes outside an approved fund etc.). The 'loop hole' allowed the policy proceeds due in the event of death of any employee to be paid to the employee's dependents or nominees tax free. Income Tax Amendment Act 15 of 2011 effectively closed this loop hole.

Policy proceeds upon the death of an employee are now taxable in the hands of the employer, if the employer claimed any premiums in respect of the relevant policy for tax purposes, in the past. An employer who maintains such a life assurance scheme needs to introduce a new employment policy to define its intention regarding the impact of tax on the gross proceeds. i.e. will the employer carry the cost or will the cost be passed on to the beneficiary/ies? If the tax is to be recovered from the gross proceeds before affecting payment to any beneficiary/ies, procedures and controls need to be introduced to ensure that the gross proceeds are reduced by the tax effect before paying a benefit.

If the employer recovers the premium from the employee, the employee and his/her beneficiary/ies will not be taxed on the policy proceeds, the flip side of course is that the employee will not have been able to claim the premiums as an expense against his/her taxable income.

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from RFS

A donation of life


In April, members of the RFS team donated 25 units of blood, wich are expected to save 75 lives.

RFS executive committee


Günter Pfeifer, Director: Operations, is responsible for the operations of the Benchmark Retirement Fund and the Retirement Fund for Local Authorities and Utility Companies, our largest client. He joined us from De Beers Marine where he held the position of financial manager. Günter distinguished himself with a cum laude in his final year of Bachelor of Commerce (Accountancy) studies, after which he qualified as a chartered accountant. He completed his articles with Deloittes where he was seconded to the Stuttgart office in Germany for 1 year. He left the audit profession in August 1999 having attained the level of audit manager, to join Fedsure as portfolio manager. He left Fedsure's successor Channel Life in the position of financial manager early 2003 to join De Beers Marine. Through Beers Marine he completed the De Beers Program for Management Development at Gordon Institute for Business Science, and the Advanced Development Program at the London Business School. Günter offers a wealth of experience and expertise and is spending much of his time improving the functionality and product range of the Benchmark Retirement Fund for the benefit of all its stakeholders.

News from NAMFISA

Quarterly SIH reports to be submitted within 45 days

In a notice to stakeholders NAMFISA advised that the period for submission of SIH reports, of 30 days after the end of each calendar quarter, has now been extended to 45 days after the end of each calendar quarter. This concession has been granted for the ensuing year and this will be reviewed after the end of the year, i.e. after the quarter ended 31 March 2017.

News from the market

BON repo rate increases once again

Bank of Namibia once again raised its repo rate from 6.75% to 7% with effect from 13 April.

Allan Gray appoints Nhlanhla Nene to its board

Allan Gray has appointed former finance minister Nhlanhla Nene as a non-executive director of the firm.

The company said in a statement on Monday that its shareholders approved his appointment to the boards of the holding and operating company.

Read more here...

Media snippets
(for stakeholders of the retirement funds industry)

Beneficiary fraud, a headache for trustees

The disposition of death benefits from a retirement fund is the statutory responsibility of the trustees and cannot be delegated. Where most of our trustees have a full-time occupation and trusteeship is just one of the additional honorary duties assigned to them, they find it hard to apply enough time and attention to death claims, yet this is one of the high risk areas in the management of retirement funds. As the article below sounds - beneficiary fraud is a headache for trustees and can produce losses to funds for which the trustees may be held liable at the end of the day.

"...Trustees of pension funds require a certain level of proof regarding beneficiaries, which helps to eliminate fraud. Beneficiaries are required to submit sworn statements confirming their dependency and relationship to the member. Where surviving spouses rely on civil marriages, the marriage certificate will be required. However, in marriages under customary law, claimants will not have certificates and will have to prove the relationship through other means. There are increasing levels of protection against fraud, she says. DNA tests, while not unheard of, are not common..."

Read the full article by Lorraine Kearney in IOL of 26 March 2016 here...

Compliance is no longer about just ticking the box

Trusteeship becomes ever more onerous without any doubt and whilst SA is a few steps ahead of Namibia with regard to the enforcement of new standards of governance, NAMFISA has signalled its resolve to follow suit. The article referred to below deals with the failure of a financial service provider in SA to meet his statutory obligations. The same principles do apply to other persons in a fiduciary capacity such as trustees, so trustees should heed the message conveyed in the below article.

"During November 2015, the Registrar imposed a fine of R150 000 against a FSP for failure to observe section 2 of the Code.

The FSP kept records of advice on some of its clients' files detailing the nature of advice that had been given to its clients. The proper interpretation of this leads one to think that a Needs Analysis had been conducted.

