Important notes and reminders

Increase in local asset allocation from 1 January 2018

NAMFISA issued a circular in June 2017, referring to a proposed staggered increase in the domestic asset requirement from 35% to 40% from 1 January 2018. The next increase will be to 42.5% effective 1 April 2018. This requires an amendment of Regulation 28 to become effective. To date no amendment to Regulation 28 has been promulgated yet. As a result the increase effective 1 January 2018 is not a legal obligation yet and it remains to be seen whether Regulation will be amended in time for the next proposed increment.

Unclaimed benefits

The government gazette is an indispensable source of information that no company should do without particularly in this day and age where governance and compliance are the buzzwords in commerce and industry!

Diligent readers of the government gazette may have seen advertisements of a handful of our pension fund clients advertising a few unclaimed benefits in gazette 6524 of 1 February 2018. The fact that most of our retirement fund clients do not have any unclaimed benefits while only a few have a few unclaimed benefits is a reflection of the diligence of the trustees of the funds administered by RFS. We commend our client trustees on their diligence!

Prospective claimants now have 3 months to get in touch with the fund they intend to claim any of the benefits advertised. Thereafter any remaining unclaimed benefits will be paid to the master.

Annual ERS and quarterly SIH returns and levy returns for period ended December 2017

All RFS retirement fund clients once again excelled in submitting all returns that were due in the first 2 months of 2018 in time. This once again is a reflection of the diligence of the trustees of the funds administered by RFS. We commend our client trustees on their diligence and express our gratitude for the wonderful support and cooperation!

Newsletter

Dear reader

In this newsletter we contemplate whether staff of an employer can belong to different funds; we provide an analysis of 3 draft regulations under the FIM Bill; we provide guidance to Benchmark Retirement Fund employers (and members) how to select an investment portfolio/s; we explain the new housing arrangement under Benchmark Retirement Fund; we put some light on RFS governance processes and in our Benchmark Monthly Performance Review of 31 January 2018, we caution that the ‘sweet’ spot’ may soon be over for the Rand.

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

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

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

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Monthly Review of Portfolio Performance
to 1 January 2018

In January 2018 the average prudential balanced portfolio returned (0.57%) (December 2017: -1.49%). Top performer is Metropolitan (1.22%); while EMH (-0.05%) takes the bottom spot. For the 3 month period, Metropolitan again takes top spot, outperforming the ‘average’ by roughly 1.9%. On the other end of the scale Investec underperformed the ‘average’ by 1.6%.

Will the ‘sweet spot’ soon be over?

What do you do if you are not patient enough to wait for your theory to realise? Well when all the SA news media were focusing their political attention on the upcoming elections of the new president of the ANC and it became ever more evident that Cyril Ramaphosa was the clear front runner the imminent strengthening of the Rand was a ‘no-brainer’ for any observer. Investment experts would have you believe that efficient financial markets would have duly discounted this development in the price setting of the Rand, and to some extent this is what indeed happened. The Rand did strengthen from over 14 to the US Dollar to around 13.60 just before the election. But since the election it went on a rampage strengthening to around 11.60 by the time of writing this column. So much for the theory of markets properly discounting certain foreseeable events and hurtful for the impatient speculator.

In the mean-time global equity markets have taken a bit of a beating but for foreign investors the strengthening of the Rand against the US Dollar by close to 20% over the past 3 months has delivered some awesome returns of 20% for the US Dollar investor and around 13% for the European investor. No wonder foreigners are starting to pile back into SA equity but are seemingly wary of fixed interest investments in the face of a rising interest rate tide. Over the past 3 months foreign investors invested R 51 billion in the SA equity market while at the same time some R 19 billion was withdrawn from the fixed interest market. Despite this significant inflow into our equity market over the past 3 months our equity market has not managed to rise but rather the contrary occurred. Well with a market cap of around R 16 trillion, 51 billion will not really move the SA equity market.

Will this sweet spot for foreigners and of a strong Rand soon be over or will we see more of this?

Read part 6 of the Monthly Review of Portfolio Performance to 31 January 2018 to find out what our investment views are. Download it here...

Can staff of an employer participate in different funds?

The scenario here is that an employer has acquired another company.  It was agreed with the acquired company that all new employees will particpate in the buyer’s pension fund while all existing staff as at date of acquisition will remain members of the ‘seller’s’ pension fund. The question arising is whether such an arrrangment is permissible.

To answer this question, there are 4 matters that need to be considered, namely the the Pension Funds Act, the Income Tax Act, the rules of the fund and the reassurance arrangement.

