NAMFISA regularly expresses concern about service provider familiarity, as regulatory scrutiny over long-standing relationships aims to ensure objectivity, transparency, and compliance. Its focus on familiarity risk emphasises avoiding potential conflicts of interest or lapses in objective oversight. Familiarity risk is the risk that, due to a long or close relationship with the service provider, the fund will become too sympathetic to the service provider's interests or too accepting of the service provider's work or product.

While a long-standing relationship with the fund administrator poses a familiarity risk, the rotation of the fund’s administrator also poses risks. Trustees should certainly not rotate their administrator, believing it would please NAMFISA. Trustees have a duty of care towards their fund and its members, and only a court may adjudicate if they have complied with this duty.

This article aims to help trustees manage the familiarity risk of retaining their administrator and the diverse risks of rotating the administrator.

1. The familiarity risk in perspective

• Trustee Turnover: Regular elections bring in new trustees, naturally introducing fresh perspectives and oversight, helping mitigate familiarity risk. New trustees can contribute independent insights, enhancing the administrator's scrutiny.
• No In-House Staff: Without in-house staff, the fund relies heavily on its administrator for operational continuity. This dependence heightens the importance of choosing a high-performing administrator, as the internal capacity to manage transitions or oversee day-to-day operations is limited.
• External Oversight: The annual external audit and statutory valuator review provide additional layers of objective scrutiny, which helps offset familiarity risk. These independent assessments ensure compliance and give the trustees external assurances of the administrator's performance.
• The board vs the trustee: In practice, familiarity often exists between a trustee and the service provider or one of its staff. The rotation from one service provider to another could create new familiarities that may not be apparent when deciding to appoint the service provider. However, the board moderates the individual trustee’s familiarity.

2. Pros and Cons of Regularly Rotating the Administrator

• Pros:
  • May address NAMFISA’s concerns on familiarity.
  • Allows periodic market testing to ensure competitiveness and relevance.
  • Could lead to an improved service experience for the fund and its members.
  • Could lead to a cost reduction.
  • Could dismantle inefficiencies and inaccuracies in processes, procedures and policies.
• Cons:
  • Disruptions could be more severe given the fund’s reliance on external administration and the absence of internal staff.
  • New administrators may not provide the same level of service quality, risking data loss or delays in meeting compliance requirements and resulting penalties.
  • Loss of corporate memory, particularly if the fund does not have in-house staff and because of frequent changes in the board composition.
  • Avoids the risk of poor service delivery.
  • Could introduce inefficiencies and inaccuracies into processes, procedures and policies.
  • Could increase costs due to incorrect or inadequate tender specifications.

3. Enhanced Familiarity Risk Mitigation

• Leveraging Annual Audits and Valuations: The fund undergoes thorough annual reviews from an external auditor and a statutory valuator. These external reviews assure compliance and performance, supplementing the need for regular administrative rotation.
• Encouraging New Trustee Involvement: With each trustee election, the board could have the new trustees more actively involved in the review of the administrator. This approach directly brings fresh oversight into the administrative relationship, reducing familiarity risk from within the board.
• Structured Administrator Reviews: Since the fund lacks internal staff, trustee evaluations of the administrator should be rigorous, with structured performance reviews based on criteria such as service quality, regulatory compliance, and responsiveness. This structured approach enables trustees to objectively assess the administrator’s suitability without undue reliance on familiarity.
• Reporting: The frequency and transparency of the service provider’s report provide an essential tool to the trustees for mitigating their risks.

4. NAMFISA’s Concerns

• Providing Evidence of Independent Oversight: Annual third-party audits and reviews could mitigate familiarity concerns effectively without necessitating disruptive administrator changes. Trustees should document the annual external audit and valuator findings as part of the fund’s compliance reports. This documentation can demonstrate to NAMFISA that familiarity risk is managed through rigorous, regular, independent evaluations.
• Policy Communication: Consider preparing a policy summary for NAMFISA that outlines the fund’s reliance on structured annual reviews by independent third parties to mitigate familiarity risk.

5. Policy on Fund Administration Outsourcing

• Formal Regular Review Process: The policy should establish a regular structured review of the administrator, inviting new bids. Regular evaluation criteria should include performance, compliance, and market competitiveness.
• Familiarity Risk Mitigation Mechanisms: The policy should note that familiarity risk is managed through trustee turnover, annual audits, and statutory valuation to address NAMFISA’s concerns without unnecessary rotation.
• Final Recommendation: Retain the high-performing incumbent administrator if they continue to meet the fund’s high standards. Rely on the policy’s structured review process, independent annual evaluations, and trustee turnover to satisfy regulatory expectations and maintain robust governance practices.

Conclusion

The Namibian retirement funds market of stand-alone funds (excluding the GIPF) of merely 50,000 members is too small to sustain one fund administrator. Together with the stand-alone umbrella funds, the 140,000 members do not provide a viable business basis for more than three administrators. The viability of the pensions industry will worsen further due to the dramatically increasing compliance requirements and associated costs of the FIMA. The National Pension Fund, with compulsory participation, will shave off around one-half of the industry’s current membership (i.e. leaving around 70,000 members), adding to the woes of the industry and its service providers. It will scarcely offer an economically viable base for one administrator, and there will be little space left for effective competition.

Over the past thirty years since Namibia’s independence, the number of administrators has always reverted to three, despite hopeful aspirants entering the market now and then, only to fade away again. There are six administrators, of which one-half will likely disappear in the next five years.

Trustees would be short-sighted not taking these constraints of the Namibian retirement funds market into account and how their decision could impact the industry and remove the only remaining competitor. The FIMA standards text-book approach to good corporate governance does not consider this' bigger picture', yet it is highly relevant to the fund and its members.

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.