Background

Trustees mostly understand that it is a risk to engage a single manage to manager their fund’s assets within a single investment mandate. But do they understand what risk or risks they face and which one will be reduced through the appointment of more than one manager and what is the correct number of managers to use?

What risks should we be concerned about?

First consider what risks one is facing. These are:

• Systemic risk
• Prudential risk
• Advice risk
• Market risk
• Volatility risk
• Currency risk
• Scam risk
• Lost opportunity risk
• Liquidity risk
• Investment risk

Does a combination of manager address all these risks?

Combining more than one manager will reduce the prudential risk that something can go horribly wrong with one organisation.  It will reduce the volatility of performance because the volatility of each managers will differ from that of other managers. It will also reduce the scam risk, the liquidity risk and the investment risk of capital loss and underperformance. It will not impact on the advice risk, market risk or lost opportunity risk. Advice risk and lost opportunity risk will need to be managed at fund level, while market risk needs to be addressed by spreading investments across different markets e.g. local and offshore market.

What is an optimal number of managers one should combine?

Evidently a combination of more than one manager within a single investment mandate of a fund does reduce most risks funds face when placing their investments. However will it suffice to engage only two managers or should one engage more than two manager? This is a tricky question and really depends on the skills of the trustees and their objectives.

How bold are the trustees in taking active decisions?

If the trustees are totally averse to actively engage in investment decisions and are comfortable with average returns, the answer is, ‘the more the merrier’ as each additional manager further dilutes the risks, approaching the answer very simplistically. There are of course much more sophisticated methods such as the efficient frontier model that will indicate that little further value is added after a certain number of managers have been combined and from where on one would actually produce negative outcomes.

The Namibian environment sets narrow confines

Being realistic about this within the confines of the Namibian environment, most funds are too small to employ one segregated investment mandates, let alone engaging more than one manager on a segregated mandate but have to invest via unit trusts. Since unit trusts are regulated by dedicated legislation and are subject to statutory supervision, the prudential and scam risks are already reduced to a significant extent and probably require very little additional attention of the trustees.

Due care and skill requires active engagement

Due care and skill would probably require of a board of trustees to engage actively in investment decisions and to achieve results better than the average for their members. This means that they will have to think carefully about how to combine managers and how many managers to combine. Given the wisdom of engaging at least two managers, a successful combination of two managers has the best chance of out-performing but of course also has the best chance of under-performing. The greater the trustees’ confidence in the ability of the selected manager to outperform, the fewer managers need to be combined and vise-versa.

What are your performance objective for combining managers?

The question then is what objectives do trustees have in combining different managers? The objective can be one of the following:

• Superior performance
  Choosing managers that are likely to outperform the average manager in the long-term. Such a combination may lead to all managers under-, and out-performing the average at the same time. The trustees need to be clear on this and be comfortable with the consequence thereof, particularly in times when all managers under-perform the average. This is obviously the ideal combination given the conviction that all managers should out-perform in the long-term. Unfortunately in Namibia, only very few managers have a long-term history of out-performing the average. The other managers have all had extended periods of either out-, or under-performance, or have no long-term performance history. Performance history therefore does not render any significant level of conviction for any of the managers outperforming the average in the long-term.
• Above average performance
  Choosing ‘core’ manager/s that is/are likely to out-perform the average in the long-term and an/other non-core manager/s that is/are likely to produce returns mirroring those of the average as closely as possible. The expectation of the non-core manager/s is to cushion any significant under-performance of the ‘core’ manager/s. Performance history should show which manager’s/s’ performance has most closely mirrored the average over the long-term.
• Hedged performance
  Choosing managers with an opposing investment philosophy and style (i.e. value vs growth). If all managers on each side of the spectrum were to perform equally well and equally poorly during periods advantaging and disadvantaging their investment philosophy and style, the combined performance of these managers should mirror that of the average. Again the realities of the Namibian environment are that there are very few if any managers that can clearly be placed on either side of the spectrum making it questionable whether the hedged performance strategy can be employed successfully.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

 

Background

You will be fully aware of the requirement in terms of regulation 28 of the Pension Funds Act, that a pension fund must invest in unlisted investments a minimum of 1.75% of the market value of it’s investments by 31 December 2014, but unlisted investments may in aggregate  not exceed 3.5% of the market value of it’s investments.

The Unit Trust Control Act  and Unlisted Investments

Funds making use of unit trust portfolios are also subject to the Unit Trust Control Act 1981. Unit trust management companies have thus far been able to offer investment portfolios that complied with regulation 28 of the Pension Funds Act.
The Unit Trust Control Act currently defines an unlisted investment as “securities other than stock exchange securities and such other securities determined by the registrar by notice in the Gazette.” Section 6(1) of the Act directs that “The registrar in concurrence with the Minister, by notice in the Gazette, may determine securities and other assets which may be included in a unit portfolio of a unit trust scheme and the minimum or maximum or both minimum and maximum restrictions and conditions subject to which such securities, classes of securities, or other assets may be included in a unit portfolio.

The Unit Trust Control Act and the Pension Funds Act are incompatible

With the introduction of unlisted investments as an obligatory asset class in terms of regulation 28 and 29, the provisions of the Unit Trust Control Act would only allow a unit trust to comply with the prescriptions of regulation 28 and 29 of the Pension Funds Act if the registrar of  unit trust companies in concurrence with the Minister by notice in the Gazette directed that the provisions of regulation 28 and 29 of the Pension Funds Act would equally apply to unit trust companies. This is currently not the case and it is highly unlikely that anything will be changed by Namfisa and the Minister by 31 December 2014. In fact, we have been made aware of a draft gazette that requires a unit trust holding any unlisted investment, to convert such investment to a listed investment within 12 months, as the result of which unit trust management companies will not be able to offer regulation 28 compliant portfolios as far as the unlisted investment requirement goes.

The challenge for smaller pension funds investing in unit trusts

Smaller pension funds mostly invest either in a policy wrapped investment vehicle offered by insurance companies or in unit trusts. Unit trust management companies devised prudential balanced unit trusts specifically to cater for the needs of smaller pension funds. For one because the pooling of investments in a unit trust offers substantially reduced management fees through economies of scale and secondly because trustees require no in depth technical knowledge about investments.

Trustees of smaller funds will now be obliged to invest directly in one or more SPV’s for the reasons set out above. Each fund will now have to select 1 or more SPV without possessing the required technical knowledge. Besides the absence of the technical knowledge to take an informed decision, small funds will each have to enter into an agreement with an SPV, in many cases for quite small amounts. These small funds will also experience the constraints resulting from the illiquidity of unlisted investments more severely than large funds as individual member benefits tend to represent a much larger proportion of total fund investments, while the benefit of higher liquidity and economies of scale through pooling via a unit trust is currently not a viable avenue. These funds may not be able to realise the proportionate share of a retiree in its unlisted investments. This may result in the remaining members effectively being ‘loaded’ with the unrealisable value of the retiree’s unlisted investment and it may even lead to the fund now exceeding the 3.5% exposure limit.

Parameters for considering exemptions from investing in unlisted investments  should be defined by Namfisa soonest

We are aware that as the result of growing regulatory pressures being exerted on pension funds, some smaller employers have already resolved to move to an umbrella fund. At this stage, there appears to be no intention on the part of Namfisa to consider exempting funds from the requirement to invest in unlisted investments, as became evident from discussions with senior officials of this regulator.

Since unlisted investments are illiquid and will not easily be transportable to an umbrella fund, it becomes more pressing that Namfisa needs to identify exceptional situations for granting  exemption from the provisions of regulation 28 to the extent that such fund would have to invest in unlisted investments.

The time frame for concluding on unlisted investments by 31 December 2014 becomes unrealistic and Namfisa should acknowledge this now

Currently all funds, whether or not they invest in unit trusts are faced with the problem that no SPV and no unlisted investment manager has yet been approved by Namfisa, and we have now nearly reached the end of August.

Funds that invest via unit trusts, must at this stage assume that their unit trust management companies will not be able to comply with regulation 28 by 31 December 2014.

This means that all funds will have to have prospective unlisted investment managers present their unlisted investment capabilities to the trustees so that trustees are placed into a position to take a decision on a preferred unlisted investment manager/s and to finalise the contractual documentation with the chosen SPV’s and UIM’s. This process can of course only commence once Namfisa has registered any Special Purpose Vehicles and Unlisted Investment Managers. Since most funds typically only meet once a quarter or even less frequently, it should become very difficult to conclude this process between the time the first SPV’s and UIM’s have been registered by Namfisa and 31 December 2014, given also that funds are unlikely to want to settle with the ‘first best’ UIM that may present to them.

Conclusion and Recommendation

We advise that funds should assume that unit trust managers will not be able to comply with regulation 28 by 31 December 2014.

This means that all funds will have to make their own arrangements as far as the required investment in unlisted investments is concerned. Furthermore trustees will have to have prospective unlisted investment managers present their unlisted investment capabilities to the trustees so that trustees are placed into a position to take a decision on a preferred unlisted investment manager/s, once Namfisa has registered one or more Special Purpose Vehicle and its Unlisted Investment Manager.

We suggest that once an unlisted investment manager/s has/have been selected by the trustees, that the trustees should negotiate an investment of more than 1.75% in order to make provision for future growth of fund assets, possibly considering an investment close to the maximum of 3.5%. This topic should now be put on the agenda as a standing item so that appropriate attention is given to this obligation of the trustees.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Sanlam recently published the results of its annual survey. 100 principal officers of stand-alone retirement funds were interviewed for this purpose. In our previous newsletter we presented some of the more interesting findings in respect of stand-alone funds. Here are some of the more interesting findings of this survey in respect of umbrella funds:

• Larger well-established employers continue to join umbrella funds;
• The average ‘sub-fund’ in an umbrella fund has 484 members and R 297 million assets;
• 12 out of 100 stand-alone funds surveyed in 2014 indicated their intention to transfer in the next 12 months, 55 indicated they have considered it;
• Costs and reputation are the main factors influencing employers’ choice of fund;
• Main reasons for the transfer are cost savings, administrative convenience and fiduciary risk;
• There is an increased awareness of costs but understanding the cost complexities remains unsatisfactory;
• 64% of employer’s remuneration packages are based on total cost to company;
• Average employee contribution rate is 5.6% of salary;
• Average employer contribution rate is 8.5% of salary;
• Average cost of death benefits is 1.6%;
• Average cost of disability benefits is 1.2%;
• Average cost of administration is 0.8% of salary;
• Average allocation towards retirement is 10.5% of salary;
• 66% of employers provide risk benefits as part of the umbrella fund;
• Average death benefit is 3.1 times salary;
• 47% of sub funds deduct fund expenses (FSB levies, auditing fees and trustee reimbursements) from member accounts, 14% from contingency reserve and 16% include it in the administration fees;
• 83% of respondents indicated that the trustees are assisted by an investment consultant;
• 52% of respondents indicated that their consultant was independent of the sponsor;
• 31% of consultants are remunerated via commission, 24% via a negotiated fee;
• 64% of respondents felt that remuneration was commensurate with the consulting services provided;
• 69% of sub funds have a formalised strategy for rendering financial advice;
• 74% of employers offer member directed investment choice;
• 98% of sub-funds indicated that an appropriate default strategy was available for members who do not want make investment choices;
• 53% of sub funds offer life stage mandates as default strategy;
• Only 35% of employers target a pension and of these 57% target 80%+;
• 93% of employer are satisfied or very satisfied with the investment choice for these being a good variety;
• Investment feedback is provided annually by 32% of funds, half-yearly by 13%, quarterly by 37% on investment returns (77%), returns vs benchmarks (66%), portfolio asset allocation (63%), economic overview (60%) and risk analysis (41%);
• Majority of member communication is via printed material on investment performance (87%), benefit structure (87%), legislative changes (61%);
• 77% of funds make use of an internet facility;
• 42% of funds offer a net replacement ratio calculator;
• 34% of employers indicated that the umbrella fund has determined an appropriate default annuity product or are working on it, 15% have determined a product and 47% of these have selected the living annuity, 40% the guaranteed annuity;

It is concerning that 90% of members do not reassess their choices after making their initial decisions.

Sanlam recently published the results of its annual survey. 100 principal officers of stand-alone retirement funds were interviewed for this purpose. Here are some of the more interesting findings of this survey in respect of stand-alone funds:

• SA treasury proposed that funds put default annuities in place for fund members. 90% of trustees are in favour of default annuities being offered by their fund.
• The average employer contribution rate (non-unionised funds) for medium sized funds (501 – 5000 members) is 10.27% (9.7% is allocated towards retirement and 3.6% towards costs);
• The average member contribution rate (non-unionised funds) for medium sized funds (501 – 5000 members) is 6.52%;
• The average cost structure is as follows –
  • Death benefits cost 1.6%, cover is 3.4 times annual salary, less than 20% of funds offer dependants’ pensions, only 16% offer flexible risk benefits;
  • Disability benefits cost 1%, cover is 2.4 times annual salary but mostly in the form of an income benefit;
  • Administration and operating costs are 1% (63% of funds allow for additional billing).
  • More funds apply a fixed cost per member to recoup admin fees, the cost of member choice on average is R 2.75 per member per month;
• Normal retirement age is 62;
• Targeted net replacement ratio is typically set at 70% of pre-retirement income.
• More funds have implemented default investment strategies, 44% of these have a life stage strategy, the less volatile phase starting between 5 and 6 years before retirement (this has decreased from 6.1 years);
• Average age of starting to work is 22, yet contributions only start at 26;
• 50% of funds have a formalised strategy for rendering financial advice;
• 54% of funds are considering to transfer to an umbrella fund;
• One in 5 pensioners supplements his retirement income with part-time work, mostly out of necessity;
• 38% of pensioners deplete their retirement lump sum early on in retirement, on average within 2.4 years after retirement.

Namibian employers often overlook the implications of starting up a branch or a subsidiary in SA as far as pension fund membership of the SA staff is concerned. Generally it is not a good idea to have SA employees be members of the Namibian fund, primarily because these employees could be subject to both SA and Namibian income tax on any benefit payable.

In as much as the Namibian Pension Funds Act prohibits any person to undertake pension fund business in Namibia that is not registered in terms of the Pension Funds Act, the same principles apply in SA and employers who allow their SA employees to participate in their Namibian fund without registering the Namibian fund in SA as a foreign fund are contravening the SA Pension Funds Act and expose themselves to statutory sanctions.

Members of a Namibian pension fund who are employed by an SA entity would not be allowed to deduct their contributions to a Namibian fund. Of course, SA revenue authorities may not always realize that these contributions were made to a Namibian fund and may have erroneously allowed these to be deducted. SARS may at any time it becomes aware of this error re-open previous tax assessments, disallow such contributions with arrears effect and may go as far as adding penalties and interest.

Where any benefit becomes payable to any of the SA members, it would be taxable both in SA and in Namibia in the first instance.

The Double Taxation Agreement between SA and Namibia would avoid double taxation only in respect of a pension payable and/or the one-third pension commutation. SA legislation provides for a deduction from a taxable benefit, any contributions made that were not tax deductible, or were never deducted for tax purposes in SA. This allowance would not apply to these members where the contributions were indeed deducted for tax purposes in SA. The Namibian Income Tax Act does not have a similar provision as the result of which any taxable benefit would be fully taxed in Namibia, whether or not the member concerned ever deducted any contributions to the fund for Namibian tax purposes.

If the fund credit of the SA members were to be transferred from the Namibian Fund to any other fund approved for tax purposes in Namibia at the instance of the member, such transfer would not be taxed in Namibia based on the concession granted in terms of section 16(1)(z) of the Namibian act. Such transfer, however, would in the first instance be taxable in SA, as a benefit has accrued to the member and as SA taxpayers are taxed on the basis of residence rather than source, as is the case in Namibia.

The fund credit of the member could also be transferred to an SA pension fund approved for tax purposes in SA, or to another person such as an SA insurance company, at the instance of the Namibian fund, by means of a 'section 14 transfer'.

In terms of the general principles of the Namibian Income Tax Act, such transfer should not be taxable in Namibia in the hands of the member as no benefit has accrued to the member. By the same principles, the Namibian tax authority could argue that an income accrues to the SA person from a Namibian source and that the amount is subject to income tax in Namibia. In the instances where such transfers have been affected by us in the past, however, Inland Revenue has never issued a directive to deduct tax. Where neither the members concerned nor their employer ever had the benefit of deducting their contributions for income tax purposes in Namibia, our tax authority should also find it difficult to argue that the amount to be transferred should be taxed in Namibia.

Where an employer intends to transfer the SA members of the Namibian fund to SA, the employer and the members concerned need to settle the arrangement concerning the disposal of the members' fund credit in the Namibian fund either, by transfer to an insurance policy in SA, or by transfer to an approved pension fund in SA, or by payment in the form of a cash benefit subject to income tax in Namibia. If the benefit is N$ 40,000 or less the provisional tax rate will be 18% and will be applied by the administrator without being required to obtain a tax directive.

If the benefit is larger than N$ 40,000, Inland Revenue should theoretically also issue a tax directive applying a provisional rate of 18%, since these members were never registered for tax purposes in Namibia. To avoid unnecessary delays in obtaining a tax directive in Namibia, the employer should issue a letter to Inland Revenue confirming that these members were never registered for tax purposes in Namibia as these members never earned any taxable income in Namibia. This letter should then be submitted together with the request for a tax directive to Inland Revenue. The benefit should be reflected by these members on their SA tax returns and will then be subject to SA income tax as well, to the extent that they are not covered by the Double Taxation Agreement between SA and Namibia.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

RFS has the philosophy to encourage the involvement of staff in the wider community at ‘grass-roots level’ through personal engagement. It is much easier to spend money on community projects than it is to apply one’s own time, dedication and commitment to such projects.

No community project can be successful without individuals that are prepared to apply their own time and to get their ‘hands dirty’.

The personal engagement by staff, together with the financial support of the company, should yield superior results for the wider community.

Günter Pfeifer, director of the company, has identified the Okanti Foundation as the project that he supports through personal involvement. Günter has acted as voluntary co-signatory since the first account for the Daniela Medical Trust was opened in 2005. He has quietly contributed to the foundation by offering advice, mainly of a financial nature, to the trustees and applying his critical mind to the issues at hand.

The Okanti Foundation offers marginalised patients and their families a support network and financial assistance, which they would not otherwise have in Namibia. Due to the rare nature of the diseases, families feel very isolated and medical aid benefits are generally not sufficient for the specialised care required. Financial problems, exacerbated by mothers mostly not being able to work, contribute to the families’ dilemma.

The Okanti Foundation is also lobbying for lower chronic medicine prices and for better medical aid benefits for organ transplant patients and other patients with rare diseases – thereby not only benefitting its beneficiaries, but the wider community in Namibia. The foundation promotes organ donation / transplant awareness through radio interviews and other media.

Since 2007, the Okanti Foundation has financially supported 4 Namibian youths before and after organ transplant, and 3 children with rare chronic diseases.

The trustees so far supported 12 other Namibian families with chronically ill children, or adults with terminal disease, or who needed an organ transplant, who did not apply or qualify for financial assistance, with advice, moral support and medical aid queries and negotiations.

Find the Okanti Foundation of Facebook, here...

This question is quite intricate, particularly in view of the fact that retirement annuity funds may only be offered by insurance companies even though a retirement annuity fund is a pension fund and subject to the Pension Funds Act. Because it is offered by insurance companies as an insurance product, both the Long-term Insurance Act and the Pension Funds Act apply to retirement annuity funds.

The Long-term Insurance Act does not specifically prohibit the transfer of capital accumulated in an individual policy to a pension fund, but this would have to be provided for by the rules/policy of the product. The Act does prohibit the transfer of insurance business or a certain type of insurance business to another entity without approval by the High Court.

The Pension Funds Act similarly does not prohibit the transfer of capital accumulated in an individual pension fund policy to another entity, but this would have to be in terms of the rules of the pension fund. The Pension Funds Act  makes provision for transferring business to or from another entity, which does not have to be a pension fund, in terms of section 14.  Where individual transfers are allowed in terms of the rules/policy of the product, these are to be considered a benefit paid by the product.

The Income Tax Act defines how benefits are to be taxed and prescribes what type of benefits an approved fund (retirement annuity fund, pension fund, provident fund and preservation fund) may offer. In the case of pension fund benefits, the Act allows for benefits to be transferred tax-free from any approved fund, other than a retirement annuity fund, to any other approved fund including a retirement annuity fund. The definition of preservation fund prohibits a transfer of member’s interest between two preservation funds. The definition of retirement annuity fund allows for members’ interest to be transferred between approved retirement annuity funds. Such a transfer is not a benefit and is not taxed as the only benefit a retirement annuity may pay is a life annuity of which up to one-third may be commuted.

A transfer from a retirement annuity fund prior to retirement, is typically prohibited in terms of the product policy as the insurer is using actuarial calculations to determine premiums, guarantees and benefits that are dependent on fixed pre-determined parameters that cannot be made subject to member discretion. At retirement the policy matures (or terminates) and then typically allows the transfer of a member’s interest to another retirement annuity fund. This would not constitute a benefit and is therefore not subject to taxation.

To accommodate above objective of allowing members of a retirement annuity to transfer their interest to another approved fund upon retirement is thus prevented by the definition of ‘retirement annuity fund’ in the Income Tax Act which means that this Act would have to be amended. To accommodate this objective prior to retirement, the product policy would have to be amended which should be possible for investment linked products without any risk benefits or other guarantees but is not likely be considered by insurers for any other type of product.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Notes from a Namfisa Pension Fund Consultation Breakfast held on 17 March 2014 at Kalahari Sands
Prepared by Kai Friedrich C.A. (SA/Nam), CFP®

Namfisa was disappointed by the low attendance at the consultation session. They made it very clear that at least the Chairman of the Board of Trustees as well as the Principal Officer of the 101 or so Funds should attend these sessions in future. In future invites will be sent out to these two parties of each Fund.

Matters arising from the previous meeting

FIM Bill and Standards & Regulations project

• The FIM Bill is on the working schedule of the Parliament and should thus be tabled this year.
• The Standards and Regulations project was submitted to Namfisa’s Board but the Board was not satisfied with the results. The project is thus still work in progress. Namfisa did not provide a date when they intend to consult with industry on the standards and regulations but they expressed disappointment with their own progress.

Quarterly Pension Fund Reporting

• Namfisa has a capacity problem in their IT department as they only have one developer available for all the departments that require developments. The developer has started with developing the Pension Fund industry’s quarterly reporting requirements on ERS. The deadline for implementation of the quarterly reports will therefore again be postponed.
• Namfisa was asked to distribute the final reporting template to the industry as soon as possible. Some minor changes were made to the latest draft that was circulated.
• Namfisa will be implementing a 30 day deadline after quarter end for submission of the quarterly returns. They were not open to extend the deadline, at least for the first return which will naturally take longer to be compiled, and indicated that the industry can apply for exemption per the Regulation. Even the concerns by industry representatives about Namfisa being flooded with applications for exemption did not make Namfisa consider these concerns.
• Namfisa has to prepare a quarterly bulleting to its board and is working backwards from those deadlines to establish the 30 day reporting deadline for industry. They indicated that other industry players (like the medical aids) submit their quarterly returns within 30 days and therefore pension funds should be able to do the same. [We should establish how comprehensive the return for medical aids actually is]
• It was muted that Namfisa might request the first few quarterly returns to be completed on Excel while they get the ERS system developed. This was not confirmed during the meeting however.