The Registrar's investigations revealed that the same advice had been given to different clients who had totally different circumstances. In fact, the clients on whose files records of advice were recorded had not even been consulted by the FSP, nor were proper needs analyses conducted..."

Read the full article in Insurance Gateway of 3 March 2016 here...

Do I really need dread disease and disability cover

In the Benchtest 11.2015 newsletter we drew attention to the additional peace of mind that is provided to members by funds offering dread disease. In the article in the link below a reader's questions on the need for dread disease and disability cover are answered by an expert. Here is an excerpt:

"Dread disease and disability cover are both lump sum benefits that I think you should have. I recommend dread disease cover for the simple reason that we are all at risk of contracting a severe illness. No one can with certainty assume that it will never happen to them. Dread disease cover is a more expensive benefit than disability cover. It pays out a lump sum on the diagnosis of a severe illness. If you have a proper medical aid, I would not recommend more than R360 000 of cover (1 times annual salary)."

Read the full article by Ingé Lamprecht in Moneyweb of 14 April 2016 here...

Media snippets
(for investors and business)

Why the Rand will continue to appreciate

• US data does not give any indication of accelerated inflation and hence no pressure on raising interest rates;
• EU stocks increased on confidence that a stronger US economy and better financial stability in EU and Asia would help global growth;
• Stronger than anticipated collection of taxes by SARS;
• SA trade deficit decreased sharply in February 2016;
• SA exports rose sharply while imports only increased marginally;
• For the year, SA trade deficit decreased by close to 40% over previous year.

Read the full article by Dr Chris Harmse, chief economist of Rebalance Fund Managers, in Moneyweb of 6 April 2016 here...

The four tiers of engagement: What Silicon Valley taught me about collaboration and time management

"Recently I was talking with the noted surgeon, writer, and public health researcher Atul Gawande about his demanding schedule - and how he tries to manage it for maximum impact...

Specifically, I think in terms of four tiers of potential engagement with a company or any project.

While these different roles help determine how I engage with start-ups, I use them generally too - for projects as well as formal companies.

• As a principal you essentially say, "I own this, and it's my responsibility to bring this endeavour to fruition."
• As a board member, you engage in a substantive but less immersive fashion than you do as a principal. You've committed to providing on-going strategic governance and assistance to the endeavour.
• As an investor - whether you're dealing with a for-profit start-up, a philanthropic project, or any other endeavour, your role as an investor will likely have a literal component - i.e., you will be contributing money to the endeavour.
• As a friend, you have a relationship or alliance with one of the endeavour's principals, but no formal or even on-going commitment to the project. You might even put money into a project - but you ultimately exist outside the project's orbit. Your engagement is serendipitous, reactive, and ad hoc."

Read the article by Reid Hoffman in Linkedin of 9 April 2016, here...

And finally...

Smart-ass answers to smile about

The policeman got out of his car and the teenager he stopped for speeding rolled down his window.
"I've been waiting for you all day," the Cop said.
The kid replied, "Well I got here as fast as I could."

Dear reader

In this newsletter we continue our support to trustees with a generic conflict of interest policy statement which should be further adapted to meet the needs of a particular fund. Find it below.

In this newsletter we provide a template for a ‘conflict of interest policy statement’, we dwell on crisis responses in the pensions industry to Inland Revenue’s changed tax practice with regard to pension fund death benefits that may yet haunt funds that go that route, we draw attention to the urgent need to update the Income Tax Act to reflect changes in the market environment since the 1980’s, we urge NAMFISA to establish a practical framework for correcting regulation 28 breaches and we draw attention to more regulatory reporting looming.

Of course as usual we also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 02.2016

In February the average prudential balanced portfolio returned 0.50% (Jan: -2.08%). Top performer is Allan Gray (1.76%); while Prudential (-0.29%) takes the bottom spot. For the 3 month period Allan Gray, for the 7th consecutive month takes top spot, outperforming the ‘average’ by roughly 6.4%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.3%.

Beware of stepping on the wrong toes

In the years after the financial crisis, when the Fed introduced its large scale asset purchase programme and reduced its repo to 0.25%, when commodities and the oil price were running hot things were going extremely well with many resource driven emerging economies and with oil producing countries. Their interest rates were low, their currencies and bourses appreciated substantially driven by foreign investors looking for yield. Those were the days when many of these countries started to think about how to break the shackles of the global hegemon. There were moves to trade crude in currencies other than the US Dollar in an effort to break the US Dollar monopoly. We read about the BRICS countries having resolved to establish a BRICS Bank in order to break the shackles of the IMF and World Bank.

A number of oil exporting countries that became more outspoken on their anti US sentiments experienced civil uprisings, some experienced regime changes and with the dramatic fall of the oil price, those regimes that survived are at last also experiencing severe economic problems.

