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.
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 recent years, pension funds have evolved in terms of the level of sophistication in the management as well as the benefits offered to members. With the advent of technological advancement, the person managing the fund (i.e the trustee) as well as the ordinary pension fund member is inundated with a plethora of choices. Pension funds now offer individual members within a group set up, the choice to decide on an investment strategy best suitable to their needs. Members are offered the choice to decide on the level of benefits needed in the event of death so as to meet the needs of the member’s dependants in the event of the untimely passing of the member. Members are also required to decide whether they have a need to make additional savings in order to adequately cater for their retirement needs etc.
However, all these options and choices offered by pension funds to members do not adequately take into account the level of financial acumen and the literacy levels of all members of pension funds. According to a study by the National Literacy Programme in the Ministry of Basic Education, it was revealed that 35% of the Namibian population above the age of 15 (and 38% of the Namibian population above the age of 16) were illiterate in 1991. Though accepted that improvements may have since taken place in this regard, I made the case in an earlier article that such a scenario poses serious constraints on members’ active participation in modern day pension fund arrangements.
There is a need for thorough study to establish whether members of pension funds that offer flexible arrangements are adequately aware of the different options offered by their funds. A second objective of such study should be to establish where members are indeed aware of the existence of such options, do they understand such options correctly to enable them to make correct use of the choices available to them.
The need to empower members of a pension fund to take full advantage of the benefits offered by their fund cannot be overemphasized. The role of a pension fund trustee is rather onerous and judicious. Pension fund trustees would ultimately fail in their duty should they not ensure that their members fully understand the benefits and choices offered by their pension fund. This goal is only achieved with proper dissemination of information and result driven communication initiatives targeted at all members, irrespective of their different levels of employment within the employer. Corporate governance guidelines and NAMFISA place a huge responsibility on the shoulders of all involved in the management of pension funds. The duty to report back to those you are accountable to in an accurate, timely and objective manner etc. is paramount.
Both the Sanlam and Old Mutual SA pension funds surveys of 2009 and 2008 respectively, found that more than 80% of fund members do not fully understand the benefits offered by their respective funds. However, there has not been a study to specifically determine the understanding of the flexible options offered by funds and the concomitant correct utilisation of the flexible options by members of those funds.
Determining what members know and understand about the workings of their pension funds, but specifically their knowledge and understanding of all options offered by their funds, have implications for the performance measurement of those entrusted with the management of pension fund business, not least being the trustees. Such a study also has implications for the industry as its outcome may speak to the need to set benchmarks for acceptable levels and forms of member engagement. Communication to members should not just be a tick box exercise, but rather it must address the genuine need for knowledge empowerment and must be purposeful in achieving tangible results amongst members across all levels. Put differently, the measurement of whether trustees have carried out their trustee duties and responsibilities successfully, must have as one of its key points of reference the measurement of members’ understanding of the benefits and choices offered by the fund.
Marthinuz Fabianus is Deputy Managing Director at Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a Macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years industry experience.
For the peace of mind of trustees our safety net offers you:
- Fidelity cover of N$ 5 million, excess of N$ 250,000 1 July 2016 to 30 June 2017, Western National Insurance Company;
- Professional indemnity cover of N$ 50 million, excess of N$ 250,000 1 July 2016 to 30 June 2017, Western National Insurance Company;
- Directors' personal liability cover of N$ 5 million per director, 1 November 2016 to 30 June 2017, Santam;
- Full-time internal audit, compliance and risk management function supported by 2 independent chartered accountants on a part-time basis;
- Off-site disaster recovery data centre;
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- On-site back-up generator;
- Secure IT production centre;
- High availability virtual server environment;
- 61 full-time staff focussed on fund administration only;
- Average of 16 years relevant experience per employee;
- Average of 7 years’ service with RFS;
- Staff with undergraduate diploma or certificate as highest qualification – 20;
- Staff with degree as highest qualification – 14;
- Staff honours degree as highest qualification – 7;
- Staff with post graduate diplomas as highest qualification – 8;
- Chartered accountants – 3;
- CFP® practitioners – 3:
- A track record and reputation second to none …-and more!
How much is good governance worth to you as a trustee – can you afford to pay less for compromising on any of these credentials?
Kai Friedrich, Director: Fund Administration, is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. He holds the Post Graduate Diploma and the Advanced Post Graduate Diploma in financial planning from the University of the Free State.
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