Pension Fund Backed Housing Loans

• Namfisa drafted amendments to the Act to allow the granting of housing loans in un-proclaimed areas following directives from Ministry of Finance. It would be premature to provide the draft amendment to the industry before it has been properly drafted into law. t
• The provision in the Act will not mean that it would be mandatory for funds to allow their members to invest in property in un-proclaimed areas. Funds allowing their members to come up with policies to mitigate the accompanying risks.

Cancellation of registration of inactive funds

• Namfisa recently published names of 135 inactive funds in the local newspapers, to establish the status of the funds.
• They received responses for about 4 of the funds from administrators.
• If they do not receive a response after 30 days of publication they will deem the fund to be inactive and will deregister the fund (by the end of March 2014).

Industry challenges

• Namfisa raised concerns why resolutions regarding s14 transfers applications are received a lot later than the effective date of transfer in many cases.
• The Act does not provide for timelines in this regard; however it does provide timeframes for the appointment of auditors and actuaries. This topic was also discussed later during the meeting.

Tax related issues

• At the last industry meeting the industry requested written feedback from the Ministry of Finance about their comments made during the industry meeting held in March 2013.
• MoF indicated that they would not provide comments in the form of a letter but will rather issue new practice notes if there are no existing practice notes on certain issues.
• Namfisa will meet with the RoR on 18 March 2014 to follow up on these matters.

New Matters

Section 14 transfers

• Again a discussion arose as to the delay in applying for s14 transfers and the effective date thereof.
• Namfisa suggested that they would develop standard forms for funds to complete when applying for a s14 transfer to ease the process.
• Namfisa suggested that funds should submit all relevant documents (incl actuarial reports) not later than 90 days after the effective date of the s14 transfer
• Namfisa’s supervisory enforcement ladder
• This was circulated to the industry in February 2014 and was briefly discussed again, i.e. when Namfisa will intervene in the fund’s operations.

Regulations 26, 28 and 29

Some frequently asked questions were addressed by Namfisa. Refer to the Namfisa presentation.

• Namfisa confirmed that they will apply the see-through principle for reg 28 reporting and will require information and compliance at issuer level. Namfisa will assess reg 28 compliance at fund level (and not a member level).
• Namfisa indicated that property (incl unlisted property) will not qualify as unlisted investments required under reg 29.
• They also noted that the penalties levied as per Regulation 26 include weekends and public holidays as well, not only working days.
• The N$1,000 charged on non-compliance with reg 28 can be levied per instance of non-compliance per fund, not only per fund being non-compliant overall, i.e. for each instance of non-compliance Namfisa can charge N$ 1000 per day.
• On Regulation 29 Namfisa indicated that applications for registration of SPVs have been received, the industry will be informed about the status of these registrations.
• Namfisa reiterated that applications for exemption can be submitted ito of sub-regulation 10 of reg 28, but confirmed that exemptions regarding unlisted investments must be approved by the Minister of Finance.
• They will also apply the see-through principle on investments in foreign unit trusts.

Inspection Highlights
Namfisa provided an overview of the most common findings in their recent inspection reports

• Funds not paying levies
• Statutory returns are not submitted (on time)
• Fund rules do not specify frequency of meetings and Namfisa would like to see trustees of any fund meeting at least 4 times a year irrespective of size of fund
• Non-compliance to Regulation 28 provisions
• No assessment of BoT and/or PO performance on an annual basis
• Lack of governance policies (e.g. Risk Management, Investment etc.)
• Namfisa not being informed about changes in fund officials (including trustees)
• Minutes of meetings are not signed
• Funds operate on outdated service level agreements
• Namfisa would like to revisit and where necessary repeal all previous practice notes issued in the past, but this project depends on finding a resource for this purpose.
• Namfisa would like to provide standards of what needs to be covered in fund governance policies

Namfisa reiterated that PO’s and Chairpersons of the funds should at least be evaluated on an annual basis, the rest of the Board preferably as well.

Replacement Ratio for DC Funds

Namfisa wanted some feedback from the industry if this is taken into account when advising funds and their members. It was agreed that it is not always that easy as pension money might not always be the main source of income for members once they retire.

NAMFISA levies

• When Namfisa reconciles the levies paid to them they will use the member count as per the audited annual financial statements whereas payment made by the funds is often based on the latest member count. This causes differences (over or under payments).
• While it was suggested that the funds should also work on the audited numbers when making payments, Namfisa was not prepared to commit to this but said that funds should follow the gazette in this regard.
• When being asked whether Namfisa would be prepared to issue invoices for the levies to make the process more efficient they kept on referring to the gazette that does not require them to issue invoices.

The next meeting will be on 15 September 2014

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

A technical analysis by Sabine Halberstadt (BA, LLM), legal consultant at RFS

1. Introduction

In a previous article we commented on the disposition of unclaimed benefits through payment to the Master of the High Court. The Administration of Estates Act directs how moneys are to be disposed of that have remained unclaimed for 5 years. In the pensions industry there are no common practices with regard to disposing of unclaimed benefits. In this review the author discusses the legal requirements that pension funds should be aware of.

2. Interpreting statutes

One of the techniques used when interpreting any statute is to establish what the legislator’s intention is. The Pensions Fund Act is silent on what should happen to unclaimed benefits. Clearly the legislator could not foresee in the 1950’s that the employer- employee relationships will change so drastically in the decades to come. At that stage many employees started their career with one employer and remained in his employment until retirement. The employer- employee relationship was probably slightly different from today where it is acceptable to change jobs every 2-5 years. Not to mention the changes in the modern family composition. Unclaimed benefits were probably not an issue back in the 1950’s.
It is trite law that there is a duty on trustees to do everything in their power to trace beneficiaries and/or dependants. How long should trustees be given to trace people? Should it be one year, three years or five years? Funds prefer to be “clean” and get these unclaimed benefits off their books.

3. Fund rules

NAMFISA has approved various rules and rule amendments dealing with unclaimed benefits. For some Funds the money must be claimed within 3 years after it became payable otherwise the money will be dealt with in terms of the Prescription Act. This means that money that has not been claimed within 3 years is forfeited and is allocated to the Fund’s reserve account. Other Funds pay money over to the Master of the High Court once the period mentioned in the Fund’s Rules has lapsed. Can the Master accept such unclaimed monies?

4. Process prescribed in the Administration of Estates Act and powers of the Master

It should be borne in mind that the Master is a creature of statute with only those powers given to it in terms of the Administration of Estates Act, in terms of which Act the Guardian’s Fund was established. In terms of this Act a person who holds money on behalf of another person for 5 years, must each year in January* advertise in the Government Gazette which monies will be paid over to the Guardians Fund if not claimed within 3 months of the advertisement.

5. Offsetting costs against unclaimed benefits

One of the arguments of NAMFISA is that the costs of the advertisement in the Government Gazette may not be deducted from the unclaimed benefit as this will be a reduction of the benefit. Whether this indeed amounts to a reduction in benefit as stated by NAMFISA, is a topic of its own. Section 93(2) of the Administration of Estates Act states that a person may deduct the advertisement costs from the unclaimed amount. It is quite an anomaly that the regulator is willing to approve rules/rule amendments in terms of which unclaimed benefits can be forfeited to a Fund while in cases where costs of advertising in the Government Gazette (which are very low) may be deducted as per a later act, they see the deduction of costs as a reduction in benefits.
An argument by trustees and consultants is that the average Namibian citizen does not read the Government Gazette and will therefore not be aware of unclaimed benefits due to them. This might be the case but it should be kept in mind that the advertisement in the Government Gazette is a legal requirement while the duty to trace dependants/former members remains. There is therefore nothing that prevents trustees to also advertise in ordinary newspapers before the 5 years have lapsed.

6. The Master’s practice of receiving unclaimed benefits

In practice the Master has accepted and still accepts unclaimed monies before the expiry of the 5 year statutory period and without advertisement in the Government Gazette. But as stated earlier, the Act is silent on whether the Master may in fact accept money that was not held for 5 years and not advertised.

7. Does the Master have the discretion to receives moneys sooner than 5 years

The author’s view is that the Act does not give the Master of the High Court the discretion to accept money that is kept by a person for less than 5 years and which unclaimed money was not advertised in the Government Gazette before it was paid over to the Master of the High Court.

However there are writers who are of the opposing opinion that if an Act is silent or does not specifically prohibit something, it is not unlawful to do something which is not directly dealt with in an Act. This question therefore needs further investigation to determine whether any court cases have dealt with situations like this.

8. The implication of unconstitutional provisions in the Act

Referring to section 93(3)(a) and (b), as quoted below, the Administration of Estates Act clearly contains unconstitutional and other provisions that cannot be complied with. There are still numerous pieces of legislation that are unconstitutional. The best example is probably the Native Proclamation 15 of 1928 dealing with marriages north of the Police Zone (red line). Normally marriages concluded in Namibia are in community of property unless there is an ANC.
According to this proclamation however, marriages between “natives” are out of community of property (without ANC) unless prior agreement to the contrary, which the Magistrate solemnizing the marriage then indicates on the marriage certificate.
As the Courts cannot mero motu decide that a piece of legislation or a part of a statute is unconstitutional and refer it to the legislature to be amended, numerous people are still affected by this provision. This will remain the situation until a party, having a direct interest in this matter, probably when instituting a divorce, applies to court to have this proclamation, or parts thereof to be declared unconstitutional and then the Court can refer it to the legislature to be repealed and or amended.
The provision of the Administration of Estates Act is therefore valid, even if it is unconstitutional, until a person or persons apply to court to have it declared unconstitutional. Seeing that the money due to ‘black persons’ must be paid to an institution that does not exist here in Namibia, the provision of the Administration of Estates Act cannot be complied with and should monies due and payable to members of such an ethnic group be dealt with like monies due to any member of any other race.
Articles 10 and 66 of the Namibian Constitution are quoted here for ease of reference:

Constitution of Namibia
Article 10:Equality and Freedom from Discrimination
(1) All persons shall be equal before law.
(2) No persons may be discriminated against on the grounds of sex, race, colour, ethnic origin, religion, creed or social economic status.
Article 66 Customary and Common Law
(1) Both the customary law and the common law in force on the date of Independence shall remain valid to the extent to which such customary or common law does not conflict with the Constitution or any other statutory law.
(2) Subject to the terms of the Constitution, any part of such customary or common law may be repealed or modified by Act of Parliament, and the application thereof may be confined to particular parts of Namibia or to particular periods.

9. Non-compliance with the Administration of Estates Act is a criminal offence

Failure to comply with these requirements of the Administration of Estates Act can result in penalties and/or imprisonment. It is not the Master who imposes penalties. None compliance with these provision constitutes a criminal offence. A complainant must lay a charge at the police and the Prosecutor-General decides whether prosecution should be instituted or not. The Court then has to decide whether a person/body has failed to comply with the statutory requirements. Of course, the ordinary Namibian is not aware of these remedies available to him.

10. Conclusion

In conclusion, and given that there are opposing views whether or not the Master of the High Court may accept unclaimed moneys prior to them having remained unclaimed for 5 years and without any advertisement having been placed in the Government Gazette, it is advisable that fund rules should be revised to provide that unclaimed benefits are to be paid over to the Guardians Fund after remaining unclaimed for 5 years and after it has been advertised in the Government Gazette.
Section 93 of the Administration of Estates Act is quoted here for ease of reference.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

The theme of this year’s conference was “Challenging the Investment Mindset”. As in previous years it was a well organised, very interesting and informative conference that can only be recommended to anyone who has a role to play in the pensions industry.

‘Consultant round table’
Discussion forum on the role of the consultant lead by Maya French-Fisher of City Press.

• Consultants’ responsibility is to -
  • Unpack products intelligibly;
  • Present appropriate solutions;
  • Focus on conflicts of interest;
  • Adhere to a code of conduct.
• Professionalisation of trustees – not necessarily in terms of qualifications - becomes ever more important.
• A trustee does not need to be an expert if he/she is properly advised.
• Conflicts of interest cannot always be avoided but then have to be managed. Those giving advice must disclose such conflicts.
• Advisers should establish a code of conduct for themselves.
• Treat your customer fairly (TCF) policies suggest that advisers should employ a flat fee rather than an asset based fee.
• Trust in the financial services industry is psychological capital that currently lacks -
  • Needs to be built by better explanations;
  • Align expectations of members with the explanations;
  • Disclosure and transparency must be in plain language;
  • Language and literacy barriers must be bridged.

‘The changing face of distribution in the asset management industry’
Discussion forum lead by Stewart Cazier, MD of Henderson Global Investors.

• Investment capital can nowadays be sourced globally
  • ‘Sovereign investment funds’ and national pension funds are on the outlook for global investment opportunities;
  • Chile has invested US$ 70 billion offshore, other examples are UK, Italy, Taiwan etc;
  • Ban of commission payments does not preclude product providers to agree on fee payments by client to intermediary;
  • Intermediaries must be consistent in establishing and evaluation clients’ needs and for similar needs similar products should be used;
  • Cost focus has moved to ‘total expense ratio’ (TER).

‘The geopolitics of modern Africa for investors’
A presentation by David Murrin, CEO of Emergent Asset Management Ltd, author of ‘Breaking the Code of History’.

• An investor in Africa must meet the following 4 criteria:
  • Must have a geopolitical understanding of the World, Africa and the specific country to invest in;
  • Must understand the business environment , i.e. rule of law, capability of work force, government policy.
  • Must understand the challenges specific to regionalization.
  • Must have specific business development knowledge.
• To understand the world you need to know the past.
  • Every empire goes through an expansive phase and a contractive phase in its history;
  • Expansive phase drives development in the world.
  • Contractive phase drives the decline i.t.o. population demographics.
  • An empire needs maverick entrepreneurial individuals.
  • The growth phase encompasses positive elements.
  • The contractive phase encompassed negative elements.
  • Empires in history have lasted for 200 years.
• Western power, including America, will collapse in the next 10 years.
• The commodity cycle is over which implies that one has to time your investments.
• Climate change is upon us, which will lead to greater conflict and wars.

The most evident question that arises from this conference is how to prepare your company, yourself and your children in the face of global climate, demographic and political change?

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Unit trust managers and pension funds beware

Most trustees will be aware by now that regulation 28 directs that all Namibian pension funds shall invest a minimum of 1.75% of the market value of its investments (note not of its assets) in unlisted investments via a registered Special Purpose Vehicle (SPV) by 31 December 2014. A number of local investment houses have created vehicles they intend to register as such SPV. Stimulus is one of such vehicles and a number of investment houses have place pension fund clients’ moneys is such vehicles. Stimulus for one, has invested these pension fund moneys in local unlisted companies. Pension fund capital will start flowing into such SPV’s and these SPV’s will be looking for investment opportunities in unlisted Namibian companies. Chances are that SPV’s will invest moneys in companies that were partly derived from such companies’ pension funds.

Namfisa is of the opinion that such investments by pension funds are contravening section 19(4) of the Pension Funds Act which states “No registered fund shall invest any of its assets in the business of an employer who participates in the scheme or arrangement whereby the fund has been established or in any subsidiary company… of such employer’s business or lend any of its assets to such employer or subsidiary company….”

Clearly what this section tries to prevent is that a trustee, who controls the participating employer, misuses his/her influence to oblige the fund to invest in the employer thereby exposing the members to the dual risk of losing their job and losing the retirement capital as the result of the employer’s demise. At the time this law was written, unit trusts did not exist yet as pooling vehicle for the investments of smaller pension funds.

In our opinion a fund that invests in a unit trust fund, gives such fund only ownership of a specified number of units and the fund is specifically precluded from title to any of the unit trust’s underlying assets. The unit trust in turn would hold an investment in an SPV that will typically not give the unit trust ownership to the SPV’s underlying investments, being a pooled investment vehicle, in most likelihood. Furthermore, with the new ‘look-through’ principle in regulation 28, the maximum investment that a pension fund will be able to hold in the employer via an SPV is 3.5% of the market value of its investments. And this would require that 100% of the capital of the SPV is invested in the employer. The risk to fund members, referred to above, is thus negligible in such a structure. There can also clearly be no argument that a fund would invest in the employer through this structure.

Namfisa now requires funds to apply for exemption from the provisions of section 19(4). Its current practice is to only grant exemption for a period of 12 months. In our opinion, Namfisa is misguided with the assertion that an investment in a unit trust, which in turn invests in an SPV, which in turn invests in the employer sponsoring the fund is in contravention of section 19(4)..In such a structure the fund clearly does not invest in the employer.

Perhaps it would be more purposeful for Namfisa to rely on section 19(5B)(b) of the Pension Funds Act which directs that “…a fund shall not …directly or indirectly…(b) grant a loan to, or invest in the shares of - (i) a company controlled by an officer or a member of the fund or a director of a company which is an employer participating in the scheme or arrangement whereby the fund has been established; or (ii) a subsidiary company or a controlled company…of such first mentioned company. Section 19(6) does mandate the registrar to grant temporary exemption from section 19(4) and 19(5B)(a) but not from the only relevant section, which is 19(5B)(b).

Regulation 28 intends to encourage investments of pension fund assets in small Namibian businesses. The majority of Namibian pension funds are too small to employ segregated investment mandates where the trustees can take active investment decisions and where the fund takes legal ownership of the investments it holds. The investment management industry has thus created pooled investment vehicles to offer an appropriate structure for these small funds to invest their assets.

The current state of affairs creates a dilemma for particularly smaller funds that invest in unit trust funds, and this dilemma will grow in time as SPV’s attract more and more capital from smaller funds sponsored by unlisted companies, and as they invest in more and more small unlisted companies.

Managers of such pooled investment vehicles will now have to continually monitor whether any unlisted investment it intends to invest in, has any ties to a fund that holds an investment in the pool. It also means that such pooled investment vehicles will now have to continually monitor whether any prospective new pension fund investor has any ties in an unlisted investment the pool holds. This will restrict the universe of pension funds from where pooled vehicles can source capital for investment in unlisted investments. At the same time it restricts the universe of unlisted investments in which pooled investment vehicles can invest. This creates an untenable situation.

Since Namfisa’s position in this regard and the letter of the law defy the purpose of enforcing investment in unlisted companies, Namfisa should take urgent steps to have the Pension Funds Act amended so as to clarify that such a structure does not contravene section 19(4) and/or section 19(5B)(b) of the Act.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

The need for, and required extent of professional indemnity cover, is a difficult topic trustees regularly grapple with.

We recently obtained an easy comprehensible explanation compiled by a global short-term broker house.

It explains why trustees should consider their fund to take out cover rather than being cover through the employer's policy:

• what are trustees duties;
• why is cover needed;
• what is the scope of cover -
  • fraud or dishonesty of any officer;
  • theft by any person;
  • errors and omissions;
  • trustees' extension;
  • computer crime;
  • claims made basis of cover;
  • retroactive cover;
• definitions of key terms -
  • negligence;
  • wrongful act;
  • officer;
• how to submit a claim;
• why have a policy dedicated to the fund;
• more about the honesty index;
• calculation of required cover.

This summary was compiled by Sabine Halberstadt, legal consultant.

New Regulations 1, 26, 27, 28 and 29 under the Pension Funds Act were published in Gazette number 5205 on 6 September 2013. As the result of a number of ambiguities presented by this gazette, it was withdrawn and replaced by Gazette number 5383 Gazette effective 1 January 2014. Note that this gazette contains a regulation issued under the Long-term Insurance Act that is the equivalent to Regulation 28.

Regulation 1, introducing certain new definitions, remains unchanged.

Regulation 26, dealing with administrative penalties, remains unchanged.

Regulation 27, dealing with the interest to be charged on direct housing loans, remains unchanged but the effective date is moved from 1 September 2013 to 1 January 2014.

The changes affected to Regulation 28 are set out hereunder:

• (1) The following definitions were changed:
  • 1.1 "banking institution", which now also includes banking institutions authorized as such under the laws of a country other than Namibia,
  • 1.2 "building society" which also now includes building societies authorized as such under the laws of a country other than Namibia and
  • 1.3 "Post Office Savings Bank" which now also includes a savings bank or similar institution authorized as such under the laws of a country other than Namibia.
• (2) Sections (3) (a)(i) to (v) set out a regressive scale of dual listed companies deemed to be domestic assets, which are required to be a minimum of 35% of market value of a fund's total assets.>
• This changed as follows:
  • (i) 30 per cent of the market value of its total assets from 1 January 2014 (previously 1 April 2013)
  • <(ii) 25 per cent of the market value of its total assets from 1 January 2015 ( previously 1 April 2014)
  • (iii) 20 per cent of the market value of its total assets from 1 January 2016 (previously 1 April 2015)
  • (iv) 15 per cent of the market value of its total assets from 1 January  2017 (previously 1 April 2016)
  • (v) 10 per cent of the market value of its total assets from 1 January  2018 (previously 1 April 2017)
• (3) Section (1) (4), deals with the minimum investment in unlisted investments. This changed as follows:
  • The effective date for achieving a minimum of 1.75% investment in unlisted investments has been moved to 31 December 2014 as the result of the date of publication having been move on to 31 December 2013.
• (4) Section (5) deals with reporting on a fund's investment holdings.
  • This has been changed from .... "within 90 days..." to " within 90 days or a shorter period determined by the Registrar by written notice, after the end of each calendar quarter, submit to the Registrar a statement of investment holdings in such form as the Registrar may determine."
• The Prescribed interest rate for housing loans (Regulation 27) has remained unchanged as per previous GG: repo rate +4% per annum with effect of date of publication of 1 January 2014 (previously 1 September 2013).

Africa Cup of Investments Conference 2013

Part 4

The theme of this year’s conference was “Challenging the Investment Mindset”. As in previous years it was a well organised, very interesting and informative conference that can only be recommended to anyone who has a role to play in the pensions industry. You may find the one or other topic of interest to you or thought provoking in which case please feel free to share your views with our readers.

Exchange traded products: ETF’s (exchanged traded funds) and the growth of ETN’s (exchange traded notes)
A panel discussion lead by Barbara Vincent, director of Blackrock.

In this panel discussion the following interesting statements and points were made:

• Exchange traded products are an appropriate investment vehicle due to mounting cost pressures;
• Exchange traded funds are an expensive investment vehicle for the individual investor and are therefore added to product providers investment platform which loses the cost benefit for investors;
• Holistic portfolio construction for wider investor distribution should comprise of a combination of exchange traded products and active products;
• Investors require to undergo a paradigm shift before they will move selecting an asset manager to constructing a portfolio;
• Main characteristics of exchange traded funds:
  • they present no credit risk as they are backed by physical assets;
  • they are established as a legal entity;
  • they are inappropriate for investment in commodities as they cannot hold the physical asset.
• Main characteristics of exchange traded notes:
  • they are issued by a bank;
  • the investor takes the credit risk of the issuer.
• In SA, commodity holdings are classified as offshore asset for the purpose of regulation 28.