Read part 6 of the Benchtest 02.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a generic conflict-of-interest policy

The purpose of a conflict-of-interest policy is to protect an organization’s interest when it is contemplating entering into a transaction of arrangement that might benefit the private interest of one of its officers or directors, or might result in a possible excess benefit transaction.

Establishing a strong conflict-of-interest policy is particularly important for nonprofits. Conflicts of interest have the potential to jeopardize a nonprofit’s tax-exempt status and damage its reputation with donors. Because of the crucial role many nonprofits play in protecting the public interest, any erosion in public confidence is particularly harmful to these organizations.

The generic conflict-of-interest policy can be further adapted with the assistance of RFS

• Download the generic conflict-of-interest policy here...

AND

• Download the generic trustee performance appraisal form here…
• Download the generic investment policy here...
• Download the generic trustee code of conduct here...

Death benefits – does it make sense to remove it from the fund’s rules?

How to circumvent the current stalemate with regard to pension fund death benefits

To circumvent the stalemate currently experienced with regard to the disposition of death benefits, that has been caused by Inland Revenue’s extremely narrow interpretation of paragraph (a) of the definition of ‘pension fund’, some funds have now removed the reassured death benefit from their rules while others are channelling their death benefits through a ‘benefit fund’. Following either route applies the same rationale as tax evasion does, i.e. following a route that is solely aimed at achieving the circumvention of legal constraints rather than achieving the underlying intention within the framework of the law. We would certainly never advise clients to revert to such measures in order to overcome existing frustrations with the Income Tax Act.

The benefit fund

Firstly, a ‘benefit fund’ is a concept that exists in the Income Tax Act but not in the Pension Funds Act. In terms of the Income Tax Act it enjoys preferential tax treatment similar to that of a pension fund. However, its definition in the Income Tax Act is very similar to the definition of ‘pension fund organisation’ in the Pension Funds Act. We are consequently of the opinion that a ‘benefit fund’ as contemplated in the Income Tax Act is in fact a pension fund organisation as contemplated in the Pension Funds Act. It must therefore register as a pension fund under the Pension Funds Act and is then also subject to the Act. This means that the principles of section 37 C have to be observed in distributing a death benefit. From an income tax perspective, any benefit paid by the benefit fund is not taxed as a pension or provident fund benefit, but would be subject to the general principles of the Income Tax Act as the Act does not contain any specific sections dealing with such benefits. This means that the employer can deduct the premiums but the benefit is taxable in the hands of the beneficiary.

The employer owned group life policy

Secondly, where funds have removed the death benefit from the rules to replace it with an employer owned group life policy that would pay directly to nominated beneficiaries, the income tax implication will be the same as for a death benefit derived from a ‘benefit fund’. The premium is deductible by the employer but the benefit is taxable in the hands of the beneficiary. The problem is that the fund is still sitting with the member’s fund credit that is subject to the stalemate referred to above. So the fund really has only achieved its goal to circumvent this stalemate with regard to the reinsured benefit but not with regard to the fund credit. Furthermore the benefit is not subject to the protection of the Pension Funds Act and could be lost should the employer be insolvent or be liquidated, or should the beneficiary or his estate be insolvent. The disposition of the benefit is not subject to the Pension Funds Act either which may make it easier to dispose of but this may not necessarily be in the interests of the deceased member.

Conclusion

Using a benefit fund will circumvent the current difficulties experienced with the payment of death benefits from a pension fund. At the same time it would however render the benefit fully taxable unlike the case of a pension fund where only the annuity is taxable but the commutation of up to 66% of the capital is tax free. Arranging an employer owned group life policy renders the full benefit taxable and removes the protection of death capital offered by the Pension Funds Act. The more appropriate route to follow to achieve the objective of avoiding the pension fund death benefit stalemate is to convert the fund to a provident fund. This in turn would render two-thirds of the death benefit taxable which is still better than what would apply to an employer owned policy benefit or a benefit fund benefit.

The way forward

Having said this, the current stalemate situation with regard to death benefits payable to minor beneficiaries of a pension fund is very unsatisfactory and the industry has to find a solution until such time as the Income Tax Act has been amended. RFS is working on a solution and should soon be able to offer a solution that meets the intention of the Income Tax Act rather than only trying to circumvent the Act. This would require an amendment of the rules of the fund to direct that no less than 34% of the capital available upon death of a member is to be paid in the form of an annuity.

