Dear reader

The question of value

In this newsletter, one of the topics we address is the issue of value. In the minds of many people, value is a euphemism for 'cheap'. Unfortunately, as many accountants will tell you, the least cost route often entails a loss of value.

At Retirement Fund Solutions and in the activities of the Benchmark Retirement Fund, we do not use a 'one-size-fits-all' approach. Each of the funds we administer, and each of the individual pension fund investments, are treated as valuable. In order to achieve this, we ensure that we have the best staff, and we nurture their skills with training and encouragement.

The care that these staff give to your account reflects in the value of funds and investments administered. Our commitment to you is to give you value that reflects in the value of your investments.

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

Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 04.2013

In April the average prudential balanced portfolio returned minus 0.53% (March 2.15%). Top performer is Sanlam (0.43%), Stanlib (minus 1.12%) takes bottom spot.

For further analyses and our views download Benchtest 2013-04, here...

Besides our usual graphs presenting index and portfolio performances, the Rand: US Dollar exchange rate, and foreign portfolio flows, in this edition of our monthly newsletter we will refrain from commenting on financial markets. Instead we refer our readers to the article "A view on equity investment and commodity prices", which you can read below.

What is a service worth to you?

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.

Did you know?
by Kai Friedrich

Having only recently joined the pensions industry from the audit profession, one gets new insights and learns a lot. Join me on this journey into the world of pension funds.

New tax rates and your pension benefits

New tax rates and changes in the tax regime have been announced by the Minister of Finance in the budget speech and reported widely. Unfortunately they are only official once they have been published in the Government Gazette and can only be applied to your pension benefit thereafter. Of course, if you have consequently paid too much tax, it will eventually be refunded to you by Inland Revenue.

The Pension Funds Act

The Pension Funds Act constitutes the proverbial ‘stick’ as opposed to the Income Tax Act that constitutes the ‘carrot’.

The Pension Funds Act, sets out what may not be done and defines how pension fund business is to be undertaken. By implication, anything that is not prohibited by the Pension Funds Act may be done by a fund, provided its rules allow this.

The rules of a fund regulate the operation and administration of the fund. They set out the rights and obligations of the various parties of the fund.

• Fund rules cannot be amended with retrospective effect.
• A fund may from time to time consolidate its rules, subject to the approval by the Registrar of Pension Funds.

The Income Tax Act

To achieve its policy objectives, Government uses the Income Tax Act as a 'carrot' through tax concessions.

The Pension Funds Act does not draw the distinction between the various types of retirement funds (pension, provident, retirement annuity and preservation funds). This distinction comes about through the Income Tax Act.

To enjoy the tax concessions that the Income Tax Act offers to these funds, these funds need to be approved by Inland Revenue on behalf of the Minister of Finance. By implication, without such approval, the income of retirement funds, and members’ benefits, would be taxed according to the general principles of the Income Tax Act.

This 'carrot' must have been very effective as far as the pensions industry is concerned, considering that its total assets are about equal to Namibia’s gross domestic product and makes this the largest industry in terms of its asset value.

Law and legal snippets

Can a retirement fund recover a death benefit already paid?

In this article in Pensions World March 2013, Johan Strydom, legal adviser of Metropolitan Retirement Administrators, discusses whether a fund can claim back a benefit paid to a beneficiary upon the death of a member, where a court or the adjudicator has ordered a fund to pay to a beneficiary not previously considered, and makes recommendations on changes to the South African Pension Funds Act. Download the article here…

Interesting media snippets

Country competitiveness ranking

According to a table in Moneyweb presenting  the competitiveness of 144 countries across the world, Namibia’s competitiveness has dropped by 9 places from no 83 to no 92. SA, the most competitive African country, dropped two places to 52. Neighbour Botswana improved its ranking by 1 to 79. Read more here…

‘Consume income, not capital’ mind-set risky for consumers in low interest rate environment
by Wilhelm Hertzog, Cover 2 May 2013

In this article the author explains that the old adage of ‘consume income, not capital’ is a dangerous rule of thumb if followed blindly. “While the rule may have served investors well in the past, we fear that it is currently having two very negative effects. Firstly, those investors who stick to the traditional income-generating investment options are being forced into gradually lowering their standard of living in an effort to make ends meet from their income. Secondly, those who wish to maintain their standard of living while not spending their capital are taking on undue risk in an effort to do so. Read more here…

A view on equity investment and commodity prices

In the MoneyMarketing newsletter of 25/04/2013 the author takes a  look at the global and local economy  - why it’s not all bad news, he shares some views on commodities, and shares some local and international investment thoughts. Is it a good time to buy, should selling be a consideration and what are expected returns looking like? Read more here…

You should save up 12 times your annual salary!

As a broad indication, you should save up for your retirement, 12 times your annual salary after 40 years of employment to maintain your standard of living after retirement. This requires you to save 14.6% of your salary for retirement, as suggested in an article in Moneyweb on the hot off the press Sanlam Benchmark Survey. Read more here…

Long-term investing works

An interesting article presenting the results of a study into the impact of timing the market on investment returns was published recently in ‘Funds on Friday’ by Sanlam Namibia Personal Porfolios. Download the article here...

And finally...

"Politicians are the same all over. They promise to build a bridge even where there is no river."
~ Nikita Khrushchev, Russian Soviet politician

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