Adviser focus: adding value thru ‘gamma’
A panel discussion lead by Anne Cabot-Alletzhauser, head of Alexander Forbes Research Institute.

In this panel discussion the following interesting statements and points were made:

• ‘alpha’ in investment terminology refers to the market and requires the investor to choose a manager or a fund;
• ‘beta’ in investment terminology refers to asset allocation and asset selection strategy of the investor;
• ‘gamma’ in investment terminology refers to putting a ‘scientific spin’ to ‘gut feel’ that is measurable (an analogy was cited: vitamins do not improve health, but those that use them are healthier because it’s the persons that are more concerned about their health);
• an adviser can add ‘gamma’ through advice.
• chasing ‘alpha’ is a ‘loser’s game’;
• 40% of manager outperformance results from asset allocation decisions;
• 90% of portfolio performance results from asset allocation;
• Thoughts on annuities:
  • should be invested using dynamic withdrawal strategies;
  • tax implications of annuitisation must be an important consideration;
  • annuity investment option should be offered that are related to the pensioner’s specific liability;
• How does the investor find an adviser that he can trust?
  • advise has to provide his client a framework that will allow the client to measure the adviser;
  • adviser fees in the UK have started to increase and are currently in the region of 1% of capital per annum.

Generational attitude to investing: preparing for longevity
A panel discussion lead by Graham Sinclair, principal at Sinco.

In this panel discussion the following interesting statements and points were made:

• For every additional year of life expectancy you need 50% more retirement capital;
• To reach young people in order to convey the dilemma of ever increasing life expectancy:
  • approach HR departments of employers and start talking to the young people to get them to make the right decision from the first day;
  • Preservation is important for young people and should be observed;
  • ‘old school’ hard copy communication is also still important for young people;
  • member options with regard to contribution levels should be meaningful and should not be too low.

Hedge fund investing in Africa
A panel discussion lead by Carla de Waal, head of alternative investment solutions of Novare Investments.

In this panel discussion the following interesting statements and points were made:

• total assets invested in SA hedge funds amount R 40 billion;
• there are 60 active hedge fund managers in SA;
• these fund typically employ long and short equity and fixed interest strategies;
• most investment capital comes from pension funds;
• SA regulation 28 now allows for a maximum 10% to be invested in hedge funds (on- or offshore);
• hedge funds are currently self-regulated in SSA but are to fit in under CISCA (Collective Investment Schemes Control Act);
• hedge funds are wrapped in a legal structure in SA;
• hedge funds are not an asset class but rather an investment strategy and offer an expanded manner for managing money;
• hedge funds offer market diversification benefits;
• management fee for hedge funds overseas is around 2% of the assets under management;
• the risk of hedge funds for the investor in on the operational level (poor management skills etc.).

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Africa Cup of Investments Conference 2013

Part 3

The theme of this year’s conference was “Challenging the Investment Mindset”. As in previous years it was a well organised, very interesting and informative conference that can only be recommended to anyone who has a role to play in the pensions industry. You may find the one or other topic of interest to you or thought provoking in which case please feel free to share your views with our readers.

Sustainability: An Investment Perspective

Glenn Silvermann shared some thought provoking and scary facts with the audience in a riveting presentation. He identified 4 unsustainable trends:

• We live on a finite planet. The earth is full and since it does not get bigger the economy will stop growing. As far as our natural resources are concerned, we are busy eating into capital.
• Inequality between rich and poor and a widening income gap.
• Demographics where the number of retired people continuous to grow relative to those in employment.
• Unsustainable government debt.

He expressed the view that these unsustainable trends have not been priced into market yet. The way forward should be that the investor starts focusing on responsible investing and on economic, social and governance (ESG) considerations and should start asking corporates questions addressing these matters. An interesting observation was also that ESG should not be measured via investment returns but should rather be considered as an investor liability.

ESG idealism versus realism: overcoming doubts and demonstrating opportunities for returns

In this panel discussion some interesting comments were made that are worth sharing with our readers.

• The market displays a natural trend toward ‘short-termism’ with regard to manager compensation.
• Investors are hesitant to implement responsible investing principles because of the absence of data that measures its impact on returns.
• Although pension funds should take a long-term view on investments, they typically outsource the problem of responsible investing to their consultants and asset managers.
• SA regulation 28 now has a preamble that makes reference to responsible investing. It distinguishes between investing in sustainability and building responsible investing principles into the investment process.
• Responsible investing should be focused on where business and politics converges in order to yield results.

A CEO conversation

In his CEO conversation Edward Kieswetter shared some interesting observations.

• When evaluating a business decision trustees should apply a ‘substance over form’ principle. One should first consider what the impact of a decision will be on the saver and if it will be negative one should not pursue the decision.
• In everything one does, one should not think about what one does but about the impact it will have.
• Increasing regulation and compliance requirements for trustees reaches a point of inflection where costs continue to increase but results actually worsen instead of improving.
• He relayed the following 3 messages to government:
  • It should stop talking about business as being its enemy where it is in fact the engine of the economy.
  • Be clear of the consequences of the actions its takes.
  • Engage the private sector in it decision making process.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Africa Cup of Investments Conference 2013

Part 2

The theme of this year’s conference was “Challenging the Investment Mindset”. As in previous years it was a well organised, very interesting and informative conference that can only be recommended to anyone who has a role to play in the pensions industry. You may find the one or other topic of interest to you or thought provoking in which case please feel free to share your views with our readers.

Challenging your investment mindset (panel discussion)

Steps taken by fiscal authorities across the globe to overcome the financial crisis had a major impact on investment markets and require a mind shift of the investor.

• In the face of the uncertainties prevailing in global financial markets, investors need to review their measure of risk, extend their investment time horizon beyond the prevailing uncertainties and must temper their return expectation.
• Knowledge is cyclical, not cumulative so we do not get cleverer but repeat our mistakes.
• Studies have shown that the behaviour of directors and trustees has not changed despite their legal liability having become significantly more onerous.
• In SA the financial services industry is being pressurized by the regulator towards more standardized contracts, which is not good for freedom of choice and competitiveness.
• The prevailing low interest rate environment is in the interests of governments and results in future consumption being advanced without really stimulating economic growth.

Facilitating investment in Africa and overcoming potential deterrents (panel discussion)
Africa has become the ‘flavour of the month’ for foreign investors. However, it does present a number of challenges that investors need to be aware of and overcome.

• Africa achieved a lot in improving political stability over the past years.
• Africa offers lots of positive stories and exiting prospects.
• Africa GDP grew from US$ 600 bn in 2000 to US$ 3 trn.
• Private sector solutions are the remedy to develop.
• Africa presents the following 3 macro risks:
  • lack of property ownership or right to title and setting up a legal format of a business;
  • GDP driven primarily by commodity exports;
  • difficulty of diversifying across the continent.
• To mitigate the above risks requires access to experience.
• Infrastructure is paramount to further investment in Africa.
• Low education levels are a serious impediment with only 7% of the workforce in possession of tertiary education, presenting a risk of political upheaval.
• Africa has taken steps to improve the environment for doing business in Africa but more effort is required in the above areas.

Commodities and currencies (panel discussion)
Quantitative easing has produced exceptional returns on equity investments since the financial crisis. In view of the risks this presents, investors should consider commodities as an asset class that offers attractive features.

• Investing in commodities should be considered for the following reasons:
  • it achieves diversification from the more traditional asset classes;
  • it reduces portfolio volatility as they are influenced by other factors such as weather (agriculture), politics (energy) and the business cycle (metals);
  • it can enhance returns;
  • it serves as an inflation hedge.
• Commodities are driven by consumption rather than production and would be better correlated with members’ expenditure patterns.
• Pension funds should invest in commodities as they directly affect members’ retirement liabilities, consider the increase in the price of oil.
• Governments cannot afford deflation as debt is determined at nominal value while tax is based on real value and governments cannot tax the improvement of the real value of taxpayers’ income as the result of growing purchasing power.
• James Rickards suggested that developing countries should introduce capital controls in the current environment where developed countries manipulate their currencies through ‘quantitative easing’. He also suggested that structural problems in the economy can’t be fixed through money supply as the US and China are doing. Europe on the other hand has taken the right steps to fix its structural problem through the austerity measures.

Upcoming structural game changers – SA retirement and savings reform and new regulatory requirements (panel discussion)
SA treasury has ventured onto a route of regulatory reform of the financial services industry in the belief that this will promote saving and benefit the consumer. Will this reform achieve what it aims to achieve if it is based on flawed assertions?

• Are administration costs in SA high relative to global experience as claimed in a government white paper?
• This statement is based on distorted data and does not compare ‘apples with apples’;
  • costs are a function of resources required;
  • on the group side, costs are higher due to fragmentation in the industry;
  • on the retirement annuity side, distribution costs are too high in terms of value for money;
  • regulations should be written to promote competition in the interests of the consumer and not the provider;
  • the retirement system should not be all things to all people as different needs exist such as between high income and low income earners.
• A culture of savings has to be built and government has a big role to play in this regard.
• The education system has to embrace the concept of savings.

Opportunities in African private equity (panel discussion)
Regulation 28 requires of Namibian pension funds and insurance companies to invest 1.75% of market value of investments in unlisted equities. Trustees will have to acquaint themselves with this topic.

• Africa has a large funding gap which presents an opportunity for private equity investment.
• SA private equity returns have outperformed listed equity.
• In terms of P:E ratios, private equity is most expensive in West Africa at a multiple of 8 and least expensive in SA at a multiple of 6.5.
• Private equity managers should be selected based on the following criteria:
  • track record of returns;
  • track record of successful ‘deals’;
  • the strength of the team and how long it has stuck together;
  • access to ‘deals’ of the manager.

The great reversal: an analysis of the potential effects of capital outflows on selected African countries (Thalma Corbett, head of research NKC Independent Economists)
The strong growth in local equity markets, a strong currency and a low interest rate environment locally is the result of large scale intervention by monetary authorities particularly of developed countries. The strong growth of foreign portfolio investments that have produced these results are likely to revers, which will impact on local financial markets as a matter of course.

• Egypt – foreign participation in bond issues has declined substantially and the TB rate increased from below 14% to 16%, while other economic fundamentals are also worsening.
• Ghana – bond yields increased sharply since the end of 2011 from around 12% to around 19%. Fiscal deficit increased sharply but it still offers a strong outlook for economic growth.
• Kenya – bond yields increased from around 5% in March 2011 to around 12%. It has a high fiscal deficit of 7.9% of GDP while inflation risk is rising. Foreign portfolio investment comprise 45% and 55% of equity its market.
• Nigeria – debt yields actually declined from around 16% in March 2012 to around 13%. It experiences strong economic growth in the non-oil sector, has strong foreign reserves and strong foreign portfolio investment.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Investment in foreign unit trusts

Namfisa if of the opinion that a Namibian fund is free to invest in a unit trust scheme anywhere in the world and that its only concern is that the underlying assets comply with the requirements of regulation 28.

Regulation 28 restricts investments in banks and in building societies to institutions registered in terms of the relevant law in Namibia. Investments in bills, bonds and securities issued by foreign governments or other institutions, requires approval of the country and the institution by the Registrar. Regulation 28 also recognises only stock exchanges registered in Namibia or within the common monetary area for the purpose of determining market value for a quoted asset.

However, Regulation does not apply equally strict controls on unit trust schemes despite the fact that an additional risk layer is introduced in the form of the unit trust scheme, that owns the underlying investments. In latter case the requirement for a unit trust scheme is only that it meets the definition of unit trust scheme in the Unit Trust Control Act. The Unit Trust Control Act 54 of 1981 defines a unit trust scheme as “…any scheme or arrangement in the nature of a trust in pursuance of which members of the public are invited or permitted, as beneficiaries under the trust, to acquire an interest or undivided share (whether called a unit or by any other name) in one or more unit portfolios and to participate proportionately in the income or profits derived therefrom”.

Regulation 28 requires an exposition of a Namibian pension fund’s investments as set out in Annexure 1 to the regulation, based on the market value of the fund’s investments. Market value is to be determined in one of two possible manners:

1. Firstly value is to be determined by reference to its value quoted by a stock exchange licensed under the Namibian Stock Exchanges Control Act or any other stock exchange within the common monetary area.
2. Assets to which the first method does not apply, have to be valued in accordance with section 19(5A) of the Pension Funds Act. In short section 19(5A) stipulates that market value is:
   • the price which would be obtained on sale in the Republic,
   • between a willing seller and a willing buyer,
   • as estimated by a person appointed by the Namibian pension fund concerned for that purpose.

The implication of the afore going is that a Namibian pension fund cannot invest in any asset that is not listed on a Namibian licensed stock exchange or a stock exchange within the common monetary area, unless market value can be determined in accordance with section 19(5A) of the Pension Funds Act.
An investment in a foreign unit trust raises a few grave concerns:

1. First and foremost, the onus rests on the trustees to execute due diligence procedures with regard to the unit trust scheme in which the fund invests.
2. Assets quoted on any stock exchange within the common monetary area (typically SA unit trust schemes) can be valued based on the quoted price, while the valuation of all other assets will have to comply with the requirements of Section 19(5A) of the Pension Funds Act.
3. For foreign assets not quoted on a ‘recognised’ stock exchange (typically offshore unit trust schemes) all 3 above requirements pose difficulties:qqq
   • A Namibian registered institution or citizen cannot freely sell or buy foreign assets without Bank of Namibia approval. This casts serious doubts on the principle of a sale ‘in the Republic’. In fact this requirement could be interpreted as requiring the asset to be physically located within Namibia.
   • Once a sale in the Republic is subject to regulatory approval, the principle of willing seller and willing buyer becomes questionable.
   • A Namibian fund would be required to appoint a person specifically for the purpose of determining the value. At best this means that the agreement with the unit trust scheme manager needs to incorporate this requirement as a specific obligation, with reference to the requirements of Section 19(5A) of the Namibian Pension Funds Act.
   • An investment listed on a stock exchange outside Namibia and the common monetary area cannot be valued based on its listed price but will have to be valued in accordance with Section 19(5A) of the Pension Funds Act.
   • A valuation of an asset listed on a stock exchange other than based on its listed price, however, would contravene international accounting conventions. This could result in a qualified audit opinion and it will be very difficult to obtain any other valuation.

In conclusion, an investment in a foreign unit trust scheme is unlikely to comply with the above. Where trustees retain the investment discretion, they should give serious consideration to the above legal requirements before investing in a foreign unit trust scheme. Where trustees grant the investment manager full investment discretion , they should establish from the manager how he envisages complying with these requirements.

Coincidentally we came across an article that examines the trustees due diligence obligation when placing moneys in investments. Read it here...

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Africa Cup of Investments Conference 2013

Part 1

The theme of this year’s conference was “Challenging the Investment Mindset”. As in previous years it was a well organised, very interesting and informative conference that can only be recommended to anyone who has a role to play in the pensions industry.

James Richards, US academic and author of “Currency Wars: The Making of the Next Global Crisis” and David Murrin, UK academic and author of “Breaking the Code of History” both gave highly interesting and thought provoking presentations from an unconventional perspective.

Here are some interesting bullet points from the presentation delivered by James Rickards (author of ‘Currency Wars: the making of the next global crisis’). James is seen as a doomsday prophet by some of his critics.

• The US is conducting financial war games, the first ever conducted in 2009.
• Financial war games are a branch of asymmetric or unrestricted warfare and have been waged against countries such as Iran and North Korea.
• Currency war III started in 2010.
• From 1997 to 2010 the world was on a US Dollar standard where the US went all out to maintain the value of the Dollar. This was abandoned in 2010.
• Led by the US Fed, many countries have pursued the course of printing money since 2012, that has led to their currencies all easing simultaneously.
• Deflation is equivalent to deleveraging or depression, while economic growth is a function of growth in the labour force and a change in productivity.
• While the US Fed has raised the money supply from US$ 800 billion in 2005 to US$ 3 trillion in 2013, the velocity of money has been collapsing since 2009 as a result of which the economy failed to respond positively.
• In order to get the US debt to sustainable levels, the Fed has to;-
  • Get the economy growing in nominal terms whereby, preferably with low inflation of 1% and real growth of 3%;
  • Change consumer behaviour in order to bend the velocity curve and to get consumption going again.
• The Feds worst nightmare in terms of managing the US debt levels will be a negative real growth rate together with negative inflation (or deflation). This means that tax revenues are declining while the interest rate mechanism to stimulate the economy is rendered ineffective.
• As the US economy has not responded positively to the measures taken by the Fed it is unlikely that the Fed will start tapering the asset purchase programme.
• The collapse of the global monetary system is considered a feasible scenario that may have the following consequences:
  • The monetary system will comprise of multiple reserve currencies in an unstable environment due to the absence of an anchor currency.
  • The world will move to a new gold standard with a gold price forecast to rise to US$ 7,000 per ounce.
  • Collapse of economies and social upheaval.

Hugely successful Patrice Motsepe, founder and chairman of African Rainbow Minerals one of the largest individual shareholders of Sanlam, shares his vision for the future of South Africa, that is as relevant to us in Namibia and should be heeded by our politicians and policy makers:

• Quality education will determine whether our children will be able to compete globally and everything in our power must be done to ensure that our children will be provided quality education.
• The education system has to position the learners for the job market where in the current system thousands of graduates have the wrong qualification.
• An environment has to be created where the private sector can flourish.
• The global investment community is critically important for our country yet it is frightened off by actions that produce negative publicity. Labour has to be engaged to create an environment in our country that will attract foreign investors.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

We have prepared a summary of what Namfisa is envisaging all funds to report on a quarterly basis, according to the latest draft that can be downloaded here...

Urgent action is required
Principal officers are advised to study these requirements in detail. These requirements are a tall order to be complied with on a quarterly basis and it will be another nail in the coffin of any fund that cannot afford to employ a full time principal officer! This should become abundantly clear from a study of these requirements. Since Namfisa apparently is not prepared to entertain any comment the industry must deliberate on how to approach this challenge as a matter of urgency. We believe that as a ‘rule of thumb’, funds with less than 1,000 members will find it difficult to comply with these requirements. This could result in the number of private pension funds be cut down from around 90 to not more than 12.

Cost for members likely to increase by 20%

As we commented in our previous newsletter, trustees are put under ever increasing pressure and trusteeship will soon become so onerous that funds will be forced to employ full time trustees. Being able to afford a full time principal officer will no longer suffice and this is likely to further reduce the number of employer sponsored funds that still can afford such an expensive structure to possibly only 2 or 3, outside the GIPF. The management costs per member per month can be expected to rise substantially. We believe that the additional cost burden per member per year that will result from these requirements can easily amount to between N$ 150 and N$ 250. Considering that current cost per member per annum is somewhere between N$ 800 and N$ 1,200 per annum, the severe impact of these new requirements should be of serious concern to funds, their members and Namfisa!

Principal officers need to take action
We suggest that principal officers sensitise their relevant service providers to start gearing up for providing this information and to set up the contractual framework for providing these services to the fund.

A substantial amount of detail required to be reported on will have to be provided by pension funds’ asset managers. On behalf of our clients, we have already made all asset managers aware of the prospective quarterly reporting our mutual clients will be required to submit to Namfisa. We have forwarded the latest template of this quarterly report and have requested the managers to consider section 3 detail that mutual clients will require from their asset managers. We have requested managers to gear up for assisting our clients in this regard. We have suggested to these managers to advise our clients of any concern in this regard and to raise any issues they believe need to be taken up by any institution or association in the interests of industry stakeholders in good time. To date we have not received any feedback.

A large fund proudly announced recently that its investments returned 7.23% for the first 6 months of the year, against a benchmark of 6.85%.

A look at the investment returns produced by prudential balanced portfolios in our Benchtest performance review reveals that the average portfolio returned 7.67%, while the default portfolio of the Benchmark Retirement Fund returned 9.78%. Clearly, the peer fund does not constitute this fund’s benchmark .

This raises the question whether the trustees should be satisfied with the returns of its fund. If the fund’s benchmark return was 6.85%, the fund has outperformed its benchmark but has underperformed the average of its peers.

Typically trustees would be guided by its investment consultants when constructing a benchmark portfolio that will be used to calculate the benchmark return of the fund.

Do trustees really have an in-depth understanding of how their benchmark portfolio is constructed and how the particular portfolio structure will respond to varying market conditions? Do trustees really know whether the benchmark portfolio truly captures the desired outcomes for the fund’s investments under different market conditions? Should trustees then not be concerned about outperforming their own benchmark, as this may be indicative of the actual portfolio structure taking higher or lower risks than what was intended?

We would suggest that, despite any internal benchmarks, every fund whose membership represents a normal demographic profile, should also measure its performance against that of its peers, which in essence represents ‘best practice’ for funds with a normal demographic profile. Ideally the investment consultant would analyse and explain the difference in performance between the peer manager and the benchmark portfolio.

Comment by Tilman Friedrich.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

How trustees should deal with unclaimed benefits is a question for which the industry has not established a common position. We also doubt that there is any Namibian legal precedent upon which trustees can rely in this regard. This of course does not make it any easier for trustees. How should trustees deal with this dilemma?

In the first instance, the fund should comply with its rules. Some fund rules state that a benefit remaining unclaimed for a specified period reverts to the fund. Others direct that such benefits are to be paid into the Guardians Fund at the Master of the High Court after expiry of a specified period while yet other rules are silent.

The Pension Funds Act is very specific on how a death benefit is to be disposed of while it is silent about any other benefits. In the case of death benefits funds must follow the prescriptions of section 37C. The Pension Funds Act therefor does not prohibit payment of unclaimed benefits, other than death benefits, to the Master.

The Administration of Estates Act (abbreviated in this discussion as ‘AE Act’) in section 93 makes reference to benefits that remained unclaimed for a period of 5 years or more and prescribes a lengthy process that needs to be followed whereupon such unclaimed benefits are to be paid into the Guardians Fund at the Master of the High Court.

Namfisa has not taken an official position with regard to the disposition of unclaimed benefits. However, Namfisa cannot of course make the law, at best it can give its opinion on how the law is to be interpreted, but at the end of the day only a court of law can bring clarity on any ambiguity contained in any law.

Pension fund rules of course may not contravene any other law. If a fund acts in accordance with its rules and these rules do contravene another law, it might invoke a penalty provision of that other law. The AE Act makes provision for a penalty of N$ 4,000 or 12 months imprisonment for contravening section 93.

In practice, those funds whose rules provide for payment of unclaimed benefits to the Master, usually require payment sooner than the 5 years provided for in section 93 of the AE Act and our experience throughout has been that the Master has accepted such payments. Would such payment be a contravention of said section 93 and pose the risk of the penalty being invoked?

In as much as trustees no doubt would prefer to act strictly within the confines of prevailing law, trustees, as any other law abiding citizen will at times have to take a ‘business decision’ rather than a decision based on clear facts and the disposition of unclaimed benefits appears to present such a scenario. In such cases, one needs to consider the risks the ‘business decision’ may present.

In assessing the risk of disposing of unclaimed benefits through payment to the Master before expiry of the 5 year period, the question is who would institute a legal challenge and why would a person institute a legal challenge? One would expect the body vested with the enforcement of the provisions of the AE Act (the Master of the High Court) to enforce the penalty provided for. One could also expect the beneficiary to institute a legal challenge.