The Income Tax Act must be amended

When the Income Tax Act was proclaimed in 1981, the pensions industry did not cater for defined contribution pension funds that only evolved about 10 years later. With defined benefit pension funds of which there are only 2 left in Namibia, life from an income tax point of view was simple. Retirement benefits, disablement and death benefits were defined in terms of a salary linked annuity. A portion of the annuity could be commuted for a cash lump sum. As per today’s definitions in the Income Tax Act, this portion was not to be more than one-third in the case of retirement or 66% in case of death. The actuary would have converted the commutable portion of the annuity to an equivalent lump sum to determine how much was to be paid out in cash. There was no direct relationship between the actual capital contributed in respect of the member and the benefit payable, unlike in defined contribution funds.

The old defined benefit funds were based on the principle of cross subsidisation. So while two members under exactly the same circumstances would have contributed the same capital, the actual cost of providing benefits could vary vastly between these members based on age, marital status and dependants’ status. Despite the fact that the capital applied towards lump-sums and towards annuities may have differed vastly, it was invisible to Inland Revenue, which was then happy to exempt all lump sum benefits paid by such defined benefit funds.

In defined contribution funds, all contributions made in respect of a member are now ring fenced and are only available to this member and his dependants. Death benefits are sometimes funded by the member’s accumulated capital, sometimes an insured lump sum is added to the accumulated capital and sometimes the fund offers survivors’ pensions that, that are usual reinsured with an insurer. In these type of funds it now becomes visible that the capital applied towards different benefits may actually be different between two members in respect of whom the same amount of contributions were contributed.

Now Inland Revenue taxes a beneficiary of a fund who receives the greater portion of a death benefit in the form of a lump sum and exempts the other beneficiary of the same fund who receives the greater portion in the form of an annuity, despite the fact that between the two the greater portion of the capital may still be paid in the form of an annuity. We do not believe this is correct or fair towards the different types of fund or the beneficiaries of different deceased members. Inland Revenue must catch up to these changes in the market place and amend the Income Tax Act to deal with the defined contribution environment appropriately and fairly. In as much as Inland Revenue in the past relied on the actuary to set up the defined benefit pension fund rules to meet the requirement of paying benefits mainly in the form of annuities, it should recognise that funds nowadays offer different benefits to different member categories and that funds often offer a combination of salary linked annuity benefits and capital linked lump sum benefits. It should accept a certificate by an actuary confirming the portion of the capital a fund applies overall toward beneficiary annuities in the event of death.

But it goes further than just amending the Act in respect of death benefits. Government wants to encourage employees to provide for their old age so that they will not depend on government when they reach retirement. However the current tax deductible contribution to an approved fund is limited to N$ 40,000. At a typical member contribution rate of 7%, it means that as from a salary of N$ 571,000 an employee does not benefit from this concession any longer. However when a benefit becomes payable by the fund, the Income Tax Act ignores the fact that the employee may have made significant  contributions that he was not able to deduct for tax purposes and taxes the benefit as if all contributions were deducted all along.

Benefit preservation upon resignation from an employer is another sore point that requires attention although not necessarily through an Income Tax Act amendment. Members of funds are currently allowed to cash in their total capital upon resignation from employment. This represents a significant leakage to the pensions system and results in such delinquents not being able to survive on their remaining capital upon reaching retirement. It is interesting to note that SA will now introduce limits and conditions for withdrawing capital upon termination of employment.

And of course the concept of a provident fund runs diametrically opposite to government’s intention to have citizens retire on adequate retirement capital. Again SA will be doing away with provident funds and Namibia needs to seriously reconsider whether we will achieve vision 2030 without extensive updating of the Income Tax Act.

The way forward

As we suggested in last month’s newsletter there is a need for a forum to be established between the pensions industry and Inland Revenue that will advise the Minister on proposed or required changes to the Income Tax Act with regard to approved funds, including benefit funds and the benefits offered by these funds.

We have approached the Retirement Funds Institute officially with this suggestion and have suggested to expand this idea to the Pension Funds Act and of the FIM Act. Pension funds are advised to also prompt the Institute to pursue this thought with vigour.

Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.

Kai Friedrich's Administration Forum

Regulation 28 - breaches must be managed in the interests of fund members

As the result of the sudden severe depreciation of the Rand in December of last year (8% against the US Dollar and 10% against the Euro), a number of asset managers with more assertive offshore exposure, suddenly found that their client portfolios were in breach of regulation 28 which caps offshore exposure to 35%. Clients will be aware that their fund had to submit the SIH report as at 31 December 2015.

Such breaches can also be caused by significant portfolio flows, both into and out of an asset manager’s or a fund’s investment portfolios.

As regulation 28 now stands and seems to be applied by NAMFISA, such breach would immediately be subject to a penalty of N$ 1,000 per day. To avoid incurring a penalty being imposed on their client funds, the asset manager should thus immediately, reduce the offshore exposure, i.e. the same day. Selling and repatriating foreign assets cannot be done within a day or two. It would incur costs that might still prove futile should market movement be in the opposite direction soon thereafter. Funds would be out of the market for a few days, incurring lost investment opportunity for the pension fund and its members and it is always a cumbersome process to move asset offshore again afterwards.