1. The Pension Funds Act – The Pension Funds Act does not provide any guidance on such a scenario other than requiring that a fund has a set of rules and complies with its rules. One would thus have to refer to the rules to determine whether the arrangement is consistent with the rules and by implication also with the Pension Funds Act.
2. The rules of the fund – Most pension fund rules would require that the employer and the fund must approve the participation of an employer. The acquired company should thus submit an application to the fund to participate in the fund. Most rules would have a definition of ‘eligible employee’. The implication of the definition is that once an employee falls into the defintion, the employee is obliged to participate and as long at he/ she does not fall into the definition the employee cannot participate. This definition may allow for different categories of employees; normally these are ‘as defined by the employer’, or may allow the fund to waive the participation requirement for a particular group of employees. In this scenario one category can be those members of the acquired company on date of acquisition and the second category could be all employees joining the acquired company after date of acquisition. This would meet the definition of eligible employee, and would thus be in compliance with the rules.
3. The Income Tax Act – This Act requires compulsory membership of all class or classes of persons specified in the person’s conditions of employment and would then support any such provision in the rules of the fund as referred to in 2. The requirement is that the two employee categories of the acquired company have been clearly defined by the employer and that membership of the two funds is strictly observed on the basis of the two categories.
4. The reassurance arrangement – The reassurance arrangement is typically based on what the rules provide and would typically only prohibit voluntary participation to avoid anti-selection, which the insurer’s risk ratings pre-suppose for any compulsory group scheme. If it were only a question of different classes participating in different funds, it is still compulsory participation per defined class of membership.

Conclusion:

The crux of the matter is the definition of ‘eligible employee’ and one needs to check whether this provides for the employer defining different membership categories or the rules providing for the trustees waiving the eligibility requirements for a particular group of employees. If so the above arrangment is permissble. To cover the fund, it is important that the admission of the acquired company on those terms is confirmed by way of a resolution. From the acquiring employer’s side it is advisable that the participation of the acquired company on the basis of the above arrangement is also confirmed by way of a resolution and that the relevant employees’ conditions of employment clearly define in which fund the employee participates.

New regulations and standards will put more strain on funds

In the second half of last year NAMFISA issued a number of new regulations and standards for comment. Although some comments were submitted these mostly did not address the substance of these but rather their form. Having considered these comments NAMFISA made some changes that we would consider superficial and not addressing the real concerns. Trustees are urged to pro-actively consider the possible implications of these regulations and standards and how to deal with these.  Funds are encouraged to liaise with RFS where these may impact the administration of the fund.

The following regulations and standards were issued and covered in the process :

Regulations:

• RF.R.5.3  Terms & conditions on which a board may distribute some or all of an actuarial surplus
• RF.R.5.7   The rate of interest payable on the value of a benefit or a right to a benefit  not transferred before the expiration of the applicable period pursuant to section 262(9)(c)
• RF.R.5.8   The protection of unpaid contributions of an employer and the rate of interest payable on contributions not transmitted or received pursuant to section 262 (9)(a) and (b).

Standards:

• RF.S.5.11  Alternative forms for the  payment of pensions for the purposes of defined contributions funds
• RF.S.5.12  The conditions pursuant to which a fund may be exempted from Chapter 5 or from any provisions of Chapter 5
• RF.S.5.13  Requirements for a communication strategy
• RF.S.5.14  Requirements for the annual report of the fund to its members
• RF.S.5.15  Requirements for the annual report of a fund to NAMFISA
• RF.S.5.17  Categories of persons having an interest in the compliance of a retirement fund with the provisions of section 262  and the requirements for reports that must be submitted to such persons
• RF.S.5.18 Matters to be included in investment policy statement
• RF.S.5.19  Matters to be communicated to members and contributing employers and minimum standards for such communication
• RF.S.5.20 Matters to be included in a code of conduct
• RF.S.5.22 Transfer of any business from a fund to another fund or from any other person to a fund
• RF.S.5.23 Fees that may be charged for copies of certain docs

We will be placing focus on these below and in the next few newsletters.

• An actuarial surplus as per RF.S.5.1 may only be distributed as per ‘execution plan’.
• Rules must specifically authorise the board.
• Fund must be in full compliance of the Act.
• Fund may not be party to any legal action that may affect the distribution.
• All parties entitled to participate in the opinion of the board (includes employer, sponsor, member, former member, dependant and nominee) must have been notified.
• The board has approved the plan.
• The relevant valuation report should not be older than 6 months at date of distribution.
• NAMFISA must approve the plan.
• Where the plan is based on a rule amendment subsequent to inception date, participants must have been informed and given an opportunity to vote on the amendment (2/3rds to vote and 2.3rds to be in favour.)
• A formal application has to be submitted that affords NAMFISA the ability to assess to what extent the preceding requirements have been addressed and complied with.