Approaching this matter pragmatically, we suggest that if the rules provide that an unclaimed benefit is paid to the Master earlier than the 5 years referred to in the AE Act, the Master has no argument for imposing a penalty, as the end result is exactly what the AE Act intends to achieve. It may in any event in our opinion be argued that the 5 year period referred to is the ‘outer limit’ and we would not read this provision as prohibiting earlier payment to the Master.

Considering the matter from a beneficiary’s point of view, he may argue that he should still have been able to receive payment from the fund rather than from the Master. The beneficiary’s argument of payment from the Master rather than the fund could be based on the frustrations he had to endure, the time delays and possible loss of interest and a remote argument of additional costs incurred. In our opinion, the risk a fund might face on the basis of such arguments is small and the probability remote as there are likely to be pro’s and con’s for either alternative from the beneficiary’s perspective.

If a fund is concerned that its rules may be illegal to the extent of not correctly prescribing the procedures for disposing of unclaimed benefits the trustees can either take a legal stance or a business stance. Taking the legal stance it can obtain greater comfort by way of a legal opinion that ideally would rely on a relevant precedent but remains an opinion that can still be shown by a court to have been wrong. Alternatively, taking a business stance, the trustees need to assess the risk of following the prescriptions of the rules. As argued above, in our opinion the risk is small and its probability remote.

Comment by Tilman Friedrich.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

In our previous newsletter we posed this question and commented on, what we believe to be a distorted focus on the cost of services in the retirement fund industry in SA media, patently out of self-interest of fund administrators specifically, who aim to herd private funds into their umbrella funds, unfortunately with the full support and cooperation of the SA regulator!

Our service philosophy is to be sensitive to the needs of our clients, first and foremost. In accordance with good corporate governance principles, we believe it is essential that retirement funds place emphasis on independence between their service providers (e.g. administrator, consultant, actuary, insurer, investment manager) to ensure that adequate ‘checks and balances’ are in place throughout.

More often than not, this produces higher aggregate costs for a fund than placing all services with a single service provider. However, what value do you place on improved governance and a significantly reduced risk? In the absence of such independence, trustees are highly exposed to legal sanction in the event of things going wrong or member expectations not being met. It is our philosophy to focus on the area where we believe to offer a superior package, namely day-to-day fund management.

When appointing different service providers however, trustees are well advised to ensure that compatibility exists between them so that they are not continually required to arbitrate, or to fear that their fund will be disadvantaged through intense competition between its service providers.

We also believe that on-going administration services require broadly based management experience, an in-depth knowledge of administration, finances and accounting aspects, pension, tax and related laws, and these are best provided on a ‘retainer’ basis (i.e. agreed range of services on an on-going basis for an agreed fee). Although fund management costs can be a factor, they are relatively ‘immaterial’ in relation to asset management costs and reassurance premiums and should be viewed in the context of the level of experience, resources, skill and qualification employed. Typically, inferior fund management becomes evident only after many years, when it is too late and the ‘wheels have come off’.  Short-term cost advantages can, in this manner, prove to be very expensive in the long-term.

Trustees can thus rest assured that an exceptionally high level of expertise will be applied to the business of their fund at all times. Those trustees that approach their fiduciary responsibilities towards their fund without proper regard to the requirements of the Income Tax Act, the Pension Funds Act, the rules of their own funds and other peripheral statutes, are likely to experience our services as frustrating at times. We shall protect the interests of the Fund, its members and the trustees without compromise, thereby living up to our credo to provide ‘rock solid fund administration that lets you (the trustee) sleep in peace’!

How much do you think you can afford to pay for this additional assurance, or ‘peace of mind’. Alternatively can you afford to shoulder the increased risks your fund may shoulder for a lower fee on offer?

Comment by Tilman Friedrich.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

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.

Unfortunately, it appears that our regulator is intent on removing the directional and tempering influence of the employer from the management of pension funds. We believe that we will live to regret it, should this become the order of the day in pension fund business.

Comment by Tilman Friedrich.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

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.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Tilman Friedrich, Managing Director of Retirement Fund Solutions (RFS), recently announced that the company reached the N$ 10 billion mark for assets under administration. In addition, the Benchmark Retirement Fund, administered by RFS, reached the N$ 1 billion mark for assets under administration, lifting total assets under administration to N$ 11 billion.

Speaking on the milestones, Tilman Friedrich said, "We believe that these are milestones for the local financial industry as well. In the past, most financial services were sourced from South Africa. In reaching these marks, and taking stock of our local clients, we believe that we have shown that locally established, owned and managed entities, without cross border agendas, can compete."

Discussing the growth of the firm, Friedrich said, "We opened for business 14 years ago, expecting to be a niche player. We based our model on a high degree of accountability and service, and we have continued growing ever since. The challenge has been to measure our growth in terms of our ability to develop employees through training and  fostering our internal values and work ethic. We see ourselves and our clients as interdependent, so if we sacrifice capacity in the pursuit of growth, we place ourselves and our clients at risk. This is why we have taken the path of managed growth."

Talking about development of the Namibian financial industry, he said, "We expect to see more localisation. We recognise that South Africa holds excellent opportunities for investment, but the industry has to recognize and react to local interests and legislation."

"We understand that some may feel threatened by change, which to a large extent is introduced by NAMFISA. We have adopted a policy of advocacy and active engagement. We appreciate and make use of the doors that are opened to us, and we believe that this approach is constructive to the development of the local industry," he continued.

Talking about skills development, Friedrich said, "We have an active and continuous internal training process that ensures that our staff is up to date with the latest administrative requirements, legislation and associated regulations. We also encourage our staff to develop their skills in the field of finance, and give them opportunities to put knowledge to work within the parameters of our services."

He noted that three staff members recently obtained Post Graduate Diplomas in Financial Planning. "This adds to our capacity and is to the benefit of our clients."

Talking on the challenges of building trust in a Namibian entity, Friedrich said, "We were recently recognised by PMR Africa, and received a Diamond Arrow, with a rating of 4,36. What we appreciate about this award is that it represents the opinion of industry peers and business leaders. We see the award as something we have earned, but also as a mark of trust."

"We believe that their recognition is an acknowledgment of the high standard we set for ourselves," Friedrich concluded.

Why might my capital be insufficient to retire?

Making adequate provision to retire with dignity is not so easy to achieve in the first instance. It requires adequate funding by employer and employee throughout the employee’s working life, it requires that not too much but also not too little of the contributions be diverted for other purposes and benefits, and that the capital accumulating for retirement does not experience any leakages.

The following are typical pitfalls that will prevent you from achieving this ideal:

• early withdrawal of accumulated capital,
• poor investment returns,
• high management costs,
• too low a basis for setting a contribution rate,
• too low a contribution rate,
• statutory disincentives and, importantly
• leakages in the system.

Government needs to take measures to prevent leakages

At an RFIN breakfast seminar reported on below, the Ministry of Finance expressed its concerns how to ensure that government doesn't end up bearing the responsibility for persons that have made inadequate provision for their retirement.

We have on various occasions in the past dwelled on the topic of the proposed National Pension Fund, one policy measure government is considering in order to ascertain that all citizens will eventually have provided adequately, to retire with dignity. Clearly there is serious and justified consideration how to go about this national objective. And it does not take much gray matter to appreciate that the approach must be two-pronged, one being to ascertain that everyone contributes adequately, the second one being to plug the holes in the system that cause leakages.

The RFIN breakfast session dealt with the topic of preservation of retirement capital upon resignation. Currently, there is no legal requirement to preserve one’s capital upon resignation. The Income Tax Act encourages preservation by allowing retirement capital to be transferred to another approved fund, tax free but at the same time it allows you to withdraw a portion or all your capital within the first three years of resignation. This is only one leakage. The National Pension Fund envisages compulsory preservation but it is not in force.

A much more serious leakage is the provision for provident funds in the Income Tax Act. These funds cannot pay pensions but only lump sums and oblige the employee to accept cash as the default arrangement. Obviously most employees are unlikely to reinvest the cash once in their possession. We question the existence of provident funds. The Act also discourages members from providing adequately

for retirement by a very low cap of N$ 40,000 on tax deductible contributions and by disallowing additional voluntary contributions for tax purposes but tax any benefit without any regard to such after tax contributions made by the member.

Another serious leakage is caused as the result of the Income Tax Act not prohibiting pension funds to pay death benefits and disability benefits as lump sums and on top of it, ‘creaming’ off income tax on such lump sum benefits. So even if the employee/dependant wants to reinvest the capital, a portion will be given up in income tax.

There are other less serious leakages which we will not cover now. The most serious leakages can and should be addressed by government through policy measures. The thought has been raised for the Income Tax Act to do away with provident funds. It is also likely that the larger portion of any benefit to be offered has to be an income benefit with only a smaller portion in form of a lump sum. With regard to the National Pension Fund, it is still being contemplated whether or not any exemption will be granted to existing funds. It would appear likely that if any exemption were to be granted, it would be on the basis that employee and employer contribute rate towards the fund is at least equal to that of the National Pension Fund (12%-14% of payroll?) and that benefits will primarily take the form of income rather than lump sum benefits.

Trustees need to look at their fund benefit structure

Often pension funds require the retiree to purchase a pension from another fund or insurer. Such transactions not only often expose the retiree to unscrupulous operators, but the retiree will incur substantial costs. Trustees are also often overwhelmed by consultants talking them into unnecessarily complex structures that might serve the needs of a very small minority but come at a cost. Trustees often do not grasp the complexity of such structures nor do they appreciate the risks and the costs attaching to such complexity. The consultants often introduce such arrangements with their own agenda, such as selling their house products and services and making themselves indispensable for the fund.

Trustees of course are free to pre-empt legislative measures to plug these leakages that are likely to be addressed through government policy measure sooner or later. In this light, here is sound advice to employers until such time as the future of the National Pension Fund and of the Income Tax Act with regard to retirement provision has been cleared:

• Rather offer a pension fund than a provident fund.
• The pension fund should offer income benefits rather than lump sums in the event of death, disablement and, as a matter of course, in the event of retirement.
• Be wary of converting your fund from pension fund to provident fund and to do away with income benefits.
• Be wary of outsourcing pensioners if your fund is large enough to carry the liability for in service spouse’s and children’s pensions and post retirement pensioners.
• Be wary of dissolving your investment reserve which is particularly useful for funds maintaining a pensioner pool.
• Be wary of unnecessarily complex and expensive fund structures that may serve a small group of members only.

Once abandoned, it will be extremely difficult for any fund to reintroduce the previous arrangements.
 

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

An overview by Tilman Friedrich and Sabine Halberstadt

Background

The Organization for African Unity (OAU) was established on 25 May 1963 in Addis Ababa (Ethiopia). In terms of the Organization’s Charter each sovereign state in Africa shall be entitled to become a member of the Organization.

Namibia was admitted to the OAU in June 1990, 3 months after independence. On 9 July 2002 the OAU was disbanded by its last Chairperson, President Thabo Mbeki of South Africa and the organization was replaced by the by the African Union.

In 1999 Namibia signed the OAU’s Convention on the prevention and combating of terrorism. This convention inter alia deals with money laundering to finance terrorist activities. A member state signing such a convention is not ipso facto bound by the convention. The states who sign such conventions undertake to ensure that their respective states will  ratify these conventions by incorporating the provisions of such conventions into their national legislation.

With the commencement of the new Financial Intelligence Act, Act no 13 of 2012 and the Preventions and Combating of Terrorist Activities Act, Act no 12 of 2012 on 21 December 2012, Namibia can ratify the convention.

Main Differences between the 2007 FIA Act ant the 2012 FIA Act

Besides the new FIA Act being considerably more detailed and specific than its predecessor law, as we will set out below, one of the main differences between the two Acts is the establishment of the Financial Intelligence Centre (Centre) that takes over the responsibilities previously shouldered by the Bank of Namibia, and the establishment of the Anti-Money Laundering and Combating Financing of Terrorism Council (Council). The Bank of Namibia (BON) now has to provide administrative services to the Centre (See section 7 (2)). The Centre is headed by the Director who may appoint its own staff complement and is now accountable to the Minister and no longer to the Governor of the Bank of Namibia. The Council comprises of the Governor, various PS’s (Finance, Nampol, Trade, Justice, Safety and Security), the Director of the Namibian Central Intelligence Agency, the President of the Bankers Association, a person representing accountable or ‘reporting institution’s and a person representing Namfisa (‘supervisory bodies’). It is to advise the Minister (of Finance) on policies and measures to combat money laundering and financing of terrorism activities and on the exercise of his powers.

New Definitions

Numerous new definitions were added. Probably one of the most significant new definitions is the definition of ‘risk clients’ which is defined as follows: ‘risk clients’ means any person, natural or legal whose activities pose a risk of money laundering or financing of terrorism activities. (For a list of the new definitions added in this act, refer to the list at the end of this article).
The definition of ‘authorized officer’ has been amended to now also include a member of the Anti-Corruption Commission, a person authorized by the Head of a Supervisory Body and a member of an investigation authority, in terms of any law that authorizes persons to investigate unlawful activities. It should be kept in mind that in terms of the new FIA Act, the only remaining Supervisory Body is NAMFISA.

Another new key definition is that of ‘unlawful activity’, which in terms of the Prevention of Organised Crimes Act, means “Conduct which constitutes an offence which contravenes any law within or outside Namibia, before or after commencement of the Prevention of Organised Crimes Act.”

The new definition of ‘reporting institution’ refers to institutions previously referred to as ‘accountable institution’ (motor dealers; second hand goods dealers; traders in jewelry, antiques or art; entities and persons regulated by Namfisa, now only short-term insurers).

‘Accountable institutions’ are, (a) legal practitioners, estate agents, Accountants or Auditors, who are involved in buying/selling of real estate; managing moneys; facilitating or sourcing contributions for, or establishing, operating or managing legal persons; buying or selling business entities or legal rights. (b) It encompasses: Trust and Company Service Providers who act as formation agent for legal persons; acting or arranging other persons to act as director or secretary or partner to a partnership or legal person; providing a registered office, business address, secretarial services or resources; acting as a trustee of a trust or as a nominee shareholder. (c) It encompasses the following institutions/types of business: banks; casinos; money lenders against or without security, such as but not only Agribank, DBN, NHE; a person/business trading in minerals or petroleum; a person/business trading in money market instruments, foreign exchange, currency exchange, exchange- interest rate and index instruments, transferable securities, commodity futures; any other securities services; a person who renders investment advice; Nampost; a person who deals with traveller’s cheques; a licensed stock exchange; a person who carries on business of electronic money or value transfer; certain persons regulated by Namfisa (individual/collective portfolio management, Long-term insurer, micro lender, friendly society, unit trust manager); auctioneer.

‘Regulatory Bodies’ encompass the Bank of Namibia, Law Society, Estate Agents Board, Public Accountants and Auditors Board and the Registrar of Companies that were previously referred to as ‘supervisory bodies’, whereas the new Act leaves under the schedule of ‘supervisory bodies’ only Namfisa. The obligations of the Registrar of Companies, who was a ‘Regulatory Body’ under the previous Act, are now dealt with in a separate section, as elaborated in Application of Act to Institutions.

In terms of the 2012 FIA Act NAMFISA is the only ‘Supervisory Body’ (Schedule 2) while in terms of the 2007 FIA Act the Registrar of Companies, Law Society of Namibia, Estate Agent Board, Public Accountants etc. were also classified as ‘supervisory bodies’. In terms of the 2012 FIA Act these bodies are now classified as ‘regulatory bodies’ (Schedule 4).

Application of Act to Institutions

Whereas the 2007 FIA Act applied to ‘accountable institution’s and ‘supervisory bodies’, the new Act imposes numerous new duties on the Registrar of Companies, the Master of the High Court and ‘reporting institution’s such as motor vehicle dealerships, persons doing business in second hand goods and short-term insurers. The Registrar of Companies for example must forward all changes in members, directors, shareholders or beneficiaries of companies owning immovable property, to the Registrar of Deeds. The Master of the High Court must keep up-to-date information in respect of the founder, each trustee, each income beneficiary and beneficial owners of all testamentary as well as inter-vivos trusts. There is furthermore a duty on a ‘reporting-’ or ‘accountable institution’ which has a business relationship with any Trust to inform the Master if a trust is not registered with the Master of the High Court.

Obligation to identify prospective clients

‘Accountable-‘ and ‘reporting institutions’ may not establish a business relationship or conclude a transaction/multiple transactions in excess of a specified amount unless the prospective client has been identified. For this purpose these institutions are required to establish the identity of a prospective client, and of the person on whose authority he is acting, where applicable, as well as the authority under which the client is acting and the same applies where a client is acting on behalf of a prospective client. Where the prospective client is a legal entity its legal existence, structure, its name, legal form, address, directors/partners or senior management, its principal owners and beneficial owner and provisions regulating the power to bind the entity must be established. Accounts must always be established in the name of the account holder and not in an anonymous or fictitious name. The same must be done for clients that existed when FIA Act of 2012 came into force within a specified period. Where these institutions are unable to establish the identity as required for existing clients within a reasonable period, it may not conclude further transactions and must immediately file a suspicious activity report. When such identity is subsequently established further transactions may only be concluded after the Centre has been informed of the identity.

Risk management and monitoring to be applied

Strangely, only ‘accountable institutions’ must have risk management and monitoring systems in place to identify clients or beneficial owners whose activities may pose the risks contemplated in this Act. Where such has been identified the source of wealth or funds must first be established and approval of top management be obtained before a business relationship may be entered into. Only ‘accountable institutions’ must also exercise ongoing due diligence in respect of all their business relationships, e.g. proper up-to-date records, monitoring consistency of transactions, activities and risk profile, specifically complex or unusually large transactions, those with an unusual pattern or no apparent economic purpose, examine background and purpose of transactions, keep all findings readily available and carry out enhanced monitoring and due diligence when doubts or suspicion arises. These institutions are obliged to undertake regular money laundering and financing of terrorism activities risk assessments taking into account the scope and nature of its clients, products and services, as well as the geographical area from where its clients and business dealing originate.

Customer acceptance policies to be employed

‘Accountable-’ and ‘reporting institutions’ must develop, adopt at senior management level, and implement a customer acceptance policy, rules, programs, procedures and controls to manage and mitigate the risks contemplated in this Act. There is also a new section setting out these institutions’ responsibilities when entering into cross-border banking relationships.

Record keeping obligations

Record keeping of ‘accountable-’ and ‘reporting institutions’ has been expanded by requiring maintenance of transaction amount and the parties to it, client/transaction files and correspondence, due diligence findings, copies of reports filed with the Centre, name of person who obtained the KYC documentation, documentation regarding identification upon establishment of business relationship after promulgation of this Act and also before promulgation of this Act. Records of all the information referred to in Obligation to identify prospective client also need to be maintained. These records may now be kept by a 3rd party service provider, provided the institution has unrestricted access.

The Centre has access during ordinary working hours, to any record kept in terms of this Act relating to suspicious money laundering or financing of terrorism activities and is entitled to reasonable assistance from those concerned.

Electronic fund transfers

When electronically transmitting or receiving moneys in excess of a prescribed amount, an ‘accountable-’ or ‘reporting institution’ must report the transaction to the Centre and must ascertain that prescribed originator information is provided or received with the transfer documentation and if such information cannot be obtained a suspicious transaction report must be filed with the Centre.

Obligation to report suspicious transaction

An ‘accountable-’ or ‘reporting institution’ or a person who carries on any business or is a director, secretary to the board, employed or contracted by any such business or institution is required to report to the Centre any suspicious activity that is contemplated by this Act (money laundering or financing of terrorism activities).

Centre is the supervisory body of all institutions not supervised by Namfisa

The Act places a number of additional obligations on ‘supervisory bodies’ (currently only Namfisa) and deems the Centre to be the supervisory body of all ‘accountable-’ and ‘reporting institutions’ that are not supervised by Namfisa (currently). For this purpose ‘accountable-’ and ‘reporting institutions’ not supervised must register their prescribed particulars with the Centre.

Conveyance of cash or similar asset across the border

Any person bringing or taking cash or bearer negotiable instruments in excess of a prescribed amount in any manner into or out of Namibia must correctly declare this in a prescribed manner to Customs and Excise or the Post Office, else it may be seized. For this purpose Customs and Excise and the Post Office are given specific powers.

Enforcement measures

No duty of secrecy or confidentiality whether imposed by legislation or arising from common law or agreement affects compliance with a provision of the Act.

No action whether criminal or civil lies against any person, body or institution that reports in good faith in compliance with the Act. Persons and the information such persons may have provided may not be disclosed.

Tipping off a person in respect of any matter contemplated by this Act that may prejudice an investigation or proposed investigation is an offence liable to a fine not exceeding N$ 10 million or 30 years imprisonment or both. The same penalty applied to the disclosure of confidential information held by or obtained from the Centre.

Any person who obstructs, hinders or threatens another person in the performance of their duties in terms of this Act is committing an offence and is liable to a fine not exceeding N$ 10 million or 30 years imprisonment or both.

A new section is introduced dealing with the appointment of inspectors and one that deals with inspections. An inspector may at any time on notice, enter and inspect any premises of any ‘accountable-’‘ or ‘reporting institution’ or person, direct persons to appear for questioning, produce documents or information in respect of a document, open a strong room, safe or container or use any computer system or equipment on the premises.

The Centre is empowered to issue directives and to impose or suspend (for not more than 5 years) administrative sanctions where a person has failed to comply with a directive or conditions set for a license, registration, approval or authorization. Such sanctions are a reprimand, a directive to take action, restriction or suspension of certain business activities, suspension of a license, or a penalty up to N$ 10 million which may directed at a person who was responsible for the failure of the ‘accountable-’ or ‘reporting institution’. The Centre may refer a matter with its recommendation to the Prosecutor General. The Centre or Namfisa (currently) may also institute proceedings in the High Court.

A new section is introduced on enforceable undertakings. Written undertakings by an ‘accountable-’ or ‘reporting institution’ to take specified action, refrain from specified action, becomes enforceable by application of the Director to the High Court, which may make any order in this regard.

The penalties for offences in terms of the Act increased astronomically. For example, contraventions of Section 22 of the new Act (Identification when transaction is concluded in the course of business relationship) the penalty is now a fine not exceeding N$ 100 million or imprisonment not exceeding 30 years, or to both such fine and imprisonment whereas the penalty in terms of the 2007 FIA Act was a fine not exceeding N$ 500,000 or 30 years imprisonment or both (Section 14 (6)).

In terms of the 2012 FIA Act, other measures must first be exhausted before penalties can be imposed (Section 51). These other measures are: the issuing of directives after consultation with the relevant supervisory body (Section 54), written undertakings by accountable or reportable institutions to comply with the Act (Section 55), administrative sanctions (Section 56) and applications to Court (Section 60).

The new Act also introduces an appeal board and appeal procedure similar to the appeal procedures in the NAMFISA Act (Sections 57 and 58).

FIA Act 2007 repealed, but not regulation, notices etc.

The Act repeals the FIA Act of 2007 but all regulations, exemption, notice, circular, determination or guidance issue under that Act are deemed to have been made or issued under this Act.

What are the implications of the new FIA Act on Pension Funds?
In terms of the Amendment of Schedule 1 to the Financial Intelligence Act dated 15 December 2011 registered pension funds and provident funds as defined in the Pension Funds Act as well as registered medical aid funds were expressly excluded from the definition of ‘accountable institutions’. The exclusion was repealed together with the 2007 FIA Act.

The 2012 FIA Act does not list pension funds or medical aid funds as being ‘accountable institutions’ which achieves the same result of exempting such institutions from the rather onerous record keeping and KYC obligations. Pension funds as any other person still have the duty to report suspicious transactions for example in cases where a member pays unusual additional voluntary contributions into the Fund, or redeems his housing loan in an unusual fashion.

List of new definitions

Bearer negotiable documents, beneficial owner, cash, Centre, competent authority, correspondent banking, Council, customer due diligence, Customs and Excise,  electronic transfer, establish identity, financing of terrorism, inspector (differs from authorized officer in 2007 Act), payment instrument, person, records, Registrar of Companies and Close Corporations, regulation, ‘reporting institution’s, risk clients, risk management system, senior management, transaction.

References:

International Law, a South African Perspective, John Dugard,Juta & Co, LTD 1994
Documents on International Law, Handbook for Law Students and Constitutional Lawyers, Mtshaulana, Dugard, Botha, Jutta & Co  Ltd, 1996

Important notice and disclaimer

This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

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The Latest Developments on Future Quarterly Reporting to Namfisa – October 2012

Namfisa recently issued a new template for future quarterly reporting by pension funds. This report comprises of a summary section, a signature section and 9 data sections. It makes reference to information to be provided by the Principal Officer, the asset manager and the administrator and attempts to separate sections according to the likely source of the information.

It is unclear how Namfisa envisages taking this reporting forward. It would be sensible that role players should once again provide comments to Namfisa. Funds should therefore coordinate with their relevant service providers and liaise with Namfisa with the view to settle on a final version that can be compiled at the least possible cost to the fund. Until such time as the template has been finalised, it would be foolish for the contributors to this report to start developing and adapting systems and procedures to ensure that the quarterly information can be provided as required.

Much of the information required from the administrator and the asset manager, should typically be maintained in their systems. It would then be a question of having the relevant information extracted electronically and reported in the format required by Namfisa.

Some of the information would have to be manipulated (e.g. average ages, average pensionable income, quarterly income statement figures), which would require programming or data manipulation. Programming and data manipulation should be avoided as far as possible as it will be costly and will require time to be done. Perhaps it is more sensible if the Namfisa ERS were to be adapted to do calculations and data manipulations and that the service providers rather provide the data required for these purposes.

Some of the information is unlikely to be maintained by service providers as it has little or no bearing on their responsibilities, (e.g. the type of transferee fund for benefits paid, housing loans in proclaimed areas vs. unproclaimed areas, status of proclamation, market value of hypothecated property in case of direct loans). To provide such information will be costly and time consuming, as it requires programming to record and report the information while systems and procedures will have to be adapted to capture such information in future.

Some information is currently in an inappropriate section of the report and should be move to a more appropriate section (‘other loans’ in housing loan section, actuarial information in administrator section, static fund information on benefits -, contributions - and cost structure in administrator section.

Some information is initiated and executed by and therefor only available from a 3rd party (insurer benefit payments, detail on indirect loans from banks).

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions. 

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Notes of a meeting of the Namibia Employers Federation (NEF) on the impact of the latest amendments of the Labour Act by Louis Theron, director support services.

The purpose of the amendments is said to be mainly to regulate the employment status of individuals placed by employment agencies.

The main concerns raised by employers were:

• The Act is again very vague on many issues and the consensus was that many disputes will first arise before clarity is obtained.In terms of the Act a “user enterprise” is now included under the definition of ‘employer’. Due to a lack of clarity within the Act, different opinions were expressed by advocate Ya Toivo who advised the Government, and by Pieter De Beer who advised the NEF. The grey areas relate to the placing of a security guard, cleaner and the use of sub-contractors in the building industry. Government (Ministry of Labour) argued that it was not the intention to include these services and that is not considered ‘labour hire’.

• In terms of the amendments the ‘user enterprise’ will be regarded the ‘employer’, should any dispute arises, and that employees placed by an employment agency must have the same rights as any other employee of the user enterprise.

• A user enterprise may not employ an employee placed, during a strike. The concern is that the Act does not specifically refer to a legal strike only.

• Section 128 A. An individual is deemed to be an employee of another person if any one of the following factors are present (bold text representing main areas of concern):
  • The manner in which the individual works is subject to the control and direction of that other person;
  • Working hours is controlled by the other person;
  • The individual’s work forms an integral part of the ‘user enterprise’;
  • The individual has worked for the other person for an average of at least 20 hours a month over a 3 month period;
  • The individual is economically dependent on that person where he/she works or to whom he/she renders services;
  • The individual is provided with tools of trade or equipment by that other person;
  • The individual only works for or renders services to that other person;
  • Any other prescribed factor.

• Section 128 C. In terms of this section an employee is presumed to be employed indefinitely, unless the employer can establish a justification for employment on a fixed term. This does not apply to ‘managerial staff’.
  • ‘Managerial staff’ is not defined in the Act and some employers argued that this is not a problem because all employees can be considered to be ‘managerial staff’.
  • Many employers from the agricultural, charcoal and retail industries raised concerns about seasonal or peak time workers in this regard.

The outcome

The employers elected an 8 man committee to clearly define the concerns. The committee was mandated to request extension from the Minister (the Act will come into force on 1 August 2012) and to provide proposals to the Minister on changes. This committee will provide feedback and a plan B for a scenario should the Minister not agree to above.

A thought not discussed but relevant to our business environment, in the light of section 128 A, is whether the administration staff of our company would now be deemed to be employed by the retirement funds we serve. (They are economically dependent on the fund, some only render services to one fund and spend more than an average of 20hours per month working for the fund??)

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions. 

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The Flexible Land Tenure Act, 2012

A technical analysis by RFS legal consultant, Sabine Halberstadt

With ever increasing house prices and the problematic registration of person’s right to land in informal settlements, this act creates two alternative forms of land title that are simpler and cheaper to administer and provide security of title for persons living in informal settlements and who are provided with low income housing.

The two types of forms of land title that are created are: a starter land title and a land hold title.

The Act is not clear about what exactly the differences between the two new titles to lands are. The Act stipulates that a starter title scheme to land can be upgraded to a land hold title scheme, if at least 75% of holders of rights in a starter title scheme have consented thereto. The holders of starter titles who do not agree to the upgrading of the scheme, must be granted starter title rights in a similar scheme by the relevant authority. The Act is silent on what is meant by “upgrading”. This will probably be dealt with in regulations to the Act.

The Act further provides that a starter title scheme or land hold title scheme may be upgraded to full ownership provided the scheme is situated within the area of an approved township. This upgrading can only be done when all holders of rights in a scheme concerned have agreed in writing to the upgrading. If 75% of the holders in the scheme agree with the upgrading, the relevant authority may pay fair compensation to the holders of rights that do not agree with the upgrading. As the holder of a land hold title has all the common law rights an owner of immovable property has, it is not clear what the difference between a land hold title and full ownership is.

From the Act it is clear that owners of a starter title right and land hold title have different rights to the property. A holder of a starter title right has the following rights:

He may erect a dwelling of a specified size and nature at the specified location allocated to him, occupy the dwelling , on his death bequeath the dwelling to his/her heirs and to lease it to another person, transfer his/her rights to any other person based on a transaction recognized by law.

There is a duty on the Registrar to register any transfer of rights of which he/she has been informed or of which he /she has become aware, if he or she is satisfied that the transaction occurred.

A holder of land hold title rights has, subject to the provision of the Act all rights in the plot concerned that an owner has in respect of his/her plot under the common law and he/she may perform all juristic acts in relation to the plot that an owner may perform under the common law.

Section 10(5) of the Act requires that the following transactions may only be performed by registration in the land hold title register: the transfer of the rights to another holder, the creation or cancellation of a mortgage or any other form of security for a debt executable on the plot concerned, creating or cancelling a right of way in favour of the owner of the land or creating or cancelling servitudes regarding water, electricity or similar services.

These two new types of property have a lot in common with sectional title schemes.

1. Like sectional title schemes, land hold title schemes have “common property” being that part of a blockerf concerned, that does not form part of any plot;
2. Starter land title and land holder title schemes have associations, owners have a right to be members of. These associations are similar to body corporates in sectional title schemes.

In the case of associations of a starter title, the association also has the right to represent the holders of the rights in negotiations with relevant authorities and to mediate disputes between members of the scheme.

Two of the major differences between the two new types of title to land and sectional titles are:

1. Units of sectional title schemes can be registered in the name of a legal person like a company or close corporation while this cannot be done in the case of starter title and land hold title.
2. As with sectional titles, the Registrar of Deeds must establish a land hold title register and a starter title register, in which information regarding acquisition and transfer of ownership is recorded. In the case of those two new types of title to land, separate land rights offices may be established. The duties of a Registrar of Land Rights so appointed, include inter alia to ensure that regular inspections of land hold title and starter title schemes are conducted to determine whether the information recorded in the registers has been recorded accurately and to assist persons who intend to transfer starter title or land hold title rights. The Registrar of Land rights has wide powers to hold enquiries, conduct interviews and even formal hearings in matters concerning disputes over starter title and land hold title property and to make entries into the register if in his opinion the information in the register is incomplete or incorrec

It is important to note that except for persons married in community of property, a starter title right may not be held jointly by more than one person, no juristic persons like close corporations, and companies may hold a starter title right. Furthermore, no natural person may hold more than one starter title right and no person may acquire such a right if he/she is the owner of any immovable property or land hold title in Namibia.

Do members of a fund qualify for direct or indirect housing loans if they would like to acquire starter title rights or land hold rights?

Section 19(5) of the Pension Funds Act reads as follows:

“(5)(a) A registered fund may, if its rules so permit, grant a loan to a member by way of investment of its funds to enable the member-
(i) to redeem a loan granted to the member by a person other than the fund, against security of immovable property which belongs to the member or his or her spouse and on which a dwelling has been or 'will be erected which is occupied or, as the case may be, will be occupied by the member or a dependant of the member;
(ii) to purchase a dwelling, or to purchase land and erect a dwelling on it, for occupation by the member or a dependant of the member; or
(iii) to make additions or alterations to or to maintain or repair a dwelling which belongs to the member or his or her spouse and which is occupied or will be occupied by the member or a

Both, starter title rights as well as land hold rights seem to comply with the requirements of section 19(5) (a) of the Pension Funds Act in that the holders of such rights have the right to use the property for occupational purposes of the purchaser thereof.

The Pension Funds Act does not define “belongs”. This means the word should carry its ordinary meaning. The Oxford Reference Dictionary defines “belong” as “(with to) to be the property of; to be rightly assigned to as a duty, right, part etc”.

It seems that the holders of starter title rights will probably not be allowed to register a bond over their property. Section 9(1)(e) of the Flexible Land Tenure Act stipulates that the holder of a starter title right has the right to transfer his or her rights to any person, (whether that person is the heir of the holder of those rights or whether the transfer is another transaction by law). The holder of such rights does not become the owner of the starter title, he only acquires certain rights.

In the case of land hold title rights, section 10(5) of the Act stipulates that certain transactions may only be performed by registration in the land hold title register. These include: the transfer of land hold title rights to another and creating or cancelling a mortgage or any other form of security for a debt executable on the plot concerned. Therefore I am of the opinion that only holders of land hold title rights and owners with full ownership will qualify for direct or indirect housing loans in terms of the Pension Funds Act.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

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Notes of a meeting of the Namibia Employers Federation (NEF) on the impact of the latest amendments of the Labour Act by Louis Theron, director support services.

The purpose of the amendments is said to be mainly to regulate the employment status of individuals placed by employment agencies.

The main concerns raised by employers were:

• The Act is again very vague on many issues and the consensus was that many disputes will first arise before clarity is obtained.In terms of the Act a “user enterprise” is now included under the definition of ‘employer’. Due to a lack of clarity within the Act, different opinions were expressed by advocate Ya Toivo who advised the Government, and by Pieter De Beer who advised the NEF. The grey areas relate to the placing of a security guard, cleaner and the use of sub-contractors in the building industry. Government (Ministry of Labour) argued that it was not the intention to include these services and that is not considered ‘labour hire’.

• In terms of the amendments the ‘user enterprise’ will be regarded the ‘employer’, should any dispute arises, and that employees placed by an employment agency must have the same rights as any other employee of the user enterprise.

• A user enterprise may not employ an employee placed, during a strike. The concern is that the Act does not specifically refer to a legal strike only.

• Section 128 A. An individual is deemed to be an employee of another person if any one of the following factors are present (bold text representing main areas of concern):
  • The manner in which the individual works is subject to the control and direction of that other person;
  • Working hours is controlled by the other person;
  • The individual’s work forms an integral part of the ‘user enterprise’;
  • The individual has worked for the other person for an average of at least 20 hours a month over a 3 month period;
  • The individual is economically dependent on that person where he/she works or to whom he/she renders services;
  • The individual is provided with tools of trade or equipment by that other person;
  • The individual only works for or renders services to that other person;
  • Any other prescribed factor.

• Section 128 C. In terms of this section an employee is presumed to be employed indefinitely, unless the employer can establish a justification for employment on a fixed term. This does not apply to ‘managerial staff’.
  • ‘Managerial staff’ is not defined in the Act and some employers argued that this is not a problem because all employees can be considered to be ‘managerial staff’.
  • Many employers from the agricultural, charcoal and retail industries raised concerns about seasonal or peak time workers in this regard.

The outcome

The employers elected an 8 man committee to clearly define the concerns. The committee was mandated to request extension from the Minister (the Act will come into force on 1 August 2012) and to provide proposals to the Minister on changes. This committee will provide feedback and a plan B for a scenario should the Minister not agree to above.

A thought not discussed but relevant to our business environment, in the light of section 128 A, is whether the administration staff of our company would now be deemed to be employed by the retirement funds we serve. (They are economically dependent on the fund, some only render services to one fund and spend more than an average of 20hours per month working for the fund??)

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Funds often acquire services and products from foreign vendors such as software, consulting services, training etcetera. Such transactions may have VAT and Withholding Tax

implications read together with the provisions of any double taxation agreement in force between Namibia and the other tax jurisdiction.

Failure to comply with the VAT Act and the Income Tax Act, with regard to Withholding Tax will expose the fund to penalties and late payment interest.

As fund administrators we do not purport to be tax experts. Such expertise can typically be sourced from Namibian audit firms. In instances where invoices are presented to us

for payment in respect of goods or services acquired from a foreign vendor, we presume that the fund has considered the potential implication of VAT (import or normal VAT) and

of Withholding Tax the fund may be liable for, as well as any relief granted by the double taxation agreement between the two countries concerned.

The purchase of software from a foreign vendor in our understanding represents a VATable import and VAT should be paid at the same time payment is affected. The cost of

attending training or seminars outside Namibia in our understanding does not represent a VATable import and VAT, if applicable in the foreign country, should be raised by the

foreign vendor. Trustee fees and trainer fees payable to a foreign resident attract Withholding Tax unless relief is provided by the double taxation agreement.

On the topic of Withholding Tax, PWC recently published withholding tax guidelines concerning South African suppliers. Download the guidelines in PDF format here...

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions. 

The full review of these regulations can be found here...

Important changes and some of our comments are set out below:

Regulation 26(1)  is to be amended to the extent of raising the penalty for failure “…to make or to transmit or deposit a scheme, report, account, statement, other document or information within the time prescribed by … the Act or the Regulations or within any extended period allowed by the Registrar in terms of section 24 [sect 24 deals with enquiries by the Registrar] and 33(1) [sect 33 deals with the extension of certain peri0ds by the Registrar]…” from N$ 10 per day to N$ 500 per day.

Our comment:

The Registrar’s current position is not to grant extension for the submission of annual financial statements. This regulation, however, makes provision for extension being granted. Any unreasonable refusal to grant extension can be challenged as administrative injustice.

Besides the above penalties set by regulation, section 37 provides for a number of further statutory penalties upon conviction for contravention or failure to comply with various sections of the Act.

Regulation 26(2) is to be introduced, which provides for a penalty of N$ 1,000 per day for contravention or failure of a person to comply with any provision of regulation 28.

Our comment:

This is a new penal provision. Interestingly, it may not necessarily be imposed upon a contravening fund but also on any other person although it is only the fund required to comply with the Act. Perhaps Namfisa can clarify what the intention of this particular wording is.

Regulation 27 is to be amended by setting the interest rate on direct pension fund loans at BON’s repo rate plus 4%, currently 10% p.a.

Our comment:

Hitherto the interest rate was set at 16% since 1 August 1989. Employers whose fund offers direct loans need to ensure that salary deductions for employees’ housing loan repayments are adjusted in future whenever the repo rate is adjusted by BON. The same applies to administrators whose clients offer such loans.

Regulation 28 is to be amended by the following key changes:

• A definition of ‘domestic asset’ is introduced.
  
  Our comment:
  
  This definition appears to include corporate bonds of foreign companies as ‘domestic asset’. The annexure to the regulation restricts the investment in such bonds to 50% and requires approval of the country in which the entity is situated. It does not include loans to member, investments in the business of a participating employer, or any asset not listed in the Annexure (e.g. gold coins/bars, works of art) unless such assets are designated a ‘domestic asset’ by the Minister by notice in the Gazette. It appears that these issues may have to be reconsidered by Namfisa.
   
• A definition of ‘foreign asset’ is introduced, covering all assets that are not ‘domestic assets’.
  
  Our comment:
  
  The Annexure to the regulation only lists a limited number of assets in which a fund may invest. True Namibian assets may fall into the category of ‘foreign asset’ purely because of this, unless the asset is designated ‘domestic asset’ by the Minister by notice in the Gazette. Some of these are listed in our comment on the definition of ‘domestic asset’ above.
   
• A definition of ‘market value’ is introduced, setting out how different asset classes are to be valued.
  
  Our comment:
  
  For any assets held outside the common monetary area, can the principle of ‘willing buyer, willing seller’ upon an ‘arms-length’ sale in Namibia be applied, or does this definition in fact preclude any such investment?
   
• Maximum investment in property (sub max 25%), shares (sub max 75%), other claims against natural persons/companies (sub max 25%) and other assets (sub max 2.5%) is 95%.
  
  Our comment:
  
  This maximum implies that a minimum of 5% less the investment in unlisted investments (min 1.75% and max 3.5%) must be invested in banks, building societies, Post Office Savings Bank, Government bonds, bonds of SOE’s, local authorities, regional councils, Registrar approved Namibian corporate bonds or Registrar approved foreign bonds.
  
  It is also noteworthy that the previous sub maximum in shares is lifted once again from 65% to 75%.
   
• The previous reference to unlisted investments and the limits and conditions for investing in such investments, is removed from this regulation.
  
  However, the requirement to invest a minimum of 1.75% and a maximum of 3.5% of total fund assets in unlisted investments, remains in place. This is to be attained within a period of 12 months of publication of the relevant notice.
  
  Our comment:
  
  On many previous occasions we have raised the concern about the implication of enforcing any minimum investment in specific asset classes for funds offering member choice. Such minimum militates against a member choice to reduce his or her investment risk and volatility, often just prior to retirement and at a time where the member cannot afford any volatility. The procedure for exemption may be too onerous to be an option. It is to be hoped that the Minister will consider blanket exemption to such funds so that it becomes unnecessary for such funds to apply for exemption.  
   
• The staggered time scale for reducing the maximum investment in shares in dual listed foreign incorporated companies is now linked to the date of publication of the relevant government notice.

• Funds must within 90 days of each calendar quarter report on their investment holdings in such format as the Registrar may determine.
  
  Our comment:
  
  Currently funds only report on their investment holdings annually. Asset managers are required to report quarterly, and their reports would cover the assets of not only pension funds but also of insurance companies but would exclude any direct investment by a fund such as direct housing loans, credit balances with financial institutions, direct property investments etc. These direct holding are minimal in the context of the industry as a whole. For funds to now report quarterly will provide a marginally more accurate picture, not without substantial additional costs though. Cognisance now also has to be given to the penalty of N$ 1,000 per day of failing to comply with any of the provisions of regulation 28.
   
• The concepts of ‘linked policies’ and ‘not linked policies’ is discarded. All policies are now considered not to be an asset of the fund. Policies issued to ‘privately administered funds’  are not subject to the requirement that the insurer must report on these in terms of regulation 15 of the Long-term Insurance Act while policies issued to so-called ‘insured funds’ are subject to that requirement.
  
  Our comment:
  
  Presumably insurance companies will be required to report on their assets in terms of regulation 15 of the Long-term Insurance Act. It seems though that the assets underlying policies issued to ‘privately administered funds’ can be aggregated by the insurer for the purpose of regulation 15 (the equivalent of regulation 28). This means that individual ‘privately administered funds’ may not need to comply. This creates uneven playing fields for ‘privately administered funds’ between assets administered by insurance companies and those held either directly or managed on their behalf by unit trusts. Furthermore any discrepancy between the provision of regulation 28 and regulation 15 of the Long-term Insurance Act must be avoided at all costs, failing which opportunities for ‘arbitrage’ would be created.
   
• Exemption from the provisions of the regulation may be granted by the Registrar, after having obtained approval from the Minister.
  
  Our comment:
  
  This new requirement of obtaining Ministerial approval is likely to introduce significant inflexibility and red-tape into our industry. Does the Registrar want to be shielded by the Minister from applications for exemption or does the Minister have any preconceived ideas about when exemptions may be granted to which the Registrar is not privy?
  
  The annexure to the regulation prescribing certain limits contains a few surprises.
  • Previously a fund could invest 100% of its assets in credit balances with local financial institutions. This has been reduced to 95%, a minimum of 1.75% to be invested in unlisted investments.
    
    Our comment:
    
    Funds offering members investment choice primarily for the purpose of members’ reducing any risk of volatility and negative investment returns, to the extent of being fully invested in cash, will now be faced with the problem that the lowest risk portfolio still has to hold a minimum of 1.75% in unlisted investments and another 3.25% in any of the other asset classes.
    
    On many previous occasions we have raised the concern about the implication of enforcing any minimum investment in specific asset classes for funds offering member choice. Such minimum militates against a member choice to reduce his or her investment risk and volatility, often just prior to retirement and at a time where the member cannot afford any volatility. The procedure for exemption may be too onerous to be an option. It is to be hoped that the Minister will consider blanket exemption to such funds so that it becomes unnecessary for such funds to apply for exemption.  
     
  • The annexure contains no limit for an investment in direct housing loans to members or in moneys in hand, but with the minimum investment required in unlisted investments, this would imply an effective maximum of 98.25% in such assets.
    
    Our comment:
    
    The annexure does not recognise fairly commonly held alternative assets such as EFT’s, derivatives or structured products unless such assets are designated by the Minister by notice in the Gazette.

Regulation 28 Conclusion

The draft revised regulation represents a substantial improvement from its predecessor and has removed most of the previous ambiguities and serious drafting errors. It does give rise to a few serious concerns as elaborated in ‘our comments’ above. We trust that Namfisa and the Ministry will consider and heed our concerns and will still be prepared to discuss and negotiate the content of this regulation before its finalisation.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions. 

Over the past 20 years 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 other than being informed every three years whether the fund had a deficit to be made good by the employer.

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 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 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 promote 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.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

Income Tax Amendment Act – Act 15 of 2011, Gazette 4864 of 30 December effective 1 January 2012 for companies and 1 March 2012 for taxpayers other than companies, except paragraph 4 which is deemed to have come into effect on 1 March 2009.

This Act is effective 1 January 2012 for companies and 1 March 2012 for taxpayers other than companies, except certain changes to the regime with regard to withholding tax on interest, which is deemed to have come into effect on 1 March 2009.

In this newsletter we draw the readers’ attention to any action required to be taken. In a special newsletter on this Act circulated early January, more detail is provided, which can be accessed at this link to our website.

1. Employer Funded Policies

What to do?

Companies:

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, keyman 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.

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.

2. Commutation of Small Pension Fund Annuities

What to do?

Trustees:

Trustees need to consider whether they want to draw their pensioners’ attention to this opportunity, recognizing that the payment of every annuity normally attracts a fee either based on the annuity capital, or a transaction based fee or both.

3. Education Policies

What to do?

Companies:

This means that where one of your staff members claims premiums towards an educational policy against the taxable income administered by your company, we suggest that you consider the following:

1. the employee to provide a copy of the policy to prove that the policy complies with the definition per the Act;
2. your HR/payroll department to diarise the maturity date of the policy and to introduce a strict routine to follow up on maturity date;
3. the employee to sign an undertaking, to inform HR/payroll department immediately upon cashing in the policy proceeds and to indemnify your company against any penalty as contemplated in section 11A of schedule 2, should he/she fail to inform your company immediately upon having cashed in the policy proceeds.

Individuals:

To ensure that proceeds from an education policy are not subjected to income tax, the employee needs to ascertain that the purpose of the policy is to provide capital for -

• education or training at an educational institution of public character;
• the purpose of obtaining a post-school qualification.

4. Withholding Tax on Interest

What to do?

Individuals:

For financial planning purposes, take into account that there is no withholding tax on bills and bonds issued by Government, regional and local authorities or on negotiable instruments issued by a local bank.

5. Withholding Tax on Services Payments to Non-residents

What to do?

Companies, trustees and individuals:

Ascertain whether you have any business dealings with any foreigner, where no double taxation agreement exists with Namibia (note that SA has a double taxation agreement with Namibia). If you do, ascertain whether these dealings fall into the ambit of the definitions of “entertainment fee”, “management or consultancy fee” or director’s fees. If they do, inform your business associate that you will be obliged to withhold 25% as from 1 January 2012 (all companies), respectively 1 March 2012 (all tax payers other than a company). Institute systems and procedures to identify taxable services, separately record the tax withheld from the gross amount, ascertain that all amounts withheld are paid over to Inland Revenue on or before the 20th of the month following the month in which any amount was withheld and complete the required form to accompany such payments.

Trustees and directors of unit trust management companies take note that funds and unit trusts are defined to be a ‘company’ and are therefore required to start deducting withholding tax as from 1 January 2012.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Income Tax Amendment Act – Act 15 of 2011, Gazette 4864 of 30 December effective 1 January 2012 for companies and 1 March 2012 for taxpayers other than companies, except paragraph 4 which is deemed to have come into effect on 1 March 2009.

1. Employer Funded Policies

Paragraph (m) of the definition of "gross income" is substituted. In short this section stipulates as "gross income" "any amount received or accrued under or upon surrender or disposal of, or by way of any loan or advance granted by the insurer…, any policy of insurance upon the life of any person who at any time while the policy was in force was an employee…or director of the company, if any premium paid …was deductible…under section 17…". Any loan or advance previously included in "gross income" is to be excluded. If a policy is terminated and a paid up policy is issued these are deemed to be one and the same policy.

Section 17(1), which deals with "general deductions" which are allowed, is expanded by the addition of subsection (w). This deals with "expenditure incurred by the taxpayer in respect of any premiums payable under a long-term policy of which the taxpayer is the policyholder, where…" any of the following conditions apply:

• the premium is included in the taxable income of the employee;
• the taxpayer is insured against any loss by reason of the death, disablement or sever illness of an employee;
• the policy is a risk policy (as opposed to an investment policy) that has no cash or surrender value prior to maturity or the death of an employee;
• the policy is not the property of any person other than the taxpayer;
• there is no scheme in place in terms of which policy proceeds are paid over by the taxpayer to the employee or a connected person, to the estate of the employee or to any person who is or was dependent upon the employee.

What to do?

Companies:

A number of retirement arrangements have been set up in the past capitalizing on a "loophole" in the Act. This allowed employers to deduct premiums paid in respect of life policies taken out on the lives of employees. 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.

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 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.

2. Commutation of Small Pension Fund Annuities

The Act creates another opportunity to taxpayers to commute small "pension fund" annuities, if the capital of an existing annuity as at 1 April 2010 did not exceed N$ 50,000.

What to do?

Trustees:

Trustees need to consider whether they want to draw their pensioners" attention to this opportunity, recognizing that the payment of every annuity normally attracts a fee either based on the annuity capital, or a transaction based fee or both.

3. Education Policies

The following new definition of "education policy" is introduced - "A policy of insurance taken out by a tax payer exclusive and solely for the purpose of making provision for future education or training of a child or step-child of the tax payer contemplated by section 16(1)(ab)(ii);"

Paragraph (dC) of the definition of "gross income" is substituted as follows – "any amount received or accrued under or upon the maturity, payment, surrender or disposal of any education policy if any premium was allowed as a deduction in terms of section 17(1)(qA);"

Furthermore paragraph 11A is inserted in schedule 2 of the Act which regulates employees" tax and the employer"s administrative responsibilities. In terms of this section:

"(1). An employer must issue a declaration to the Minister within 30 days following the month in which any payout is received or accrued to a tax payer under or upon maturity, payment, surrender or disposal of an education policy to which paragraph (dC) of the definition of "gross income" applies;

(2). if an employer fails to submit such a declaration in terms of subparagraph (1)within the period prescribed in that subparagraph he or she is liable to pay a penalty equal to 10% of the amount received or accrued to a tax payer under or upon the maturity, payment, surrender or disposal of the policy."

As far as it concerns the employee, section 16(1)(ab)(i) is substituted to now clarify that proceeds are only exempted from income tax if they will be used to fund "…education or training…" at an "…educational institution of public character; and is undergone or will be undergone… for the purpose of obtaining a post-school qualification;".

What to do?

Companies:

This means that where one of your staff members claims premiums towards an educational policy against the taxable income administered by your company, we suggest that you consider the following:

1. the employee to provide a copy of the policy to prove that the policy complies with the definition per above;
2. your HR/payroll department to diarise the maturity date of the policy and to introduce a strict routine to follow up on maturity date;
3. the employee to sign an undertaking, to inform HR/payroll department immediately upon cashing in the policy proceeds and to indemnify your company against any penalty as contemplated in section 11A of schedule 2, should he/she fail to inform your company immediately upon having cashed in the policy proceeds.

Individuals:

To ensure that proceeds from an education policy are not subjected to income tax, the employee

needs to ascertain that the purpose of the policy is to provide capital for -

• education or training at an educational institution of public character;
• the purpose of obtaining a post-school qualification.

4. Withholding Tax on Interest

Section 34A is amended to clarify that withholding tax does not apply to "…interest from stock or securities, including Treasury Bills issued by the Government of Namibia, any regional council or local authority in Namibia…" or to "…any amount of interest accruing to or in favour of any person in respect of any negotiable instrument issued by such (Namibian) banking institution…"

What to do?

Individuals;

For financial planning purposes, take into account that there is no withholding tax on bills and bonds issued by Government, regional and local authorities or on negotiable instruments issued by a local bank.

5. Withholding Tax on Services Payments to Non-residents

Newly introduced Section 35A is likely to affect most of us. It firstly introduces definitions of the services that will be subjected to this tax:

"(1) "entertainment fee" means any amount payable to an entertainer (including cabaret, motion picture, radio, television or theatre artiste and any musician) or sportsperson, and includes any payment made to any other person in relation to such activity; "management or consultancy fee" means any amount payable for administrative, managerial, technical or consultative services or any similar services, whether such services are of a professional nature or not;"

This section requires any resident person ("the State, a regional council or a local authority in Namibia", "a natural person ordinarily resident in Namibia", "a company, partnership, board or trust which is formed or established or incorporated under the laws of Namibia or which is managed or controlled in Namibia") who becomes liable to pay any management fee, consultancy fee, director"s fee or entertainment fee to deduct 25% of such fees and pay this tax to the fiscus within 20 days of the end the month during which such tax was withheld, together with a "…return in the manner and form and containing the information as prescribed…".

Non-compliance attracts penalties of 10% for each month or part thereof and interest at the rate of 20% per annum.

• In this regard, the double taxation agreement with South Africa (DTA) deals with:
• "independent personal services" derived by a resident individual. Such services include especially scientific-, literary-, artistic-, educational-, teaching services as well as other activities of physicians, lawyers, engineers, architects, dentists and accountants. These shall only be taxable in the state in which they were derived;
• dependent services, meaning salaries, wages and other similar remuneration. These shall only be taxable in the state in which they were derived;
• directors" fees derived by a resident individual serving on a board of a company in the other state. These shall only be taxable in the state in which they were derived;
• income derived by resident entertainers and sportspersons, may be taxed in the state in which these activities are exercised.

Reading the DTA together with section 35A, Namibian persons will have to withhold the tax referred to in section 35A but the recipient, as a South African tax payer can claim a deduction against any SA tax on the same income in terms of Article 23 of the DTA. Residents of countries who do not have a double taxation agreement with Namibia will suffer a reduction in fees equal to the withholding tax.

What to do?

Companies, trustees and individuals:

Ascertain whether you have any business dealings with any foreigner. If you do, ascertain whether these dealings fall into the ambit of the definitions of "entertainment fee", "management or consultancy fee" or director's fee. If they do, inform your business associate that you will be obliged to withhold 25% as from 1 January 2012 (all companies), respectively 1 March 2012 (all tax payers other than a company). Institute systems and procedures to identify taxable services, separately record the tax withheld from the gross amount, ascertain that all amounts withheld are paid over to Inland Revenue on or before the 20th of the month following the month in which any amount was withheld and complete the required form to accompany such payments.

Trustees and directors of unit trust management companies take note that funds and unit trusts are defined to be a "company" and are therefore required to start deducting withholding tax as from 1 January 2012.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

African Cup of Investments Conference 2011

A Conference Review – by Tilman Friedrich

1. Details of Conference, Participation & Venue

The two day conference was arranged by Information Management Network (IMN). It was held at International Convention Centre Tower (ICCT). It was attended by approximately 350 delegates from the financial services industry, public sector, academy, retirement funds, the audit profession, invited guests from US (academy and industry) and a number of delegates from other African countries.

Conclusion and Recommendations:

The conference organisation and venue were excellent. There were a number of high caliber speakers including a speaker from Harvard Business School and from a US asset manager. Much of the conference was presented in the form of discussion panels of 3 to 4 well known experts in their fields and lead by an expert moderator. As the result, a wide range of topics was covered although not in great depth. Provision was made for questions but there were relatively few questions, given the large audience.

This conference was definitely worth while although some may find the cost prohibitive.

Lessons:

• Presenting a conference by way of discussion panels provides a good overview of the SA environment and broad exposure to topical subjects, although it does not allow for in depth technical exposure.
• The advantage of a number of delegates promotes a great opportunity for networking but inhibits more active participation of and discussion by delegates.

2. Summary of Discussions

The discussions highlighted areas where the investment industry failed its clients in terms of promoting economic development in SA and in Africa. The statement was made that if the industry does not ‘get cracking’ the regulator will to it for the industry.

Andre Perold, chief investment officer of US investment manager Highvista spoke on ‘next generation asset management’. He questioned whether the so-called long-term investment philosophy of buying to hold really works. He suggested that risk must be considered on a dynamic basis and that risk changes as markets move up and down. The strategy should consequently be one of dynamic asset allocation.
Along similar lines, George Gund, professor of finance and banking at Harvard Business School pointed out that long-term risk cannot be measured but that current risk can be measure quite accurately and that there are a number of indices that measure the risk on various stock indices (‘VIX’). He proposed that ‘beta’ (broad market) returns are more efficiently achieved by investing in an index while ‘alpha’ should be added through active management. He explained how any manager that has shown to consistently add alpha in any particular asset class can employ a strategy whereby beta is obtained through derivative structures (e.g. swaps), i.e. by separating the alpha and beta returns while taking into account prevailing asset class risk levels, overall returns can be optimized.

Elias Masilela, CEO of the Public Investment Commission made the point that Africa realized during the global financial crisis, it is on its own and cannot count on the developed world for support. Africa will have to look at itself to fund its growth and development. The PIC has set its sights on investing in Africa and as a first in its history decided to set aside 5% of its assets to invest in Africa. I seem to recall that he was talking about an amount of R 600 million. He suggested it is not enough to just build new schools but that these projects must be maintained to make an impact.

During a panel discussion on ‘Reform and Modernisation of the Current Pension System’ Johan Anderson head of institutional strategy at Alexander Forbes moderated one of the panel discussions on modernization of the current pension system in SA. He pointed out that the number of private funds in SA had declined from 13,000 to only some 3,000 (if my memory serves me right) and how this has resulted in average costs declining from something like 1.3% to 1% (if my memory serves me right). As a result the industry now has a 30% capacity but some 15 million people were still not covered. The point was made that the new regulation 28 contained the ‘look through’ principle in terms of prudent investment guidelines. Trustees are now required to take responsibility for investment risk and can no longer rely on rating agencies as alibi. Banks receive a very preferential treatment in being recognized essentially as risk free. A fund can invest up to 70% in credit, up from 25% before and up to 100%, up to 75% in banks and up to 100% in money market instruments. One speaker went so far as to say that as the result of the new fiduciary duty of trustees with regard to managing investment risk, the life stage portfolio concept was have to undergo significant changes and can no longer be employed as in the past.

Avril Halstead, Chief Director of SA National Treasury explained how it facilitates development projects in such a manner that the rural communities benefits from such projects, at little additional costs. As an example she cited a pipeline built to supply the Jhb metropolis via rural areas to at the same time provide for these communities.

Setlakalane Molepo from the National Empowerment Fund (NEF) in SA spoke about its involvement in economic development in SA. This fund is available to SA business to invest for BBEE. Investors would receive full BBEE credentials for any investment in the NEF. The fund focuses on employment creation, skills development and access to finance by the disadvantaged communities.

During a panel discussion on ‘Focusing on Africa: Working Together to Develop Economies’, pleas were made for greater regional integration. A warning was sounded though that such development will bring with it greater market volatility and risk. The point was also made that capital projects are typically designed for the next 40 years and that it is therefore very important to design such projects taking into account the impact on the environment.

During a panel discussion on ‘Product Innovation: Beyond the Latest Trends’ Vladimir Nedeljkovic head of EFTs and Index Products at ABSA made the point that many of the new products have actually just added unnecessary features at a cost where one should really focus on simplicity and needs. He compared Apple with Microsoft, saying that Apple focuses on being user friendly and that its applications actually dropped a lot of the unnecessary features while Microsoft pursued the opposite business philosophy.

In a panel discussion on ‘Global Sustainable Investment’, one speaker advised that renewable energy and green projects should be the main focus of future economic development. In this vein, quite a lot of emphasis was placed on trustees’ fiduciary duty to ascertain that investment inculcates the ESG principles i.e. Environment, Social, and Governance.

One panel discussed ‘The Role and Benefits of Financial Intermediaries’. The point was made that the current model of commission remuneration of intermediaries is likely to change as it has in New Zealand and Australia where intermediaries are now remunerated through fees. This will necessitate innovation and the analogy of the Apple vs the Microsoft model was drawn stating that the consumer experience and simplicity will become the focus points.

Dr Alex Pestana Investment Strategist at Sanlam spoke on the ‘Role of China in Africa’. He gave an overview of China’s historic position with regard to GDP, where China represents 20% of global population. Its contribution towards global GDP used to be 20% and then later declined to only 3% with the rising of western global hegemonies. He cited Napoleon as stating ‘when China awakes, the world will tremble’. In the US and Europe 20% of the economy was investment and 70% consumption, in China 48% is investment and only 355 consumption. China has a US$ 350 bn trade surplus, the US a US$ 400 bn trade deficit. China holds 1 trn in US government bonds; its purchasing power is growing in double digits while its urban population will increase by 400-500 million over the next 20 years. The Chinese consumer is moving from a carbohydrate based diet to a protein based diet, while at the same time its arable land is experiencing rapid desertification. These developments impact on its consumption and consumption patterns. Chinese are very brand conscious and the demand for luxury goods as well as tourism is increasing rapidly. He made the interesting observation that Africa’s GDP remained stagnant for over 20 years to 2000, in line with a decrease in global commodity prices. Since then both trends turned around due to the increasing demand for commodities by China.

Here is a blog that summarizes his presentation.

September 2nd, 2011

China’s rising presence in Africa will have a big impact on food prices, land prices and agriculture on the continent. That’s according to Alex Pestana, investment strategist at Sanlam Investment Management, speaking at the Second Annual African Cup of Investment Management in Cape Town.

Pestana says agribusinesses could enjoy significant benefits as a result. China is currently the sixth largest investor in Africa. China-Africa trade increased to $120-billion last year, from negligible levels in 1999. Pestana says China’s interest in Africa is deliberate, and has specific emphasis on Africa’s arable land. He says only 15 percent of sub-Saharan Africa’s potential arable land is currently being used for agriculture.

“Given China’s growing urbanisation; increase in life expectancy; rising incomes and its limited resources as a result of the desertification in China, prices for agricultural products will undoubtedly rise, and food security will become important.” Pestana says China is urbanising at a rate of 24 million people a year.

At the same time, the consumer as a percentage of the Chinese economy is forecast to grow from 35 percent today to 50 percent by 2025. “That will have an impact on the consumption patterns in China. As the Chinese become wealthier, higher income will translate into higher food needs. So a more intense form of agriculture will be required to feed the huge population.”

As a result, China has built 20 agriculture technical demonstration centers in Africa today. It has also sent 50 agricultural technical teams to the continent. Pestana says other industries that will, and have, benefited from China’s presence in Africa are luxury goods, tourism and travel, durable goods, top brands and commodities. Base metals such as iron ore and copper have been in particular demand from China. Currently some 80 percent of South Africa’s exports to China are commodities. As an example, China consumes 62 percent of the world’s iron ore supply. But Pestana warns that a significant slowdown in China’s growth would have a big impact on commodity prices.

China has also developed a new model wherein it offers concessionary loans to the continent. While there are few conditions attached to these loans, a large portion of the repayment of the loan is expected to be channeled to Chinese contractors operating in the country. This model has led to criticism of China’s role in Africa, most notably because it fails to create jobs for locals. Pestana says, “China also doesn’t really pay heed to environmental issues, there are low safety standards and a low transfer of skills.”

Another panel discussed ‘The Implications of Investing in the Global Market’. Here the point was reiterated that the driver of Africa’s growth has been Chinese demand for Africa’s resources. There is a 91% correlation between China’s economic growth and that of sub- Saharan Africa. Reviewing economic policies of emerging economies, it was stated that China’s policies very fragmented, India and Russia have no coherent policy whereas Brazil has presented the exception with a political approach to its global economic involvement. The difference between ‘frontier markets’ and ‘emerging markets’ was discussed and it was stated that ‘frontier markets’ are a subset of ‘emerging markets’. These markets typically have low liquidity but high growth. There are political risks (e.g. the devaluation of the Pula a few years ago), institutional capacity and investible opportunities are lacking. There is a trend of emerging markets investing in other emerging markets; one example cited was a SA property investor who achieves a return of 28% on its investment in Romania.
Nerina Visser, Head: Beta Solutions at Nedbank Capital gave an overview of the different types of collective investment schemes and investment products, how they are set up legally, their costs, advantages and disadvantages. She distinguishes between ‘fund of funds’ (investment in units, no ownership of underlying investments), ‘wrap funds’ (direct investment in underlying assets), ‘linked products’ (here she distinguishes between voluntary and compulsory savings via LISPs)  and ‘multi manager funds’ (this represents an outsourcing of risk assessment). She also touches on offshore investments in a life wrapper, on ETFs (exchange traded funds, subject to tight regulation and insolvency protection) and ETNs (exchange traded notes that have are subject to a much more liberal regime).

Michael Maubossin of Legg Mason Capital Management and author of ‘Think Twice’ gave an insight into the concepts revealed in this book. Here are some of the points he made:

Reference is made to the gullibility of a person and that this depends on the person, his character and the state in which he is. One has to prepare for this, recognize the situation and apply the right methods not to fall into the trap of gullibility.

People have illusions of superiority, of optimism and of control, i.e. being better than the average.

A human being is attached to stories not statistics and is influenced strongly by what goes on around us.

Experts are vastly overrated. They squeeze from algorithms and intuition. One should try and harness the wisdom of the collective to counter one’s intuition.

One needs to recognize under which circumstances experts do well and when not.

Intuition works well in a stable and linear system, otherwise not.
To improve one’ decision making one should:

• Maintain a journal about what you decided, why you decided so, what you expected to happen and what actually happened.
• Create a checklist for decisions
• Perform a pre-mortem, i.e. look back before the event and think what will have happened.

Recognize that smart people to dumb things.

Recognize when you have to think twice.

It’s all about opportunity.

3. Concluding Remarks

The conference theme was how to apply the South Africa’s financial resources to develop the economy. Interestingly, national policies appear to be very incoherent and fail to create an appropriate environment to this end. On the one hand much emphasis is placed on the importance of housing and the role that retirement funds can play, yet recent credit legislation passed in SA, effectively terminated lending for housing by funds. Clearly housing is one of the few ways in which a member who has no access to capital, can get a direct benefit from his pension fund investment.

In another apparent contradiction, one speaker expressed sympathy for a shack dweller who chops down the trees in order to survive the winter. The same speaker on the other hand ridiculed an oil company that employs ‘fracking’ (sharply criticized in environmental circles as being damaging to our environment) to extract gas from deep underground. South African FSB exercises tremendous pressure on the reduction of costs by the financial services industry, very much in line with local public policy. Analysing the result of this drive, one speaker pointed out to what extent the industry had consequently already consolidated. This consolidation in SA no doubt would have lead to the demise of many smaller service providers and would have lost a significant number of jobs, more particularly in the smaller towns and rural areas. The question begs to be asked what a developing country such as SA and Namibia really needs first and foremost? Should the emphasis, first and foremost not be to create jobs and to prevent the loss of jobs at all cost?

The dilemma of how much risk you prefer to take versus how much risk you are prepared to take to meet your retirement goals

In a previous newsletter we spoke about the relevance of the salary replacement ratio and provided table 1 below. 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? The table uses 5% as the maximum assumed ‘real investment return’. 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.

So how do we get to the assumption on the expected future ‘real investment return’ and what is the implication for how you should invest? Table 2 breaks down the real investment return into the typical components of a retirement fund portfolio. It shows that if you employ a maximum equity exposure of 75% (65% domestic and 10% global), 15% in bonds (10% domestic and 5% global) and 10% in the money market you can expect a ‘real investment return’ of 5.6%. Prudential balanced portfolios would typically employ such an asset allocation.

You can manipulate the figures in table 2 to determine what ‘real investment return’ you may expect based on different asset allocation scenarios. The historic real returns should be taken as a given but the allocation between the different asset classes can be varied.

Asset class	% Historic real returns	% (%) Allocation (Prudential max)	% Projected  real return
Domestic Equity	6.7	65 (75)	4.4
Domestic Bonds	3.7	10 (50)	0.4
Domestic Money Market	1.7	10 (100)	0.2
Global Equities	5.2	10 (incl.)	0.5
Global Bonds	2.2	5 (incl.)	0.1
Global Money Market	0.2	(incl.)	0.0
Total			5.6

A more conservative investor who is averse to fluctuations in values would reduce equity and bond exposure in favour of cash. Take into account the ‘prudential maximum’ you may invest in the various asset classes in terms of regulation 28. The extremely conservative investor who cannot live with any value fluctuations might want to invest 100% in the money market. Per table 2 this should produce a ‘real investment return’ of roughly 1.7% (100% exposure to a return of 1.7%). Whilst table 1 does not provide for such a scenario it should be evident that this investment strategy would require a total contribution towards retirement of way in excess of 16% of total remuneration.

When you plan for retirement, the contributions to your employer’s retirement fund are usually a given and cannot be manipulated to suit your needs. You have the choice though to make additional voluntary savings outside the fund, sometimes within the fund as well.

Table 1 will tell you how much you need to set aside in total to achieve a desired income replacement ratio after retirement, based on the ‘real investment return’ your investment is likely to generate and based on a service period of 30 years. It shows that if you require an income of N$ 600 after retirement while you earned an income of N$ 1,000 before retirement (i.e. a replacement ratio of 60%) and you want to invest in a conservative investment generating a ‘real investment return’ of 3% per year, you need to set aside for retirement only, 16% of your total remuneration over a 30 year service period.

Conclusion
From these examples it is fair to conclude that your risk appetite is really irrelevant with regard to retirement planning. It is rather a matter of how much you are setting aside and how much income you need after retirement that will determine how much risk you need to take to achieve your ultimate goal with regard to your income replacement ratio after retirement.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

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.

Trustees and their consultants should review the fund rules to make these ‘dovetail’ with the receiving funds typically offered in the market and should caution fund members against transfers to insurance products.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

With regard to absence on maternity leave, fund rules usually state something to the extent that a MEMBER is permitted to be absent on maternity leave as envisaged in the Labour Act, 2007, with either decreased or no remuneration, and that membership of the fund and the benefits and contributions payable shall not be affected by such absence from service.

The employer and the member are thus contractually obliged to continue full contributions to the fund and all benefits shall remain in place. Employer's employment practice is often inconsistent with the rules of the fund. One of two routes needs to be taken. Either the rules must be amended to reflect the conditions of employment or the conditions of employment must be changed to reflect the content of the rules relevant to maternity leave.

The employer needs to be clear whether or not the employee's retirement fund benefits, including the employer contribution towards retirement, should remain unchanged while she is on maternity leave or whether they are to be reduced in line with the reduction in the salary paid by the employer and this should be reflected clearly in the conditions of employment, as well as in the rules of the fund.

From a fund administration point of view, both member and employer contributions can usually be suspended fully; alternatively, only contributions towards retirement by member and employer can be suspended.

We have come across below conditions of employment that appear to adequately cover this situation.

"1. Remuneration

In return for the contributions of the EMPLOYEE as set out in clause 9, the parties agree on the following remuneration structure, based on a cost to company of N$ X:

1.1 The basic wage, as contemplated by the Labour Act, shall initially amount to N$ Y per month as from 1 September 20__. At the instance of the EMPLOYEE, and subject to the agreement of the EMPLOYER, this amount may comprise of such components as agreed between the parties. All allowances as agreed between the parties remain part of the basic wage of the employee. Where payable in cash or otherwise, the basic wage shall be paid or provided otherwise, monthly before or on the last working day of every month, unless specifically stated otherwise. The granting or otherwise of future increases shall be based on the EMPLOYEE'S individual performance, as well as on the overall financial performance of the EMPLOYER'S business during the preceding financial year. Salary reviews usually take place once a year, effective 1 October.

1.2 Participation of the EMPLOYEE in the EMPLOYER'S retirement fund, based on a pensionable amount of N$ Z per month, contributions totalling N$ Z * x% to be borne by the EMPLOYER y% shall be deemed to the EMPLOYEE contribution. Of this amount a fraction of x% minus y% shall be deemed to be the EMPLOYER contribution for the purpose of maternity leave benefits as contemplated by the Labour Act. The balance shall be deemed to be the EMPLOYEE contribution for the purpose of overtime pay and leave pay as contemplated by the Labour Act. This amount shall be adjusted pro-rata in accordance with any future increase granted by the EMPLOYER as aforesaid.

2. Maternity leave

The maternity leave entitlement of a female EMPLOYEE who has completed at least 6 (six) months of continuous employment with the EMPLOYER, subject to the provisions of the Labour Act, shall be:

2.1 Before her expected date of confinement -

She is entitled to commence maternity leave four weeks before her expected date of confinement, as certified by her medical practitioner.

And

She is entitled to maternity leave for the entire time from the commencement of her maternity leave as contemplated in the paragraph above, until her actual date of confinement;

2.2 After her date of confinement, she is entitled to -

Eight weeks maternity leave in every case;

And

In the case of an employee whose date of confinement occurred less than four weeks after the commencement of her maternity leave, the amount of additional time required to bring her total maternity leave to 12 weeks.

During maternity leave, the EMPLOYER shall pay a maternity benefit to the EMPLOYEE, calculated as 40% of the basic wage of the EMPLOYEE, up to a maximum amount equal to the difference between the basic wage earned by the EMPLOYEE immediately before the start of maternity leave, and the benefit cap set by the Social Security Commission from time to time for determining maternity benefits.

In addition, the EMPLOYER shall carry the deemed EMPLOYER contribution towards the retirement fund, medical aid scheme and any other benefit arrangement the EMPLOYEE participated in prior to the commencement of her maternity leave, and shall pay to the EMPLOYEE the total cost so calculated, minus so much as is agreed between the EMPLOYER  and the EMPLOYEE, to be paid by the EMPLOYER towards the retirement fund, medical aid scheme and any other benefit arrangement referred to, in respect of the EMPLOYEE during this period. The EMPLOYER shall also pay to the EMPLOYEE any maternity benefit received from the Social Security Commission in respect of the EMPLOYEE.

During the absence on maternity leave the EMPLOYEE shall remain a member of the retirement fund, medical aid scheme and any other benefit arrangement she participated in prior to the commencement of her maternity leave. The EMPLOYEE and the EMPLOYER shall assume responsibility for their respective deemed contribution, as contemplated in 1.2 during such absence, provided that the EMPLOYEE may request that all contributions to the retirement fund, for the purpose of funding the EMPLOYEE'S retirement, be suspended for such period. It is a further proviso, that any additional obligations the EMPLOYER may be required to comply with in terms of the Labour Act shall also be observed by the EMPLOYER."

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

The winner of an N$5,000 bursary from RFS has been announced. He is Johannes Nanyeni of Old Mutual (pictured above with RFS Managing Director Tilman Friedrich). RFS offered the bursary for professional development or further education to entrants in a competition held at the recent RFIN (Retirement Fund Institute of Namibia) Conference in Windhoek.

Placing all your eggs in one basket during uncertain times as we are going through right now, can be pretty unnerving, whether you coincidentally have chosen the ‘right’ manager or not. If you were so fortunate to have chosen the ‘right’ manager at the right time, you still have to be cognizant that times will change. Just when, and will you rely on your good fortunes to pick just the right time once again? I would rather not bank on it! If you were less fortunate, your manager is underperforming and this is unnerving too and it would take more conviction that most of us possess to stay put!

The obvious answer for greater peace of mind is to choose another manager. Your choice will be choosing between two with a similar philosophy or two with opposing philosophies. The first approach is probably more suited for someone intent on reducing his counter party risk, the second one, for reducing market risk. The first one is suited for someone with a strong conviction, the second one for someone who is undecided on where markets are headed.

Allan Gray has always been, and still is a ‘contrarian’ investment manager and is likely to produce investment performance quite different from the average prudential balanced portfolio. Under current global economic conditions investment managers and experts have widely diverging views on the course of the global economy. The course the global economy will take over the next 3 to 5 years will determine trends in global currencies and these developments and trends will determine the development of our local bourses specifically, and local financial markets in general, where the greater portion of local pension fund members’ capital is invested, as evidenced in the table below. The table below reflects the asset allocation of Allan Gray, Investec, Standard Bank and the average prudential balanced portfolio as at 31 March 2011, and is indicative of the diverging views our investment managers currently have on these developments.

Asset class	Allan Gray %	Investec %	% Standard Bank	% Average Manager
Local Equities	42.3	43.0	50.7	44.0
Local Bonds	7.1	9.4	7.0	11.4
Local Cash	18.5	17.5	23.0	17.4
Local Property	1.8	2.1	0.0	2.3
Total Local (RSA/Nam)	69.7	72.0	80.7	75.1
Offshore Equity	16.5	18.9	19.3	18.8
Offshore Bonds	0.0	7.2	0.0	2.4
Offshore Cash	0.0	0.8	0.0	0.7
Offshore Other	12.4	1.1	0.0	2.2
Other	1.4	0.0	0.0	0.9
Total Offshore	30.3	28.0	19.3	25.0
Total Portfolio	100	100	100	100
Resources	31	17	15	28

Going by the asset allocation per table, Investec and Allan Gray appear to have a very similar view on expected developments in the global economy and global markets while the average prudential balanced manager, and Standard Bank in particular, appears to take a slightly different view. Allan Gray had this view for the past 3 years or so. Over this period global markets did not develop as expected by Allan Gray and hence its under performance relative to the average prudential balanced portfolio. Investec raised its offshore exposure closer to the statutory limit more recently (statutory limit is now 35%).

Depending on your personal views, you may wish to diversify between two managers with similar views if you foresee a reversal of trends seen since the global financial crisis, alternatively between 2 managers with diverging views if you foresee a continuation of these trends. In former case, Investec appears to have a similar view to Allan Gray, while in latter case Standard Bank displays the most divergent view, based on above table.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

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.

The table is read as follows: a member that has invested in a portfolio (or combination of portfolios) that yields 4% above inflation 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 in the form of 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 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.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.   

On 15 April 2015, Namfisa issued a circular on 15 April, requiring pension funds to submit a totally new type of report by 15 May for the first quarter of 2015 - under threat of penalties for late or non-submission, of course. Its predecessor report, a much shorter version, was just submitted for the first time at the end of February for the 4 quarters of 2014, after having given the industry close to 3 months to prepare for that version.

The new report, which has to be manually inputted into Namfisa's Electronic Regulatory System, comprises of no less than 53 pages of information and data plus another 7 pages per investment portfolio operated by a fund. An early version of this report, in Excel format was circulated to the industry in March 2014. At the time the industry expressed its concerns and reservations about this report. The cost of producing such a extensive report versus the benefits of having the information, the time it would take to program systems to record and produce the reports as well as the purpose and use of some of the information were questioned, without convincing response by the regulator.

When a new, much shorter report version was circulated later in 2014 the industry took comfort with this, because the investment related information was actually aligned with regulation 28, on which asset managers had to report for many years, while the other information, of a limited scale, by and large also already, had to be reported on for a couple of years.

During the regular 'industry meetings' arranged by Namfisa since the introduction of the abbreviated report version, no reference was made to the fact that Namfisa's programmers were actually busy programming the Electronic Reporting System on the basis of the extensive  report initially circulated in March 2014. Even upon a follow up with a Namfisa official on the status of the requirements for the first quarter 2015 report a few days prior to the latest version having been circulated, the official confirmed that there was no change to the reporting format.

What a surprise to all concerned to find a few days later that the report has now actually been expanded from 1 page of general information and 7 pages of information per investment portfolio to the monster referred to above.

To make matters worse, the circular was issued 2 days before the start of the school holidays with a due date in the middle of school holidays over a period covering 3 short weeks, due to public holidays. The principal officer who asked whether the industry was intentionally kept in the dark all along may be forgiven.

Pension funds are now in the unenviable position that they are required to comply. Yet they will have to call on their service providers to assist while service providers will in most likelihood not be contractually obliged to meet this totally new requirement, and may in fact not be able to provide much of the  required information due to the fact that their systems are not geared to capture, store and retrieve the information in the manner and format required. At best all parties involved will have to improvise and it may be expected that some of the information is not available or will be unreliable or inaccurate. How meaningful will such information be to the regulator?

Many pension funds have expressed their perception that the regulator is ruling autocratically, is exercising unreasonable pressure on their limited resources and is disregarding their concerns or suggestions. The concern was also expressed that funds are being systematically alienated through the approach of the regulator and that this will not be conducive to a spirit of mutual respect and co-operation.

Funds believe that the regulator does not appreciate the fact that the Namibian industry is totally dependent on layman trustees who are full time employees that are burdened with the additional responsibility of serving as trustee. Namibia has just over 100 registered funds with a membership of around 220,000. Eliminating the GIPF and umbrella funds, the average size of employer sponsored funds is around 500 members. For reference purposes it is relevant that the SA regulator takes the view that employer sponsored funds of less than 3,000 members are not viable on a stand-alone basis and should rather be accommodated in an umbrella fund. In terms of reporting though, even the SA regulator does not have such extensive requirements.

Ironically, NAMFISA seems intent on getting better insight on costs of managing pension funds and has given the impression that they may be concerned about these costs being too high.

To avoid alienation of pension funds and any confrontation, there is an urgent need that an independent and unbiased statutory mechanism is created under the Pension Funds Act that will objectively consider justified general concerns and objections of the pension funds industry and that has the authority to guide the regulator. Until such time, it will be purposeful for the Minister to play a role in introducing balance and fairness into the regulatory system.

Appealing decisions by Namfisa

Government notice no 160 provides an appeal procedure and form for persons wishing to appeal any ruling or decision of the chief executive officer of Namfisa made under the Namfisa Act. The new quarterly report is required in terms of the Pension Funds Act though, which does not provide for an appeal process. Funds should, however, consider using the procedure to appeal any other matter they may be aggrieved with which originated by Namfisa under the Namfisa Act,. It is to be noted that a person intending to appeal a decision of the chief executive officer in terms of the Namfisa Act must commence the appeal within 14 days of receipt of the notice.

Download the form here...

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Section 16(1)(z) of the Namibian Income Tax Act allows the transfer of money, tax free from an ‘approved’ fund to another ‘approved’ fund. ‘Approved’ means approved by Inland Revenue in Namibia. A Namibian tax number evidences such approval (these are referenced 12/1/12/…). In order for a fund to receive tax approval in Namibia it needs to be registered by Namfisa. A Namfisa registration number evidences such registration (these are referenced 25/7/7/…). Your PAYE 5 certificate or correspondence from your fund should reflect the tax approval and registration numbers. If these have a different look to that format, the fund is not a Namibia domiciled fund.

To allow an administrator to transfer money from a Namibia domiciled fund to another fund without deducting tax, the receiving fund must be approved by the Namibian tax authorities, as evidenced by a tax approval number 12/1/12/…

Under certain circumstances, funds domiciled outside Namibia may apply for registration as a foreign fund by Namfisa. Once Namfisa has registered the foreign domiciled fund, it may apply for tax approval by Inland Revenue. Namfisa would lay down certain conditions for registration, essentially in order to protect the interests of the Namibian members of the fund. These conditions relate to reporting and to the investment of assets in Namibia, equivalent to the Namibian liabilities. The advantage of a foreign fund being tax approved in Namibia is that the Namibian tax regime will apply to benefits paid to Namibia members and these members and their Namibian employer may deduct their contributions from their taxable income.

Where a foreign domiciled fund does not have Namibian tax approval, contributions by member and employer are not tax deductible, while Namibian members will be taxed in accordance with the Namibian as well as the foreign tax regime. This could result in benefits being taxed by both regimes, at best with double taxation relief. This, however, always means that the regime producing the higher tax will apply to the Namibian member.

Where a foreign fund has been registered and tax approved in Namibia, it is generally quite onerous for these foreign funds to have Namibian members, in terms of investments, where the equivalent value of these members’ liability should be invested in Namibia, reporting to two statutory authorities and administering tax for two different tax regimes.

If your fund is a foreign domiciled fund with Namibian members, we can assist in finding appropriate solutions.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Administration process of a deceased estate

The duties of the executor are threefold, being the collection of all the assets, paying all creditors and distributing the balance to the heirs (in terms of the will or rules of interstate succession).

The basic process of administering an estate is a rather complicated and technical field of expertise. A sound knowledge of the underlying technical legal principals is needed on the part of the estate administrator.

The process consists of the following steps:

• First consultation with the next-of-kin of the deceased to get necessary information and to sign the necessary documents;
• Reporting of the estate by filing a death notice, inventory, original will and acceptance of trust as executor with the Master of the High Court;
• The opening of a main file and sub files for the estate;
• Writing of letters to debtors and creditors of the estate;
• Obtaining valuations for estate assets;
• Completion and lodging of income tax assessments;
• Placing of advertisement to debtors and creditors in the Government Gazette and a local newspaper;
• Opening of an estate cheque account;
• Deciding on a suitable administration process together with beneficiaries;
• The collection of sufficient cash and the payment of debts;
• Drafting and lodging of the Liquidation and Distribution account;
• Placing of advertisement in the Government Gazette and local newspaper that the Liquidation and Distribution account is lying for inspection;
• Payment of any outstanding debts as well as the payment transfer of legacies and inheritances to heirs;
• Paying of the Master's fees;
• Complying with Master's final requirements;
• Receipt of the Master's filing slip.

Why do pension fund rules allow additional voluntaru contributions

Fund rules often provide for members making additional voluntary contributions (AVC’s), “…subject to such conditions imposed by the TRUSTEES from time to time.”

Despite the fact that the rules allow members to make AVC’s, such contributions are not tax deductible, and the fact that rules still make provision for such contributions is an anachronism rooted in the old South African tax regime that ended in Namibia in 1981.

Members who make such contributions then attempt to claim these in their annual tax return. Inland Revenue would require proof from the fund that the member has made contributions to the fund and members then approach the fund or administor to issue a letter confirming the AVC’s he/she has made. Member contributions to a retirement fund, however, are only tax deductible to the extent that they were accounted for on the member’s pay record and are reflected on the annual PAYE 5 form. Only voluntary contributions to a retirement annuity fund are tax deductible by an individual, subject to certain conditions.

We do not issue such letters as a matter of principle, as such letter may be used to attempt to claim these contributions for tax purposes. Since AVC’s are not tax deductible, any attempt to claim these for tax purposes is tantamount to tax evasion. It exposes all parties involved to risk. These risks include the risk of tax penalties and interest, reputational risk, the risk of the fund losing its tax status as approved fund and the risk of money laundering.

Where a fund nevertheless offers its members to make additional non-tax deductible contributions, we suggest that the fund considers imposing the following conditions:

1. Members who wish to make additional voluntary contributions must apply in writing to the trustees in respect of every contribution to be made, and in respect of a fixed monthly contribution, reflecting the once-off amount to be paid, or the monthly payment to be made and the period for which such payment will be made.

2. Members making additional voluntary contributions are to disclose the source of funds for making such contributions and submit documentary evidence to the satisfaction of the fund.

3. The fund informs members wishing to make AVC’s explicitly, that AVC’s are not tax deductible and that they should not be claimed for income tax purposes as this amounts to tax evasion that may have severe consequences for the tax payer.

4. The fund informs the member that any fees that may be levied by the administrator of the fund from time to time in respect of any additional voluntary contributions, shall be deducted from the contribution/s received and only the balance shall be allocated to the member in the records of the fund.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.   

When trustees are confronted with the question whether their fund should introduce member investment choice, there will be a number of arguments in favour and a number of arguments against this notion. How can you as a trustee and a layman then take a rational decision? Here are some guidelines that may assist:

• You should know what the fund would like to achieve.
• You should know what the needs of the fund’s stakeholders are.
• You need to ascertain that you apply the basic principles of governance.
• You should be wary of flawed arguments, such as “member carries the investment risk so the member should be entitled to make his own investment decisions” and “the life stage model is international best practice, so there can’t be any question”.

The 5 year period from July 2005 to June 2010 is a very representative period in terms of long-term investment returns as it covers both a bull and a bear run in the markets but produced returns reflecting what one can expect over the long-term.

We have used this period to put the life stage model on the test bench and were intrigued by the outcomes and observations that this produced. Our conclusions follow.

Conclusion

The 5 year period from July 2005 to June 2010 has been a highly volatile period in investment markets encompassing both a severe down turn and a dramatic recovery. In real terms, the returns generated over this period are quite representative of long-term expectations. Because of these features of this particular period they make for good testing ground of the life stage model.

From the results of this particular research project one can deduce the following:

• Returns are linked to risk and higher equity exposure (or higher risk) produces higher returns;
• The average balanced portfolio outperforms the lower risk portfolios;
• The life stage model will lose returns for a fund’s membership overall, unless the lower risk can be compensated by higher risk in the earlier life stages;
• Smoothed, systematic switching to the conservative and cash portfolios, produced a higher end value than remaining in the balanced portfolio over the full period (this is similar to the principle of ‘Rand cost averaging’);
• Switching at specified times produced higher end values in some events, but there is a significant risk of losing value compared to the average balanced portfolio as well;
• What combination of portfolios to use depends on one’s objectives as measured in terms of absolute outcome, volatility of outcomes and probability of underperforming the average balanced portfolio;
• Assuming the objective would be to maximise the absolute outcome, to minimise volatility and to minimise the probability of underperforming the average balanced portfolio and applying different weightings to the increasing levels of desired outcomes, a combination of balanced and conservative portfolios produces the highest score;
• As the result of the fact that balanced and conservative portfolios both contain a significant equity component, their behaviour in volatile markets is synchronous while cash typically behaves counter cyclical.

Based on the experience of this 5 year period, trustees contemplating the introduction of the life stage model, should be very clear on what their objectives are in terms of absolute returns, volatility and probability of underperformance.

They need to be aware that employing lower risk portfolios will reduce the returns for the fund and its members overall unless this can be compensated with a portfolio presenting a risk profile higher than the average prudential balanced portfolio.

The cash portfolio should preferably be by member choice, and for member specific reasons only. This choice should require special individual attention by the trustees to avoid any undue risk exposure.