There is clearly a need for NAMFISA to formulate a meaningful framework on how regulation 28 breaches as the result of market movements and significant portfolio flows are to be managed in the interests of the members of pension funds in accordance with its declared intent to protect the interests of the fund member.

The asset management industry has already formally approached NAMFISA in this regard and it is to be hoped that the matter will receive due attention.

Kai Friedrich Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.

News from RFS

RFS executive committee


Charlotte Drayer officially retired from our board of directors and as an employee at the end of June 2014. However a person with her knowledge, her skills, her drive and her passion for the pensions industry flourishes best in the work environment. Not seeing herself sitting at home all day, she signed up a new contract of employment and continues to share her knowledge with staff in general and her successors and continues on our executive committee for the benefit of our staff, the company, our clients and indeed the pensions industry at large. Having introduced pension fund administration to Namibia in 1987, she built up a name even beyond the borders of Namibia and is without any doubt the most experienced and one of best qualified fund administration experts in Namibia.

News from NAMFISA

Industry meeting held on 14 March 2016

The following topics were addressed during this industry meeting:

• Complaints lodged - mostly on benefit payments;
• Status of FIM Bill, standards and regulations – out of NAMFISA’s hand, time schedule uncertain;
• Feedback on statutory submissions – certain information reflected incorrectly and a number of other questions addressed e.g. exemptions based on good reason;
• Future quarterly ERS reporting – funds to be requested to do testing;
• Registered SPV’s and UIM’s, status of number registered, 2 in the pipeline;
• Implementation of ERS based forms;
• NAMFISA engagement plan to be communicated soon – no feedback received from industry;
• Regulation 28 and 29 – Ministry of Finance considering proposed changes;
• Fund inspections – on-site inspections scheduled for 2nd half of year;
• Late and non-payment of contributions – delinquent employers may be publicly named and shamed by NAMFISA and will be referred to prosecutor general;
• Risk based supervision – being attended to.

Download our internal notes from the meeting here…

New quarterly reporting requirements looming

NAMFISA recently approached a number of pension funds with the request to assist in testing the new ERS based quarterly report that is to replace the SIH report and that will require much more extensive reporting. NAMFISA indicated that testing should be finalised within 30 to 45 days. The intention is that the report will be released on 1 July for full implementation.

With the annual and quarterly SIH report for end of December 2015 due by end of January 2016, our experience has been that our fund accounting team had to fully focus on the submission of these reports during January at the cost of focus on our service commitments to our clients.

We believe it is inevitable that additional capacity will have to be created by fund administrators to cater for the new quarterly reporting. This will undoubtedly also impact administration fees.

New regulatory requirements for the asset management industry

In accordance with NAMFISA’s stated intention to move from compliance to risk based supervision, Oshili Nashi Popiwe reports that asset managers will have to comply with numerous new requirements such as:

• Fit and proper requirements for shareholders, directors, managers, portfolio managers and compliance officer;
• Manager approval requirements;
• Compliance officer requirements;
• Duties of managers;
• Requirements for record keeping;
• Requirements for appointment and duties of auditors;
• Requirements for appointment and duties of portfolio managers;
• Client reporting requirements;
• Requirements for professional indemnity and fidelity insurance cover;
• Minimum start-up capital required is N$ 250,000;
• Sufficient liquidity to cover 13 weeks of annual budgeted expenditure;

It will be interesting to see whether and if so, how asset managers will respond to the increasing cost pressures these requirements will bring about without any doubt.

Read the full article here…

News from the market

Social Security Commission improves MSD benefits

Benefits under the maternity leave, sick leave and death benefits fund are improved as follows as from 1 January 2016:

• Sick leave benefit: first 12 months - 75%, maximum increases to N$ 9,750 from N$ 9,000; next 12 months 65%, unchanged,  maximum benefit increases to N$ 8,450 from N$ 6,275;
• Maternity benefit: 100% of basic wage, maximum benefit increases to N$ 13,000 p.m. from N$ 10,500 p.m., now for maximum period of 12 months;
• Death/retirement benefit increases to N$8,475 from N$ 5,510.

Old Mutual PLC announces break up of group into four separate businesses

Old Mutual PLC has announced, following a strategic review of the Group that it intends to implement over time a managed separation of the Group into four separate businesses, including a standalone Old Mutual Emerging Markets entity. Read more here...

Financial giants accused along with FSB

Financial giants Liberty, Alexander Forbes and others are accused of colluding with the Financial Services Board (FSB) to close thousands of pension funds illegally, to the detriment of savers and their families, many of them working class and poor. Read more here...

Namibia’s trade deficit reaches a record N$ 39bn

Media recently lamented last year’s record trade deficit. We are all aware that government spent massively on construction and infrastructure, including costly projects like the Neckartal dam, the expansion of the port of Walvis Bay etc.

Could our trade deficit be explained by the fact that just about every one of these projects was awarded to foreign contractors? To what extent do the new government tender regulations duly weight such negative consequences in scoring competitive bids?

Fund members take fund on for reckless investments

Momentum's Red Eye Weekly reporths that a group of government pensioners has taken the SA Public Investment Corporation (PIC) and the SA Government Employees Pension Fund to the public protector for the "reckless" handling of their money. They have listed investment in two companies — Lonmin and African Bank — as examples of bad and reckless investments, arguing that it was apparent at the time of the transactions that the companies were facing bankruptcy. The PIC manages more than R1.5-trillion in assets on behalf of the Government Employees Pension Fund. This is the second high profile complaint so far this year concerning the use of government employees’ funds.

Media snippets
(for stakeholders of the retirement funds industry)
 
Pension fund trustees: personal liability kicks in

The principal officer and trustees of the SA Local Authorities Pension Fund have been thrashed by a decision of the FSB Appeal Board. Not only has the appeal been struck from the roll, and dismissed with costs on the punitive attorney/client scale, but it was ordered that these costs be paid jointly and severally by the fund, its principal officer and the trustees who’d authorised the appeal. Moreover, the fund must fully recover these costs from the principal officer and relevant trustees in their personal capacities.

Let this sound a warning to any fund embarking on litigation that’s “vexatious”, as found here by the Appeal Board sitting under retired judge L T C Harms with J Damons and L Makhubela.

“Persons who are in a fiduciary position and litigate in their own interests, in the name of say an estate agent or trust, ought to be held personally liable for the cost of the litigation,” Harms stated. “The (SALA fund’s) board members and the principal officer stand in such relationship to the fund.”

Read the full report by Allan Greenblo in Insurance Gateway of 2 February 2016 here…

Media snippets
(for investors and business)

Critical skills you should learn that pay dividends

“The further along you are in your career, the easier it is to fall back on the mistaken assumption that you’ve made it and have all the skills you need to succeed. The tendency is to focus all your energy on getting the job done, assuming that the rest will take care of itself. Big mistake.”

Here are these skills: -

• Emotional intelligence – It is your ability to recognize and understand emotions in yourself and others and your ability to use this awareness to manage your behaviour and relationships.
• Time management - This refers to the tendency of little things that have to be done right now, to get in the way of what really matters.
• Listening - True listening means focusing solely on what the other person is saying. It’s about understanding, not rebuttal or input.
• Saying no - Saying no to a new commitment honours your existing commitments and gives you the opportunity to successfully fulfil them. When you learn to say no, you free yourself from unnecessary constraints.
• Asking for help - The ability to recognize when you need help, summon up the courage to ask for it, and follow through on that help is an extremely valuable skill.
• Getting high quality sleep - When you don’t get high-quality deep sleep, the toxic proteins remain in your brain cells, wreaking havoc and ultimately impairing your ability to think.
• Knowing when to shut-up - In conflict, unchecked emotion makes you dig your heels in and fight the kind of battle that can leave you and the relationship severely damaged.
• Taking initiative - You have to take risks and push yourself out of your comfort zone, until taking initiative is second nature.
• Staying positive - Maintaining positivity is a daily challenge that requires focus and attention. You must be intentional about staying positive if you're going to overcome the brain's tendency to focus on threats.

Read the article by Dr Travis Bradberry in Linkedin of 2 March 2016, here...

What every start-up CEO should know to not go down

“Much has been made of the recent resignation of Zenefits’ CEO, Parker Conrad – not because the CEO of one of the hottest startups in Silicon Valley was stepping down, but because of compliance. Or more accurately, lack thereof…Companies that have a comprehensive compliance management system (CMS) in place are better equipped to monitor marketing messages across a wide range of customer channels -- everything from digital and TV to print and contact centers. Effective monitoring plans include audit capabilities, a standard operating procedure for remediation of violations, and technology that identifies possible infringements before they become problematic. As we saw with Citigroup Inc's 2015 judgment (the consumer bank was ordered to pay $700 million in relief to borrowers for illegal credit card practices), for even well-established companies the costs can be colossal - for a start-up they can be catastrophic..”

Compliance management is extremely important to financial institutions such as pension funds in Namibia generally and to their financial services providers more specifically where statutory and regulatory requirements are increasing by the day. Engaging a service provider without obtaining comfort on the service provider’s compliance processes is tantamount to reckless management and dereliction of duty by a board of trustee.

Read the article by Alex Baydin in LinkedIn of 29 February 2016, here...

5 ways to make your clients love you

“A positive relationship with a client is beneficial for many reasons, says Hellriegel. From an agency perspective, if a client is happy they are more likely to retain your services. In the event of budget restraints, the client may be more likely to look at readjusting the contract rather than simply cutting the budget entirely. In addition, making your clients happy opens up new business opportunities for the company as the client is more likely to recommend the agency to other businesses.”

1. Build trust: Show your client that you are invested in their success
2. Communication: Keep clients updated
3. Respect: Meeting deadlines
4. Dedication: Going beyond the call of duty
5. Personalisation: Treating clients to lunch once in a while

Read more here...

And finally...

Smart-ass answers to smile about

It was mealtime during a flight on a British Airways plane:
"Would you like dinner?" the flight attendant asked the man seated in the front row.
"What are my choices?" the man asked.
"Yes or no," she replied.

Dear reader

The trustee's duties are complex, governing decision processes as well as administration. RFS forms a working partnership to ensure that all of the regulator's legal requirements are satisfied, and that the legal obligations of the trustee are fulfilled.

In this newsletter we continue our support to trustees with a generic trustee code of conduct which can be further adapted with the assistance of RFS. Find it below.

In this newsletter we provide a template for a ‘trustee code of conduct’, we report on the on-going difficulties with Inland Revenue taxation practice with regard to pension fund death benefits, we caution against unintended consequences of transferring retirement capital from an approved fund to an insurance product, we comment on study policies and the risks an employer may face in this regard and we draw attention to the ‘cash4lovedones’ benefit that Old Mutual added to its disability income product and the potential pitfalls. We also have a link to the New Equitable Economic Empowerment Bill that will impact on most businesses.

Of course as usual we also have links to topical articles from various media that readers should not overlook – they are carefully selected for the value they add to the financial well-being of pension funds and individuals.

As always, your comment is welcome, so open a new mail and drop us a note!

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 01.2016

In January the average prudential balanced portfolio returned -2.08% (Dec: 0.57%). Top performer is Allan Gray (-0.12%); while Namibia Asset Management (-4.03%) takes the bottom spot. For the 3 month period Allan Gray, for the 6th consecutive month takes top spot, outperforming the ‘average’ by roughly 5.4%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.9%.

The winds have changed

For many years Namibia’s big brother SA, and with it Namibia too, has experienced a tidal lift of its entire financial system. It started off with the commodity run that led to SA ALSI growing by a nominal 15.8% per annum from August 1998 to its peak in April 2015, equivalent to a real growth of 8.3%, excluding dividends. And this period includes the financial crisis that saw the index declining from its October 2007 peak of 28,400 to a trough of 16,500 in February 2009.

Foreigners piled into local equities at an annualised rate of between R 60 billion and R 80 billion. For a long time the Rand held up well on an exchange rate to the US Dollar of between 5 and 8 up until the first quarter of 2012. Interest rates were very low as the result of the US Fed’s stabilization of its financial system post financial crisis with its large scale asset purchase programme that had money flowing freely across the globe and in particular into commodity based economies like SA.

These good times have come to an end now, even though much later than we had anticipated where we expected the Fed to start raising interest rates in 2012. As we know now, this only happened in December 2015. The fact that the Fed stopped its large scale asset purchase programme was largely negated by a virtually simultaneous entry by the ECB with a similar programme.

The anticipated increase of the Fed repo rate in 2015 was the turning point for our financial markets and the tail winds our markets experienced have now turned into head winds.

Read part 6 of the Benchtest 01.2016 newsletter to find out what our investment views are. Download it here...

Pension fund governance - a generic trustee code of conduct

To avoid being sucked further into the Regulator’s enforcement processes, trustees should ascertain that their fund has certain documents in place as we have and will present in the next few newsletters.

The Trustee Code of Conduct governs management of trustees and the principal officer, management of the business of the fund, and management of stakeholder relationships.

These documents should be adapted to meet the fund’s specific objectives. If you do not have any of the documents in place yet, please have your consultant assist you to adapt these documents to your circumstances and objectives.

• Download the generic trustee code of conduct here...

AND

• Download the generic trustee performance appraisal form here…
• Download the generic investment policy here...

Taxation of death benefits - Inland Revenue to get its house in order

Over the last few issues of this newsletter we have been commenting on the status of Practice Note 5 of 2003 and how this impacts on the taxation of death benefits.

At this stage, Inland Revenue issues tax directives on death benefits payable to survivors of deceased pension fund member that are inconsistent from one Revenue office to the other and at times even within one Revenue office.