• Interest at the ‘prescribed rate’ must be credited to a transfer value for every day following the ‘prescribed period’ up to date of transfer.
• ‘Prescribed rate’ is the greater of (a) the average of 30 to 60 day government securities, (b) the average of 30 to 60 day deposit certificate rate as applied by the 4 largest banks and (c) the rate of interest applicable to unpaid transfer values as per rules of the fund.
• ‘Prescribed period’ is the period starting 60 days from receipt of the prescribed form from the member, instructing the fund to transfer the benefit, until date of payment.
• The daily interest rate is to be calculated on the basis of 365.25 days per year.

1. The prescribed interest rate appears to be designed to punish funds that do not pay over transfer benefits within 60 days of the member’s request. To determine the interest rates according to the above parameters will be a serious challenge and could not have been made more complex, barring the formula for calculating interest on late payment of contributions per RF.R.5.8 (see below). It will be costly to program these parameters into an admin platform and it will be costly and complex to manage and to police by NAMFISA.  The question begs to be asked what the purpose of such a complex formula is and whether the regulator has considered how this may delay the payment of a transfer benefit.
2. An employee who moves to an employer whose fund has a waiting period before becoming eligible to join will not be able to transfer their benefit to the new employer’s fund immediately until the waiting period has expired. This waiting period will then automatically lead to the transferor fund being punished with ‘late payment interest’ for a reason totally out of its control.
3. An employee who instructs his previous fund to transfer his benefit to another fund may have a tax issue and the transferor fund is thus unable to implement the instruction until the tax issue has been resolved, which can conceivably be much after the  fund received the instruction to transfer the benefit. The member’s failure to resolve his tax issue will then automatically lead to the transferor fund being punished with ‘late payment interest’ for a reason totally out of its control but well within the transferring member’s control.
4. The question begs to be asked what the purpose of such a complex formula is and whether the regulator has considered how this may delay the payment of a transfer benefit.
5. Where will funds get any shortfall between the actual investment return earned on the exited member’s underlying investments and the interest to be allocated to the member in terms of this regulation except by reducing the retirement savings build-up of the remaining members?

• ‘Prescribed period’ is the period starting on the eight day after the end of the month in respect of which contributions should have been deposited until the day on which the required contribution and prescribed interest has been deposited.
• The employer who is required to make contributions and its directors and officers are held jointly and severally liable for the contributions and interest.
• ‘Prescribed rate’ is the greater of (a) the average of 5 year government securities, (b) the average of 5 year deposit certificate rates as applied by the 4 largest banks and (c) the greater of (i) the return earned by the fund over the last 3 financial years, or (ii) the rate of return earned by the fund over the last financial year and (d) the greater of inflation plus 4% (i) over the 12 months preceding the prescribed period or (ii) over the 12 months of the immediately preceding calendar year.
• The daily interest rate is to be calculated on the basis of 365.25 days per year.

1.  The prescribed interest rate appears to be a punishment of funds that do not pay over transfer benefits within 60 days of the member’s request. To determine the interest rates according to the above parameters will be a serious challenge and could not have been made more complex, barring the formula for calculating interest on late payment of contributions per RF.R.5.8.
2. It will be costly to program these parameters into an admin platform and it will be costly and complex to manage.

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment here...
• Download the generic conflict-of-interest policy here...
• Download the generic trustee performance appraisal form here…
• Download the generic investment policy here...
• Download the generic trustee code of conduct here...
• Download the unclaimed benefits policy here...
• Download the list of fund service providers duly registered by NAMFISA here...

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

Gunter Pfeifer's Benchmark Notes

Selecting asset managers to diversify risk

Background

Trustees mostly understand that it is a risk to engage a single manager to manage 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 manager 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 visa-versa.

What are your performance objectives 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 who 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 who is/are likely to out-perform the average in the long-term and an/other non-core manager/s who 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.

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

Paul-Gordon /Guidao-Oab joined RFS as Manager: Audit and Compliance in May 2016 and has then moved into the position of Benchmark Product Manager. Paul holds a B Compt degree from Unisa and has completed his articles with SGA

• the accomplishment of established objectives and goals for operations and programmes;
• the economical and efficient use of resources;
• the reliability and integrity of financial and non-financial information;
• compliance with relevant policies, procedures, laws and regulations;
• safe guarding of assets.

• Risks are appropriately identified and managed;
• Interaction with the various governance groups occurs as needed;
• Significant financial, managerial, and operational information is accurate, reliable, and timely;
• Employees’ actions are in compliance with policies, standards, procedures, and applicable laws and regulations;
• Programs, plans and objectives are achieved;
• Quality and continuous improvement are fostered in Retirement Fund Solution’scontrol process;
• Significant legislative or regulatory issues impacting the organization are identified and properly addressed.