Furthermore, considering that human nature finds losses more painful than missed opportunities, instead of switching at particular dates, it is advisable to switch a regular amount in respect of the aggregate value of all relevant members’ retirement capital on a regular basis, because the pain of losing outweighs the pleasure of gaining. This would have to be done by the trustees on behalf of their members and cannot be left to the individual.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

Many funds grant housing loans to members which are secured by a first mortgage or by a pledge by the member of his or her benefits in the fund. How would your board of trustees deal with an application in respect of a property situated outside Namibia?

Unfortunately, neither the Pension Funds Act nor the Namfisa guideline (Circular PI PF 03 2003) on the granting of housing loans, provide any clear guidance on the matter. Before a fund grants any loan for such property, trustees are well advised to consider the implications, as the granting of such a loan will create a precedent, where future applications may be difficult to be turned down.

Section 19(5)(c)(i) provides that a loan secured by a first mortgage may not exceed 90% of the market value of the property concerned. Section 19(5)(c)(ii) provides that a loan secured by a pledge of the member’s benefits may not exceed the market value of the property concerned. Market value is thus an important point of reference. Clearly, for property situated outside Namibia, trustees will find it difficult to formulate a policy how market value will be determined.

PF Circular 03 of 2003 suggests that a housing loan must be treated and managed by the trustees with the same care and diligence as any other investment of the fund is to be treated. Once again, if a property is situated outside Namibia, it should be substantially more difficult for trustees to comply with their fiduciary duty to protect the investment of the fund in a loan for such a property.

We therefore suggest that trustees should first formulate a policy that addresses the practical difficulties posed by loans in respect of property situated outside Namibia, before granting any loan lightly and then being confronted with a precedent.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

In the normal course of business, if often happens that an employee is absent from work for various reasons. Such absence can carry the employer’s consent, e.g. maternity leave, sabbatical absence, suspension with immediate departure from office, dismissal or ill-health. In other instances it can be unauthorised absence, e.g. ill-health, disablement, absconding etc. Until such time as employment ends contractually or legally, employees are entitled to their contractually agreed remuneration and benefits. This includes employer contributions towards the member’s retirement as well as death and disability benefits typically offered by pension funds. It is critical, however, that the rules of the fund and the relevant insurance policies are complied with in order to ascertain that an employee remains covered by the fund for these benefits. In this regard, the employer plays an important role and should carefully consider the following exposition.

Introduction – rules vs contract of employment

The rules of the fund typically set out the rights and obligations of the employer and the member and determine how the administrator is required to administer the fund. Since an employee’s membership of the fund arises from his employment with the employer, the contract of employment may have a key bearing on the employer’s and the employee’s contribution obligations towards the fund.

Commencement and termination of membership

Typically rules would state that membership commences on the first day of the month coincident with or following his becoming and employee. Membership typically ceases upon termination of service. Service can thus terminate at any time in terms of the rules. Service is usually defined as full-time permanent employment with any of the employers. One will now have to refer to the contract of employment to determine when the service of an employee actually terminates. The employer would have to advise the fund administrator of the correct date of termination of service in terms of a member’s employment contract.

Commencement and termination of contributions payable

Contributions to the fund by the member and by the employer are typically payable at the specified rate of the monthly equivalent of the member’s annual pensionable emoluments. Pensionable emoluments’ are then usually defined as the member’s basic annual salary or wage and any other amounts that are regarded as pensionable by the trustees at the request of the employer. This formulation provides considerable latitude to the employer to have different classes of membership where the fund contributions are based on different proportions of the employee’s cost to company.

To determine the employer’s and the employee’s obligation concerning the contributions to the fund, the employer would have to first calculate the annual pensionable remuneration, divide this amount by twelve and multiply the result by the relevant contribution percentage. It appears logical that the basis for determining the annual pensionable remuneration has to be the employee’s current rate of pay per pay period, times number of pay periods per year. This means that if rules are formulated as set out above, they do not provide for any pro-rata payment in the last month even though the employee’s service may have terminated in the course of the month.

Whether or not any contributions are payable for the last month if it was a broken period will have to be established from the contract of employment. The rules link the contribution to the member’s remuneration. Again the employer would have to advise the administrator of the correct end date of the member’s last monthly contribution in terms of a member’s employment contract.

Commencement and termination of risk cover – what does the insurance policy say?

As far as ‘risk benefits’ are concerned, the reassurance policies link a member’s cover to his membership in terms of the rules of the fund, which in turn, link membership of the fund to his or her service in terms of his employment contract. Typically the policy read together with the rules, would imply that cover always commences on the 1st day of a month but ceases as soon as the service of the employee ceases in terms of his contract of employment.

Temporary absence – what do the rules say?

The rules normally make provision for ‘temporary absence’. Typically, this rule provides for continuation of benefits and contributions while the member is in receipt of his or her full normal remuneration. When a Member is granted leave of absence with less than full normal remuneration, the rules would typically provide that his or her member’s share will be credited with any contributions actually paid by the member and/or the employer during such period of absence. Commencement and termination date for this purpose would then be irrelevant.

As far as ‘risk cover’ is concerned the rules typically provide that the member will continue to be covered for the insured benefits in the event of death or disability, for the period specified in the assurance policy issued to the fund by the relevant insurer (normally between 1 and 2 years). After expiry of said period, such cover shall terminate unless the member returns to active service. Any benefit that may become payable during such period of absence will be based on the member’s pensionable emoluments as specified in the assurance policy issued to the fund by the relevant insurer (normally based on the employee’s full normal remuneration).

Temporary absence – disability reassurance policy

Although every insurer has slightly different formulations in their insurance policies, typically, for ‘leave of absence’, the disability reassurance policy normally provides that no claim for the benefit is admitted if the disability arises during a period in which the member concerned is deliberately absent from the employer’s service without permission, unless the fund and the insurer agree otherwise in a particular case. By implication, in the case of temporary absence approved by the employer the member will continue to be covered.

Temporary absence – death reassurance policy

Although every insurer has slightly different formulations in their insurance policies, typically, for ‘leave of absence’ the group life reassurance policy normally provides that if a member is absent from the service of the employer with the employer’s consent, it is deemed that the member’s membership continues, subject to the following
1. During the period of absence the member’s remuneration is deemed to be equal to the remuneration he/she received immediately before the commencement of absence….”
For ‘absence without the employer’s consent’, these policies typically state that a member’s membership lapses and the member’s service with the employer is regarded as terminated if and as soon as he/she is absent from the employer’s service without the employer’s consent.”

Summary

The following conclusions can be drawn from the above deliberations:

1. Contributions by both employer and employee have to be made for full months, except in the case of approved temporary absence.
2. The date of termination of service is to be determined in accordance with the contract of employment.
3. Death and disability benefits cease upon date of termination of service in accordance with the contract of employment.
4. Whether or not contributions by the employee and the employer are payable for the last month in which service terminates is to be determined in accordance with the contract of employment.
5. In the case of temporary absence, contributions by employer and employee are determined in the normal manner, where the employee receives his full remuneration.
6. In the case of temporary absence, the rules do not detail how contributions by employer and employee are to be determined, where the employee’s remuneration is less than his full remuneration and the administrator simply updates what it receives.
7. In the case of approved temporary absence, the employee’s death and disability benefits will continue based on the employee’s remuneration prior to the approved temporary absence.
8. In the case of unapproved temporary absence, the fund and the insurer can agree to keep a specific member covered for disability benefits, else cover will lapse.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.

 

 

Funds should provide adequately for retirement

Most trustees would probably know that the purpose of their fund is to provide adequately for retirement, perhaps for disablement and death as well. But, ‘to provide adequately for retirement, or disablement or death’ – what does this actually mean? Why do you actually need a fund for these purposes? We all know that we can individually make our own insurance and savings arrangements according to our own needs and requirements, without being ‘straight jacketed’ into the employer’s retirement fund.

Why have a pension fund?

Let’s revisit the main reasons for setting up a retirement fund to provide for retirement, disablement and death before we examine what ‘provide for’ means. Honing in on the many reasons, one needs to recognize the main stakeholder of retirement provision which are: firstly, the government, secondly the employer and thirdly, the member.

Government is a key stakeholder in retirement provision

Government clearly has an interest in its subjects providing for retirement, disablement and death to relieve the burden on the fiscus to look after those that can no longer provide for themselves and their families due to superannuation, incapacity or death. To encourage its citizens to make their own provision, government offers special tax incentives via the Income Tax Act, not availed to any other savings vehicle. In addition, government has thrown a special protective net over retirement fund savings via the Pension Funds Act that is not availed to any other savings vehicle.

The employer is a key stakeholder in retirement provision

Let’s now turn to the employer as another key stakeholder. Considering that there is currently no legal obligation on an employer to offer a retirement fund arrangement to its staff, the question begs to be asked, why an employer would have any interest in a retirement fund and why is it then that the majority of employers do actually burden themselves with the responsibilities and obligations linked to the introduction and maintenance of a retirement fund? Why does the employer not simply hand over the cash to the employee and let the employee care for himself? After all, they are all mature adults and the employer not their tutelage. Fact of life unfortunately proves these assumptions wrong! So the employer has to think long-term on behalf of his employees, a social responsibility that will allow the employer to sleep in peace. But this is not the only reason. In today’s competitive labour market, an employer who does not offer pension benefits, will be at a distinct disadvantage when it comes to attracting and retaining scarce skills, so market forces pressure the employer into offering pension benefits.

The employee is a key stakeholder in retirement provision

Where does the employee as third key stakeholder stand with regard to pension arrangements? As we just read, employees of course prefer to have the cash in their back pockets, at least while they are young, healthy and in a sound financial position. When any of these parameters change and as the employee gets older, starts thinking about his kids and their future and about his own old age, the perspective starts changing. Trying to make personal arrangements at this point would be either too late or one would be barred for reason of pre-existing conditions that no one in his right mind would be prepared to underwrite anymore.

Government wants the private sector to make provision for retirement

The long and the short of this is that government wants the employer and the employee to make provision for old age and other situations and offers very attractive incentives to the employees in particular. Employers feel a moral and competitive compulsion and employees are probably split equally on the issue.

‘To provide adequately’ – is it in the eyes of the beholder?

Having considered the reasons for retirement funds the next question to answer is what ‘to provide adequately for retirement, disablement and death actually means. Since all of us incur regular monthly costs to live that are related to our income, while we incur ad hoc outlays only infrequently. The main objective of a retirement fund should then be to replace one’s regular income come retirement. For retirement, an accepted international norm is to achieve an income replacement ratio post retirement of 2% per year of service. This means that you would only be able to replace your income before retirement one on one, if you have been employed for 50 years! Most of us won’t be in that category but would look rather at 30 or 40 years of service at best. Considering that the capital available at retirement is a function of contributions made and investment returns earned.

How much do I need to put aside to retire with dignity?

If we assume that when I retire at 60, the pension of 2% per year of service is to provide for my surviving spouse at a reduced pension after my demise and that this pension is to sort of keep up with inflation, I would need capital at retirement of around 7 times my annual cost of living at the time. To get to 7 times my annual cost of living, I would have to put aside a net 14% of my cost of living (or monthly income) earning a net 3% above inflation. If my money earns a net investment return of 5% net above inflation, I only need to set aside 10% net, or if I earn 7% net above inflation, I only need to set aside 7% net of my cost of living (or monthly income). Higher investment returns imply higher risk, but in the reasonable safety offered in the retirement fund environment, a return of 7% net above inflation can be achieved in the most aggressive pension fund portfolios. A note from the market here – in Namibia the average gross contribution towards retirement is in the region of between 10% and 11%, between employee and employer.

What you need to bear in mind in all of these calculations though is that you need to be a member of the fund when you enter employment until you reach retirement. The contribution towards the fund must be based on your total remuneration throughout, rather than perhaps just the cash component. When you change job you must preserve your accumulated capital for retirement. Given this, you should be able to replace your income before retirement at a ratio of 80% if you join the fund at 20, retire at 60 and maintained the appropriate contribution ratio, and achieved the required investment return throughout. Should you have joined the fund only at age 30, the replacement ratio would decline to 60%.

What about death and disablement?

So now you should have an idea what it means to provide adequately for retirement. What we have not looked at yet is what it means to provide adequately for the event of death or disablement. This we will be looking at in the next newsletter. Suffice it to point out here that this has a cost implication that would have to be added to what we have arrived at when considering retirement. And of course nothing comes for free, so on top of all these elements you will eventually also have to add the cost of managing such an arrangement.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of RFS.  

A guide to the functions of the Master of the High Court i.r.o. deceased estates & Guardians Fund

Hannes van Tonder, manager: Benchmark Client Service and Administration

Introduction

Although the Master of High Court was created to protect the inheritance rights (in so far as they are protected by law) of beneficiaries, minors and persons incapable of handling their own affairs, proper estate planning is usually underestimated.  This often results in the estate being distributed to beneficiaries that the deceased did not want to inherit or leaving minor children without a guardian.

Part 1: Deceased estates

As protector of the rights of beneficiaries, the Master ensures that the estate representative/executor distributes the estate in a professional and timely manner, as all deceased estates in Namibia fall under the jurisdiction of the Master. A beneficiary (or heir) being the person the deceased nominated in his/her will to benefit from the estate. It is important to use the correct names and that it is clear who the beneficiaries are e.g. “I appoint my sisters, Aletta Johanna Magrieta Visagie and Susanna Albertina Jacoba du Preez to be heirs of my estate”.

A deceased estate includes all property, assets & liabilities which will be distributed according to the provisions of the will or in terms of the rules of interstate succession (in the absence of a valid will). In estates with a value above a certain amount in terms of the Government Gazette (currently N$100,000) the Master will appoint an Executor to administer the estate.

Wills:

Persons 16 years or older, who are able to understand the nature and effect of their actions, may draft a will - in their own handwriting – and in any language preferred.

A will is a legal document that sets out the wishes as to how and whom the testator wishes to benefit and which should be kept in a safe place. Most important is to appoint a guardian to any minor children to make sure they are properly looked after by someone trusted. Without a valid will the estate will be distributed in terms of the rules of interstate succession. This could result in someone benefiting that the testator never wanted to benefit or that minor children might suffer because no guardian was appointed.

A will is valid if it meets the following requirements:

• It must be in writing.
• It must be signed in the presence of at least 2 competent witnesses (or confirm the testator’s signature in the presence of at least 2 competent witnesses).
• Each page must be signed in full by the testator and the witnesses, the last page being signed directly underneath the last sentence. 
• The testator may sign by making a mark (cross or thumbprint) but it must then be certified by  a notary, magistrate or commissioner of oaths, who needs to sign it and also needs to attach his/her certificate on the last page.

A will is a ‘living’ document, to be reviewed regularly to provide for changing circumstances, and can thus be changed at any time. However it is important that the previous will be revoked by inserting a revocation clause in the new will.

Estate planning:

To ensure that loved ones are financially and otherwise cared for, a testator needs to ensure that the will makes provision for:

• The nomination of an executor.
• Appointment of a guardian for minor children.
• The establishment of a trust and appointment of a trustee for children under the age of 21 in order to safeguard the inheritance of such minors.
• Provision for estate administration costs & debts.
• Provision for the financial needs of dependants until the estate is finalised.

Administration process of a deceased estate:

The duties of the executor are threefold, being the collection of all the assets, paying all creditors and to distribute the balance to the heirs (in terms of the will or rules of interstate succession).

The basic process of administering an estate is a rather complicated and technical field of expertise. A sound knowledge of the underlying technical legal principals from the estate administrator. For the basic process of the administration of an estate, as received from the Master’s office, follow this link.

The Guardians Fund

Being a statutory trust (established in terms of Chapter V of the Administration of Estates Act 66 of 1965, as amended), the Guardians Fund is a trust account and entails all the requirements of a trust. Besides being a section of the Master’s office, the main aim of the Fund is to safeguard the interests of minors, mental patients, unknown & absent heirs and certain untraceable persons. Monies for such persons are received from pension funds, inheritances, insurance companies, insolvencies and curatorships, to name a few.

The purpose of the Fund is to protect the money of persons lacking legal competence and capacity, undeterrmined and absent heirs as well as untraceable persons. The functions of the Fund are as follows:

• The receipt, bookkeeping & disbursement of money.
• Investment of funds.
• The safekeeping of and control over hypothecation and security deeds for money accruing to minors.
• The compiling and publishing of annual lists of unclaimed sums exceeding N$500.
• The calculation of interest.

Interest is calculated at a fixed rate determined annually, taking into consideration the interest earned for the book year. Interest is calculated monthly and capitalized every year on 31 March.

Payments (for the benefit of minors and persons incapable of handling their own affairs) in terms of Section 90 of the Administration of Estates Act, are paid out for the following purposes:

• Maintenance & education for minors or dependants,
• Preservation or safe custody of any property of minors,
• Transfer of inheritance of minors to the relevant authorities in the country where the minor resides, with the Master’s consent.

In terms of proviso 90, the amount paid out (of the capital) for minors may not exceed N$50,000 without authority of the court.

Payment of a quarterly allowance, to the guardian, for minors are made in March, June, September and December upon completion of the relevant application form (GF5) and submission of the required certified copy of the ID of the guardian. Allowances are paid on application only (and are thus not automatically paid to the guardian quarterly).

Payment of ad-hoc expenses, like school fees, medical expenses etc. will be considered upon completion of the relevant application form (GF6) and submission of the required certified copy of the ID of the guardian and account(s). Prior approval of the payment of additional expenses is considered on merit taking into consideration the age of the minor and available capital. If approved, payment will be made on the first payment date determined by the Master and will be made in favour of the creditor only.

Payment of remaining inheritance will be made when a minor turns 21 or marries, unless the will provides otherwise e.g. that the minor may only receive his/her inheritance on attaining the age of 25. Payment will only be made upon completion of the relevant application form (GF7) and submission of the required certified copy of the ID of the child. 

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.   

The 2009 Taxation Laws Amendment bill introduced an amendment to the once off estate duty abatement of R3,5 million per person. For some who have set up structures to take into account the older legislation it will mean revisiting and if necessary simplifying.  

Until the change, the law provided an abatement of R3,5 million per person, but if not used was forfeited. What this meant was that where a husband bequeathed his estate to his wife (and vice versa), making use of the estate duty exemption between spouses, only on the death of the “second dying spouse” would the R3,5 million be available as offset against the now combined estate.  

In order to avoid forfeiting, many wills were structured so that each spouse first bequeathed an amount equal to this abatement to a trust and the balance to the spouse. This ensured that the tax free R3,5 million was captured for each spouse. The creation and administration of a trust can be costly especially where a total estate is valued less than say R10m.

The changes to the estate duty now obviate this and simplify the planning that is necessary.

Section 4A of the Estate Duty Act now caters for “portability” of the abatement between spouses. With effect from 1 January, where the first dying spouse does not utilise any or the full R3,5 million, the unutilised portion rolls over to the second spouse and his added to that persons R3,5 to a maximum of the R7 million.
 
Therefore where the first dying spouse, merely bequeaths the entire estate to the surviving spouse, then the full R7 million is available as an abatement for the second dying.

While the changes make things simpler, this does not necessarily mean throwing out the use of trusts. Consider these 2 considerations.

• The second dying spouse may still live many years after the death of the first and so while the R3,5m is now not forfeited, the growth on this value will be. Bequeathing to a trust will capture the growth in a trust and avoid the 20% estate duty.
• A trust has other advantages including asset protection and the holding of assets for minor children.

There is no doubt that this change is advantageous. It may be the first step in the process of overhauling the Estate Duty Act.

This recent change should prompt everyone that has not looked at their wills and trusts for some time, to do so. This must be done in conjunction with investment planning and appropriate levels of risk cover.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.  

We believe that the employer has and should have a keen interest in its retirement fund for various important reasons. Let’s just sketch a scenario where the employer is not represented and the trustees decide to remove all risk benefits, to only provide for retirement. Conversely, consider a scenario where retirement funding is depleted continuously as the result of ongoing increases in costs for risk benefits and/or fund management.

How would the employer view the situation where something happens to
one of the long serving employees and the fund offers no support to the member and/or his dependants, because risk benefits were removed? Or the employee reaches normal retirement age after 40 years’ service and the available retirement capital produces such an inferior pension that the pensioner is left destitute?  

Employers normally offer a remuneration package, including membership of its retirement fund. This package and all its components, has to be market related and competitive, to offer the employer an effective means of attracting and retaining scarce skills in a competitive labour market. A package without retirement provision is unlikely to be attractive for most prospective employees. Irresponsible or short sighted management of the fund poses a serious reputational risk for the employer that it will not be able to circumvent by not being represented on the board of trustees. Typically, the employees are likely to take a short-term perspective in managing the fund, while the employer has long-term objectives.

We are not aware of any employer sponsored fund that does not have employer representation on the board of trustees here in Namibia. Funds that tend to be managed without employer participation are union sponsored industry funds. As administrators, we have a distinct preference for funds where the employer is actively involved on the board of trustees and tend to stay clear of funds where this is not the case, as this has serious repercussions for the administrative efficiency.

High levels of sophistication and flexibility clearly imply high costs. As pointed out above, the trustees, the fund and ultimately the employer will carry the risk attaching to choice, flexibility and sophistication.

Typically one can expect the management costs for the ultimate level of choice and sophistication to be a multiple of those applicable to a group focused arrangement. If one were to take it to these levels, the question begs to be asked whether members should not rather make their own private arrangements thereby removing the risk from the trustees, the fund and ultimately the employer and paying for what is demanded.

Does your fund have a strategy?
Much is being spoken and written about the need and indeed trustees’ duty of diligence, care and skill, that requires funds to formulate, implement, monitor and regularly review their business strategy.

What your retirement fund should aim to achieve
Most trustees would probably know that the purpose of their fund is to provide adequately for retirement, perhaps for disablement and death as well. But, ‘to provide adequately for retirement, or disablement or death’ – what does this actually mean?

Should your fund focus on what's best for the group or the member?
To find an answer, one needs to understand what is important to the members, and what is important to the trustees, who carry the ultimate responsibility for the choices offered and the folly of the members?

How absence from work affects the employer, the fund and the member
In the normal course of business, if often happens that an employee is absent from work for extended periods. Until such time as employment ends contractually or legally, employees are entitled to their contractually agreed remuneration and benefits.

Stress testing the life stage model
When trustees are confronted with the question whether their fund should introduce member investment choice, there will be a number of arguments in favour and a number of arguments against this notion. How can you as a trustee and a layman then take a rational decision?

Should the employer be represented on a board of trustees?
We believe that the employer has and should have a keen interest in its retirement fund for various important reasons.

Housing loans for property outside Namibia
Many funds grant housing loans to members which are secured by a first mortgage or by a pledge by the member. How would your board of trustees deal with an application in respect of a property situated outside Namibia?

The pitfalls of participating in a foreign domiciled fund
To allow an administrator to transfer money from a Namibia domiciled fund to another fund without deducting tax, the receiving fund must be approved by the Namibian tax authorities, as evidenced by a tax approval number 12/1/12/…

Changes to the South African Estate Duty Act
The 2009 Taxation Laws Amendment bill introduced an amendment to the once off estate duty abatement of R3,5 million per person. For some who have set up structures to take into account the older legislation it will mean revisiting and if necessary simplifying.