The past practice of allowing the full lump sum death benefit to be paid in cash but then being subjected to PAYE is still followed by various Revenue officers and offices in many instances. In other instances Revenue officers and offices indicate that a maximum of the smaller of N$ 50,000 and 66% of the total capital available for benefits may be paid as a lump sum while the balance of 34% if larger than N$ 50,000 must be paid in the form of an annuity.

Survivors of course can be adults or minors. Problem is that no insurer in Namibia offers an annuity for a minor. Where a minor is a beneficiary of a portion of a pension fund death benefit, latest Inland Revenue practice means that a significant portion of the capital available to provide benefits to a minor cannot be paid out at all.

The issue gets clouded further by the fact that some pension funds actually require that survivors be paid a portion of the available capital in the form of an annuity. Whether or not the Revenue requirement for a minimum portion to be paid in the form of an annuity will be observed depends on each case and will further depend on whether the survivors’ pensions are quantified in the rules or whether the capital allocation is quantified in the rules, to then be converted to an annuity. Where the survivor’s pension is quantified, a young child or spouse will receive a larger portion of the available in the form of an annuity than what would apply to older survivors. As the result the question arises how Inland Revenue would give due recognition to these individual differences in applying its latest practice based on PN 5 of 2003.

It is our interpretation of the Income Tax Act, that the requirement of a minimum capital amount to be applied to providing annuities, has to be determined and measured at fund level rather than at the level of the individual payments due to be made. We have approached Inland Revenue with concrete examples and requested an opinion 2 months ago but have unfortunately not received any feedback.

Having followed up on this with a senior Inland Revenue official, it is recognised that the Income Tax Act needs to be amended due to its prevailing ambiguities. But when will this happen, considering that the same conclusion on the same topic was already reached in 2004 but nothing has been done yet?

This official suggested that the Retirement Funds Institute should approach the Minister with the request to establish a joint committee to propose changes to the Act. This will no doubt also be a long road. We encourage members of the Institute to raise this with their Institute and to lobby for urgent action in this regard.

Transfer of retirement capital to insurance policy – watch out for unintended consequences

This topic has also been addressed in a number of previous newsletters and remains in murky waters.

The point here is that pension fund rules generally allow, and sometimes even require the retiring member to purchase a pension with the amount of the capital that cannot be commuted for cash (i.e. two-thirds). Mostly the member has the choice to have the one-third that may be commuted for cash, paid out to him/her soonest after retirement and the expectation is that this happens within a few days.

Problem number one is that often the rules of the transferring fund and the rules of the receiving fund do not ‘dovetail’. Receiving funds often do not accept retirement capital unless it represents the full amount before commutation of the one-third. So if the transferring fund has already paid out the one-third the two-thirds cannot be transferred.

Problem number two is that a practice has evolved of brokers selling an insurance product to the retiring member. The Income Tax Act dictates that benefits can only be transferred tax free, if such transfer is made to another ‘approved fund’. Typically these insurance products do not fall into the category of ‘approved fund’ and the administrator of the transferring fund is obliged to determine and deduct tax on the amount transferred to the insurance product. Since annuities then paid by such insurance products are taxed again, the member is effectively taxed twice on the income generated by his/her retirement capital.

Some commentators believe that there is a fine but critical distinction between transferring pension capital to another approved fund and purchasing an annuity with the retiring member becoming the owner of the annuity. We do not agree with this view. Problem is that Inland Revenue has indicated that in one opinion that it agrees with this view. This opinion is addressed to a specific party and is thus null and void with respect to any other person. At the same time this opinion attaches conditions to such purchase that are a given when the capital moves to a fund registered under the Pension Funds Act but cannot be complied with if the money moves to an insurance policy under the Long-term Insurance Act. It furthermore does not indicate who is to ascertain that these conditions will be complied with and how this will be achieved without the Pension Funds Act applying. Is it the insurer receiving the capital or is it the transferor fund, respectively its administrator?

We believe that at the answer to this question must be sought in the Pension Funds Act rather than in the Income Tax Act. Does section 37A of the Pension Funds Act allow pension fund capital to be moved to an insurance policy under the Long-term Insurance Act without the capital losing its treasured protection under section 37A?

This is a question that we have posed to NAMFISA to which we are eagerly awaiting a response for a number of years now. In the most recent communication, NAMFISA indicated that it is consulting senior council due to the complexity of the matter.

So here we are - NAMFISA is not in a position to lay down the rules of the game yet insurance brokers and insurance companies are happily entering into business that may yet prove to be in contravention of the Pension Funds Act, and consequently would be taxable in terms of the Income Tax Act.