News from RFS

Mens sana in corpore sano!

So the old Latin saying goes – a healthy mind requires a healthy body! For probably as many years as RFS has been around, we have been participating in the Volleyball-for-All tournament that takes place on the first Saturday of every February at DTS sport grounds. Thank you to Bianca Busch who has arranged our participation for the past so many years! Here are the players and some action photos of this year’s occasion.


Above, the RFS team at the event.


Above, the RFS team in action.

• Amei Diener
• Caroline Scott
• Lilly Boys

• Louis Theron

• Austin Thirion
• Rudigar van Wyk
• Kai Friedrich

• No comments were raised on the One Chart f Accounts project.
• Concern was expressed on the short time afforded to implement the new levies. Per NAMFISA this falls outside its mandate.
• NAMFISA will only register a complaint if the fund has been unable to satisfy the complainant.
• FIM Bill has finally been signed off by legal drafters. Bill was forwarded to Ministry of Finance for submission to Attorney General for certification.
• NAMFISA draws attention to 4 malpractices in the industry:
  • Abdication of powers, duties and responsibilities of trustees. Trustees are expected to make sure that functions outsourced to service providers are carried out properly. Trustees are expected not to leave it to service providers to explain non-compliance issues and non-payment of contributions to NAMFISA but to rather do this themselves.
  • False statements made under oath in an affidavit. Rule amendments that may negatively affect members’ benefits are expected to be communicated to members and the statement under oath is to certify this. False statements have been submitted which constitutes a criminal offence. NAMFISA was requested to report back on the outcome of the false statement under oath. NAMFISA was requested not to issue directives for isolated incidents similar to this.
  • Unauthorised investment in employer currently being investigated by NAMFISA. Funds to apply for exemption if it is necessary to invest in the employer. Approval of such applications is not within NAMFISA’s mandate and fund will not be penalised for delays experienced in the processing of applications.
  • Non-disclosure of risk benefits in fund rules.
  • Industry working group will be set up by NAMFISA to discuss issues faced by the industry.
• The following stats as at end June 2017 were mentioned:
  • Total industry assets at end of September decreased to N$ 143.79 billion from N$ 143.84 billion at the end of the previous quarter.
  • Overall industry domestic asset allocation was 46%.
  • Overall industry equity allocation was 63.5%.
  • Overall industry investment in unlisted investments was 2.1% of assets, drawn down percentage was only 0.2%.
  • Total investment in insurance policies was N$ 18.0 billion.
• Principal officers are required to sign off the SIH returns as it is the fund’s responsibility and not the service provider’s.
• Observations arising from offsite inspections by NAMFISA:
  • Board not constituted in terms of rules.
  • Familiarity risk of long-serving service providers, such as auditors, to their independence of fund. NAMFISA was requested to assist trustees to identify long serving service providers who can potentially pose a familiarity risk.
  • Investments not in line with investment strategy.
  • Insufficient effort made by funds to trace beneficiaries of unclaimed benefits.
  • NAMFISA not informed within 30 days of appointment of principal officer and auditor.
  • Unclaimed benefits not dealt with in terms of NAMFISA circular and Administration of Estates Act.
  • Rules do not deal with handling of unclaimed benefits.
  • Non-compliance with regulation 28(4), i.e. investment in unlisted investments.
  • Non-payment of contributions (section 13A) – funds required to take necessary action to rectify the non-payment and to inform NAMFISA.
  • Inconsistent disclosures in SIH reports.
  • Not all expenses are appropriately disclosed in the financial statements.
  • Reserve allocations not in line with actuary’s recommendations.
  • No formal trustee performance assessment in place. NAMFISA was requested to advise who should assess the board.
  • Investment in employer not appropriately disclosed.
  • NAMFISA failed to respond to a legal opinion provided that differs fundamentally from NAMFISA directive on unclaimed benefits.
• NAMFISA will try to communicate additional requirements for any applications ahead of time before enforcing compliance.
• Funds with state funded employers are required to report any non-payment of contributions by these entities by the 15th of each month.

• almonds,
• yogurt parfait,
• a can of tuna with crackers,
• blueberries and babybel cheese,
• apple and roasted chickpeas,
• mug of soup,
• full-fat plain green yogurt with chia seeds and cacao powder,
• veggies with hummus,
• Italian taralli crackers and string cheese,

Blackboard wisdom at a filling station

A  filling station has become quite a landmark in Gauteng, South Africa, with its daily #PetrolPumpWisdom, which are uplifting quotes written on a chalkboard. Some motorists say they deliberately travel this road just to read the quote which brightens their day. Here's one: